Strong B2C growth in its US domestic package business helped to offset yield declines in UPS’sinternational package and air freight businesses in first-quarter results published today, as the
company vowed to focus its investments on developing its expanding B2C and healthcarebusinesses.For the three months ended 31 March, package volumes increased by 4.1% over the prior-yearperiod, thanks to US domestic package volume growth of 4.4%, helping drive revenues up 2.2% toUS$13.43 billion. Operating profit edged up fractionally from $1.57 billion to $1.58 billion,although adjusted operating profit of $1.62 billion showed a 3% increase, year on year. Adjustedoperating margin rose from 11.9% to 12.1%.
During the first quarter, US domestic revenues increased $267 million to $8.27 billion andoperating profit was up $90 million compared to last year. Growth in US domestic package volumeswas led by UPS Ground, up nearly 5%. Next Day Air and Deferred products also demonstrated growth,up 1.8% and 3.7% respectively. Total US domestic revenue per piece was up 0.4%, as base rateimprovements were offset by lower fuel surcharges and changes in both customer and product mix.
UPS said post-holiday demand in January had been “very strong, buoyed by B2C growth, includingadoption of the UPS Returns portfolio of services”. The company said its “automated andcustomisable” returns services helped businesses gain better control and visibility of theirinventories while improving customer satisfaction.
International package revenues remained flat despite average daily export volumes increasing by3.8%, driven by Asia, where volumes were up around 8%. European daily export volumes grew around3%, while US exports “expanded slightly”.
Export yield, down 2.5% on a currency-neutral basis, “continued to be pressured bylighter-weight packages and increased reliance on non-premium products”, said UPS. In addition,fuel and currency were a $30 million drag. As a result, adjusted operating profit was $391 million,a decline of $17 million. On a reported basis, the segment recorded operating profit of $352million, a decline of $56 million compared to the prior year period, reflecting charges related tothe attempted acquisition of TNT.
Reflecting the move towards “non-premium” products, UPS said it had also significantly expandedits UPS Worldwide Expedited service for less-urgent international shipments, tripling the coveragearea to more than 220 countries and territories.
Chairman and CEO Scott Davis stressed that these “non-premium” products were still expressproducts and told analysts and journalists today that he was unconcerned about the recent trendstowards deferred services. He said it was normal to see some shifts between the products, adding: “We are not trying to up-sell to faster products. If a customer chooses a slightly slower service,then we will use that additional time and put it into a slower part of our network. We just need alittle time to adjust the network.”
Davis was also confident that yields in the company’s air freight forwarding business wouldrecover in the second half of 2013, as global economies improved and because of easier year-on-yearcomparisons. “Last year we had a strong first half in forwarding and a weak second half to theyear,” he explained.
Revenue in the company’s Supply Chain & Freight business was up 0.9% to $2.19 billion, butthe forwarding business remained under pressure, impacted by overcapacity in the transpacific tradelanes, where both tonnage and yields declined, driving down operating profit by nearly 14% in thissegment to $143 million.
Davis said UPS saw great potential in the B2C market globally, “which gives us a lot ofopportunities and we are going to be looking at where we can capitalise on that” through targetedacquisitions. Dan Brutto, the outgoing head of UPS’s international business who will shortly bereplaced by Jim Barber, estimated that Europe was three to five years behind the US in terms of itsB2C market overall, with certain countries such as the UK and France ahead of other Europeancountries.
Davis estimated that B2C made up around 40% of UPS’s US package business and around 25% inEurope. “This is one of the reasons we have invested in the Kiala business,” he said. “We aretaking some of the Kiala applications to other places in Europe.” Kiala, bought by UPS lastFebruary, has developed a platform that enables e-commerce retailers to offer their shoppers theoption of having goods delivered to a convenient retail location. At the time of the acquisition,Kiala operated in five countries: Belgium, France, Luxembourg, the Netherlands andSpain.
During the quarter, UPS launched its UPS Access Point service in the UK, based on the Kialaplatform. By the summer, UPS said consumers in the UK would have 1,500 alternative locations forreceiving UPS home deliveries and dropping off returns. Davis said the service would also belaunched in Germany this year, with 2,000 locations expected this year and 4,000 by the end of2014.
Separately, UPS today criticised a decision by the US Federal Aviation Administration torecommend that UPS should pay a $4 million civil penalty for not complying with certain rules onmaintaining and operating four of its aircraft between October 2008 and June 2009. A spokesman forUPS told CEP Research the company believed it was compliant with FAA rules and that there was nevera safety issue. He called the penalty “unwarranted and unreasonable”, vowing to vigorously defendUPS’s position.
