Consultant Insight: UPS expects another strong year led by International in 2022

The fourth quarter of 2021 delivered another record for UPS and the company’s “better, not bigger” strategy, which continued to pay off for the parcel giant. Improvements for the International division in revenue per piece helped deliver large revenue gains for the express giant. [caption id="attachment_69752" align="alignright" width="300"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] In total, Q4 revenue was $27.8 billion, up 11.5% from 2020, while total unadjusted operating profit was $3.9 billion, up 91.0% year over year and up 37.7% on an adjusted basis. Amazon remains UPS’ largest customer, representing 11.7% of total revenue, down from 13.3% in 2020 and mostly level with 2019 when Amazon represented 11.6% of total revenue. “We are laser-focused on improving revenue quality, reducing our cost to serve, and allocating capital in a disciplined fashion,” UPS CEO Carol Tome told analysts. “This is enabling us to move faster and to be more agile so that we capture the best opportunities in the market, enhance the customer experience and continuously improve our financial performance.” UPS’ largest division, US Domestic, reported Q4 revenue of $17.69 billion, up 12.4% YoY, driven by a 10.5% increase in revenue per piece. The operating margin was 11.9%. “Our success was driven by gains in revenue quality and productivity, as well as our ability to quickly adjust our network to match capacity with the needs of our customers while providing industry-leading service,” CFO Brian Newman said. Indeed, since introducing its “better, not bigger” strategy, UPS has focused on adjusting its pricing to ensure that it matches the services it provides and focuses on a select group of shippers. The International division reported revenue of $5.4 billion, a 13.1% increase with revenue per piece increasing 16.4% despite total export average daily volume declining by 5.2% and operating 105 fewer flights than planned. The decline in volume was attributed to Brexit disruptions, while COVID-19 prevented UPS from operating more flights. UPS has also implemented many automation and technology solutions within its facilities to improve efficiencies. As a result, productivity in its U.S. operations improved by 1.7% in Q4, as measured by pieces per hour, helping to reverse the company’s return on invested capital from a downward trend to one of 30.8% in 2021. The freight forwarding arm of UPS also had a strong quarter. Forwarding revenue was up 37.9% YoY, and operating profit more than doubled as global market demand remained strong and capacity stayed tight. International airfreight kilos increased 3.3% YoY, while ocean freight volume growth on the trans-Pacific eastbound lane, UPS’ largest trade lane, grew 7.8%. The year ahead UPS’ outlook for 2022 is positive. Revenue growth for its US Domestic division is expected to be around 5.5%, with revenue per piece growing faster than volume. The Supply Chain Solutions group revenue is also expected to grow, but UPS expects ocean surcharge rates to moderate below 2021 peak levels. As a result, the company forecasts that its operating profit will decrease from what it reported in 2021. But it’s the International division where the highest growth is anticipated. Revenue growth is expected to be about 7.7%, with volume growing slightly faster than revenue. “More specifically, we expect to grow faster in our transborder ground products,” Newman said. To achieve its growth plans, UPS plans to invest $5.5 billion in capital expenditures. “These investments will continue to improve overall network efficiency and move us further down the path to achieving our 2050 carbon-neutral goal,” Newman said. UPS plans to purchase more than 3,700 alternative fuel vehicles and to deploy around 425 arrival electric delivery vehicles in the U.S. and Europe. It will also take delivery of two new 747-8 freighter aircraft, which will add international capacity.

Consultant Insight: UPS expects another strong year led by International in 2022

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