Q2 operating profit down at UPS as demand slows

Washington DC
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Atlanta-based United Parcel Service (UPS) saw second quarter operating profits decrease 2.7% across all segments, partly due to a trend in customers prioritising slower, cheaper shipments that has prevailed over the last few quarters.

This mode shift contributed to weaker-than-expected quarterly results in the shipper's freight forwarding and international business segments.

The changes in shippers' preference is "primarily cyclical" due to a low point in demands for new technology products over the last few quarters, says UPS chief executive Scott Davis. But he also tells investors that "some of the trade-down is likely permanent" due to the increasing regional nature of international trade and advances in making supply chains more efficient.

The effect on air freight is seen primarily on international routes to Asia, where UPS says it sees new freighter capacity entering the market via belly space in passenger aircraft. Next quarter, the shipper will reduce flights from Asia to Europe by one frequency per week and eliminate some ground routes within Asia on slower days, say executives on a 23 July earnings call.

Air freight tonnage was down 10% during the quarter, which was heavily influenced by a lack of shipments in light of requirements drawing down in the defence sector, say executives. Since 2011, UPS has cut capacity in Asia by 20%.

Logistics companies have been waiting to see conditions improve in the freight market for months, but UPS says that conditions have now degraded to a point where they could start improving again.

"We think that international air freight is at a trough, and it's hard to imagine it getting much worse going forward," say executives.

That view is being echoed elsewhere in the market. In a recent survey from the IATA, 58% of cargo heads said they expected to see an increase in cargo traffic in the next year.

On 12 July, UPS warned investors that it planned to see lower-than-expected results during the quarter, partly due to overcapacity in the global freight market.

"What's increased the capacity has been the belly space in all the passenger airlines...the aircraft that have been added," says David Abney, UPS' chief operating officer. "What you are seeing us do, and other people in our marketplace, is to watch very closely the trade lanes and make sure that we deploy those assets to match the volume in those trade lanes," he says.

He adds that UPS' lack of future aircraft commitments is an advantage in the wake of this uncertainty.

"We have not ordered any aircraft after the 767s that we are receiving this year," says Abney. "That gives us a little time to hold firm and see what's going on in the marketplace the next couple of years."

UPS expects to receive the remaining two Boeing 767-300ERF aircraft on order from Boeing in August and December of this year, which will bring its in-service 767-300 fleet to 59 aircraft, shows data from Flightglobal's Ascend Online database.

In some instances, shippers are changing the modes of the shipments from air freight to ocean, say executives. As a result, UPS is increasing its product offerings in that space.

UPS' overall operating profits dropped 2.7% to $1.74 billion from $1.79 billion in the same three months of 2012. However, operating profits in the supply chain and freight segment suffered a 21.3% decrease year-over-year, dropping from $202 billion to $159 billion this quarter.

Net income fell 4% in the second quarter to $1.07 billion.

UPS' total revenues were up by 1.2% $13.51 billion from $13.35 billion in the second quarter of 2012.