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FedEx Rates Going Higher

Rates for FedEx Express, its air cargo subsidiary, will rise by 3.5% Jan. 1.


(FDX) - Get FedEx Corporation Report

said it will raise its air and ground rates in 2007, setting the stage for


(UPS) - Get United Parcel Service, Inc. Class B Report

to take action, as well.

Memphis-based FedEx said Friday it will raise the rates for FedEx Express, its air cargo subsidiary, by 3.5%. The increase includes a 5.5% average increase in standard rates, offset by a 2% reduction in fuel surcharges. However, the fuel surcharge will now apply more broadly to various components of the shipping charge.

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The new express rates will take effect Jan. 1 and will apply to domestic and U.S. export express package and freight shipments.

Additionally, the parcel-delivery company said it will raise rates for ground shipping next year, but it didn't specify the extent of the increase or the date. Effective Feb. 5, it will also add a new dimensional weight system for oversized, large ground shipments.

UPS will announce its rate increases during the next two weeks, providing specifics for both air and ground, said spokesman Norman Black. "We do a rate increase every year, normally in mid- to late November, and we have everything in it, any charges that are going up or down."

FedEx shares rose 10 cents to $112.19, while UPS shares fell by 64 cents to $73.36.

Banc of America Securities analyst Scott Flower wrote in a research report that "FedEx is prudently managing the risk of a declining oil environment by boosting the rate base at the expense of lower fuel surcharges."

The stage is now set for the dance involving FedEx and UPS. "In the last few years, FedEx has announced its air-rate increases before UPS, and has employed a 'wait-and-see' policy with respect to ground rates," wrote Flower. Once UPS announces, FedEx can "adjust its ground rate according to its view of UPS' competitive response," he said.

The process "confirms our view of a detente in the parcel industry, with pricing firming," he added. Banc of America Securities has financial relationships with FedEx and UPS that include co-managing a recent FedEx securities offering and providing investment banking services to both companies.