Strong Increase In Pricing Expected For FedEx

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FedEx (NYSE:FDX) is likely to see strong growth in its pricing in 2015. The increase in pricing will be the result of the company’s response to the overwhelming e-commerce volumes and declining fuel prices. The likelihood of the logistics industry now imposing peak-based surcharges could also drive an increase in pricing. In this article we take a look at these factors and how they will impact FedEx’s pricing.

See our complete analysis of FedEx here

Dimensional Weight Pricing To Boost E-Commerce Package Revenues

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In May 2014, FedEx announced that it would be applying dimensional weight pricing for all FedEx Ground packages effective from 2015. [1] The change in pricing mechanism was aimed at generating higher revenues from lightweight e-commerce packages which occupy a large space in FedEx trucks. When charged simply on the basis of their weight, these products would generate revenues which did not justify the space they occupied. In order to charge a fair value for its most important asset, the space in its trucks, and also more efficiently cover operating costs, FedEx decided to move on to a dimensional weight based pricing.

Dimensional weight can be calculated by multiplying the length, breadth and height of the package, and then dividing by 166. The change in pricing mechanism could result in a 30-50% increase in revenue per package for bulky-yet-light products ordered online such as toilet paper rolls, towels, shoes, diapers and purses.

Revised Fuel Surcharge Rates To Counter Impact Of Falling Fuel Prices

FedEx recently announced its revised fuel surcharge rates, effective February 2. [2] The revision came after FedEx announced a decline in its fuel surcharge revenue in the second quarter of fiscal 2015, as a result of the falling prices of U.S. on-highway diesel fuel and U.S. Gulf Coast kerosene-type jet fuel.

In addition to increasing fuel surcharge rates, FedEx has also widened the range over which rates remain static. Under the revised rates, if fuel prices remain at their current levels, FedEx Ground’s fuel surcharge rates will increase by 1.5% and those of FedEx Express will increase by 1%. The difference in fuel surcharge becomes wider at lower prices. The higher rates and broader price ranges will allow FedEx to capture higher fuel surcharge revenue if fuel prices continue to decline.

Logistics Companies Likely To Add Peak Based Surcharges

United Parcel Service (NYSE:UPS) and FedEx had made significant investments in its network in order to cater to the growing holiday season package volumes. The investments were either in the form of new technology, capacity expansion or increasing seasonal workers. Looking at the significantly improved delivery rates, it seems that the investments paid off. On December 24, the busiest day of the season, FedEx and UPS had delivery rates of 98%, compared to 90% levels in 2013. [3]

 

However, UPS’s pre-announcement of its poor fourth quarter results led the market to believe that investing in improving the network is not enough to deal with overwhelming holiday season package volumes. At its earnings meeting, UPS announced that it will be implementing a season based surcharge, with deliveries made on peak days carrying a higher surcharge. [4] Industry experts believe that this is the best possible solution to help logistics companies to cover their operating costs, which are bound to surge with volume.

Given the history of FedEx and UPS’ following each other’s pricing mechanisms, it is likely that FedEx will soon announce a similar surcharge for its services during holiday season. This should also add to FedEx’s pricing.

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Notes:
  1. FedEx announces pricing Changes, May 2 2014, www.fedex.com []
  2. FedEx Feb. 2, 2015, Fuel Surcharge Changes, www.fedex.com []
  3. FedEx, UPS step up their holiday shipping performance, January 1, 2014, www.washingtonpost.com []
  4. United Parcel Service’s (UPS) CEO David Abney on Q4 2014 Results — Earnings Call Transcript, February 3, 2015, www.ups.com []