Consultant Insight: UPS reports record operating profits in Q3

UPS’ revenue and operating profit continued their upward climb during the third quarter, reporting $23.2 billion in total revenue, up 9.2% year over year, and $3 billion in operating profit, a 23.4% increase from Q3 2020. For the first nine months of the year, UPS generated more operating profit than any full year in its history. [caption id="attachment_69752" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] Each division reported double-digit operating margins, despite declines in average daily volumes in the U.S. Domestic and International divisions, with tough YoY comparisons and some supply chain disruptions. Export growth in Europe and the Americas offset a 4.8% decrease in export average daily volume out of Asia. The decline in Asia was due to difficult comparisons from the prior year and the implementation of network contingency plans in response to COVID-19 protocols at select airports, UPS CFO Brian Newman said on the company’s earnings call Tuesday. “We had 137 fewer flights out of Asia than we anticipated,” Newman told analysts during the call. The International volume characteristics continued to favor business-to-consumer shipments in Q3 despite B2C average daily volumes declining 2.3% YoY. Recovery in B2B demand resulted in average daily volume growing 3.8% YoY. The company’s total volume breakdown stands at 42% B2B and 58% B2C, an improvement since the beginning of the pandemic in March 2020, when B2C volumes jumped to more than 70% of total volumes. Ready for the holiday season UPS is expecting a robust peak season. Though the company did not forecast expected volumes for the holiday peak season, it has expanded its weekend delivery and added additional sorting capacity. Still, the company does not expect these measures to meet the demand. “We expect consumer demand will outpace capacity in the market,” CEO Carol Tome told analysts. As such, Tome noted that UPS’ technology allows it to match daily capacity with customer demand, and where it needs to, the express operator will control the amount of volume that enters its network. These actions will “minimize the chaos costs and enable high service levels,” according to Tome. However, the U.S. West Coast port congestion is slowing down the flow of packages. Tome noted that UPS has several hubs around the ports with capacity of 70 containers each. However, because of the supply shortage of third-party truck drivers delivering to the hubs, UPS is only receiving 50 of the containers. Struggles could present opportunities for UPS. Tome highlighted some pilot programs currently underway with a third-party platform to test whether UPS can move upstream to consolidate orders from multiple shippers into a basket and ship it on one delivery vehicle. Better not bigger Managing capacity from a profitability perspective is part of UPS’ “Better not bigger” strategy, which is supportive of the overall strong financial health of the company. As part of the strategy, UPS has mitigated some costs by implementing surcharge increases to manage demand. This year alone, UPS has raised its peak surcharge on exports originating in Asia and destined to the U.S. at least four times. In addition, an average 5.9% general rate increase for 2022 was announced during the earnings call, as well as a 1% increase in fuel surcharge effective Nov. 1. Another part of the strategy is the investment in technology and productivity gains. As an example, during Q3, UPS was able to lower direct labor hours per day by 5.1%. As UPS manages its costs and capacity and improves its productivity, it is reaping the benefits in terms of higher operating profits and expects to continue to do so through 2022, despite ongoing uncertainties and delays in the market.

Consultant Insight: UPS reports record operating profits in Q3

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