UPS struggles with strong demand

UPS has had a bumpy ride over the past year. On the one hand, demand has been strong with its core business boosted by demand for e-retailing. On the other, the company is facing difficulties related to pension costs and the need to expand capacity to cope with greater demand.

Although the company saw revenue growth of 8.2% and net income was up 43.1% for the twelve months ended December 31st, the fourth quarter saw flaws in performance with operating profits falling back slightly even after adjusting for higher pension contributions.

For the year, U.S. Domestic Package revenue was up 6.4%, International Package revenue was up 10.6%, however the former’s operating profit adjusted for pension contributions fell back by $64m to $1,264m compared to Q4 2016.

The reason for this was additional costs of purchasing transport to cope with what UPS described as shipments surging “beyond network capacity during Cyber-periods driving additional operating cost of $125 million.” In addition, shifts had to be extended at Saturdays to provide “additional capacity and flexibility during the quarter”.

UPS also commented that this “operating profit includes additional expense from investments in new technology, customer solutions and automated capacity expansion of about $60 million.”

In contrast, the International Package segment saw operating profit increase to $760m from $706m in Q4 2016.

The ‘Supply Chain and Freight’ segment was able to exploit strong market conditions more effectively. It saw revenues rise 21% and even allowing for increased pension contributions, the business shifted from a loss in the same period last year to an operating profit of $142m.

UPS and its CEO Dave Abney have been criticised for what is perceived to be mistakes around estimating demand from Christmas e-retail demand and he did admit that “no doubt about it, we have to get our arms around better forecasting for cyber week,”. What is worse is that this is a recognised problem that UPS has suffered from on previous occasions.

However, this management mistake should not obscure the fact that underlying demand for UPS’ express services is strong and that there is real opportunity for sustained profit increases.

Source: Transport Intelligence, February 6, 2018

Author: Thomas Cullen


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