Domestic operations at UPS have been affected by the slowing consumer market and high fuel prices, but the contract with DHL for domestic lift could help protect margins, says equity analyst firm Stifel Nicolaus.
Domestic operations are the biggest part of the UPS network, and they have been adversely affected by slowing consumer buying and high fuel costs, the latter exacerbated by the 45-day lag on fuel surcharge recovery. But the pending contract with DHL to provide lift on domestic air services should help UPS mitigate losses in capacity utilization in its air fleet as more shippers shift from air services to lower-priced ground service.
International growth could slow depending on the impact the US economy has on global trade. But, based partly on density, UPS should be able to maintain reasonable margins on the business.
Improvements in the supply chain and freight operations should help as well. Those operations were affected by performance issues not related to business levels, says the Stifel Nicolaus report.