United Parcel Service Inc. (UPS:US) plans to begin charging for ground-shipped packages by size, not just weight, a change designed to increase revenue and reduce costs at the world’s biggest delivery company.
UPS already uses so-called dimensional pricing for packages carried in its air network and larger pieces shipped by ground, the company said in a statement today. It follows rival FedEx Corp., (FDX:US) which said in May it would shift to charging by weight and size.
UPS expects the change to discourage online retailers from shipping small, lightweight items in large boxes, taking up more space in trucks and raising costs. The change at both companies likely is the first step toward improving the profitability of business-to-consumer shipments, said David Vernon, a Sanford C. Bernstein & Co. analyst.
“This change should allow for a meaningful boost to revenues and on a net basis, we estimate that it should be worth around 5 percent” to earnings per share on an annualized basis, he said in a note to investors today.
Price increases under the new system should apply to about two-thirds of UPS domestic ground shipments, Vernon said.
Expanding dimensional pricing could increase operating income at Atlanta-based UPS’ domestic ground unit by at least $350 million, or 24 cents a share, on an annual basis, Kevin Sterling, a BB&T Capital Markets analyst, estimated last month.
Sterling estimated that the cost to ship a box of paper towels weighing three pounds and measuring 17 x 17 x 17 inches could jump to more than $20 from $8 under the new pricing rule.
“UPS has been researching the potential expansion of dimensional-weight pricing for a number of years because it enables us to more appropriately align rates with costs, which are influenced by both the size and weight of packages,” Chief Commercial Officer Alan Gershenhorn said in the statement.
The change at both companies will come after the holiday shipping crunch. The UPS move is effective Dec. 29 in the U.S., while Memphis, Tennessee-based FedEx will begin dimensional pricing on Jan. 1, 2015.
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