High parcel demand means another year of 'firm pricing' for UPS - The Entrepreneurial Way with A.I.


Thursday, February 3, 2022

High parcel demand means another year of 'firm pricing' for UPS


Dive Brief:

  • Parcel carrier capacity is expected to remain tight in 2022, UPS CEO Carol Tomé said on the company's earnings call Tuesday, which would allow carriers to maintain their pricing power as shippers continue to fight for limited space in delivery networks.
  • "The small package market is expected to grow about 5% in 2022," Tomé said. "There is additional capacity being added, but not enough. That's going to create surplus. So the environment supports firm pricing as we look to 2022."
  • To better balance sortation capacity with delivery capacity in its own network, UPS plans to launch 30 delivery centers and two "automated hub projects" this year, CFO Brian Newman said. The company is also enhancing its weekend service to further free up space.

Dive Insight:

Parcel shippers shouldn't expect much more generosity this year compared to 2021.

As elevated package volumes strain carrier networks, shipping costs continue to climb. UPS recently instituted a 5.9% general rate increase, as did FedEx.

Many shippers have accepted surging rates as the cost of doing business in the constrained environment. FedEx Chief Marketing and Communications Officer Brie Carere said on a December earnings call that FedEx expects "a higher-than-normal capture" of its general rate increase, with over half of its customer base having renewed contracts.

UPS is also in the thick of contract negotiations. Newman said the company is "about 60% the way through with" customer contract renegotiations. "So, there is still mileage there to go from a sustainability standpoint."

At the same time, carriers' network investments should help chip away at capacity limitations that are contributing to the jump in rates.

UPS aims to improve productivity at its facilities by eliminating millions of manual scans daily through the use of RFID tags on packages, Tomé said. Additionally, it has eliminated more than 1,000 trailer loads daily through ongoing optimization efforts, according to Newman.

Better productivity helped UPS keep service levels high in an atypical peak season. After a flood of packages at the beginning of Q4, volume levels later in the quarter "were lower than we expected, as omicron and inventory challenges negatively impacted the enterprise retail sector," Newman said. Companies also appear to have heeded carrier warnings about shipping goods earlier rather than later amid wider supply chain challenges.

And UPS' average daily volume domestically increased just 0.2% year over year, which Newman said was below expectations. The slowdown in package volume led UPS to decrease seasonal staffing levels and return rental equipment early, he added.

Since then, demand has bounced back, according to Tomé. She doesn't expect the December retail slowdown to reoccur in 2022's peak season, either.

"In terms of current trends, the first week of January, I'm like, 'Where are the customers?' Everybody seemed to be at home because of omicron, but the business has come back roaring," Tomé said.

via https://www.aiupnow.com

Max Garland, Khareem Sudlow