Surging international trade carries UPS in 3Q17

After a strong finish in the second-quarter of 2017, UPS reported weaker financial results in quarter three, in part because of the natural disasters which impacted Domestic Operations. The impact was minimized by higher average daily package volumes, and solid results from the company’s International Package Segment, which saw average daily package volumes jump 11.3% y-o-y, leading to an 8.9% increase in operating income for UPS’ second-largest segment.

Overall, Q3 net income was down slightly (0.5%) y-o-y to US $1.26 billion on revenues that were 7.0% higher at $15.98 billion. Operating income for the quarter was flat at $2.04 billion.

As can be seen from the chart at right, revenue rose in all three of the company’s operating segments, and operating income was up in both the International Package and Supply Chain & Freight segments. Operating income was down in the Domestic segment, in part because of hurricanes Harvey, Irma and Maria, which cost the company $50 million.

Average daily volume was up for all products in both the US Domestic and International Package segments with the exception of Deferred Air, but, again, currency headwinds pushed revenue per piece down in the International segment.

Looking at the quarter on a segment-by-segment basis:

US Domestic Package: Consolidated average daily package volumes were 3.4% higher y-o-y in quarter three, led by growth in Next Day Air and Ground services, which reported volumes up 8.0%, and 3.4% respectively. Average daily volumes for UPS’ domestic Deferred Air service meanwhile, was down 1.6%.

Per-package revenues were mostly higher, though Next Day Air saw a 2.6% drop in per-package revenues. The decline was buoyed by higher per-package revenues for its deferred air service, which rose 8.0%. Consolidate revenue per-package was up 2.0%, with the increase helped by both base-rate price increases and higher fuel surcharges.

The impact of the hurricanes combined with slightly lower yields led to a 5.6% drop in segment operating income. The US Domestic Package segment saw operating margins drop slightly to a still enviable 12.6%.

International Package: Increasing demand for export shipments “generated solid top-line and operating-profit growth” for UPS’ International Package division. Average daily package volume was up 11.3% for the segment, led by an 19.0% jump in International Export volume, while International Domestic volume increased 5.7%.

Operating income for the unit rose to $627 million, up by 8.9% compared to 3Q16. The segment reported an extremely strong operating margin of 18.1%

Looking ahead, we note that UPS’ international activities should benefit from the alliance it formed with China-based SF Express in the second quarter and received approval for in Q3. You can read our analysis of that deal here.

Commenting on the drivers of the recent improvement in global air freight markets James Jay Barber, president, UPS International noted three main factors :

• Low inventory levels, which are pushing more goods through the air freight supply chain.
• Solid underlying growth for air freight demand, which is now in its fourth quarter of consecutive growth.
• Weather: hurricanes and other natural disasters have positively impacted cross-border volumes.

Supply Chain & Freight: By revenue and operating income, Supply Chain & Freight is UPS’ smallest segment, but in terms of third-quarter performance it is usually a strong performer for the company. Revenue was up 7.0%, led by a 14.6% gain in the Forwarding & Logistics unit, operating income rose 9.7%. Operating margin is still not at the level of the other two segments, but is healthy at 7.5%.