In the middle of 2022, the US parcel market began shifting in shippers’ favor. While it took a while to make up the ground lost in 2020/2021, savings started to become a possibility, even a likelihood, in mid- to late 2023. But in July of last year, when UPS and the Teamsters reached a tentative agreement (later ratified), and the prospect of a major capacity disruption faded, the brakes came off. We are now experiencing what appears to be the most shipper-friendly parcel market since DHL Express exited the US market in 2009. The argument could be made that this market tops even that, as DHL was then seen as a low-cost option, and those stranded volumes needed to find a home, even at a higher cost, leaving UPS and FedEx to divvy up the spoils at higher rates. Now, UPS is attempting to claw back volumes that shippers diverted to other carriers to mitigate the risk of a work stoppage, while FedEx and other carriers try to defend and expand on those gains. All of which combines to make this a very soft, shipper-friendly market.
It is important to note that when we talk about parcel prices and the market, there is a sharp distinction between what is happening to published prices and what is happening in negotiated prices. Both UPS and FedEx have been aggressive in their General Rate Increases (GRIs). Increases on published rates have been surprisingly high, and even more so on surcharges and effective minimum package charges. But what we are addressing here is what is going on in pricing negotiations.
This situation was over three years in the making, and it came with significant suffering on the part of shippers. In 2020/2021 carriers, all carriers, were caught off guard but the spike in market-wide parcel volumes, especially e-commerce volumes. Shippers scrambled to find safety valves for volumes subject to aggressive carrier rate increases, or in some cases volumes being declined by carriers altogether. At that time there were no safe havens. Most carriers were struggling, and in many cases failing, to service current customers, with little appetite for new business. Ignoring the lessons of history, many in the industry proclaimed that the e-commerce surge was not a surge at all but was instead the new normal. These people said that the e-commerce growth rates seen in 2020, over 24%, could be expected to extend into the future indefinitely. And, in my opinion, UPS and FedEx bought in. They both began to quickly build out capacity, both fixed and flex capacity. Predictably, parcel volumes did not continue their meteoric rise. 2022 volumes slipped by two to six percent, depending on which source you believe. The slide continued and intensified through 2023, and this took place in the face of the national parcel carriers’ now overbuilt networks.
But falling volumes was not the only driver. There were others that played a role. Amazon continued to pull more volumes in-house. While this did not reduce total parcel volumes, it did reduce national carriers’ total addressable market volume.
OnTrac’s acquisition by Lasership, and the company’s (now simply OnTrac) subsequent national strategy is having an impact as well. While the strategy is not yet fully realized, many shippers are adding OnTrac to explore the service, build the relationship, and to be in a position to quickly implement on a broader scale when and if OnTrac becomes a de facto national carrier (and often to save some money in the meantime). Additionally, new entrants like Veho and Better Trucks, along with established regional carriers, have captured significant volumes during and after the pandemic. Carriers like upstarts Veho and Better Trucks, and seasoned regionals GLS, Spee-Dee, and LSO also garnered a lot of volume during and immediately following the pandemic. Although shippers are focusing less on diversification than they were in 2021/2022, so that situation seems to have mostly stabilized.
Finally, we have USPS’ Ground Advantage, which is proving to be a serious disruptor. The service is very well suited to SMBs with low package weight and high residential deliveries. So, apparel, footwear, health and beauty, and other categories that are still showing positive growth are being further encroached by the USPS, again reducing the addressable market, or at least making it expensive to compete, for UPS and FedEx.
During a recent panel discussion at Stifel’s Logistics and Transportation conference, I was asked, how long will this shipper-friendly market last? It is a complex question. In my view, the competitiveness will last until capacity and volume reach equilibrium. Or, put more accurately, when the carriers’ networks are deemed right-sized for the addressable market. UPS has taken a first step in this, by announcing cuts of up to 12,000 positions this year and ending remote work for most of its corporate employees (which looks a lot like a transparent bid to drive attrition). This will help, but it will take time, and more than this, if market-wide package volumes continue to fall. Look for similar measures from FedEx in the near future. Which brings us back to the question; how long will it last? Well, 2020 and 2021 put a serious crack in my crystal ball. But I do not see this situation turning around before the end of the year. Failing some sort of black swan event, nothing visible on the horizon is going to materially change the competitiveness in this market.
Which is not to say wait it out. Shippers took the brunt of exorbitant rate increase when capacity was tight. Now that the pendulum has swung in the other direction, it is time to recoup some of those losses. Savings are like a river. Once they are past, they never come back. Far better in my opinion to take some of the winnings off the table through active negotiations. While there are no signals that the market will become less competitive this year, the last four years should have taught us that the unexpected can, and usually does, happen.
Joe Wilkinson is VP, Professional Services (Transportation Consulting) at Intelligent Audit. He can be reached at joeywilkinson@intelligentaudit.com
This article originally appeared in the March/April, 2024 issue of PARCEL.
