UPS revealed today that it is cutting its air capacity to and from Asia by an additional 10%, inresponse to a further unexpected weakening of Asian export volumes to Europe and the US, and also
reported signs of the US domestic economy faltering in the last few months.Speaking today at the announcement of the company’s second-quarter results, chief financialofficer Kurt Kuehn described the company’s performance as “mixed” during the second quarter.
“The results in the US Domestic and Supply Chain and Freight segments were partially offset bythe weakness in International,” he observed. “Our first-half results have been respectable, but wehave seen signs of a weakening economy. But we are prepared to make the necessary changes to ournetwork, while providing the service excellence our customers have come to expect.”
Second-quarter revenue was up 1.2% to US$13.35 billion, while operating profit grew 4.7% to$1.79 billion. Margins increased from 13% to 13.4%, year on year.
UPS’s US domestic package revenue increased 4.1% over the prior-year period, driven by a 3.5%gain in package volume, while domestic package operating profit jumped more than 12% over 2011adjusted results and the operating margin grew by one percentage point to 14.1%, aided by volumegrowth, improved efficiency, higher base rates and a benefit from the timing of the fuelsurcharge.
For international packages, revenue dropped 4% to $3.01 billion, as the segment “remains underpressure due to weaker global economies and reductions in exports from Asia”, UPS said. Currencyfluctuations also had a negative impact.
In this “challenging environment”, operating profit fell by 10% to $454 million, and marginsdropped one percentage point. But UPS stressed: “The operating margin of 15.1% remains the best inthe industry.”
Export volume increased 0.8% over the same quarter last year. European growth was mostly offsetby double-digit declines in exports from Asia to the US and Europe, UPS observed. Non-US domesticvolume, down 3.2%, reflected weaker economic conditions and continued yield improvementinitiatives, the company added. Intra-regional shipments continued to increase, in Asia, Europe andNorth America.
Export revenue per piece was down 3.5%, as customers continued to trade down, although theprimary factor was currency fluctuations, Kuehn said. “So it has been a challenging environment forinternational,” he added. “We made adjustments to our network in the first half of the year, and weare implementing additional adjustments.”
Having already implemented a 10% cut in capacity from Asia in the first half of the year, mainlyby lowering frequencies, he said the company needed to reduce Asia capacity by further 10% thisquarter.
“Clearly things are weaker than we thought when we developed plans for this year,” he explained.“This latest series of reductions has been a tough decision for us.”
He said the company had been careful to maintain service frequencies at a level that would notimpact customer service. “We have gone through our network and really held service fully intact,but we may have gone from three or four flights from a given airport down to two or three,” hecommented.
Kuehn added: “Clearly we have made some significant reductions from Asia, to Europe andparticularly America, but we do forsee some pick-up in the fourth quarter, as there will be someproduct launches. We can bring in some extra capacity when we need to, although that doesn’t fullycover it, so there is some lag there. On the domestic side, that seems more of a gradual decline,and we can pick things up and bring them down more quickly in domestic.”
Although the Asia declines had been bigger and faster than expected, chairman and CEO ScottDavis said probably the bigger change in the outlook was in the US domestic market.
“International got a bit worse, and exports from Asia fell off a cliff in the second quarter.But going forward, the outlook has been more affected by the downturn in domestic,” heobserved.
“The weakening environment in the US is a bit more recent; we started to see that in the secondquarter, and so there will probably be a time lag of a couple of quarters until we catch up withthat. But we will also be doing things on the revenue side, for example focusing more on themedium-sized customer.”
He described the recent weakening of the US domestic market as “a soft landing”. “We weresurprised and pleased that demand picked up in the fourth quarter and continued into the firstquarter of this year. Our surface offering has continued to be strong, but B2B has seen significantdeclines. I think it is going to get tougher before it gets better. But it will get better,” heinsisted.
“Increasing uncertainty in the United States, continuing weakness in Asia exports and the debtcrisis in Europe are impacting projections of economic expansion,” Davis concluded. “Throughout itshistory, UPS has maintained its strength in all economic cycles and we are making the adjustmentsnecessary to respond to today’s challenging conditions.”
