UPS in Overdrive

UPS in Overdrive

Copyright 2004, Traffic World, Inc.

International business is fueling the greatest part of the growth at UPS but the most troubling thing for the competition is that the parcel giant is also growing sharply in the domestic U.S. market.

Rapid growth across the board sent UPS''s profits soaring 24 percent in the first quarter to $759 million. With $8.92 billion in revenue, 11.3 percent better than the year before, the company''s profit margin hit 8.5 percent, a rare height in the competitive transport field and clear evidence that the world''s largest package carrier is benefiting strongly from the improving global economy.

"We clearly are reaping the benefits of our strategy to provide broad solutions across the supply chain," UPS Chief Financial Officer Scott Davis said. "Increasingly, we are seeing each segment of our business help fuel the growth of other business units."

UPS''s international wing more than doubled its operating profit to $269 million even though traffic in that field grew only 6.4 percent.

Of bigger concern to UPS competitor FedEx was that UPS''s overall domestic traffic grew 5 percent, including growth in the air express arena that suggested UPS is taking market share away from FedEx''s signature service. FedEx saw overnight air volume slip 1.4 percent in its most recent quarter ending Feb. 29 against a 3.1 percent gain for UPS in the March quarter. A 5.2 percent gain in UPS''s huge ground business was smaller than FedEx Ground growth but the FedEx unit is far smaller and industry analysts say they see suggestions of growing competition on price.

"The domestic franchise has stabilized and management has undertaken efforts to improve productivity, but our concern over a more competitive pricing environment, longer-term, remains," said investment analyst James Valentine of Morgan Stanley.

During the first quarter, UPS began implementing its package flow improvement project, which it announced last fall.

Although it is losing money from the investment in the short-term, including $15 million to $30 million during the first quarter, UPS executives said they expect to see the rewards from the new technology by the fourth quarter. The technology is aimed at improving routing of shipments and making pickup and delivery more efficient.

The international business, where UPS recently gained important new route authority through Hong Kong, appears remarkably efficient.

The $1.62 billion in international revenue was not only 24.3 percent better than the first quarter of 2003, it was 6.7 percent better than the fourth quarter of 2003 and it was 18 percent of UPS''s overall revenue, the largest share international business has ever had at the Atlanta-based company.

Analysts said the profit hit a target that had been projected for 2007.

"So the question is, can international continue to grow at these rates?" said UBS transportation analyst Rick Paterson. "We see little reason to expect otherwise. UPS (and competitors) are adding capacity as quickly as possible."

The nonpackage revenue - largely the forwarding and logistics business under UPS Supply Chain Solutions - grew 9.7 percent to $760 million and the $117 million operating profit was up 9.3 percent over last year. Even there, UPS appears to be seeing stronger returns from the improvement in the economy that appeared to take hold around the turn of the year: the revenue figure for the normally slow first three months actually was slightly ahead of UPS''s revenue for last year''s fourth quarter.