On Wednesday’s night analysts call to discuss FedEx Corp.’s fiscal 2024 first quarter results, Brie Carere, FedEx’s executive vice president and chief customer officer, was asked about the pricing environment for next calendar year.

Carere instead steered the dialogue toward the upcoming peak season. FedEx’s peak residential delivery surcharges “target volume that will surge and will drive the network to flex,” Carere said during Wednesday night’s analyst call following the release of FedEx Corp.’s (NYSE: FDX) fiscal 2024 first-quarter results. She added that most customers do not pay surcharges because “their volume just doesn’t flex enough to qualify for a peak surcharge.” 

FedEx’s peak delivery surcharges apply to customers shipping 20,000 weekly residential shipments from the end of October through mid-January. The pricing is based on tiers, with customers whose weekly peak volumes are 400% above their weekly volumes in June being hit with the heaviest levy of $6.35 per package for a FedEx Ground ground delivery and $7.40 for a delivery by FedEx Express. (Surcharges on FedEx Ground Economy deliveries, the slowest and least-expensive service the carrier offers, will be priced separately.)

Clearly not every shipper meets one of the residential delivery metrics, let alone both. Most small to midsize customers don’t generate such high levels of weekly volume to be subject to either requirement. 

In addition, the U.S. Postal Service, which according to estimates from consultancy ShipMatrix handled, on average, about 35 million daily parcels during last peak season, will not be imposing holiday surcharges for the first time since 2019. Amazon.com Inc., (NASDAQ: AMZN) which recently rolled out a stand-alone delivery service in 15 major markets, doesn’t impose surcharges at all. Both actions will further reduce the peak volumes exposed to any levies.

As a result, the volume of surcharge-laden shippers is relatively small. During the upcoming peak, about 1.75 million parcels per day will be subject to residential delivery surcharges, according to ShipMatrix. That is a fraction of the 82 million parcel average daily volume expected during the cycle, according to the firm’s forecasts.

But those shippers are not invisible. Moreover, the surcharge battle is expected to be different this peak season than in years past. FedEx rival UPS Inc. (NYSE: UPS), fresh from a contract battle with the Teamsters union that saw about 1 million daily packages diverted to competitors — about 400,000 of that to FedEx — is determined to win back that volume by year’s end. To do that, UPS is likely to be more aggressive in discounting peak surcharges to undercut FedEx, although UPS CEO Carol B. Tomé has made it clear that it will not come close to giving away the store to win back business.

The national carriers will also face surcharge challenges from their regional delivery counterparts. The regional carriers impose peak surcharges, but they are easier to navigate and generally less onerous. Virtually no regional carrier uses tiered surcharge levels. Nor are there any volume thresholds based on volumes from earlier in the year. This benefits shippers with large peak volumes.

The one notable exception is OnTrac, which has built out the largest geographic footprint of any regional carrier. The Vienna, Virginia-based company, whose network blankets most of the country, recently announced peak surcharges with tiers and volume thresholds based on shipper activity earlier in 2023. 

Interestingly, this month OnTrac hired Sean McCarthy, a retired UPS executive, as vice president of revenue management, a position associated with pricing initiatives. McCarthy spent virtually all of his UPS career in pricing and revenue management and is credited by some with developing UPS’ peak and demand surcharge initiatives.

On Wednesday’s analyst call, Carere said FedEx has already pre-negotiated surcharge levels with many of the large shippers that will be paying them. But those agreements aren’t cast in stone. Many large shippers use FedEx and UPS and have some latitude to shift business without losing their discounts that might otherwise be reduced should the foregone revenue from the original carrier drop below certain contractually agreed upon levels. What’s more, experts have said, the savings from lower surcharges from the new carrier may offset the loss of discounts from the old carrier.

“For the past few months, larger shippers have been actively negotiating the demand surcharges with FedEx and UPS to varying degrees of success,” said Rob Martinez, founder and co-CEO of Shipware LLC. “Like any accessorials concession, discount ranges have been zero to full waivers.”  

Martinez said that many shippers feel they lack the leverage to negotiate lower discounts with FedEx and UPS because they dominate the business-to-business delivery segment and remain a powerful presence in the business-to-consumer space, which dominates the peak cycle. Such an assumption, he said, is no longer valid, especially with the parcel market heading into peak with between 110 million and 130 million daily parcels worth of capacity if Amazon’s network is included. That number is well above seasonal demand forecasts, which call for volumes to be well below the last three years. ShipMatrix, for example, expects the Postal Service to handle 29 million daily parcels, about 20% less than last year.

“The first thing shippers need to internalize is that the days of UPS and FedEx forcing rate increases, and their take-it-or-leave-it attitudes, have changed. The … networks have excess capacity, and shippers have more leverage than they think” Martinez said.

One best practice Shipware recommends to shippers that can shift volumes to alternative carriers is to show FedEx and UPS how much volumes and revenues they stand to lose if forced to pay the demand charges, Martinez said. “You’ll have a discounted proposal back from the carriers within a week,” he said.