UPS lowers Q1 earnings expectations due to market conditions

Jeff Berman, Group News Editor -- Logistics Management, 4/9/2008

ATLANTA—With current economic conditions continuing to hamper domestic volume, UPS announced it has lowered its first quarter earnings expectations.

The company said in a statement that earnings guidance has been lowered to $0.86 or $0.87 per diluted share from its previous forecast of $0.94-to-$0.98. This revision follows a March 12 analyst meeting, where UPS took steps to issue cautionary guidance about economic conditions and shipment volumes.

At that time, UPS Chief Financial Office Kurt Kuehn said the company’s earnings guidance for the quarter would be hard to achieve if lower volume trends that occurred in February continued into March.

That appears to have happened, as the economy has remained cool, and many economists have stated that the U.S. is already in a recession. And UPS noted that this has resulted in a “reduction of domestic package volume and a shift away from premium products…[and] significantly increased fuel costs in the quarter also contributed to the lower-than-expected results.”

The fact that UPS is revising its earnings forecast indicates that the economy is not improving in the way that was originally anticipated going back to last year, when volumes across all areas of freight transportation and parcel delivery carriers began to drop.

“A company like UPS that has such a large customer base and is diversified in its geographic coverage to all economies of the world is seeing the impact in its business due to current market conditions, and it confirms for me that [the economy] is not getting better,” said Satish Jindel, president of Pittsburgh-based SJ Consulting, in an interview.

Jindel noted that even though the U.S. economy is still slow and will likely remain that way for the rest of the year, economies in China and India and other countries will continue to support global growth.

And over the last few years, according to Jindel, the parcel delivery industry has done some things that are now getting “played out” to a greater extent. One are where this is occurring is significant improvement in the lower cost ground operations ang ground services at a company like UPS.

“When UPS recently announced it was improving its transit times for ground service, what they were doing was converting express shipments into ground shipments for their customers,” he said. “Clearly, the margins for express are higher than on the ground, so when that happens, the revenue drops and so do margins. But they have to do it for competitive reasons. It is good for the industry, but as transportation costs go up due to things like fuel surcharges more companies are attracting logistics professionals who are experienced in managing customer transportation spend. And in the process they are picking out some of the inefficiencies transportation processes were occurring; this has reduced tonnage and total transportation spend, too.”

A research report by John G. Larkin, managing director at Stifel Nicloaus’ Transportation and Logistics Group, supported Jindel, stating that due to the current market environment, UPS has seen a shift from premium products like high-yielding next-day air to deferred and ground products. Larkin also wrote that the run-up in fuel prices in March has also reduced margins, due to the timing lag in how UPS applies fuel surcharges.

UPS’ biggest competitor, FedEx, is also feeling the effects of the economy. On March 20, it announced that its net income for the fiscal third quarter was down six percent at $393 million compared to $420 million a year ago.