UPS expects big return on facilities, fleet investments

At a UPS “Transformation Conference” in New York today, the company outlined plans for expanding and automating its international and domestic express services to better accommodate burgeoning cross-border e-commerce volumes, justifying the major capital expenditures with larger expected returns on revenue.

The express company struggled somewhat during the second quarter of this year, reporting a 13.0% year-over-year decline in operating profit. At the time, Richard Peretz, UPS’ Chief Financial Officer, attributed the particularly large decline in the express company’s U.S. Domestic Package segment to “higher pension expense and project-related costs.” UPS has already made about US$2.8 billion in capital expenditures (capex) as of the first half of 2018, and plans for a total 2018 capex of between $6.5 billion and $7 billion. During today’s conference, UPS said it expects its transformation program to deliver $200 million in annual savings through the Voluntary Retirement Program launched earlier this year, as well as a $1 billion cash flow improvement.

UPS sees its $7 billion investment as necessary to capture the rapid growth in domestic package revenue and cross-border e-commerce volumes it expects. The express company is expanding its business-to-business (B2B) and business-to-consumer (B2C) offerings in expectation of a 40% growth in US industry package revenue between 2017 and 2022, and 28% growth in cross-border e-commerce volumes over the next three years. To keep up with the growth, UPS said that for each year in 2018, 2019, and 2020, it will expand its US sortation capacity by 350,000-400,000 pieces per hour, or about seven times the sorting capacity added in 2017.

Increasingly, global integrators are investing not only to stay abreast with one another but also to stay ahead of omnichannel retailers, which are increasing their own delivery capabilities. Last week, Amazon announced an order with Mercedes-Benz for 20,000 delivery vans to support the company’s recently-unveiled last-mile delivery program.  Walmart is also testing a crowdsourced delivery platform called Spark Delivery, which works with a third-party company, Delivery Drivers Inc, to employ independent contractors that pickup orders from Walmart stores, and deliver them to customer homes.

Returning to UPS, adding capacity is not the company’s only focus.  As UPS adds capacity, it has also made significant investments in automating its sortation facilities to boost sorting efficiency. While today about 50% of the packages UPS sorts are processed in the automated facilities, by 2022, 100% of eligible packages will be sorted in the facilities, said UPS’ CEO, David Abney. The automation increases will require UPS to open seven new “super hub” automated facilities by 2022. About two-thirds of UPS’ investments during that time will be aimed at improving its US domestic offerings.

The company has already made significant investments in improving its international express delivery capabilities over the past few years, via investments in its air cargo fleet, expansions of its European network, and the opening of “super hubs” in Paris and London. UPS has made large investments in its freighter fleet over the past two years, adding five new 747-8 freighters so far just this year and firming up  options for fourteen additional 747-8Fs in February. Those investments have already contributed to improving financial results for the company’s International Package segment, a 10.0% y-o-y increase during the second quarter.

Learn more about long-range strategies for the express industry from 10-12 October at Cargo Facts Symposium, where a presentation will be dedicated to the topic. For more information, or to register, visit www.cargofactssymposium.com.