UPS Inc. is finding e-commerce to be a tough tiger to tame.

The Atlanta-based transport and logistics giant reported an 11.5-percent increase in fourth-quarter e-commerce volumes versus the same period a year ago, as more consumers migrated to online ordering for the peak holiday season. UPS delivered more than 712 million packages in the 21-day peak period, a 16-percent increase over 2015's record levels.

However, a larger proportion of e-commerce traffic pushed more holiday packages from UPS' traditional ground network into its lower-priced service known as "SurePost," where UPS funnels shipments into the U.S. Postal Service's (USPS') last-mile infrastructure for deliveries from post offices to residences. UPS' domestic fourth-quarter revenue rose 6.3 percent year over year, due in part to the e-commerce volume surge. But UPS Spokesman Steve Gaut said in an e-mail that the "significant product-mix shift impacted our revenue per piece" and weighed on the company's results. Cost per package remained constant in the quarter due to technology-driven productivity improvements, Gaut said.

Gaut added that results were adversely affected by the cost of "network investments" that have yet to become operational. UPS has projected $4 billion in 2017 capital expenditures, which would be a significant increase from the $3 billion spent in 2016. A large portion of this year's expense will go to boosting network capacity to handle e-commerce flows. FedEx Corp., UPS' Memphis-based rival, is planning similar capacity improvements in its FedEx Ground unit, which handles that company's e-commerce traffic.

The converging challenges facing UPS "underlines our need to accelerate our multi-year investments in air and ground capacity and operational efficiency improvements, along with ensuring we are appropriately compensated for the costs we incur to serve our customers," Gaut said. For 2016, business-to-consumer (B2C) traffic, almost all of it some form of digital commerce, accounted for 48 percent of UPS' total traffic. B2C volume is expected to surpass 50 percent this year for the first time. In December, the ratio jumped to 55 percent.

Business-to-business (B2B) revenue, UPS' bread and butter, dropped 2 percent in the quarter from 2015 levels due to weaker industrial production activity, the company said. B2B traffic is more profitable than B2C because of better package density per stop. UPS drivers normally pick up multiple packages per stop. By contrast, B2C deliveries can consist of one package delivered to one residence, which is less cost effective. UPS and FedEx have a virtual duopoly on the U.S. B2B market. In the B2C arena, they compete with USPS and, increasingly, Seattle-based Amazon.com Inc., which has assembled an air and ground fleet to move packages for consumers and merchants relying on its web site and services.

Amazon still relies on UPS to move its goods, though Jerry Hempstead, a long-time top parcel executive and head of a consultancy that bears his name, said the relationship has eroded as UPS grows less tolerant of Amazon's demands to reduce shipping rates. Hempstead said UPS is better off handling less Amazon traffic, claiming "there is no honor in being Amazon's carrier, and there is little or no profit in being Amazon's carrier."

UPS' fundamental problem, according to Hempstead, is that it is making large capital investments in anticipation of seemingly never-ending double-digit growth in e-commerce deliveries. If that growth doesn't materialize, UPS would be "gambling away earnings" for the next few quarters, he said.

Hempstead also said UPS is being pressured by FedEx, which claims its ground delivery times are faster than its rival's, to speed up its own ground transit times. This has meant an increase in UPS' infrastructure and technology investments and a downshift from premium-priced next-day or second-day air services to cheaper ground deliveries, he added.

Editor's note: An earlier version of this story misidentified UPS' SurePost service as "SmartPost." SmartPost is a service offered by FedEx Corp. in conjunction with the U.S. Postal Service. DC Velocity regrets the error.