UPS posts best fourth-quarter operating profit in its history, double-digit gains across all segments

It wasn't a Christmas miracle, but UPS Inc. yesterday did deliver a post-holiday gift to millions of stakeholders by posting favorable fourth-quarter results that demonstrated the company's ability to finally get control of its peak-season flows.

Atlanta-based UPS posted operating profit of $2.17 billion, a 17.1 percent increase over 2014 levels, and an all-time record for that specific period. The three operating units—domestic package, international package, and supply chain and freight—reported double-digit profit increases year-over-year, UPS said.

Revenue of slightly more than $16 billion in the quarter was up 1 percent from 2014 levels, UPS said. Revenue growth was hurt by unfavorable currency fluctuations and reduced diesel and jet fuel surcharges due to the dramatic drop in oil prices, the company said.

Quarterly net income reached $1.33 billion, a 193.8-percent jump from 2014 levels. The 2014 net income results were adjusted downward to reflect a large noncash charge to account for defined-benefit pension obligations. The 2015 results were adjusted for a similar charge, but the amount was significantly less than in 2014.

UPS reported record peak volume of 612 million packages, up 47 million packages from the 2014 peak. UPS' peak delivery period runs from the day after Thanksgiving through Christmas Eve. For all of 2015, UPS delivered 4.7 billion packages, a 2.1-percent increase from 2014.

In the 2015 fourth quarter, UPS reported a 2.4-percent increase in average daily shipments, and it delivered to 1.9 million new U.S. addresses in December alone. UPS said the latter figure is a testament to e-commerce's growing relevance in holiday shopping and shipping.

Demand for the company's next-day and second-day air products rose by double-digit amounts year-over-year as more customers relied on fast, premium-priced airfreight services to deliver holiday gifts during the hectic last week before Christmas Day. David Ross, analyst for investment firm Stifel, said in a note yesterday that UPS saw a profitable shift from ground to air as shoppers with a 3- to 4-day delivery window were essentially forced to use next-day or second-day air services to ensure their packages were delivered no later than Christmas Eve.

The shift in mix was tantamount to a "hidden price increase" on those customers, Ross wrote. The analyst said that UPS also benefited from lower prices for purchased airfreight transportation. A UPS spokesman said that Ross' comments on a shift in delivery mix represented the analyst's opinion, and that the company could not confirm or deny their veracity.

In mid-January, DC Velocity reported that UPS had tweaked its network to avoid a last-minute package pileup that could disrupt deliveries. It created an extra delivery day for packages shipped on Dec. 21 and scheduled to be delivered by air in two days, or on the ground in three. This meant packages to be delivered in three days had to be tendered by Dec. 18 to arrive by Christmas Eve (Dec. 19 and 20 were weekends) while items shipped by air in two days had to be received no later than Dec. 21.

UPS declined to accept an undetermined number of last-minute shipments out of concern for overloading its network on Dec. 23 and 24. However, as the fourth-quarter results indicated, there was still substantial demand for air deliveries as the clock ticked down. "It just proved the price inelasticity close to Christmas," Ross wrote.

For UPS, the results proved a welcome change from the past two years, when it struggled to align its network with demand forces that were being increasingly influenced by online ordering. In 2013, UPS took enormous criticism for late deliveries of an avalanche of last-minute packages from e-tailers, which it was not prepared for. In 2014, it invested heavily to avoid a repeat of the 2013 fiasco, only to discover that volume growth didn't match its cost structure. Shippers, by and large, were pleased with UPS' service during the 2014 peak. Analysts and investors, however, were chagrined by the hit to the bottom line due to the increased expenses.