FedEx Wanders, UPS Follows

It has been nearly a month since FedEx (NYSE: FDX  ) reported fiscal-first-quarter 2009 earnings, and the wound remains raw. So I just want to say "thanks" to UPS (NYSE: UPS  ) for driving by Friday and pouring in some salt.

As you may recall, my biggest objection to FedEx's news wasn't its earnings or revenues -- those both matched guidance perfectly. Nor was it forward guidance. The predicted 15% decline in fiscal '09 earnings may not impress, but it's hardly unexpected in this economy. No, what really ticked me off was the rate increase.

What rate increase?
The 6.9% uptick in shipping fees. The one FedEx announced last month -- and that UPS mimicked last week.

Aiming to restart his growth engine, FedEx CEO Fred Smith promised last month to "enhance the customer experience, gain market share, reduce expenses, [and] improve profits." Now, I applaud management's slashing capital spending because it will promote free cash flow. And as a Boeing (NYSE: BA  ) shareholder, I was selfishly gratified to learn that part of the cash FedEx will spend will go to purchasing fuel-efficient Boeing birds.

But FedEx isn't stopping at cutting costs. It also wants to enhance profits at your and my expense. Specifically, management promised to first "increase shipping rates by an average of 6.9% for U.S. and U.S. export services" and then give back two points in the form of lower fuel surcharges -- charging 4.9% more, net.

UPS framed its increase similarly: UPS Ground shipments will incur "an average increase of 5.9 percent" in 2009. Air express and international shipments will get a "6.9 percent increase in the base rate, less a 2 percent reduction ... in fuel surcharge" -- again, 4.9% total.

The song remains the same
Just as UPS's move mimics FedEx, so do my objections: The price of oil has fallen by more than half over the past several months. But all we get is a lousy two-percentage-point drop in fuel surcharges? And not even that -- a 5% increase in overall shipping costs?

Call me crazy, but I fail to see how these price increase will gain market share for either party to enhance anybody's "experience." To the contrary, I fear the most FedEx and UPS will accomplish is raising the cost of business for everyone from major corporate customers like Rite-Aid (NYSE: RAD  ) and Zumiez (Nasdaq: ZUMZ  ) to the small shippers operating out of virtual storefronts on Amazon.com (Nasdaq: AMZN  ) and eBay (Nasdaq: EBAY  ) -- slowing a wounded economy even more, and "improving profits" for nobody.

Find further FedEx and UPS Foolishness in:

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Fool contributor Rich Smith owns shares of Boeing. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (4)

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  • Report this Comment On October 20, 2008, at 2:30 PM, BITG wrote:

    It's disappointing to see this kind of "opinion" coming from the fool... In this country the marketplace decides who is charging too much and who isn't. Expressing anger over the fuel surcharge just shows a lack of understanding on how the surcharge is determined.. the surcharge goes down automatically as the price of fuel drops. The writer seems to be unaware of that fact.

    The idea that these companies should refrain from a price increase in order to avoid "raising the cost of business" for big and small companies alike sounds like much of the polical rhetoric we are hearing everywhere these days... "Business should forego a reasonable profit for the good of society..." that's not a free market society.. that's the other kind.

  • Report this Comment On October 20, 2008, at 4:53 PM, djdx2 wrote:

    Mr. Rich Smith obviously has not done his homework. The previous comment began to elaborate, let me explain further. The fuel surcharge is updated on a monthly basis based on the spot prices of jet fuel. Obviously this works sometimes favorably for FedEx and other times unfavorably. For instance, if fuel prices are low, and the surcharge is set low accordingly, FedEx has to eat the lag on the fuel surcharge if fuel prices spike accordingly. The reverse of that situation is obviously the good version for FedEx.

    So before you make these false accusations that FedEx has only lowered the Fuel Surcharge by only 2% please know that they fluctuate often and it is not fixed by any means.

  • Report this Comment On October 20, 2008, at 6:28 PM, sparky08 wrote:

    Behind the "fuel surcharge" link on ups.com, it explains that UPS adjusts its fuel surcharge each month based on the average fuel prices reported by U.S. Dept. of Energy.. also, there is a TWO month lag. FedEx appears to use the same fuel surcharge rates and the same two month delay. If October is good month for fuel, it will help shippers during the busiest shipping season of the year in December.

  • Report this Comment On October 20, 2008, at 11:54 PM, TMFDitty wrote:

    All fine points, and I appreciate the feedback -- so thanks for that. However, none of the comments so far address the key issue here:

    "Improve profits" -- sure. Assuming FedEx doesn't scare off customers with the rate hike, raising prices *should* improve profits. But how does raising prices in a recessionary environment "enhance the customer experience [or] gain market share"?

    I honestly don't see it accomplishing -- or even being at all relevant to -- either of those goals.

    --Rich

  • Report this Comment On October 21, 2008, at 8:33 AM, dlstpg wrote:

    Looks like a couple of UPS/FedEx employee posts... accurate on the fuel surcharge comments but no defense of the true issue. This is a two horse dominated market place. They raise rates because they can, and more importanly because its the only way to raise revenue other than trade business back and forth each time diminishing margins in the domestic market. Look at the 10k, no surprises.

    What other industry do you have where you can be "contracted" for rates and services but subject to whatever annual rate increase they want to impose on you? Dont be fooled by the 5.9% fools.... the devil will be in the detail and most customers will take more that that.

  • Report this Comment On October 21, 2008, at 8:42 AM, djdx2 wrote:

    Rich,

    I don't think the raising of prices and enhancing the customer experience were used in the same sentence. I think you are unfairly melding the two together and may be creating a misunderstanding.

    Raising prices in any business keeps up with inflationary pressures, the weakening dollar, and the higher cost of doing business in general, not to mention other unknowns.

    Enhancing the customer experience comes from FedEx reducing its service times to more and more zip codes every day, meeting service levels, and meeting customer expectations on a more regular basis. When you expect your package to get there at 8:30am FedEx gets it there 99% of the time on-time. I think this may be what "enhancing the customer experience" means. In addition the FedEx Ground network is continually making improvements and services more zip codes in fewer days than any other carrier. I believe these are some of the things that Fred's company does to "improve the customer" experience. These are good reasons to charge a premium price to the competition.

    In addition, FedEx can command a hefty premium to DHL because they serve less areas, have a much lower delivery success rate (80%), and they generally have bad service.

    If the customer does not mind an inferior service they can pay a cheaper price and go with USPS, DHL, UPS...

    -djdx2

  • Report this Comment On October 21, 2008, at 10:28 AM, FreeMrksRNotFree wrote:

    So I guess UPS and FDX should lower rates and get more market share? From where? USPS? Nothing like those profitable $2.34 rev per piece packages..yeah! UPS and FDX CAN raise rates, and isnt that an advantage in a free market? Your article doesnt have logic.

    There are two players in the market, and neither of their large shippers (ie - market share) have anything to do with the rate increase. It's all negociated outside of the rate increases.. You should be talking about who is better positioned to gain the DHL volume falling into the laps of these two companies, and who has a better infrastructure to handle that during peak season...

  • Report this Comment On October 21, 2008, at 10:58 AM, prissyw wrote:

    I feel you left out one thing when you say a 5% increase is high for FEDEX, and UPS. When our government raised the miminum wage this year it costs everyone's cost to go up more than 6%. When you add this in you have a rate that will make less profit unless they are more efficient. JURON

  • Report this Comment On October 22, 2008, at 7:52 PM, JDRichards wrote:

    Okay, let's keep one thing in mind: Businesses are in business to make money. Really?!? No! You don't say! Pardon the sarcasm, but it would seem that the author wants American business to slide into bankruptcy along with those banks that chose to lend monies to people who technically could not afford it. As Ross Perot use to say, "Nope, not gonna do it." The fact of the matter is that American business must take price increases to compensate for other increases in the expenditures, for example, health care. Gee, that doesn't go up, does it? Also, companies need additional monies to continue to reinvest in their infrastructure to keep them competitive in the market and thus provide value to the world consumer. Let's take one example of a transportation company that came in an CUT their rates: DHL. In the next few weeks and months, you will most likely see this company exit the US market for the most part. Why? Because they took in "X" for revenue, but spent "X+10" in expenditures. You can't borrow money all the time! Therefore, they are out. Do we want all of American business to share the same fate?

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