UPS reported first-quarter net income up 2.4% y-o-y to $1.16 billion as revenue increased 6.2% to $15.32 billion. Operating profit for the quarter, however, was down 2.1% to $1.78 billion as fuel surcharge revenue lagged a big increase in fuel expense.
In recent years, the quarterly reports from the world’s big express companies have often included significant one-time costs or benefits, and the as-reported and as-adjusted financial numbers can be vastly different. This time, however, other than a relatively modest negative foreign exchange impact, UPS’ reported financial data paints a fairly straightforward picture.
On the operational side, there was nothing but good news. As shown in the chart at right, average daily package volumes rose for all of the company’s products, with the growth particularly strong in the International Package segment.
Commenting on the quarter, UPS said: “Revenue grew in all segments and in all major product categories, as balanced market demand occurred across the company’s broad product portfolio.”
Looking at the results on a segment-by-segment basis:
- US Domestic Package: Volume was up by mid-single-digit percentages for Next Day Air, Deferred, and Ground, driven by the continued shift of retail activity to e-commerce. Per-package revenue also increased, though not by as much, and segment revenue rose 5.0% to $9.54 billion.
As mentioned above, the lag between rising fuel costs and fuel surcharge revenue hit operating profit, which was down 2.4% to $1.08 billion. Regarding fuel costs, UPS implemented a fuel surcharge change in February, and said this would “mitigate the variance for future periods.”
Given that US Domestic volume growth has been driven by the growth of e-commerce, it is no surprise that UPS said it had begun construction on seventeen major facility projects (over five million square feet) “to create capacity and efficiency to support further B2B and B2C growth.” Or that the company has launched Saturday pick-up and delivery of its Ground products in fifteen major metropolitan areas and plans to expand this to “more than 4,700 cities” by this year’s peak holiday season.
- International Package: Volume gains were much stronger in the International Package segment, up 10.5% for International Domestic and 14.2% for International Export. UPS said Export shipment growth was strong across all regions.
Per-package revenue was down 3.6% for Domestic and 7.6% for Export, but segment revenue was up 4.9%, nonetheless, to $3.06 billion (and up 11% on a currency-neutral basis). Operating profit was down 7.8% to $529 million, but, even so, operating margin for the segment was a very healthy 17.3%.
- Supply Chain & Freight: UPS’ two package segments did well in the quarter, but the Supply Chain & Freight segment also turned in a strong performance, with revenue up 12.5% to $2.72 billion, and operating profit soaring 21.8% to $179 million. UPS credited the gain to a combination of “higher-performing business development programs and improved market conditions across all business units.”
In addition to the strong financial and operational performance, UPS’ first quarter was also noteworthy for the change it signaled for the company’s fleet. Over the past few years, while the freighter fleets of FedEx, DHL, TNT, SF, and YTO have been undergoing rapid change, UPS has operated the same 237 jet aircraft. The first sign of change came in late October last year, when the company placed an order with Boeing for fourteen 747-8Fs. And while there was nothing said about it in the quarterly report, the change is continuing. Late in the quarter UPS acquired a 767-300ER from Japan Airlines. Cargo Facts believes this is the first of many such acquisitions as UPS adds capacity in the form of freighter-converted 767-300BCFs. For more on that, see our report “UPS goes for 767 conversions“.