With Volume Down, Shipping Discounts Abound

If there’s an upside to the down economy, it’s that you can probably get lower prices for some services—including parcel delivery.

In the wake of nationwide package volume decline for the sixth straight quarter, shippers should “seize the day and take advantage of the current dynamic and get lower prices,” says Gerard Hempstead, president of Hempstead Consulting and a former vice president for DHL.

United Parcel Service, the world’s largest package delivery company, announced July 23 that its earnings fell 49%, to $445 million, for the second quarter compared to $873 million for the same period in 2008. What’s more, sales dropped 17%, to $10.8 billion.

UPS domestic volume slipped 4.6% in the second quarter; international volume decreased 5.5%. The domestic volume decline is a “huge problem for a carrier that has tremendous fixed costs,” Hempstead adds. “UPS can’t just make its terminals or sort centers 4.6% smaller.”

The declines in package counts are not limited to UPS. The same is occurring at the U.S. Postal service and Federal Express as well, Hempstead says.

What does this mean to you? No matter when your parcel contract expires with a carrier, Hempstead says, the time to take advantage of lower pricing is now. “In time, the year-over-year declines will stop, and you will see posted year-over-year gains in parcel counts.”

When that happens, the carriers will begin to moderate price to win or retain business,” he explains. “Right now, just like housing: It’s a buyer’s market.”

Hempstead suspects that word has gone down from senior management to the sales forces and to pricing departments to aggressively go after new business, and “don’t dare lose the business over price.”

For example, Hempstead’s company recently spoke to a large international manufacturer regarding current freight trends and bid activity. The company in the second quarter decided to rebid the full small package contract to consolidate volumes and manage costs through rate reductions.

Both UPS and Federal Express bid double-digit year-over-year rate decreases, however, Hempstead says, “Federal Express was more aggressive and won the multiyear deal.” What’s more, this shipper’s new contract includes fuel surcharge caps and discounts on published surcharge rates, “as well as minimal rate escalators in the subsequent years of the contract.”

As couriers feel squeezed, shippers may see more additional charges. Hempstead says some possible things to look for from UPS during the rest of 2009 include a seasonal surcharge for shippers that have “an extraordinary deviance in their shipment count at some point in their shipping season.” This may manifest itself first as a “peak season” shipping surcharge, he says.

“We have heard rumblings for some time of a desire to institute a super urban delivery surcharge to cover the additional costs of delivering in downtown Manhattan, Chicago, Boston, Philadelphia,” Hempstead says.

“We are also going to see an increase in fuel surcharges next month and the surcharges have been growing month over month for the past four months, albeit significantly less than the fuel surcharges we saw at this time last year.”