ATLANTA¡ªAs has been the case in recent quarters, tough economic conditions¡ªwhich have since been exacerbated by issues in the global financial markets¡ªwere reflected by UPS in its third quarter earnings.
Third quarter income for UPS was down 9.9 percent at $970 million. But quarterly sales revenue was slightly more than $13 billion, which represented a 7.4 percent gain over the same timeframe last year. UPS delivered a consolidated volume of 950 million packages for the quarter, which was off 1.0 percent year over year.
U.S. Domestic revenue was ahead of last year by 3.9 percent at $7.841 billion, although operating profit and operating margins were down compared to last year at $1.12 billion ($1.23 billion in 2007 3Q) and 14.2 percent (compared to 16.3 percent), respectively.
International revenue also fared better than last year at $2.95 billion compared to $2.53 billion, but operating profit was off at $386 million (compared to $428 million) and an operating margin of 13.1 percent compared to 16.9 percent last year. Overall daily export volumes for the International Package segment was up 7.0 percent at 792,000.
Average volume per day was down 2.6 percent at 14,845 compared to 15,425 last year. This decline includes decreases in Next Day Air (9.8 percent), Deferred (1.7 percent), and Ground (2.8 percent). And average daily U.S. domestic volume was down 3.4 percent.
UPS also said that total operating profit for the quarter was down 4.4 percent at $1.632 billion. And it said that operating results were positively impacted by productivity gains and benefits from a two-month lag in fuel surcharges, which were offset by a down economy and high fuel costs, which dipped throughout the third quarter.
JP Morgan Analyst Tom Wadewitz wrote in a research note earlier today that the sharp move down in fuel prices within the third quarter along with the two month lag in fuel surcharge mechanism added about $90 million of operating profit ($0.09/share) within
domestic parcel. He added that the fuel benefit in the fourth quarter for UPS may be even greater than the third quarter.
A bright spot for UPS in the third quarter was its Supply Chain and Freight unit, which saw revenue come in at $2.32 billion (compared to $2.13 billion last year)¡ªa 9.0 percent increase. Both operating profit and operating margin were up for the quarter on a year over year basis at $129 million and 5.6 percent, respectively.
Based on lower consumer demand and economic forecasts, UPS CEO Kurt Kuehn said that the company anticipates a challenging environment for a number of quarters going forward, adding that the U.S. consumer will be very conservative with spending this year.
"We've taken steps to effectively manage our costs and enhance service levels in an environment that proved substantially worse than we initially anticipated, with significant slowing toward the end of the quarter," Kuehn said in a statement. ¡°Our focus on service, revenue management, cost reduction and our sound financial position will help us manage through these tough business conditions."
Kuehn also said that UPS reduced its 2008 capital expenditure budget by $200 million to $2.8 billion and expects to reduce 2009 capital expenditures, too.
Satish Jindel, president of SJ Consulting, told LM in an interview this quarter¡¯s performance can be viewed as a confirmation of a sort of domino effect of how the financial markets have been in turmoil, spilling over into the manufacturing and retail side of the economy.
¡°Companies like UPS and FedEx do not participate as much in the service side of the industry, as opposed to the non-service side where there are goods that have to be moved,¡± said Jindel. ¡°It shows that when the financial markets are having a difficult time, all other businesses see that impact, and this is a confirmation of that. UPS alone handles almost eight percent of the GDP, and you are looking at a good example of that half of the economy.¡±
What is not surprising, noted Jindel, is that UPS continues to have customers convert from premium express services to ground services. And part of the reason for this conversion he explained is that fuel surcharges are on the high side and fuel surcharges alone can almost be as much as total ground fees.
This situation would suggest that people are less inclined to do that conversion, but the fuel surcharge difference may have triggered the attention to this, but the conversion to the extent it is being done, said Jindel, without accepting two-day service where customers previously had one-day service, is not the conversion that is taking place.
Instead, it is more of a conversion from two days of deferred to two days of ground, and the reason they are able to do it is that companies like UPS and FedEx have improved transit times. Jindel said these improvements are things like a three-day ground delivery being cut to two days or one day.
¡°It is with that in mind that it is so applicable [for] UPS to have a 20 percent higher rate increase for ground (5.9 percent) than for express (4.9 percent) with its 2009 rate increases,¡± said Jindel.
