UPS seeks to cope with high demand with home delivery surcharges

It is a little strange that UPS appears to be complaining about too much demand. It ought to be surfing a wave of internet-shopping driven parcel traffic however its latest quarterly results show that it is still struggling to cope with its good-fortune.

At the core US domestic business, operating profit fell by 5.3% year-on-year to US$1.1bn, driven-down by $200m of higher costs “primarily due to higher than anticipated peak related costs. Decreased productivity, higher contract carrier rates as well as overtime and training hours contributed to the excess costs.”

The situation appears to be that UPS still has too little permanent capacity to cope with peak Christmas demand and must ‘fire-fight’ by drawing-in a huge number of additional workers and third party transport providers in order to respond. Unsurprisingly UPS pays a premium for these resources.

Yet the underlying demand picture is very healthy with daily package volume up 6.6% leading to a 7.5% increase in revenue.

The situation in the ‘International Package’ sector seems better with a 4.3% increase in volume leading to a 5.9% increase in revenue yet ‘adjusted’ operational profit was “flat” at $536m. The picture of profits here was complicated by pension and restructuring charges and if these are taken into account profit fell by 38% to $335m.

At the Supply Chain business things appear more stable with revenue up 7.4% and profit before pension liability change up 4.7%. Within the division, contract logistics is growing at “mid-teens growth rate, as demand from Retail and Healthcare customers remained strong”. Road freight appears to be doing well but freight forwarding is struggling in a difficult air freight market. After the costs of pensions and healthcare adjustments the business lost $25m for the quarter.

Over all the effects of these problems weighed heavily on UPS results. Even before the ‘mark-to-market’ pension adjustments, net income was down 1.9% year-on-year at $1.8bn. The response of UPS has been to increase prices, not least by announcing that it will phase-in a ‘residential surcharge’ for home delivery.

Aside from UPS’ self-inflected wounds, these sorts of results reflects the fact that logistics costs in e-commerce home delivery are high and that a market which is frequently based on the concept of ‘free delivery’ is probably not sustainable in the long-run.

To learn more about the nuances of the e-commerce market take a look at Ti’s Global e-commerce Logistics 2015 report here.