Consultant Insight: UPS volumes slip more than expected

The first quarter was another strong one for UPS as the parcel giant reported 6.4% growth in revenue at $24.4 billion and consolidated operating profit of $3.3 billion, up 17.6% year over year. On an adjusted basis, operating profit was up 12.1%. [caption id="attachment_69752" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] Average revenue per package was positive across all services but average daily volumes slipped. U.S. Domestic average daily volumes declined 3% while International package average daily volumes fell 6.7%. The year-over-year comparisons aren’t exactly apples to apples, as omicron outbreaks early in the quarter, inflation concerns and higher energy prices were noted to be behind the decline in average daily volumes. But could UPS’ strategy — better not bigger — be part of the reason as well? UPS denies this, but one should consider the possibility. Average daily volumes for Ground declined 3.2% YoY or 611,000 packages per day, driven by a 7.4% YoY decline in residential volume, according to Brian Newman, chief financial officer at UPS. Last-mile market evolves The U.S. last-mile market has traditionally been one in which FedEx, UPS and USPS were the only choices when it came to nationwide, last-mile delivery capabilities. Most shippers typically have parcel contracts with all three after learning a lesson from the 1997 UPS strike. However, a lesson learned from the pandemic is the need to diversify parcel contracts even further. Shippers experienced new and increased surcharges, delays and equipment limitations as major last-mile providers struggled with increased business-to-consumer (B2C) volumes and employee shortages. As the pandemic eases, volume characteristics still favor B2C. Major last-mile providers continue to raise rates but shippers are adding regional parcel carriers such as OnTrac, LaserShip, Lone Star and GLS; 3PLs that have added last-mile services to their list of offerings; startups such as Pandion and FrontDoor Collective; crowd-sourced services such as DoorDash and Instacart; and some, such as retailer American Eagle Outfitters, are acquiring their own last-mile capabilities. Shippers now have more last-mile options not just here in the U.S. but also in Europe, and they’re adding them to their existing list of last-mile carriers. In addition, shippers, mainly retailers, that have physical stores are utilizing their stores as pick-up locations. Trade down? Besides more last-mile carrier options, perhaps shippers are also beginning to consider trading down to lower-cost services to mitigate higher parcel costs. In addition to more last-mile carrier options, perhaps shippers are also beginning to consider trading down to lower-cost services to mitigate higher parcel costs. However, according to Newman, the decline in residential deliveries included a reduction in SurePost volume of about 312,000 packages per day. “If you look at the performance of our SurePost product, last year, SurePost grew 35%,” UPS CEO Carol Tome said during the company’s April 25 earnings call. “This year, SurePost declined in the first quarter, 10.5%. And if you look through that, you can see that five customers actually drove more than 60% of the year-over-year decline. And in talking to those customers, they tell us it was just too hard to comp those stimulus checks.” Perhaps there was some volume shift to UPS’ Mail Innovations. Mail Innovations specializes in mail and small parcels, specifically any parcel under 1 lb. UPS offsets its mail and small-parcel delivery costs by partnering with USPS to provide a low-cost mail solution for customers that move large amounts of small envelopes and parcels. UPS Mail Innovations is part of UPS Supply Chain Solutions’ Solutions group, which also includes customs brokerage, freight consolidation, supplier management, cargo insurance, industrial 3D printing services and transportation management. In regard to financial reporting, the Solutions group falls under UPS Supply Chain Solutions’ “Other,” which noted revenue increasing 54.6% to $538 million. Any shift in volumes to Mail Innovations was probably not very meaningful. There may have also been some trade downs from Next Day Air to Deferred. Average daily volumes for Next Day Air declined 3.3% while Deferred’s average daily volume slipped less than 1%. Deferred is a less costly service that has longer transit times compared with Next Day Air. While not particularly noticeable in the Q1 earnings, Q2 earnings will likely tell us more on any possible trade downs as shippers look to mitigate costs to combat rising inflation concerns and expected lower consumer spending. ‘Trending in the right direction' “Our April volume is better than our March volume, so we’re trending in the right direction and then I look at the volume that’s coming into the network at great revenue quality for deals that we’ve just cut,” Tome told analysts. “So over the next several months, we’ve got new volume coming into our business, both from enterprise customers, as well as SMB customers. So we feel very good about the volume projections that are coming into our new network.” However, volumes are expected to trend lower during the first half of the year before improving in the second half. “Pricing is expected to remain firm and will continue to price based on the value we provide to our customers,” Newman said. UPS’ strategy could be under pressure as shippers focus on cost control measures as the economy becomes more uncertain. During the call, Newman referred to gross domestic product (GDP) expectations for the full year that have been lowered from previous forecasts — now expected at 3.2% for global GDP and 3% for U.S. GDP. “We are continuing to pay close attention to macro elements, including COVID-19, upstream supply chain constraints, inventory and inflationary pressures and the geopolitical environment,” Newman said. “Despite this backdrop, we are reaffirming our consolidated financial targets for 2022 driven by our results in the first quarter and the momentum we are seeing in the second quarter.” The Air Cargo Tech Summit, the new airfreight logistics event presented by Air Cargo World , will take place LIVE in Miami from June 6-7. Learn more and register here.

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