UPS Shuns ‘Slash-and-Burn’ in Bid to Blunt Next-Day Drop

UPS Shuns ‘Slash-and-Burn’ in Bid to Blunt Next-Day Drop

United Parcel Service Inc. (UPS) is trimming flight hours and miles driven to reduce costs as customers shy away from pricier overnight packages to cheaper two-day and deferred offerings.

UPS is trimming main aircraft routes out of Asia to an average of 7.5 from 8, and will lower headcount through attrition and slower hiring, Chief Financial Officer Kurt Kuehn said. The company will also cut discretionary spending on projects that don’t have an immediate payoff, he said.“This is not a restructuring or a slash-and-burn” approach, Kuehn said in a telephone interview today after the Atlanta-based company reported a 4 percent decline in second-quarter earnings. “This is calibrating and adapting to reflect slower conditions than we expected. It’s broad, looking for adjustments across the business. Not anything draconian.”

Kuehn declined to provide a dollar figure for the cost reduction efforts. Rival FedEx Corp. (FDX) last year began a $1.7 billion restructuring to adjust to similar patterns among its customers, which includes parking 86 of its oldest jets, retiring 5,000 aging vehicles and offering voluntary employee buyouts.

“What you’re seeing UPS do is more on the variable cost side versus FedEx much more on the fixed cost side,” Kevin Sterling, an analyst at BB&T Capital Markets in Richmond, Virginia, said in a phone interview. UPS was “already pretty lean,” said Sterling, who has a hold rating on the shares of both companies.

Fewer Miles

UPS drivers logged 1.6 million fewer miles in the second quarter while airplane block hours were down 1.2 percent as the world’s largest package-delivery company responded to a slump in demand for the most expensive services such as overnight shipping, executives said today on a conference call.

The company also cited a reduction in military shipping and technology devices for the slowdown. Next-day air shipments in the U.S. fell 1.5 percent in the quarter, while air freight forwarding revenue dropped more than 10 percent on slumping demand in Asia, Kuehn said on the call.

That caused second-quarter profit to fall to $1.07 billion, or $1.13 a share, from $1.12 billion, or $1.15, a year earlier, UPS said today in a statement. Analysts had estimated an average of $1.20 before UPS gave preliminary results July 12 and cut its annual forecast to a maximum of $4.85 a share, from $5.06 previously.

Cost Reductions

UPS has been lowering costs in recent quarters by trimming flying and optimizing drivers’ routes, Kuehn said. Jet capacity to Asia is down by 20 percent in the past year.

“It’s more like parking a plane temporarily or cutting a service” than retiring large numbers of aircraft permanently the way FedEx is doing, said BB&T’s Sterling.

Technology investments also made routes more efficient and reduced missed deliveries when recipients weren’t there to accept packages, Myron Gray, president of U.S. operations, said on the call. UPS is starting to use a new system called Orion that allows real-time adjustments to drivers’ routes, he said.

“We are able to significantly reduce the number of miles it takes to deliver a given number of packages” with Orion, Kuehn said. The system is only 10 percent rolled out so far.

The shares were little changed at $87.51 at the close in New York. UPS increased 19 percent this year, matching the gain for the Standard & Poor’s 500 Index. (SPX) FedEx rose 16 percent.

UPS said today it reached a contract extension with the Teamsters for the 15,000 employees in its freight unit, which eliminates the risk of a strike when the current contract expires on July 31, as the company renegotiates a contract that was rejected in a ratification vote.

The company has a similar open-ended extension with the 235,000 Teamster employees in its small package unit while it renegotiations more than a dozen local supplement and rider provisions that are holding up implementation of a new so-called national master contract.

Founded 106 years ago as a bicycle messenger service, UPS now handles 16.3 million packages and documents per day and is considered an economic bellwether because of the diverse items it delivers such as industrial parts, health-care products and financial paperwork.

To contact the reporter on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net