UPS revealed today its operating profits declined nearly 52% in the first three months of 2009 asthe global economic slump led to double-digit revenue declines. But the company claimed to have won
market share around the world, including more than half of DHL’s former US domestic business.The US integrator also continued to downsize its air network in the first three months,speeding up the retirement of 44 smaller DC-8s, as it consolidated more volumes through itsexpanded Worldport hub at Louisville following air sorting centre closures in Dallas and SouthCarolina.
In the first quarter, the continuing deterioration in global economic activity resulted indecreased revenue and profitability in all business segments, UPS announced. But the companysucceeded in maintaining its industry-leading small package margins and expanded its market shareboth domestically and overseas while generating strong cash flow.
Group revenue dropped 13.7% to $10,938 million in Q1, 2009, outweighing an 8.6% reduction inoperating costs. The operating profit declined 51.9% to $718 million, leaving the operating margindown from 11.8% to 6.6%. Excluding a $181 million impairment charge on its entire fleet of 44 DC-8aircraft, including related engines and parts, the operating profit was $899 million and theoperating margin was 8.2%. Net profit dropped 55.7% to $401 million. Consolidated average dailyvolume dropped 3.9% to 14.5 million packages. Average revenue per piece decreased 6.9%,reflecting changes in product mix, declining fuel surcharges and weight per package and thenegative impact of currency.
“As economic activity deteriorated throughout the world during the quarter, we managed costswhile maintaining our excellent service to our customers,” said Scott Davis, UPS’s chairman andCEO. “We are optimistic about the company’s future. UPS is becoming an even leaner, moreefficient enterprise, making many improvements that are sustainable when the economic climatestrengthens.”
In the USA, domestic package revenues dropped 10.2% to $6.95 billion, with volume per daydown 4.3%. Operating profits slumped 60% to $384 million, and were 41% lower at $565 million on anadjusted basis, including the DC-8 charge. Ground revenues dropped 7.9% to $4,875 million, withvolumes down 5%. Air revenues dropped even more, with Next Day revenues down 15.7% but volumes onlyfell by 0.7%. Deferred air revenues dropped 13.9% with volumes down 1%. Revenue per piece declined4.6%, reflecting product mix changes, the decrease in fuel surcharges on all products and thecontinuing trend toward lighter weight packages.
CFO Kurt Kuehn told analysts that the rate of rapid decline seemed to have stabilisedsomewhat but warned that Q2 could be weaker due to Easter being in April rather than March thisyear. UPS believed it had gained more than 50% of DHL’s business, gaining market share, althoughthese were largely lighter and cheaper volumes, he added. In terms of product segments, B2Bshipments were “negative” while B2C shipments, representing about one third of US domestic volumes,were still “slightly positive”, Kuehn said.
The International Package segment showed resilience during the quarter, gaining substantialmarket share in both export and non-US domestic products and with volume down only 1%, UPSsaid. International package revenues, however, slumped by 18.8% to $2,240 million. The segment’00 0 s operating profit declined by 30% to $294 million. The 15.3% decline in revenue per piecereflected similar negative trends as in the US small package operation as well as the negativeimpact of currency and the sharp fall in fuel surcharges, UPS said. Reductions in operating profitand margin were caused primarily by volume declines, changes in mix and lower package weight,although at 13.1% the segment’s operating margin remains the highest in the industry.
In the first quarter, Chinese exports to the USA had improved but US exports to China werestill weak, executives said. Asia to Europe volumes were also softer. UPS had performed “fairlywell” in Europe, and Germany had been “not too bad”, CEO Scott Davis noted. “Our business stillseems to be growing in Europe,” he commented.
For Q2, CFO Kurt Kuehn warned that the US economic outlook could be worse than in Q1 and thathe expected the next quarter to be “more challenging”. UPS expected a 4%-6% drop in US domesticvolumes while international volumes could be down by 3%. UPS will scale back $200 million offcapital spending this year, bringing it down to $2 billion, and has identified $300 million worthof additional cost savings. “Economic indicators tell us recovery in the US might begin late thisyear, but more likely not until 2010,” Kuehn continued. “So we expect the second quarter willbe another difficult one.”
