The overnight companies have compensated by adding hefty fuel surcharges while keeping a close eye on what the others are charging. Those extra fees have only increased the pressure on businesses to find less expensive ways to deliver their goods.
FedEx adds a 28% fuel surcharge for domestic express packages, up from 18.5% in March. The surcharge will increase to 32.5% on July 7.
"Once we crossed over that threshold and started turning toward 30%, our customers wanted to take a second look" at reducing shipping costs, FedEx Chief Financial Officer Alan Graf said in a conference call with analysts and the media. The company is counting on strong international business and domestic cost cuts to improve the earnings picture, he said, "while at the same time -- unlike some in our market -- not sacrificing service."
Business owners like Neal Harris shifted from ignoring express mail costs to negotiating with clients about how quickly they really needed his products.
Harris operates two small Los Angeles companies -- ScentEvents and Harris Fragrances -- devoted to the world of smells. The entrepreneur assembles as many as 200 ingredients to come up with aromas to enrich events and everyday products.
"The cost has just gotten insane. We sent one 2-ounce, nonhazardous fragrance sample from our New Jersey lab to Los Angeles. It was $45, including a $9.93 fuel surcharge," Harris said.
"Now, I'll ask a customer, 'Do you really need it Friday?' If it's yes, I ask by what time. I'll ask if they are willing to pay for overnight," Harris said. "I'll tell them I'll pay the freight if I can ship it by Monday. A lot of the time, the answer is that they can wait."
The U.S. Postal Service can't impose fuel surcharges the way its privately run competitors do. The post office ended its most recent quarter with a $707-million net loss and a 3.3% drop in mail volume.
UPS and FedEx have been fairly well prepared to handle a shift to less profitable ground delivery, said Stifel, Nicolaus & Co. analyst David Ross, who is based in Baltimore. The companies have strong delivery networks that can ship a package to a destination by ground in as few as two or three days, he said. FedEx is pushing hard on ground delivery while UPS is emphasizing peripheral services such as packaging and warehousing.
DHL has been left at the gate.
