UPS May Follow FedEx Pricing Changes for Revenue Gain

United Parcel Service Inc. may find find FedEx Corp.’s new pricing rules too tempting to pass up.

As FedEx prepares to start charging for ground-shipped packages by size, not just weight, the promise of $350 million in extra revenue could be “compelling” enough to spur UPS to copy that approach, said Kevin Sterling, a BB&T Capital Markets analyst. UPS said it’s “continually” evaluating its policies.

“History tells you that when one changes prices, the other follows,” Sterling said yesterday in an interview about the prospects for Atlanta-based UPS joining FedEx with a different rate structure.

FedEx said May 2 it’s moving to “dimensional-weight” pricing in 2015 at its Ground business, matching the policy at its Express unit. Shipments of e-commerce purchases will be among those affected as size becomes part of the rate calculations, buoying FedEx as shoppers go online to order everything from shoes to household supplies.

In a note to investors, Sterling gave an example of how rates would rise for a box of paper towels. Under FedEx’s pricing, a 3-pound (1.4-kilogram) box that’s 17 inches (43 centimeters) on a side would be charged as if it weighed 30 pounds, wrote Sterling, who is based in Richmond, Virginia.

UPS isn’t commenting on whether a similar change is in the works, said Andy McGowan, a spokesman. The company “continually evaluates our policies to remain competitive in the industry,” he said.

Income Estimate

FedEx Ground’s shift will boost operating income by more than $180 million a year, Sterling estimated. That assumes shippers won’t modify package sizes to reduce the impact of new rates. Also, many major shippers would negotiate their own rates lower than FedEx’s published prices, Sterling said.

UPS’s benefit would be larger because its ground division is larger than that of Memphis, Tennessee-based FedEx, according to Sterling. UPS is No. 1 in the world in package shipping, while FedEx operates the world’s biggest cargo airline.

“We felt like we weren’t receiving the correct compensation for the services we were providing,” said Jess Bunn, a FedEx spokesman. “We announced it now so customers would have adequate notice for their planning purposes.”

The change also makes pricing consistent across FedEx Ground and FedEx Express, he said. He declined to comment on potential increased revenue from the switch.

Consumer Shipments

Small packages shipped from businesses to consumers make up almost all the volume handled by FedEx’s SmartPost unit, and 30 percent to 40 percent of total volume at FedEx Ground, said David Vernon, an analyst with Sanford C. Bernstein & Co. in New York. SmartPost specializes in handling such low-weight parcels, with the “last mile” delivery done by the U.S. Postal Service.

“You want to make sure you’re getting paid for the space you use on the trailer,” Vernon said in an interview. “Space is valuable.”

The shift in pricing all FedEx Ground packages by size amounts to a rate increase, he said, and is likely to push some customers to switch from Ground to SmartPost or possibly to competitors like UPS or the U.S. Postal Service.

While some customers may be lost, it will be better for FedEx Ground to not have lower-weight, high-cost packages in its network, said Vernon, who rates the company market perform, the equivalent to a hold rating. Sterling has a hold recommendation on both UPS and FedEx.

It costs FedEx Ground more to make residential deliveries than SmartPost because of its partnership with the postal service, which Vernon said has the lowest expense to drop parcels at homes. UPS has a similar product named SurePost.

FedEx probably will see a decline in revenue that will offset some of the price increase, and also will have the added expense of handling the packages more to collect the dimensional pricing data, Vernon said.

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