UPS Inc.’s average daily package volume in the United States increased 6.6% during the fourth quarter, but that increase didn’t produce enough revenue growth for the carrier to justify the costs it incurred to improve its operations during the peak holiday season, company executives said today in a call with investors announcing its final Q4 results.
UPS plans to implement surcharges for residential deliveries during peak periods, like the holiday season, to adjust to the disparity between its costs and revenue, UPS CEO David Abney said. “We will be implementing peak residential surcharges that are differentiated from our non-peak time of year on a customer-segmented basis,” he said. Those surcharges will focus on its SurePost—in which UPS hands off parcels to the U.S. Postal Service for final delivery to consumers—and other residential delivery services. It plans to make changes over a multiyear period as its contracts come due. “These pricing strategies will be designed to ensure we are properly compensated for the value we provide,” he said. He did not provide further information on what the surcharges will be.
UPS says SurePost volume jumped more than 28% during the fourth quarter.
UPS invested heavily throughout last year to prepare for the busiest time of the year, seeking to avoid the issues it faced during the 2013 holiday season when a surge in late-season web orders caused it to miss deliveries. It hired 100,000 temporary workers and spent $500 million on network improvements.
“We invested in capacity with new facilities, automation and expanded operations,” Abney said. “It was important to fortify the trust of customers and protect our brand. From that perspective, UPS was successful. While we met our commitments to serve customers, we certainly did not achieve our financial objectives.”
UPS says it made 7 cents less revenue per domestic package delivered in Q4 2014 than Q4 2013, and attributes the decline to lower fuel surcharges and changes in the product mix, such as the increased use of SurePost. It made 90 cents less per international shipment.
For the fourth quarter ended Dec. 31, UPS reported:
- Revenue of $15.90 billion, up 6.1% from $14.98 billion a year earlier.
- Operating expenses of $15.14 billion, an increase of 15.8% from $13.07 billion a year earlier.
- Net income dropped more than 61% to $453 million from $1.17 billion.
- A 3.2% decline in U.S. Next Day Air daily volume. UPS chief financial officer Kurt Kuehn attributed the drop to changes in the holiday calendar and distribution channels, including the “proliferation of omnichannel” initiatives on the part of retail chains that led retailers to use more local distribution options—their stores—to fulfill online orders. This, Kuehn said, led retailers to “trade down” from using UPS’s premium products, like Next Day Air. Kuehn said 50% more retailers deployed local distribution strategies in Q4 2014 than Q4 2013 and the number of stores being used to fulfill online orders was up 30%.
- Total domestic package revenue of $10.0 billion, up 7.4% from $9.31 billion a year earlier.
- Average domestic package daily volume of 18.186 billion, up 6.6% from 17.066 billion a year earlier.
- A domestic package operating profit of $444.0 million, down 63% from $1.20 billion a year earlier.
- Net income was 2.8% of total revenue versus 7.8% a year earlier.
- A 10.6% increase in U.S. Deferred Air daily volume. Deferred packages are air shipments that are not guaranteed to arrive the next day.
- A 7.1% increase in U.S. ground daily volume (including SurePost).
For the full year, UPS reported:
- Total revenue of $58.23 billion, up 5.0% from $55.44 billion in 2013.
- Total operating expenses of $53.26 billion, up 10.0% from $48.40 billion in 2013.
- Net income of $3.03 billion, down 30.7% from $4.37 billion in 2013.