February 1, 2018

UPS delivers seemingly solid quarterly, full-year results, yet stock plunges

Company takes $125 million hit for peak delivery problems, orders Boeing freighters.

By Mark B. Solomon

UPS Inc. delivered fourth-quarter and full-year results today that appeared to beat investor and analyst expectations. Yet a $125 million fourth-quarter charge to cope with a surge of delivery orders early in the peak holiday period; higher-than-expected capital expenditures; and numbers that analysts, on second look, deemed a little light sent UPS' stock price down nearly $8 a share in one of its worst downdrafts in years.

The Atlanta-based transport and logistics giant posted an 11-percent year-over-year gain in fourth-quarter revenue and an 8-percent increase for the year to a record $65.9 billion. Its three operating units—domestic package, international package, and supply chain and freight—posted high single-digit or double-digit revenue increases in the quarter. The international unit was profitable on a "constant currency" basis, or excluding the impact of currency fluctuations. Domestic ground parcel volume rose 5.9 percent in the quarter, while next-day and second-day air traffic increased 4.9 and 2.2 percent, respectively.

David Abney, UPS' chairman and CEO, said in a statement announcing the results that the company's domestic air traffic is "expanding to record levels" as e-commerce demand puts more of a sense of urgency into the delivery step. The company will bring nine Boeing 747-8 and three 767 freighters converted from passenger configuration into the U.S. market before this year's peak, according to UPS spokesman Steve Gaut.

Abney's comments are instructive in that they may signal a renaissance in air commerce in the U.S., the market where air was king during the 1970s, 1980s, and 1990s, only to go into hibernation at the start of the century as cheaper surface transportation emerged as a viable alternative for cost-conscious businesses. After a tough six-year stretch, global air cargo traffic surged 9 percent in 2017, the International Air Transport Association (IATA) said earlier this week, as a synchronized worldwide recovery prompted more and faster inventory restocking. The global airline trade group expects cargo volumes to rise 4.5 percent in 2018.

UPS also announced today that it would boost 2018 capital expenditures to between $6.5 billion and $7 billion, or approximately 10 percent of projected 2018 revenue, thanks in large part to the new tax law that reduces the federal corporate rate and includes generous expensing provisions for capital investments. The company, which allocated $5.2 billion to capital expenditures in 2017, had originally forecast that 2018 capital expenditures would equal 5 to 6 percent of this year's revenue.

UPS estimated it will spend an additional $12 billion over three years as a result of the new law. Of that, $7 billion is earmarked for overall network improvements and the remaining $5 billion has been contributed to further fund the company's three pension plans.

PEAK PROBLEMS

The quarterly results were highly anticipated, as they included holiday-season activity during the first peak period in which UPS imposed a delivery surcharge. Industry experts said the surcharge did not result in the loss of business to any of its competitors. In fact, UPS ended up deferring or waiving the surcharge for customers that were sufficiently put off by it, according to Rob Martinez, CEO of Shipware LLC, a parcel consultancy.

On an analyst call today, Abney said the surcharges were effective in incentivizing customers to shift shipments that would normally have been delivered during the very busy last holiday week into the prior week, thus enabling UPS to manage its network more efficiently. UPS will again impose surcharges during the 2018 peak, though when they will be applied, and what service levels will be affected, has not been determined.

The company got behind the eight ball early in the cycle when it underestimated the deluge of orders on the day after Thanksgiving, known as Black Friday; the following Monday, known as Cyber Monday; and for the entire first full week of the period called Cyber Week. Myron Gray, head of UPS' U.S. operations, said the company recovered quickly after the initial hit. Others, though, were not so sure. Martinez of Shipware said UPS' on-time delivery performance trailed FedEx's for the entire six-week holiday cycle. In the 2016 peak, UPS started behind FedEx, but caught up and eventually surpassed its rival in the latter half of the peak period, according to Shipware data.

Nearly 15 percent of UPS ground shipments faced delays of some type during the peak period, based on the activity monitored by consultancy LateShipment.com, which helps shippers identify and get reimbursed for late parcel deliveries. That was worse than FedEx's performance, said LateShipment co-founder and CEO Sriram Sridhar.

Sridhar acknowledged that UPS confronted record peak volumes—about 750 million parcels in all. However, he added that the company had anticipated such a high level of activity, and that the problems it faced lay more with the infrastructure's ability to respond than with the magnitude of the traffic.

Martinez and Sridhar said that UPS and FedEx were largely successful in ensuring that all shipments were delivered by Dec. 23 or 24.

Separately, UPS said it ordered 18 Boeing freighters—14 747-8s and four 767s—that will be delivered in staggered intervals through the end of 2022. The aircraft will join the 14 747-8s the company ordered in 2016. The new planes will be used exclusively on international routes linking the company's "Worldport" global air hub in Louisville, Ky., with Asian markets through Anchorage, Alaska, according to Jim Mayer, a spokesman for the company's UPS Airlines unit. As more of the planes enter the fleet, they may be used in round-the-world services as well, Mayer said.

Mayer wouldn't comment on the order's price tag. Jim Smith, editor of U.K. publication Global Transport Finance, said the order was large enough to have qualified for a 50-percent discount off the planes' respective list prices. Smith added that it was likely that Airbus Industrie, the European aircraft-maker consortium and Boeing's fiercest rival for commercial business, was also keenly interested in getting the UPS order.

Smith estimated that a 747-8 freighter lists for $360 million, and a 767 freighter lists for approximately $185 million.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

More articles by Mark B. Solomon

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