UPS Second Quarter Margins Drop

Revenue was up 6.6% at UPS, but the company reported US package volumes fell over 1%, carrying the domestic operating margin with it: from 15.7% in the 2007 period to 11.7% in second-quarter 2008.

UPS reported earnings in line with reduced guidance issued earlier. Revenues for the period were up 6.6% to $13 billion as a result of improved pricing and increased fuel surcharge collections, says analyst firm Stifel Nicolaus.

Domestic package volumes remained flat while fuel price increases outpaced the company's ability to adjust fuel surcharges. (Eventually this situation balances itself as prices stabilize.) Commenting on the fixed network costs and reduced volumes, Stifel Nicolaus analysts noted, “It is not possible to shed network costs as fast as volumes decline while still meeting high-level customer expectations.”

International volumes rose 7% compared with the year-earlier period.
UPS has yet to reach an agreement with DHL on its domestic airlift, which should start entering the UPS network in the first half of 2009 and help leverage some of the costs of its fixed network.

UPS Freight, the company's less-than-truckload operation, reported volumes declined 2.3% but revenues grew 7.2%. UPS Freight, which is reported with Supply Chain Services, helped provide an 11% revenue increase overall.

UPS offered the following outlook: “Even though economists do not predict recovery until 2009, we anticipate the second half of 2008 will generate modestly better results than the first half, assuming business conditions do not worsen.”

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