On Thursday, April 26, 2012 UPS released the results of their first quarter. The subtitle reads, "U.S. Domestic and Supply Chain & Freight Segments Post Double-Digit Gains in Operating Income." 

Corporate Financial Highlights

• Earnings per share were $1.00 (diluted) versus $0.91 last year. Analysts' consensus was for EPS of $1.02.
• Revenue was up 4.4% to $13.14b for the quarter.
• Overall operating profit was up 6.8%, operating margin up 1.7%, and average volume per day increasing 4.3% versus the first quarter of last year.

Results by Segment

U.S. Domestic had 6.1% revenue growth with a 13% jump in operating profit- the operating margin was the highest first quarter margin since 2008. Package volumes increased, particularly with Deferred Air and especially SurePost as residential deliveries for large e-commerce customers continued to grow. Base pricing was up 2.5 to 3%, yet the changing mix impacted yield. It will be interesting to see how productivity gains and greater economies of scale offset the lower revenue per piece which comes from this change in product mix. This could become a driver in future pricing decisions.

Internationally, export volume was up over 5% but changing trade patterns offered a challenge. The longer, higher yielding lanes out of Asia were flat.

In Supply Chain & Freight the operating profit increase was a very strong 19%. Forwarding revenue declined due to lower tonnage and excess capacity; Distribution profit improved with noted expansion of health care capabilities; and the Freight unit broke even with tonnage declines offset by higher revenue per CWT and improved productivity. There was little said about the LTL division in the release. During the earning's call UPS stated that they are working to differentiate themselves and trying to strike a balance between being a disciplined yield player and generating growth.

Comments on TNT

UPS executives are confident that they will receive all the regulatory approvals. The acquisition would diversify their revenues around the globe, increase their portfolio of services and expand their geographic footprint. They expect the transaction to close before the end of the year.

Somewhat buried from the TNT announcement was the February acquisition of Kiala, a European consumer delivery company with a delivery network and technology focused on the B2C segment. The integration of these capabilities will make UPS a formidable player in the European B2C sector.

Yield Revenue Management Story Continues

Last month FedEx discussed their continued focus on yield management. UPS talks in terms of revenue management, both carriers are talking about the same thing.

In last week's call the financial analysts asked numerous questions around margin, the challenges that the changing weight and mix will bring given the explosive growth of SurePost and ever increasing e-commerce.

Kurt Kuehn, CFO addressed the concern, "The core underlying philosophy we have for pricing has not changed. On an account-by-account basis, our discipline and approach is the same. Individual customers are being reviewed and we are executing our normal yield processes."

What are some of those processes? They are focused on base rate increases of 2-3%, aggressive cost control, and productivity gains in order to take advance of operating leverage. 

Does This News Have Any Significant Impact on Shippers?

There used to be many competitive options for commercial shipments and few for residential. Over the past few years that situation has completely reversed itself.

Given UPS' roll-out of SurePost there may be a window of opportunity for shippers who use a postal consolidation service to bring UPS in, evaluate this option, and see if a competitive proposal can be obtained.

Another area of opportunity could be with Air services. Either the economy has picked up or UPS may selectively be going after some market share given the current growth trend with Deferred Air products.

That in turn lends itself to connectivity of other products in their portfolio of services; which supports the premise we wrote about last month and bears repeating here-

In this sellers' environment, how you use a carrier's full portfolio of services, provide consideration to alternative sources, and most importantly, identify and implement internal process improvements you can make before presenting your business to an incumbent or opening a bid to the marketplace is what will separate you from the new competition. That competition is not the carriers- it's other shippers who are also seeking the best available deals in the market. How you take your business to the marketplace really does matter.

The process and practice improvements you make, that reduce your service provider's cost of doing business with you, can and should be leveraged. This will allow you to better control cost inflation and gain an edge over your competitors.