Last week, global transportation and services provider UPS reported its Q1-2013 earnings results and re-affirmed trends underway for at least six months or more.  The results reflected both positive and concerning developments.

The company continues to benefit from the growth of B2C online shopping within the U.S… Ground based daily package volumes were up 4.4 percent leading to a 9 percent increase in operating profit for the U.S. segment. Senior management pointed to increased support of both E-Commerce and Omni-channel commerce as the principle force of both revenue and profitability growth. In the earnings briefing, management noted 25 retailers moving to UPS Omni-channel support programs and further stated that 40 percent of current domestic package volumes stem from B2C package delivery. The company generated $1.4 billion in free cash flow and ended the quarter with $7.3 billion in cash as it continued to benefit from previous cost control and efficiency initiatives.

On the concern side, total operating profits remain somewhat flat.  The company recorded $1.62 billion in adjusted operating profits for Q1-2013 primarily because of a gain related to its attempted acquisition of Europe based TNT which was terminated. Without this adjustment, operating profit was noted as $1.58 billion compared with $1.57 billion in the year ago quarter.  Two challenging operating entities remain as the International and Supply Chain and Freight segments.

International, revenues were essentially flat from a year ago while operating profit and margin declined.  Operating profit for the International segment actually declined by 13.7 percent overall. Similar to what rival FedEx reported in its recent quarter, Asia-Pacific freight tonnage and yield were both down resulting in a 9 percent decline in revenues in this area. The actual yield decline was 2.5 percent with management attributing this erosion to lighter packages and customer use of non-premium internal freight services. It was also acknowledged that Asia-Pacific schedule capacity has been reduced by 10 percent from a year ago. In the Q&A segment of the earnings briefing, there was an acknowledgement that the use of newer 777 freighter aircraft provides more belly capacity which is currently not being fully utilized in current Asia outbound routing. While UPS has been ramping up services for less-than-truckload ocean container transportation services, the growth of this new segment was not enough to offset the negative aspects of international air freight. Management also noted that Europe is essentially 2-3 years behind the U.S. in the wider scale adoption of online buying, thus hampering UPS E-commerce growth in that area.

Management characterized results for the Supply Chain and Freight segment as a “tough quarter” with growth of just 1 percent while profit declined by $23 million and margins declined by 102 basis points. UPS has been investing heavily in support for the healthcare logistics segment with new investments in advanced technology and logistics infrastructure, all of which continues to drag on profitability in this segment.

UPS additionally reduced its previous guidance on total revenues for the fiscal year, now forecasted to be low to single digit growth.  The company however, maintained its guidance for earnings per share

A little over a month ago, Supply Chain Matters noted a radically changing international airfreight environment.  Carriers can no longer rely on shippers opting for premium overnight delivery of international shipments, with perhaps the one exception of Apple or Samsung smartphones or electronic tablets that are short in supply. Shippers and supply chain planning teams have done their homework, not to mention that global sourcing changes continue. FedEx declared that it will aggressively move more lower-yielding traffic to lower cost networks.  UPS has now declared that it will absorb more international freight onto its own aircraft, continue to adjust capacity downward, and provide more LTL ocean container service alternatives.  All of the major air freight carriers remain reluctant to park complete airplanes, hoping that a competitor will be the first to blink on wholesale cutback.  All continue to hope for a rebound in premium service needs, or the next great product launch that results in severely constrained supply.

There is therefore little doubt that the structural shifts in airfreight traffic are now confirmed, carrier bottom lines are being affected. A similar but more severe capacity overhang trend remains in ocean container transport out of Asia.

We again reiterate that for international shippers, procurement and product management teams, transportation and on-time fulfillment is going to get extremely challenging in the coming months.  The ability to overnight shipments, compensate for delays in scheduling, or seize a market opportunity on a time sensitive basis are going to be constrained and expensive in cost, inventory and resources.

Bob Ferrari