About Scale

About Scale

If you want a good snapshot of the direction of the U.S. economy, the progression of business at UPS is an excellent place to start. After all, the company claims to carry the equivalent of around 6 percent of the country’s economic output on its trucks, vans and aircraft on any given day.

But the first quarter earnings report UPS issued last week, with its 66 percent boost in the bottom line from shipping volume that barely budged from a year earlier and a projection for record full-year profit, carried an especially important message for the broad shipping business that serves global trade.

That shipping world has been wrestling with short-term concerns about capacity in its many forms, and questions about the longer-term impact and market power that come with greater concentration of capacity in larger shipping equipment or larger companies. That was at the center of the April 18 Journal of Commerce cover story, “Big, Bigger, Biggest,” which looked at the huge new container ships Maersk Line is adding and the impact the market will see from Maersk’s greater economies of scale.

With some $50 billion in annual revenue, UPS is all about economies of scale. How the company — by shorthand a parcel carrier, but one that includes one of the world’s largest logistics providers — is managing that scale tells an interesting story about what’s happening in shipping in a post-recession world.

The latest financial report shows that rather than concentrating on market share in any particular area, UPS is maintaining its focus on the efficiency and close management of capacity the company imposed during the downturn. How efficient? Net profit may have expanded 66 percent, but revenue increased “only” 7.3 percent and employee costs, based on compensation and benefits, grew just 1.1 percent over last year’s first quarter.

The downbeat note in the report was that broad economic growth did not appear to contribute much to the earnings improvement. In fact, UPS CFO Kurt Kuehn said the U.S. economy “was a little softer than we’d expected” in the first quarter.

Yet UPS found shippers were willing to pay more to take part in that economic growth. The company, which announced an effective average 4.9 percent rate increase for 2011 (5.9 percent on base pricing, with a 1 percentage drop in the fuel surcharge), saw its overall domestic yield grow 5 percent over last year.

More significantly, the indicator of rate strength grew even more sharply for the premium-priced air express service and reached the highest level since the end of 2008. The average yield for ground parcel service reached the highest level since, well, it was higher than anything UPS has on its records.

Given such pricing strength, Kuehn’s remarks to investment analysts that “customer pushback has been minimal” and “we’re seeing some pretty good leverage” sound remarkably understated.

The other side of UPS’s scale, of course, is the competition concentration among just a handful of companies with similar capabilities.

The maritime shipping business is far more fractured, but carriers and shippers in that business have to believe that the efficiencies that come from scale will bring some concentration in the market.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.