UPS sees Q1 profit boost, but international air freight still challenged

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United Parcel Service (UPS) saw first quarter 2013 net income increase 6.9% year-over-year, totalling $1.04 billion compared to $970 million in the same three months of 2012.

Operating profit totalled $1.59 billion, a 0.7% increase from the previous year.

Strong US domestic package demand drove better-than-expected first quarter earnings at the Atlanta-based logistics company, with the segment increasing profits 9% to $1.01 billion.

International package profit, on the other hand, decreased by 13.7% to $352 million in the first quarter, compared to $408 million in the first quarter of 2012. International export yields were down by 2.5%, reflecting a continued trend of customers opting for lighter-weight packages and non-premium products.

Overcapacity in the international air freight segment is causing weak yields, especially in Asia, say UPS executives on an analyst call. Some of this overcapacity is being driven by the Boeing 777 freighter belly capacity now available in the market as carriers upgauge their freighter aircraft, putting pressure on pricing and creating an environment where customers are taking advantage of spot rates for these international shipments.

The outlook for the international air freight segment is a "rocky road" for at least the next quarter because of this overcapacity, executives say, but is expected to improve by the end of the year. UPS says it will be "bullish" on air freight continuing to be a big part of its portfolio, citing the flexibility to move certain shipments into its freight division to adjust to market trends.

UPS says that the low rates in the current air cargo environment are reminiscent to what the market saw in 2009, however, it sees a trend of cargo carriers adjusting frequencies rather than taking aircraft out of its fleet.

To adjust, the carrier has reduced air cargo capacity 20% since the first quarter of 2011 on transpacific routes.