UPS grows and invests in new air capacity

UPS recorded a respectable performance over the past quarter, whilst its senior management struck an aggressively optimistic tone announcing a wave of new investment.

In results released last week, the Atlanta based company saw revenue climb by 4.9% year-on-year for the third quarter whilst income before tax was 2.5% higher, the latter slightly depressed by greater costs, notably higher wage costs. Yet across the different parts of the business performance varied considerably.

The US Domestic Express business benefitted from the growth in e-commerce volumes both in terms of B2C and B2B traffic. Revenue increased 4.8% year-on-year to $9,289m but operating profits fell by 0.5% to $1,252m. International Express, in contrast, saw operating profits jump 13.6% to $576m on 2.2% higher revenue. Exports are strong in most main markets including Asia, the US and Europe generally growing in “high single digit percentages”.

It is this growth potential of e-commerce that UPS is most excited about.  David Abney, CEO of UPS, said that UPS air products have increase more than 15% since 2015, and that the company now could reach customers accounting for “90% of world GDP by the next day”.

UPS wants to respond to the potential of this market by installing a “cascade” of new aircraft that will “optimise air capacity”. The first move in this process will be the purchase of 14 new Boeing 747-8 cargo jets costing $5.3bn, with an option for a further 14 aircraft. There will be further investment in new logistics hubs as well.

In the rest of the business it was Coyote Logistics that pushed up revenue in the ‘Supply Chain & Freight’ business. Areas such as freight forwarding and ‘less than truckload’ were described as seeing “weak market conditions”. This resulted in a rise in revenue of 8.1% year-on-year to $2.6bn for the quarter, but a fall of 5.9% to $206m in operating profit.

As with so much of the express and mail sector, UPS is emphasising the growth in its air express sector driven by e-commerce, something that now represents a fundamental restructuring in the nature of air freight. Certainly, it will shape the future of UPS. However, these results also suggest that the company still has the forwarding and road transport businesses to fix.

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Source: Transport Intelligence, November 1, 2016

Author: Thomas Cullen