netrashetty
Netra Shetty
United Parcel Service, Inc. (NYSE: UPS), commonly referred to as UPS, is a package delivery company. Headquartered in Sandy Springs, Georgia, United States,[2][3] UPS delivers more than 15 million packages[4] a day to 6.1 million customers in more than 220 countries and territories around the world.
UPS is well known for its brown trucks, internally known as package cars (hence the company nickname "The Big Brown Machine"). UPS also operates its own airline (IATA: 5X, ICAO: UPS, Call sign: UPS) based in Louisville, Kentucky.
United Parcel Service (NYSE:UPS) is the world’s largest small-package carrier, by revenue and by volume. UPS offers ground, air, and ocean freight shipping and shipping-related services. Every day, UPS ships approximately 14.4 million packages for businesses and individuals around the world.[1]
UPS aims to grow by increasing its coverage of global small-package markets and developing its auxiliary businesses. UPS’s earnings in coming years will still depend largely on the U.S. economy. In fact, domestic shipping revenue currently accounts for 62% of UPS's total package business.[2] The dependence on the U.S. economy was apparent in the 2Q09 earnings: UPS lost 4.6% of its domestic volume and reported a 49% decline in earnings.[1] Similarly, international package volume fell by 5.5%, an even larger dropped than that seen in the domestic volume.[1] However as the economy showed signs of recovery from the recession, so did the performance of UPS. In the 4th quarter of 2009, UPS' domestic profits increased over 60% from the previously mentioned low point in the 2nd quarter.[3] Operating margin also increased from 8.32% in Q3 2009 to 10.1% in Q4 2009.[3][4][5]
Contents
1 Business Overview
1.1 Business and Financial Metrics
1.1.1 2010 Fourth Quarter Overview
1.1.2 2010 Third Quarter Overview
1.1.3 2010 Second Quarter Overview
1.1.4 2010 First Quarter Overview
1.1.5 2009 Overview
1.2 Business Segments
1.2.1 Domestic Package Business (62.1% of total revenues)
1.2.2 International Package Business (21.4% of total revenues)
1.2.3 Freight and Supply Chain Solutions (16.5% of total revenues)
2 Trends and Forces
2.1 International Trade
2.2 Global Sourcing
2.3 Fuel Costs
3 Competition
4 References
UPS has ample opportunity to grow in the international parcel shipping market. As a result of globalization, the global economy is expanding at roughly twice the rate of American GDP. Recently, UPS also acquired freight carrier and supply chain management businesses. Both have struggled to date but have the potential to contribute significantly to revenue growth if UPS can cross-market them to its parcel service customers. Including the acquisition of a Turkish package carrier, UPS' international growth produced a 6% gain in international package revenue while increasing operating margin by 19% in the 4th quarter of 2009.[3]
Business Overview
UPS was founded in 1907 by 19 year-old Jim Casey as the American Messenger Company, a private messenger service employing local teenagers in Seattle. In 1913, the company moved from messages to packages, began using automobiles, and started making deliveries for retailers.
Realizing that service for retailers was limited, UPS moved into the parcel shipping business shortly thereafter. Despite legal restrictions that it faced initially, UPS offered parcel delivery services between the 48 contiguous United States by 1975. In the 1980s, UPS began flying packages on its own airplanes to avoid the risk associated with relying on commercial airlines. UPS is now the 9th largest airline in the world.
In the 1990s, UPS launched online package tracking, the UPS Logistics Group, and UPS Capital, which offers customers financing for the supply chain purchases that they ship via UPS. These steps marked the beginning of UPS’s first efforts to expand its services beyond shipping, efforts that remain key to UPS’s growth strategy for the coming years. Today, UPS offers business customers supply-chain management, financing, and the option to incorporate UPS shipment data into their own IT systems. For individuals, more than 6,000 franchisee-owned UPS Store and Mail Boxes Etc. locations across the U.S. offer private mail box rentals, packaging supplies for purchase, and convenient drop-off locations for UPS shipments. These services are available in 24 countries and include about 150,000 access points.[6]
Business and Financial Metrics
2010 Fourth Quarter Overview
UPS today announced net income of $1.119 billion for the fourth quarter of 2010, a 47.8% improvement over the prior-year period.[7] Global revenue grew 8.4%, generating $1.8 billion in adjusted operating profit, a 40% increase.[7] For the three months ended Dec. 31, 2010, UPS delivered 1.1 billion packages, a 3.9% increase.[7] Operating margin expanded 290 basis points to 13.5%. During the holiday shipping season, global volume exceeded 24 million packages on five days, including one day that exceeded 25 million.[7] UPS delivered more than 440 million packages during the holiday shipping season, powered by strong demand from on-line retailers.[7]
For the U.S Domestic Package segment, operating profit increased 37% to $1.04 billion on revenue growth of 7%.[7] The margin expansion of 280 basis points was driven by higher yields, operational efficiencies and volume growth.[7] Revenue per piece improved 3.5%, primarily through increases in base pricing and higher fuel surcharges. Average daily package volume was up 1.7% during the quarter due to growth in UPS Next Day Air(R) and Ground.[7]
For the International Package segment, operating profit increased 15% to $537 million on 9% growth in revenue.[7] The operating margin expanded to 17.6% as a result of volume growth, yield improvement and excellent cost management.[7] Export average daily volume increased 8.7%.[7] The company experienced strong growth from key export countries, with China up more than 30%.[7] European exports continued to show solid performance, led by double-digit gains in Germany.[7]
For the Supply Chain & Freight segment, Adjusted operating profit improved more than six fold to $176 million on revenue growth of 13%.[7] The adjusted operating margin for the segment increased 630 basis points to 7.7%, with all business units contributing.[7] UPS Freight outpaced the market with revenue up 23% due to double-digit growth in shipments per day, an increase in gross weight hauled and significant yield improvement.[7] Forwarding and Logistics revenue increased 10.1% to $1.6 billion, driven primarily by revenue management initiatives in the Forwarding business unit.[7]
UPS maintains a positive outlook and cites global growth in packaging necessities for their optimism.[7]
2010 Third Quarter Overview
For the third quarter, UPS announced a 69% improvement over third quarter 2009 net income.[8] Operating profit was $1.51 billion or 12.4% of revenue.[8] This compares to $929 million and 8.3% margin year ago third quarter.[8] Revenue grew 9.3% to $12.19 billion from $11.15 billion which lead to the 62% increase in operating profit mentioned above.[8] Average volume growth during the third quarter of 2010 was 5%, and UPS delievered 958 million packages this quarter.[8] UPS published their quarterly data on a segment basis:
U.S Domestic Package: Operating profit increased 77% to $911 million on revenue growth of 6%.[8] The margin expansion of 500 basis points was driven by volume growth, improved yields and the benefits of more streamlined operations.[8] Average daily package volume expanded 3.6% during the quarter due to growth in Ground and Next Day Air.[8] Revenue per piece improved 4%, primarily through increases in base pricing and higher fuel surcharges.
International Package: The operating profit for the segment increased 34% to $419 million on an 11% increase in revenue.[8] Operating margin improved 280 basis points to 15.7%.[8] Export average daily volume increased 13%, outpacing the market, due to growth in all regions with Asia leading the way, up more than 30%. Non-U.S. domestic volume increased 14% with strength across Europe, Canada and Mexico.[8] As part of an on-going strategy to grow its business in emerging markets, UPS entered into an expanded alliance with its local domestic courier in Indonesia.[8] This agreement extends the footprint for pick-up and delivery of international express packages throughout the country.
Supply Chain and Freight: Revenue grew 19% with the Forwarding business unit leading the way. Operating profit jumped 74% to $177 million, powered by Forwarding and Logistics.[8] The operating margin for the segment increased 250 basis points to 8.0%.[8] This margin expansion was primarily driven by improved revenue management, increased tonnage and improved operational efficiencies in Forwarding and Logistics.[8] UPS Freight revenue grew 14% due to improved yield and increases in gross weight hauled.[8] During the quarter, UPS launched Preferred LCL Ocean Freight, a new service that provides up to 20% faster door-to-door delivery than other less-than-container-load (LCL) services on the market.[8]
UPS raised its full-year guidance and expects 2010 earnings to grow over 50% over the year of 2009.[8]
2010 Second Quarter Overview
As with many companies in the transportation and shipping industry, UPS grew substantially since the recession during the 2nd quarter of 2009. For the second quarter of 2010, global revenue increased 13%, generating a 57% increase in operating profit to $1.4 billion.[9] UPS published their quarterly data on a segment basis:
U.S Domestic Package: Operating profit climbed 57% to $748 million.[9] This operating leverage was driven by improved yields and additional efficiencies throughout UPS.[9] Average daily package volume rose more than 1% during the quarter, driven by a 2% growth in ground volume.[9] Revenue per piece improved 6%, primarily through higher fuel surcharges and increases in base pricing.[9] UPS forecasted increases in demand post-recession, and correspondingly charged higher prices.[9]
International Package: The operating profit for the segment increased 78% to $521 million on a 23% jump in revenue.[9] Export volume increased 15%, outpacing the market due to strong growth in all regions with Asia leading the way, up more than 40%.[9] Non-U.S. domestic volume increased 24%, driven by an acquisition in Turkey in the third quarter of last year as well as 13% organic growth, powered by strength in core European countries and Canada.[9]
Supply Chain and Freight: Despite a reduction of 0.7% in operating margin, operating profit increased 5.5% on account of revenue's increase by 20.6%.[9]
During the quarter, UPS announced new alliances with its local service partners in Malaysia and Vietnam. These agreements will provide greater access to UPS's broad portfolio of services and superior global network for customers in these important emerging markets. Due to this and better economic prospects, UPS maintains a 45-50% increase in earnings for the full year 2010.[9]
2010 First Quarter Overview
For the first quarter of 2010, revenue increased by 7% to $11.7 billion since the previous year's first quarter.[10] This was mainly due to increases in yield and operating leverage. The overall increases in operating leverage were due to overall growth in all business segments, most notably the growth in the international package and supply chain business. Higher revenues were also due to increases in base pricing and higher fuel surcharges. Higher prices were possible due to the recovery from the 2008-2010 recession. In the overall, net income increased by 37%[10]
For the first three months of 2010, UPS volume was 940 million packages, a 3% increase since first quarter 2009. Operating profit went up to $1.2 billion, up from 1Q 2009 operating profit of $899 million.[10] $660 million - around half of the $1.2 billion - were from domestic U.S packaging revenues.[10] The international segments proved most lucrative, with a 45% increase in operating profit and an 18% increase in average daily volume since the 1st quarter 2009.[10]
UPS expects these increases to continue throughout the year, producing substantial revenue growth from recessionary levels.[10]
2009 Overview
UPS' domestic packaging, international packaging, and its supply Chain & freight segments were all negatively affected by the deteriorating worldwide economic situation in 2008 and 2009. Declines in world trade, U.S. industrial production and retail sales particularly affected its package delivery and forwarding operations.[11] However, as the global economy began its recovery process, volume and revenue trends began to improve in the latter half of 2009.[12]
In 2009, overall volume declined as decreases in industrial production and retail sales reduced overall demand in the U.S. small package market. UPS' air product volume grew faster than its ground volume due to consolidation and departure of competitors in the industry as well as improving economic trends in the latter half of the year.[12] Volume trends improved in the fourth quarter due to overall economic improvements. Average daily volume for next day air increased 2.8% over 2008 levels.[12] Ground volume demonstrated an improving trend over the previous quarters despite a 2.9% decline in the fourth quarter compared with 2008.[12]
In the international segment, export volume declined due to weakness in the Asia, Europe and U.S. export lanes. This weakness was mostly due to worldwide economic recession and slowdown in world trade more than offset market share gains.[12] By the fourth quarter of 2009, export volume began to improve as global trade and economic activity accelerated. Since UPS' growth is dependent on global trade, the increase in global trade after the end of the 2009 recession increased UPS' growth. The 4th quarter operating profit for UPS' international segment increased by 19% since 2008. [12]
Business Segments
Domestic Package Business (62.1% of total revenues)
Parcel services within the United States generated the majority of UPS’s revenues, 62.1% or $28.16 billion in 2009.[12] UPS includes packages up to 150 pounds, via air and ground delivery, as well as letters in its U.S. Domestic Package segment.[13] UPS seeks to strengthen its position as the leader in U.S. Domestic shipping by reducing shipment times and expanding its related services—tracking, intra-company shipping for customers with multiple locations, and systems integration options that allow large customers to see UPS data on their own information systems. On 29 May 2008, UPS received a major boon to its core domestic package business. Deutsche Post's American subsidiary, DHL, decided to outsource its air operations to UPS.[14] The arrangement is for 10 years and will add an additional $1 billion a year to UPS's revenues. [15]
The 2008-2009 recession has forced UPS to undercut shipping prices significantly. Revenue decreased by almost 10% since 2008, and operating margin decreased from 12.5% to 7.6%.[12] However, with the recent economic optimism in the 4th quarter of 2009, UPS' domestic profit increased over 60% since the 2009 2nd quarter low.[3] Growth in next day air and deferred shipping since 4th quarter of 2008 is 3% and 4% respectively in 4th quarter 2009.[3] However, revenue in general decreased by 5.2% mostly due to lower fuel surcharges. As of the fourth quarter of 2009, operating margin was 10.1%, highest since the pre-recessionary levels.[3]
International Package Business (21.4% of total revenues)
UPS’s international package business offers parcel delivery between more than 200 countries and territories and domestic service within 22 countries besides the United States.[13] Although UPS is geographically diversified in this segment, about 50% of revenue is related to shipping in Europe.[12] International small-package shipping generated 21.4% of UPS’s revenue in 2009.[12]
The recession had susbstantially decreased overall revenues in the international segment. Revenue in this segment declined 14% since 2008. [12] However, in the fourth quarter of 2009, UPS' strategy of acquiring internationally substantially increased profits in its international segment. Year-over-year revenue increased by 6%, and operating margins increased by 19%.[3] Due to acquisitions, average daily volume increased by 12% while exports went up by 3%. Non-US domestic revenues increased by 18% and cost-cutting measures increased operating margin to 16.7% in the 4th quarter.[3] The recovery from the recession also assisted in this improvement. All of this considered, operating margin went up by 0.1% from 14% to 14.1% between 2008 year end and 2009 year end.[12]
Freight and Supply Chain Solutions (16.5% of total revenues)
UPS reports earnings for its freight and supply chain management businesses together. UPS entered the logistics services and ground freight markets in earnest in 2004-2005 when it acquired Menlo Worldwide Forwarding and Overnite Transportation, leaders in those markets respectively. UPS Supply Chain Solutions offers integrated domestic and international transportation, customs brokerage, and supply chain management services including warehousing and financing. These businesses complement one another because they allow customers to store, import/export, and transport large quantities of material entirely through UPS.
In 2009, UPS Freight, Supply Chain Solutions, and other auxiliary businesses generated $7.44 billion, or 16.5% of UPS's revenue.[12]. This is a decrease of 16.5% since 2008. However, as with the previous segments, the recovery from the recession provided an uptick in this segment. In the overall, the operating margin increased to 4.0% from a negative 1.2% in 2008.[12]
Trends and Forces
International Trade
Small package shipping now generates about $125 billion in revenues globally, of which about $60 billion derive from U.S. domestic shipments. UPS has 48-51% share in the U.S. domestic market, but more room to grow abroad, where markets are less mature. The U.S. domestic package market is expected to grow about 3% annually, tracking U.S. GDP. In contrast, the international market is expected to grow 5-6% annually in coming years, at nearly twice the rate of global GDP. Increased international trade not only boosts growth in less developed economies, but also results in increased demand for transportation services. Further, international markets are generally more fragmented than the U.S. market, offering more opportunities for large carriers like UPS to grow by acquisition.
Global Sourcing
Increased international trade in finished goods translates into more packages shipped longer distances. But the potential benefits of international trade for UPS are not limited to growth in the parcel carrier market. Many developed world businesses already purchase materials they use from abroad, and this practice, known as global sourcing, is on the rise. For businesses, the downside of global sourcing is complex supply chains that present previously unknown risks. For businesses facing import/export regulations and international transportation logistics for the first time, the appeal of outsourcing supply chain management is obvious. UPS Supply Chain Solutions hopes to capitalize on a projected increase in the market for third-party supply chain managers.
This is especially evident in Latin America. During the first half of 2010, UPS’ average export volume expanded by 50 percent in Costa Rica compared with the same period last year, and by 15 percent in Brazil.[16] Mexico, Brazil, Argentina, Puerto Rico and Colombia are UPS’ largest markets in the region, but other countries – like Costa Rica – are demonstrating strong growth.[16]
Fuel Costs
Fuel costs represent a significant expense for any transportation business and fuel prices have increased significantly over the last year. UPS spent $4.13 billion on fuel in 2008, a increase of over 39% from 2007.[17] Fuel costs did decline by 53.8% in 2Q09 as compared to 2Q08, still, fuel costs represent only 5-7% of operating expenses each year, too little to be a driver of growth or share price.[11] Fuel surcharges, which pass fuel costs on to customers, are standard practice in the transportation business. UPS calculates surcharges for a given period based on fuel prices six weeks earlier, absorbing some loss when prices increase sharply but making a profit on surcharges when prices fall. There is little reason to expect that this practice will change in the near future, despite the threat of increasing prices.
Competition
UPS has three major competitors. The services offered between them are identical, though prices and availability in different regions vary.
Deutsche Post AG: A privately held company, Deutsche Post AG competes with UPS through its DHL operations. Overall, DHL-branded businesses account for more than half of the parent company's sales. However, most of Deutsche Post's sales come from outside its home country. Deutsche Post still handles the mail in Germany, delivering an average of 70 million letters per working day. In addition to traditional postal operations, the company provides mail process outsourcing at home and abroad. [18] As of 2008, revenue for Deutsche Post AG was 76.78 billion...
United States Postal Service: USPS is also not traded publicly. It is an independent government agency that relies on postage and fees to fund operations. USPS handles all kinds of mail and ships domestically and internationally. They also offer prices subsidized by the U.S government. The USPS delivers 203 billion pieces of mail a year (at an average of 667 million per day) to some 149 million addresses in the US and its territories. Though it has a monopoly on delivering the mail, the USPS faces competition for services such as package or freight delivery.[19] The USPS `has 74.93 billion dollars in revenue as of 2008.
FedEx (FDX): FedEx and UPS are close competitors in almost every way. FedEx offers every service offered by UPS, including freight services. FedEx Corporation provides transportation, e-commerce, and business services in the United States and internationally. It operates in four segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. The FedEx Express segment offers various shipping services for the delivery of packages and freight. This segment also provides international trade services specializing in customs brokerage, and ocean and air cargo distribution; customs clearance services, as well as global trade data. However, the scale of operation between FedEx and UPS are different. FedEx has revenues of 33.16 billion in 2009, while UPS had $45.3 billion in revenues.
UPS is well known for its brown trucks, internally known as package cars (hence the company nickname "The Big Brown Machine"). UPS also operates its own airline (IATA: 5X, ICAO: UPS, Call sign: UPS) based in Louisville, Kentucky.
United Parcel Service (NYSE:UPS) is the world’s largest small-package carrier, by revenue and by volume. UPS offers ground, air, and ocean freight shipping and shipping-related services. Every day, UPS ships approximately 14.4 million packages for businesses and individuals around the world.[1]
UPS aims to grow by increasing its coverage of global small-package markets and developing its auxiliary businesses. UPS’s earnings in coming years will still depend largely on the U.S. economy. In fact, domestic shipping revenue currently accounts for 62% of UPS's total package business.[2] The dependence on the U.S. economy was apparent in the 2Q09 earnings: UPS lost 4.6% of its domestic volume and reported a 49% decline in earnings.[1] Similarly, international package volume fell by 5.5%, an even larger dropped than that seen in the domestic volume.[1] However as the economy showed signs of recovery from the recession, so did the performance of UPS. In the 4th quarter of 2009, UPS' domestic profits increased over 60% from the previously mentioned low point in the 2nd quarter.[3] Operating margin also increased from 8.32% in Q3 2009 to 10.1% in Q4 2009.[3][4][5]
Contents
1 Business Overview
1.1 Business and Financial Metrics
1.1.1 2010 Fourth Quarter Overview
1.1.2 2010 Third Quarter Overview
1.1.3 2010 Second Quarter Overview
1.1.4 2010 First Quarter Overview
1.1.5 2009 Overview
1.2 Business Segments
1.2.1 Domestic Package Business (62.1% of total revenues)
1.2.2 International Package Business (21.4% of total revenues)
1.2.3 Freight and Supply Chain Solutions (16.5% of total revenues)
2 Trends and Forces
2.1 International Trade
2.2 Global Sourcing
2.3 Fuel Costs
3 Competition
4 References
UPS has ample opportunity to grow in the international parcel shipping market. As a result of globalization, the global economy is expanding at roughly twice the rate of American GDP. Recently, UPS also acquired freight carrier and supply chain management businesses. Both have struggled to date but have the potential to contribute significantly to revenue growth if UPS can cross-market them to its parcel service customers. Including the acquisition of a Turkish package carrier, UPS' international growth produced a 6% gain in international package revenue while increasing operating margin by 19% in the 4th quarter of 2009.[3]
Business Overview
UPS was founded in 1907 by 19 year-old Jim Casey as the American Messenger Company, a private messenger service employing local teenagers in Seattle. In 1913, the company moved from messages to packages, began using automobiles, and started making deliveries for retailers.
Realizing that service for retailers was limited, UPS moved into the parcel shipping business shortly thereafter. Despite legal restrictions that it faced initially, UPS offered parcel delivery services between the 48 contiguous United States by 1975. In the 1980s, UPS began flying packages on its own airplanes to avoid the risk associated with relying on commercial airlines. UPS is now the 9th largest airline in the world.
In the 1990s, UPS launched online package tracking, the UPS Logistics Group, and UPS Capital, which offers customers financing for the supply chain purchases that they ship via UPS. These steps marked the beginning of UPS’s first efforts to expand its services beyond shipping, efforts that remain key to UPS’s growth strategy for the coming years. Today, UPS offers business customers supply-chain management, financing, and the option to incorporate UPS shipment data into their own IT systems. For individuals, more than 6,000 franchisee-owned UPS Store and Mail Boxes Etc. locations across the U.S. offer private mail box rentals, packaging supplies for purchase, and convenient drop-off locations for UPS shipments. These services are available in 24 countries and include about 150,000 access points.[6]
Business and Financial Metrics
2010 Fourth Quarter Overview
UPS today announced net income of $1.119 billion for the fourth quarter of 2010, a 47.8% improvement over the prior-year period.[7] Global revenue grew 8.4%, generating $1.8 billion in adjusted operating profit, a 40% increase.[7] For the three months ended Dec. 31, 2010, UPS delivered 1.1 billion packages, a 3.9% increase.[7] Operating margin expanded 290 basis points to 13.5%. During the holiday shipping season, global volume exceeded 24 million packages on five days, including one day that exceeded 25 million.[7] UPS delivered more than 440 million packages during the holiday shipping season, powered by strong demand from on-line retailers.[7]
For the U.S Domestic Package segment, operating profit increased 37% to $1.04 billion on revenue growth of 7%.[7] The margin expansion of 280 basis points was driven by higher yields, operational efficiencies and volume growth.[7] Revenue per piece improved 3.5%, primarily through increases in base pricing and higher fuel surcharges. Average daily package volume was up 1.7% during the quarter due to growth in UPS Next Day Air(R) and Ground.[7]
For the International Package segment, operating profit increased 15% to $537 million on 9% growth in revenue.[7] The operating margin expanded to 17.6% as a result of volume growth, yield improvement and excellent cost management.[7] Export average daily volume increased 8.7%.[7] The company experienced strong growth from key export countries, with China up more than 30%.[7] European exports continued to show solid performance, led by double-digit gains in Germany.[7]
For the Supply Chain & Freight segment, Adjusted operating profit improved more than six fold to $176 million on revenue growth of 13%.[7] The adjusted operating margin for the segment increased 630 basis points to 7.7%, with all business units contributing.[7] UPS Freight outpaced the market with revenue up 23% due to double-digit growth in shipments per day, an increase in gross weight hauled and significant yield improvement.[7] Forwarding and Logistics revenue increased 10.1% to $1.6 billion, driven primarily by revenue management initiatives in the Forwarding business unit.[7]
UPS maintains a positive outlook and cites global growth in packaging necessities for their optimism.[7]
2010 Third Quarter Overview
For the third quarter, UPS announced a 69% improvement over third quarter 2009 net income.[8] Operating profit was $1.51 billion or 12.4% of revenue.[8] This compares to $929 million and 8.3% margin year ago third quarter.[8] Revenue grew 9.3% to $12.19 billion from $11.15 billion which lead to the 62% increase in operating profit mentioned above.[8] Average volume growth during the third quarter of 2010 was 5%, and UPS delievered 958 million packages this quarter.[8] UPS published their quarterly data on a segment basis:
U.S Domestic Package: Operating profit increased 77% to $911 million on revenue growth of 6%.[8] The margin expansion of 500 basis points was driven by volume growth, improved yields and the benefits of more streamlined operations.[8] Average daily package volume expanded 3.6% during the quarter due to growth in Ground and Next Day Air.[8] Revenue per piece improved 4%, primarily through increases in base pricing and higher fuel surcharges.
International Package: The operating profit for the segment increased 34% to $419 million on an 11% increase in revenue.[8] Operating margin improved 280 basis points to 15.7%.[8] Export average daily volume increased 13%, outpacing the market, due to growth in all regions with Asia leading the way, up more than 30%. Non-U.S. domestic volume increased 14% with strength across Europe, Canada and Mexico.[8] As part of an on-going strategy to grow its business in emerging markets, UPS entered into an expanded alliance with its local domestic courier in Indonesia.[8] This agreement extends the footprint for pick-up and delivery of international express packages throughout the country.
Supply Chain and Freight: Revenue grew 19% with the Forwarding business unit leading the way. Operating profit jumped 74% to $177 million, powered by Forwarding and Logistics.[8] The operating margin for the segment increased 250 basis points to 8.0%.[8] This margin expansion was primarily driven by improved revenue management, increased tonnage and improved operational efficiencies in Forwarding and Logistics.[8] UPS Freight revenue grew 14% due to improved yield and increases in gross weight hauled.[8] During the quarter, UPS launched Preferred LCL Ocean Freight, a new service that provides up to 20% faster door-to-door delivery than other less-than-container-load (LCL) services on the market.[8]
UPS raised its full-year guidance and expects 2010 earnings to grow over 50% over the year of 2009.[8]
2010 Second Quarter Overview
As with many companies in the transportation and shipping industry, UPS grew substantially since the recession during the 2nd quarter of 2009. For the second quarter of 2010, global revenue increased 13%, generating a 57% increase in operating profit to $1.4 billion.[9] UPS published their quarterly data on a segment basis:
U.S Domestic Package: Operating profit climbed 57% to $748 million.[9] This operating leverage was driven by improved yields and additional efficiencies throughout UPS.[9] Average daily package volume rose more than 1% during the quarter, driven by a 2% growth in ground volume.[9] Revenue per piece improved 6%, primarily through higher fuel surcharges and increases in base pricing.[9] UPS forecasted increases in demand post-recession, and correspondingly charged higher prices.[9]
International Package: The operating profit for the segment increased 78% to $521 million on a 23% jump in revenue.[9] Export volume increased 15%, outpacing the market due to strong growth in all regions with Asia leading the way, up more than 40%.[9] Non-U.S. domestic volume increased 24%, driven by an acquisition in Turkey in the third quarter of last year as well as 13% organic growth, powered by strength in core European countries and Canada.[9]
Supply Chain and Freight: Despite a reduction of 0.7% in operating margin, operating profit increased 5.5% on account of revenue's increase by 20.6%.[9]
During the quarter, UPS announced new alliances with its local service partners in Malaysia and Vietnam. These agreements will provide greater access to UPS's broad portfolio of services and superior global network for customers in these important emerging markets. Due to this and better economic prospects, UPS maintains a 45-50% increase in earnings for the full year 2010.[9]
2010 First Quarter Overview
For the first quarter of 2010, revenue increased by 7% to $11.7 billion since the previous year's first quarter.[10] This was mainly due to increases in yield and operating leverage. The overall increases in operating leverage were due to overall growth in all business segments, most notably the growth in the international package and supply chain business. Higher revenues were also due to increases in base pricing and higher fuel surcharges. Higher prices were possible due to the recovery from the 2008-2010 recession. In the overall, net income increased by 37%[10]
For the first three months of 2010, UPS volume was 940 million packages, a 3% increase since first quarter 2009. Operating profit went up to $1.2 billion, up from 1Q 2009 operating profit of $899 million.[10] $660 million - around half of the $1.2 billion - were from domestic U.S packaging revenues.[10] The international segments proved most lucrative, with a 45% increase in operating profit and an 18% increase in average daily volume since the 1st quarter 2009.[10]
UPS expects these increases to continue throughout the year, producing substantial revenue growth from recessionary levels.[10]
2009 Overview
UPS' domestic packaging, international packaging, and its supply Chain & freight segments were all negatively affected by the deteriorating worldwide economic situation in 2008 and 2009. Declines in world trade, U.S. industrial production and retail sales particularly affected its package delivery and forwarding operations.[11] However, as the global economy began its recovery process, volume and revenue trends began to improve in the latter half of 2009.[12]
In 2009, overall volume declined as decreases in industrial production and retail sales reduced overall demand in the U.S. small package market. UPS' air product volume grew faster than its ground volume due to consolidation and departure of competitors in the industry as well as improving economic trends in the latter half of the year.[12] Volume trends improved in the fourth quarter due to overall economic improvements. Average daily volume for next day air increased 2.8% over 2008 levels.[12] Ground volume demonstrated an improving trend over the previous quarters despite a 2.9% decline in the fourth quarter compared with 2008.[12]
In the international segment, export volume declined due to weakness in the Asia, Europe and U.S. export lanes. This weakness was mostly due to worldwide economic recession and slowdown in world trade more than offset market share gains.[12] By the fourth quarter of 2009, export volume began to improve as global trade and economic activity accelerated. Since UPS' growth is dependent on global trade, the increase in global trade after the end of the 2009 recession increased UPS' growth. The 4th quarter operating profit for UPS' international segment increased by 19% since 2008. [12]
Business Segments
Domestic Package Business (62.1% of total revenues)
Parcel services within the United States generated the majority of UPS’s revenues, 62.1% or $28.16 billion in 2009.[12] UPS includes packages up to 150 pounds, via air and ground delivery, as well as letters in its U.S. Domestic Package segment.[13] UPS seeks to strengthen its position as the leader in U.S. Domestic shipping by reducing shipment times and expanding its related services—tracking, intra-company shipping for customers with multiple locations, and systems integration options that allow large customers to see UPS data on their own information systems. On 29 May 2008, UPS received a major boon to its core domestic package business. Deutsche Post's American subsidiary, DHL, decided to outsource its air operations to UPS.[14] The arrangement is for 10 years and will add an additional $1 billion a year to UPS's revenues. [15]
The 2008-2009 recession has forced UPS to undercut shipping prices significantly. Revenue decreased by almost 10% since 2008, and operating margin decreased from 12.5% to 7.6%.[12] However, with the recent economic optimism in the 4th quarter of 2009, UPS' domestic profit increased over 60% since the 2009 2nd quarter low.[3] Growth in next day air and deferred shipping since 4th quarter of 2008 is 3% and 4% respectively in 4th quarter 2009.[3] However, revenue in general decreased by 5.2% mostly due to lower fuel surcharges. As of the fourth quarter of 2009, operating margin was 10.1%, highest since the pre-recessionary levels.[3]
International Package Business (21.4% of total revenues)
UPS’s international package business offers parcel delivery between more than 200 countries and territories and domestic service within 22 countries besides the United States.[13] Although UPS is geographically diversified in this segment, about 50% of revenue is related to shipping in Europe.[12] International small-package shipping generated 21.4% of UPS’s revenue in 2009.[12]
The recession had susbstantially decreased overall revenues in the international segment. Revenue in this segment declined 14% since 2008. [12] However, in the fourth quarter of 2009, UPS' strategy of acquiring internationally substantially increased profits in its international segment. Year-over-year revenue increased by 6%, and operating margins increased by 19%.[3] Due to acquisitions, average daily volume increased by 12% while exports went up by 3%. Non-US domestic revenues increased by 18% and cost-cutting measures increased operating margin to 16.7% in the 4th quarter.[3] The recovery from the recession also assisted in this improvement. All of this considered, operating margin went up by 0.1% from 14% to 14.1% between 2008 year end and 2009 year end.[12]
Freight and Supply Chain Solutions (16.5% of total revenues)
UPS reports earnings for its freight and supply chain management businesses together. UPS entered the logistics services and ground freight markets in earnest in 2004-2005 when it acquired Menlo Worldwide Forwarding and Overnite Transportation, leaders in those markets respectively. UPS Supply Chain Solutions offers integrated domestic and international transportation, customs brokerage, and supply chain management services including warehousing and financing. These businesses complement one another because they allow customers to store, import/export, and transport large quantities of material entirely through UPS.
In 2009, UPS Freight, Supply Chain Solutions, and other auxiliary businesses generated $7.44 billion, or 16.5% of UPS's revenue.[12]. This is a decrease of 16.5% since 2008. However, as with the previous segments, the recovery from the recession provided an uptick in this segment. In the overall, the operating margin increased to 4.0% from a negative 1.2% in 2008.[12]
Trends and Forces
International Trade
Small package shipping now generates about $125 billion in revenues globally, of which about $60 billion derive from U.S. domestic shipments. UPS has 48-51% share in the U.S. domestic market, but more room to grow abroad, where markets are less mature. The U.S. domestic package market is expected to grow about 3% annually, tracking U.S. GDP. In contrast, the international market is expected to grow 5-6% annually in coming years, at nearly twice the rate of global GDP. Increased international trade not only boosts growth in less developed economies, but also results in increased demand for transportation services. Further, international markets are generally more fragmented than the U.S. market, offering more opportunities for large carriers like UPS to grow by acquisition.
Global Sourcing
Increased international trade in finished goods translates into more packages shipped longer distances. But the potential benefits of international trade for UPS are not limited to growth in the parcel carrier market. Many developed world businesses already purchase materials they use from abroad, and this practice, known as global sourcing, is on the rise. For businesses, the downside of global sourcing is complex supply chains that present previously unknown risks. For businesses facing import/export regulations and international transportation logistics for the first time, the appeal of outsourcing supply chain management is obvious. UPS Supply Chain Solutions hopes to capitalize on a projected increase in the market for third-party supply chain managers.
This is especially evident in Latin America. During the first half of 2010, UPS’ average export volume expanded by 50 percent in Costa Rica compared with the same period last year, and by 15 percent in Brazil.[16] Mexico, Brazil, Argentina, Puerto Rico and Colombia are UPS’ largest markets in the region, but other countries – like Costa Rica – are demonstrating strong growth.[16]
Fuel Costs
Fuel costs represent a significant expense for any transportation business and fuel prices have increased significantly over the last year. UPS spent $4.13 billion on fuel in 2008, a increase of over 39% from 2007.[17] Fuel costs did decline by 53.8% in 2Q09 as compared to 2Q08, still, fuel costs represent only 5-7% of operating expenses each year, too little to be a driver of growth or share price.[11] Fuel surcharges, which pass fuel costs on to customers, are standard practice in the transportation business. UPS calculates surcharges for a given period based on fuel prices six weeks earlier, absorbing some loss when prices increase sharply but making a profit on surcharges when prices fall. There is little reason to expect that this practice will change in the near future, despite the threat of increasing prices.
Competition
UPS has three major competitors. The services offered between them are identical, though prices and availability in different regions vary.
Deutsche Post AG: A privately held company, Deutsche Post AG competes with UPS through its DHL operations. Overall, DHL-branded businesses account for more than half of the parent company's sales. However, most of Deutsche Post's sales come from outside its home country. Deutsche Post still handles the mail in Germany, delivering an average of 70 million letters per working day. In addition to traditional postal operations, the company provides mail process outsourcing at home and abroad. [18] As of 2008, revenue for Deutsche Post AG was 76.78 billion...
United States Postal Service: USPS is also not traded publicly. It is an independent government agency that relies on postage and fees to fund operations. USPS handles all kinds of mail and ships domestically and internationally. They also offer prices subsidized by the U.S government. The USPS delivers 203 billion pieces of mail a year (at an average of 667 million per day) to some 149 million addresses in the US and its territories. Though it has a monopoly on delivering the mail, the USPS faces competition for services such as package or freight delivery.[19] The USPS `has 74.93 billion dollars in revenue as of 2008.
FedEx (FDX): FedEx and UPS are close competitors in almost every way. FedEx offers every service offered by UPS, including freight services. FedEx Corporation provides transportation, e-commerce, and business services in the United States and internationally. It operates in four segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. The FedEx Express segment offers various shipping services for the delivery of packages and freight. This segment also provides international trade services specializing in customs brokerage, and ocean and air cargo distribution; customs clearance services, as well as global trade data. However, the scale of operation between FedEx and UPS are different. FedEx has revenues of 33.16 billion in 2009, while UPS had $45.3 billion in revenues.
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