Revenue Generated Per Shipment is Rising
Kurt Kuehn, the CFO described the improvement in revenue as follows:
Revenue per piece grew 5% with the biggest driver being increases in base rates, as we get our prices back in line with the value we provide.
Higher fuel surcharges and package characteristics also contributed to the yield improvement. We are executing our strategy of focusing on the quality of revenue. The key objective of this strategy is to ensure that we are properly compensated for the value we provide customers. And this is paying off as evidenced by our strong yield gains.
Mr. Kuehn's statement suggests that customers have had limited leverage in resisting the 4.9% rate increases implemented January 3, 2011.
Scott Davis, in response to a question of Ed Wolfe of Wolfe Trahan & Co. noted that UPS is taking a firm stance in pricing negotiations in order to get prices up to levels that they want. The impact of this change in negotiating posture impact may be modest as many customers have multi-year contracts.
The shift in package characteristics that Mr. Keuhn mentioned that would yield more revenue per package most likely reflects an increase in the proportion of shipments that are delivered to a homes
Package Market and GDP
In response to a question by Garrett Chase of Barclays Capital, Scott Davis noted a disconnect between industrial production levels and demand for parcel shipping. Parcel shipping demand did not decline as much as industrial production during the recession and is not rebounding as fast after. This may be another indication of the importance of the link between parcel shipping and retail markets.
The Impact of Oil Prices on GDP
Scott Davis in response to a question by Nathan Brochmann of William Blair & Company provides the rule of thumb that UPS may be using to estimate the impact of rising oil prices on GDP.
I think the rule of thumb for economists are that if oil prices go up $10 a barrel, it's going to knock down GDP about 0.02% in the year 1, about 0.5% in year 2. We've seen about $30 run in crude oil, so that could certainly have an impact in 2012, knock out about half the growth.
UPS and Labor Costs
UPS also indicated that its head count was likely to remain steady if economic growth continues at the current forecasted pace. If it stalls, it could see some reductions as efficiency improvements reduce demand for drivers and parcel sorters.
Large verses Small and Medium Sized Shippers
Both Scott Davis and Kurt Keuhn noted that large global enterprises have recovered faster from the recession than small and medium sized enterprises in response to a question from Jon Langenfeld of Robert W. Baird. They indicated that the real challenge facing these firms is access to credit which they expect to improve later this year.
Improvement in shipping volumes from smal and medium sized enterprises is important for the parcer and express carriers as these firms are offered smaller discounts off of list rates than larger firms. Increases in the share of business from this market segment should help improve carrier yields (revenue per package) and profitability.
B-2-B and B-2-C Markets
In a response to a question from Bill Greene of Morgan Stanley, Kurt Keuhn stated that B-2-C now represents one-third of United Parcel Service's volume. He further stated that B-2-C is growing faster than B-2-B volume.
This response provides a further indication that 1) the increase in yield is driven by home delivery surcharges, and 2) UPS's business success is increasingly tied to the success of e-commerce.
Kurt Keuhn described the parcel and express market as "extremely competitive." He went on to state:
Customers have multiple choices, and so we're out there competing like crazy. The comparisons to our competitors are a little confusing because some of them are use a different calendar. FedEx, for example had the December in their last quarter, which makes comparisons a little unusual. And we haven't heard yet from the post office, which is another very large player. We suspect they'll show negative results.
UPS clearly is concerned about competition from FedEx. It looks at the Postal Service as a less significant competitor. No mention was made regarding competition from regional and local parcel carriers or foreign-owned operators like Purolator International.
The problems that the Postal Service is having competing in the parcel market are worth studying. It is unclear whether the Postal Accountability and Enhancement Act provided the Postal Service with sufficient commercial freedom to set rates and negotiate with customers to allow its parcel business to grow at a rate equal to market growth.
Postal Vision 2020 will be bringing together some of the greatest minds in e-commerce, social media, digital and print communications to discuss the future of print and digital communications. The symposium to be held June 15, 2011 and the Marriott Chrystal Gateway Hotel in Arlington, VA. To learn more check out Postal Vision 2020 .