According to the TD Cowen/AFS Freight Index released this week, traditional parcel delivery giants FedEx and UPS have begun moving away from offering commercial discounts that were previously introduced to remain competitive. Instead, they are now prioritizing high-yield shipments and overall profitability to better align with Wall Street expectations.

Shipping costs for businesses using FedEx and UPS are on the rise. These companies are seeing a decline in lower-end volume within their ground networks, partially replacing it with express parcel volume. Cost-conscious shippers are turning to alternative providers that offer slower but cheaper services. This shift is reflected in a record high: ground parcel costs per package in Q2 rose 32% above the 2018 baseline.

A reduction in lightweight parcels has led to an increase in the average billed weight per package, pushing up the cost per shipment, according to a report by AFS Logistics and financial services firm TD Cowen.

During the pandemic, both FedEx and UPS experienced a surge in parcel volumes. However, as e-commerce sales normalized and companies like Amazon expanded, combined with the rise of new courier startups, parcel volume has declined since 2023. FedEx and UPS engaged in an 18-month price war with emerging courier companies and major retailers like Walmart. Now, both companies have signaled a strategic shift: the new focus is on profitable parcel shipments.

UPS’s decision in January to cut ties with about half of its business with Amazon over the next two years highlights its shift toward profitability.

In recent earnings calls, executives from both companies emphasized a renewed focus on the B2B market segment.

“For small and medium-sized shippers, shifting part of their volume from FedEx or UPS to USPS or regional carriers can save $3 to $5 per package. However, this must be weighed against the cost implications of FedEx/UPS's volume-based pricing models. This may effectively lock SMEs with limited volume into a single-source parcel strategy with one of the major national carriers,” said Bascome Majors, an equity analyst at Susquehanna.

The parcel giants have also been actively adding surcharges on top of their base shipping rates, often matching any additional fees imposed by competitors.

Earlier this month, FedEx notified U.S. customers it would impose higher peak season surcharges than last year. These surcharges, based on handling demand and service levels, will be gradually implemented starting September 29 and remain in effect through January 18. On July 14, FedEx also introduced similar handling, oversized, and unauthorized package surcharges for international shipments.

According to the TD Cowen/AFS Freight Index, UPS has been more proactive than FedEx in enhancing its pricing models and introducing new surcharges.

“Muted demand and heightened competition from alternative players are pushing FedEx and UPS to focus on optimizing their network scale to sustain volumes that generate profit,” said Mingshu Bates, Chief Analytics Officer and President of Parcel at AFS Logistics.

FedEx has recently accelerated the integration of its ground and express networks. UPS, in turn, is closing some terminals and shifting operations to larger, automated sorting centers to boost efficiency.