Sale of UPS Freight indicates a change in direction

UPS Freight

The sale of UPS Freight, the ‘Less-than-Truck Load’ business of UPS, seems a significant strategic move by the Atlanta based giant. It appears to indicate the future direction of UPS, one distinctly different from that of the past decade. It also suggests a quiet failure of the previous corporate strategy.

The financial implications of the deal are a little disappointing. Overall, the company has lost money, with UPS expecting “to recognize a non-cash, pre-tax impairment charge of approximately $500m on its statement of consolidated income for the year ended December 31, 2020”. A sizeable driver for these losses is probably the effects of pensions, which have long been a problem for UPS.

The performance of UPS Freight has not been spectacular. Although volume growth in the US market has often been respectable, UPS Freight has frequently struggled with profitability and continues to do so. Numbers published by the company on Monday, January 25, show projected losses on a GAAP basis of $463m for the financial year 2020, so in the light of this, it is less surprising that UPS wanted to escape from this situation. This is disappointing, as others have been able to create value in this market.

A key part of the reasoning for the sale articulated by CEO Carol Tomé was a “better not bigger” strategic positioning enabling “UPS to be even more laser-focused on the core parts of our business that drive the greatest value for our customers.” It is logical to assume that the “core parts” of the business are now focussed on e-commerce, both in terms of air and ground capabilities. UPS needs capital to sustain its investment in this area and $800m from the sale was too obvious to ignore.

It’s worth noting that “UPS and TFI International will also enter into an agreement for UPS Freight to continue to utilize UPS’ domestic package network to fulfil shipments, for a period of five years.”

UPS Freight’s creation was in part stimulated by the desire to compete with FedEx in North America; however, it also represented an attempt to create a more broadly positioned logistics provider. If UPS is now to become more “laser-focused” are there any other parts of the company that will be put up for sale?

Source: Transport Intelligence, January 26, 2021

Author: Thomas Cullen