UPS is planning a wide-ranging package of revenue and cost measures to ensure a successful peakseason in 2015 after two years of misjudging demand.
The company under-estimated demand in 2013 when a late surge of online orders overwhelmedavailable capacity, resulting in presents being delivered after Christmas. Then last year, afterinvesting heavily to increase capacity, UPS over-estimated demand and lower than expected volumesmeant the additional capacity was significantly underused.
But executives stressed during yesterday’s Q4 results call with analysts that they aredetermined to ‘get it right’ this time. The company will impose peak season surcharges on some B2Cdeliveries to drive up revenues and cut down on peak season operating costs.
Looking back at the 2014 lessons, CEO David Abney emphasised: “It was important to fortifythe trust of customers and protect our brand. From that perspective it was successful.” UPS claimedit had achieved high service levels in the late November – late December peak season despite thecontinued volume growth and emergence of new ‘spikes’ in demand, such as the long weekend coveringBlack Friday and Cyber Monday.
Abney pointed out that average daily volume during peak season had risen by 6 millionparcels from 2012 to 2014 to reach more than 30 million items a day, which was up to 75 per centmore than usual volumes during the year. “This is a trend we expect to continue as e-commerceexpands its influence over the retail sector,” he said.
But Abney admitted that UPS “erred on the side of caution” last year and built an operatingplan for peak season “that would provide superior service if volume levels exceeded expectations,contributing to higher than expected costs”.
CFO Kurt Kuehn admitted that UPS had been “a little concerned and surprised” at thechallenges of opening up so many operations last November ready for the peak season. “I think thebig issue is just that the demand has become much more spiky at the very beginning of peak and atthe very end. And so forecast aside, the shape of demand around the cyber weekend and then theweekend before Christmas was the big spikes and there just wasn’t as much needed in that flatperiod,” he commented.
Outlining plans to increase revenues and reduce costs at this year’s peak season, Abney saidthe company would invest in technology and capabilities to tackle costs and launch revenueinitiatives to improve yields and profits.
On the cost side, these would include ‘tighter dispatch’ and reduced overtime, whileexpansion of permanent hubs would reduce the need for temporary sorting facilities. Third-partytransportation costs, which soared by 65 per cent in Q4, 2014, would be reduced and the rollout ofthe ORION software would be accelerated.
On the revenue side, UPS plans to introduce peak season surcharges on B2C shippers forresidential deliveries, including via SurePost, “on a customer segmented basis”. This will takeseveral years where customers are on multi-year contracts. “These pricing strategies will bedesigned to ensure we’re properly compensated for the value we provide. We will align revenue withcost, extracting the value for the investment in our network, especially during peak periods,” theCEO declared.
Moreover, the ‘control tower’ system introduced last year to monitor capacity use will againprovide capacity management during peak season 2015 but will also be used more for revenue andyield management, he explained.
Chief Commercial Officer Alan Gershenhorn told analysts that introduction of dimensionalweight pricing for all ground packages this year would “go a long way” to increasing yields,especially in B2C.
Myron Gray, President of US Operations, said that this year UPS would not contract externaltransportation capacity so early and would take on fewer additional drivers to avoid some of thehigh costs of last year. He said that over 70 per cent of drivers would be using ORION by the endof 2015 to help reduce operating costs with more efficient routes, and UPS would expand use of itsnew consolidated B2C delivery service as well as Access Points in the USA.
Executives also stressed that UPS is growing in the B2B market. Kuehn said that the B2Bbusiness grew by over 3 per cent in the fourth quarter, while Gershenhorn noted that five of thecompany’s top six vertical industries are growing, and helping to create more ‘year-round’ businessin contrast to the ‘peakiness’ of the retail sector.
For 2015 as a whole, UPS expects to improve overall operating profits by 5-9 per cent,revenue by 3-4 per cent (5-6 per cent excluding the fuel surcharge impact) and volumes per day byabout 4 per cent. The US Domestic Package business is expected to increase volumes and revenues byabout 4 per cent this year, with operating profit up by 5-9 per cent. The International Packagebusiness is expected to increase volumes about 3-4 per cent, revenues about 2-3 per cent andoperating profits by 6-12 per cent.
Abney told analysts: “I want to emphasise that we’re resolute in improving the financialperformance of the company. During the next couple of years, the cost initiatives will provideescalating benefits and the revenue strategies will continue to be implemented. We’re 100 per centcommitted to our long term financial targets that we shared in November. UPS is focused on the keypoints of our long term strategy which include investing to position UPS for future growth,developing innovative industry-specific solutions and adapting our B2C delivery model to improveprofitability.”
