Supply Chain and Freight came to the rescue for UPS in the third quarter, with a strong performance in road freight and forwarding counter-balancing profitability problems elsewhere.

For the whole company consolidated revenue increased by 7.9% year-on-year, whilst stripping-out currency fluctuations, it was up 8.4% at $17.444bn. Net Income was up 19.8% at $1.508bn, a number slightly flattered by lower income tax costs. Operating profit was only 0.7% higher.

The core US Domestic Package revenue was good at $10.437bn, an 8.1% rise. Here the underlying picture was of strong demand from internet retailing in particular enabling a better pricing environment. However operating profit fell in the third quarter possibly influenced by higher transport subcontractor costs, which for the whole group climbed by 13.6% compared to the same period last year.

International Express was not quite as strong in revenue terms, up 3% at $3.47bn. Volumes fell slightly over the quarter by 0.2% but this was balanced by higher average revenue per package. However, fuel costs and currency effects conspired to drive down operating profits by 11% to $536m.

A much better performance was recorded by the Supply Chain and Freight business. It saw profits sharply higher at $242m, a 24.1% increase on revenue up 12%. In UPS Forwarding and UPS Freight a virtuous circle of higher volumes and better utilization improved margins as did better quality products. Presumably this must have been in the face of higher underlying transport costs.

This quarter’s numbers were roughly aligned with the trends seen through the rest of the year, that of good revenue growth but difficulties with the cost base. This is especially the case in the Domestic Express segment, for the first nine months revenue is up 7.2% but operating profit is down 17.8%.

The pre-Christmas period will be key to UPS in terms of whether it can match capacity to demand in both in terms of volume and cost effectiveness. UPS needs get on top of the problem of a cost base that is increasing faster than the market. A company with the resources of UPS ought to be able to achieve this.

Source:  ti-insight.com