(Bloomberg)—FedEx Corp. and United Parcel Service Inc. are running into a shortage of delivery vans, prompting a surprise cost squeeze that’s cutting into profits during a record surge in package volumes.
Urged by the couriers to purchase any vans they can scrounge up, leasing companies are dipping into the used market. Added demand in the rental market “is creating shortages,” a UPS spokesman said by email. FedEx is even paying a stipend to its contractors to offset the extra cost of renting.
“If there’s a cargo van out there, we’re trying to buy it,” said Brendan Keegan, chief executive officer of Merchants Fleet, which provides vehicles to package delivery companies. It expects to have 15,000 vans out for lease at year-end, up from 6,000 a year earlier.
The van drought sprang from pandemic-induced shutdowns at factories that build the high-ceiling and box-like vehicles—just as soaring ecommerce ratcheted up demand for home deliveries. While FedEx and UPS don’t expect the scarcity will hobble delivery capacity, it adds to the rising expense of doing business as COVID-19 rages on.
Indeed, rising costs from efforts to speed deliveries have been a source of concern for Wall Street analysts, even as investors have rushed to buy shares in both couriers amid the virus-fueled delivery boom. UPS has jumped 48% this year through Tuesday while FedEx has surged 93%.
Total vehicle output is nearing pre-pandemic levels, yet inventories are still thin. The number of all new vehicles available in the U.S. was almost one million units lower in October than a year earlier, according to researcher LMC Automotive.
FedEx is offering to compensate some of its independent delivery contractors for the costs of having to rent more vehicles this year than is typical during the holidays, said Steve Myers, senior vice president of operations for the company’s Ground unit.
“Many of our service providers, especially for the peak season, have pivoted more to the rental market,” he said. “So, we work with them on that.” Myers declined to estimate the added costs or effect on profit margins, as did UPS.
Amazon.com Inc. said it hasn’t seen signs of a shortage. And leasing companies face the risk that demand could be short-lived for vehicles that would stay in their fleets for years, said Joel Eigege, vice president of rental products for Ryder System Inc. But there’s no doubt that there’s plenty of appetite for vehicles now, he said.
“There is definitely a shortage of units in the market, specifically raised roof cargo vans for delivery,” Eigege said.
Some of the bottleneck lies with manufacturers of custom truck bodies for step vans, which were affected by the auto plant closures.
Shyft Group Inc.’s backlog for its customized vehicles quintupled to $282 million in October from a year earlier, CEO Daryl Adams said this month on an earnings conference call.
Orders from parcel delivery companies are rising sharply, “and customers have been asking us to fill them with urgency,” he said.
Keegan, of leasing company Merchants, typically buys vans directly from the automakers but has had to call dealers around the country and turned to purchase used vehicles. While he expects that production will catch up, growth will remain robust.
“Cargo vans will continue to be our fastest-growing asset class,” he said.