UPS: Q3 revenues impacted by overcapacity in Asian market

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UPS saw an uptick in Asia export package volume in the third quarter for the first time in several months. However, its freight forwarding unit experienced a drop in operating profits, driven in part by overcapacity in the market.

"Poor industry conditions, due to overcapacity in the Asia air freight market, pushed revenue and margin lower in the forwarding unit," says UPS chief financial officer Kurt Kuehn.

The Atlanta-based logistics firm saw operating profits in its supply chain and freight segment decrease to $188 million in the third quarter - a $15 million drop from the third quarter of 2011. While the company did see a 3.6% increase in freight revenues, it was not enough to offset a 6.9% decline in forwarding and logistics unit.

"Whenever there's overcapacity, even though our kilos are up, certainly the rates are down, and that's pretty much consistent across the whole forwarding industry," said Daniel Brutto, president of UPS international.

Despite this, UPS' international segment experienced its best third quarter ever, with $449 million in revenues - a 7.7% increase from the same quarter a year earlier. UPS' international results in the third quarter show some uptick in Asia export package volumes for the first time in several months, in part due to new product launches in September.

However, Kuehn says it will take more time to see how export volumes will fare over the long term.

"It's too soon to say that we or the industry is out of the woods in term of long term Asia exports," he says.

UPS said it has seen a decade of high growth in the international segment until the global economy weakened. To account for a slowing in demand, the company has contracted its Asian network by 10% year over year, said David Abney, COO of UPS International.

UPS achieved the network shrinkage by consolidating routes rather than retiring aircraft. The carrier says it has seen an overall reduction in international flying but has added aircraft in some areas where it has made sense abroad. One example, Brutto says, is a new Hangzhou, China branch that UPS opened in September to complement the tech sector's shift from the east coast to the west coast of the country.

Abney says that the freight company has increased its packages per block hour by 15% between 2008 and 2011. Block hours were down 5% in the third quarter, yet export volume increased by 1%. This is in part due to the fact that the carrier has added 51 Boeing 767-300 aircraft capable of holding larger freight containers. The carrier has eight more of the aircraft type on order.