UPS Posts $757 Mln. Profit as Air Shipments Increase
This story appears in the Feb. 8 print edition of Transport Topics.
UPS Inc. said it benefited from a sharp increase in December air shipments out of Asia and a busy holiday season to post profits for the fourth quarter and the full year.
The largest corporation in North American freight transportation earned $757 million, or 75 cents a share, during the fourth quarter on quarterly revenue of $12.38 billion. A year ago, the company had net income of $254 million, or 25 cents, on revenue of $12.7 billion, but those results were diminished by $575 million in one-time, noncash charges.
“I’m pleased with the way in which UPS wrapped up the year, but I, for one, am glad that the year is over,” Chief Financial Officer Kurt Kuehn told stock analysts and reporters during the company’s Feb. 2 earnings call.
“UPS has emerged from a very difficult year leaner, more focused and better positioned to take advantage of improving economic trends,” Chairman and CEO Scott Davis said during the same presentation.
For the year, the company had net income of $2.15 billion, or $2.14 a share, on revenue of $45.3 billion. In 2008, UPS earned $3 billion, or $2.94 a share, on revenue of $51.49 billion.
The Atlanta-based carrier said the economy is now normal enough that management can return to annual — rather than quarterly — forecasts and the prediction for 2010 calls for slow but steady improvement, meaning its less-than-truckload operations should return to profitability.
Davis and Kuehn said the Asian shipping surge affected UPS in two different ways but was positive as a whole. The increase in demand for air capacity squeezed margins at UPS’ air forwarding business.
However, as the owner of 212 cargo aircraft, it benefited as a direct supplier of transportation. Kuehn said shippers purchased more high-yielding services such as next-day and deferred air, leaving less room in the freighters for more basic air cargo.
Kuehn described the decline in basic cargo against the backdrop of more premium services as “a good problem for us.”
Package pricing seems to have turned around in favor of carriers, they said.
“Now that the economy is stabilizing, we’re focusing much more on yield management, on making sure that we negotiate and extract the value that we’re creating,” Kuehn told analysts, adding that higher pricing will be a prime goal with contract shippers as the current deals expire.
Yields on all major service lines decreased during the quarter, compared with year-over-year, but Kuehn said that downturn was because of declining fuel surcharges and covered up a more important point.
“Base-rate pricing — my No. 1 priority heading into 2010 — improved sequentially,” he said.
“Due to the amount of leverage in the business model and management’s willingness to continue to cut costs accordingly, UPS is well-positioned to benefit from the gradual economic recovery in 2010,” analyst Art Hatfield wrote to clients of Morgan Keegan & Co.
In terms of cost-cutting, Kuehn said the company has offered an early retirement buyout to 1,100 managers and is looking to reduce employment by 1,800 slots overall.
“Management’s recently announc-ed domestic management restructuring should drive further margin improvement in later 2010 and into the future,” wrote analyst Jon Langenfeld of Robert W. Baird & Co.
“The reduction in head count and consolidation of geographies should enhance UPS’ interaction with small and medium-sized customers, which typically come with better margins than larger customers,” Langenfeld said.
In other labor matters, UPS said it would increase its payment to Teamsters union pension funds through 2013, in accordance with new federal regulations, but it should get a break on labor costs as the economy improves.
Operations last year were marked by low volumes and wage bills to the most senior and expensive Teamsters union members. As the economy improves, volumes will rise and new hires will be far more junior, thereby lowering the average wage, Kuehn said.
