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| UPS > SEC Filings for UPS > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
Operations
The following tables set forth information showing the change in revenue,
average daily package volume, and average revenue per piece, both in dollars or
amounts and in percentage terms:
Year Ended
December 31, Change
2008 2007 $ %
Revenue (in millions):
U.S. Domestic Package:
Next Day Air $ 6,559 $ 6,738 $ (179 ) (2.7 )%
Deferred 3,325 3,359 (34 ) (1.0 )
Ground 21,394 20,888 506 2.4
Total U.S. Domestic Package 31,278 30,985 293 0.9
International Package:
Domestic 2,344 2,177 167 7.7
Export 8,294 7,488 806 10.8
Cargo 655 616 39 6.3
Total International Package 11,293 10,281 1,012 9.8
Supply Chain & Freight:
Forwarding and Logistics 6,293 5,911 382 6.5
Freight 2,191 2,108 83 3.9
Other 431 407 24 5.9
Total Supply Chain & Freight 8,915 8,426 489 5.8
Consolidated $ 51,486 $ 49,692 $ 1,794 3.6 %
Average Daily Package Volume (in thousands): #
U.S. Domestic Package:
Next Day Air 1,186 1,277 (91 ) (7.1 )%
Deferred 947 974 (27 ) (2.8 )
Ground 11,443 11,606 (163 ) (1.4 )
Total U.S. Domestic Package 13,576 13,857 (281 ) (2.0 )
International Package:
Domestic 1,150 1,132 18 1.6
Export 813 761 52 6.8
Total International Package 1,963 1,893 70 3.7
Consolidated 15,539 15,750 (211 ) (1.3 )%
Operating days in period 252 252
Average Revenue Per Piece: $
U.S. Domestic Package:
Next Day Air $ 21.95 $ 20.94 $ 1.01 4.8 %
Deferred 13.93 13.69 0.24 1.8
Ground 7.42 7.14 0.28 3.9
Total U.S. Domestic Package 9.14 8.87 0.27 3.0
International Package:
Domestic 8.09 7.63 0.46 6.0
Export 40.48 39.05 1.43 3.7
Total International Package 21.50 20.26 1.24 6.1
Consolidated $ 10.70 $ 10.24 $ 0.46 4.5 %
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Year Ended
December 31, Change
2007 2006 $ %
Revenue (in millions):
U.S. Domestic Package:
Next Day Air $ 6,738 $ 6,778 $ (40 ) (0.6 )%
Deferred 3,359 3,424 (65 ) (1.9 )
Ground 20,888 20,254 634 3.1
Total U.S. Domestic Package 30,985 30,456 529 1.7
International Package:
Domestic 2,177 1,950 227 11.6
Export 7,488 6,554 934 14.3
Cargo 616 585 31 5.3
Total International Package 10,281 9,089 1,192 13.1
Supply Chain & Freight:
Forwarding and Logistics 5,911 5,681 230 4.0
UPS Freight 2,108 1,952 156 8.0
Other 407 369 38 10.3
Total Supply Chain & Freight 8,426 8,002 424 5.3
Consolidated $ 49,692 $ 47,547 $ 2,145 4.5 %
Average Daily Package Volume (in thousands): #
U.S. Domestic Package:
Next Day Air 1,277 1,267 10 0.8 %
Deferred 974 993 (19 ) (1.9 )
Ground 11,606 11,537 69 0.6
Total U.S. Domestic Package 13,857 13,797 60 0.4
International Package:
Domestic 1,132 1,108 24 2.2
Export 761 689 72 10.4
Total International Package 1,893 1,797 96 5.3
Consolidated 15,750 15,594 156 1.0 %
Operating days in period 252 253
Average Revenue Per Piece: $
U.S. Domestic Package:
Next Day Air $ 20.94 $ 21.14 $ (0.20 ) (0.9 )%
Deferred 13.69 13.63 0.06 0.4
Ground 7.14 6.94 0.20 2.9
Total U.S. Domestic Package 8.87 8.73 0.14 1.6
International Package:
Domestic 7.63 6.96 0.67 9.6
Export 39.05 37.60 1.45 3.9
Total International Package 20.26 18.70 1.56 8.3
Consolidated $ 10.24 $ 9.88 $ 0.36 3.6 %
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The following tables set forth information showing the change in UPS Freight's less-than-truckload ("LTL") revenue, shipments, and gross weight hauled, both in dollars or amounts and in percentage terms:
Year Ended
December 31, Change
2008 2007 $ %
LTL revenue (in millions) $ 2,062 $ 2,013 $ 49 2.4 %
LTL revenue per LTL hundredweight $ 18.68 $ 17.41 $ 1.27 7.3 %
LTL shipments (in thousands) 10,036 10,481 (445 ) (4.2 )%
LTL shipments per day (in thousands) 39.5 41.4 (1.9 ) (4.6 )%
LTL gross weight hauled (in millions of pounds) 11,037 11,560 (523 ) (4.5 )%
LTL weight per shipment 1,100 1,103 (3 ) (0.3 )%
Operating days in period 254 253
Year Ended
December 31, Change
2007 2006 $ %
LTL revenue (in millions) $ 2,013 $ 1,831 $ 182 9.9 %
LTL revenue per LTL hundredweight $ 17.41 $ 15.93 $ 1.48 9.3 %
LTL shipments (in thousands) 10,481 9,638 843 8.7 %
LTL shipments per day (in thousands) 41.4 38.2 3.2 8.3 %
LTL gross weight hauled (in millions of pounds) 11,560 11,498 62 0.5 %
LTL weight per shipment 1,103 1,193 (90 ) (7.5 )%
Operating days in period 253 252
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Operating Profit and Margin
The following tables set forth information showing the change in operating
profit (loss), both in dollars (in millions) and in percentage terms, for each
reporting segment:
Year Ended
December 31, Change
2008 2007 $ %
Reporting Segment
U.S. Domestic Package $ 3,907 $ (1,531 ) $ 5,438 N/A
International Package 1,580 1,831 (251 ) (13.7 )%
Supply Chain & Freight (105 ) 278 (383 ) N/A
Consolidated Operating Profit $ 5,382 $ 578 $ 4,804 N/A
Year Ended
December 31, Change
2007 2006 $ %
Reporting Segment
U.S. Domestic Package $ (1,531 ) $ 4,923 $ (6,454 ) N/A
International Package 1,831 1,710 121 7.1 %
Supply Chain & Freight 278 2 276 N/A
Consolidated Operating Profit $ 578 $ 6,635 $ (6,057 ) (91.3 )%
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The following table sets forth information showing the operating margin for each reporting segment:
Year Ended December 31,
2008 2007 2006
Reporting Segment
U.S. Domestic Package 12.5 % (4.9 )% 16.2 %
International Package 14.0 % 17.8 % 18.8 %
Supply Chain & Freight (1.2 )% 3.3 % 0.0 %
Consolidated Operating Margin 10.5 % 1.2 % 14.0 %
U.S. Domestic Package Operations
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2008 compared to 2007
U.S. domestic package revenue increased $293 million, or 0.9%, for the year, largely due to a 3.0% improvement in revenue per piece, partially offset by a 2.0% decrease in average daily package volume.
Next Day Air volume, deferred air volume and ground volume declined 7.1%, 2.8%, and 1.4%, respectively for the year, primarily as a result of the current U.S. recession. These declining volume trends worsened through the year with Next Day Air, deferred air, and ground volume declining 8.6%, 3.5%, and 2.1%, respectively, during the fourth quarter. Relatively high energy costs during most of the year combined with the deepening recession and weak output within the industrial production and retail sales sectors adversely affected the small package market, which places additional pressure on our domestic package volume.
The increase in overall revenue per piece of 3.0% resulted primarily from a rate increase that took effect during the first quarter and higher fuel surcharge rates, but was partially offset by an unfavorable shift in product mix. Next Day Air and Deferred revenue per piece increased 4.8% and 1.8%, respectively, and were positively impacted by the base rate increase and a higher fuel surcharge rate for air products (discussed further below). This increase was adversely impacted by lower average package weights, a mix shift toward lower yielding products, and hedging losses. Ground revenue per piece increased 3.9%, mainly due to the rate increase, as well as a higher fuel surcharge rate due to increased diesel fuel prices in 2008 compared with 2007.
On November 9, 2007, we announced a rate increase and a change in the fuel surcharge that took effect on December 31, 2007. We increased the base rates 6.9% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day Select, and 4.9% on UPS Ground. Other pricing changes included a $0.10 increase in the residential surcharge, and an increase of $0.10 in the delivery area surcharge on both residential and commercial services to certain ZIP codes.
We also modified the fuel surcharge on domestic air services by reducing the index used to determine the fuel surcharge by 2%. This fuel surcharge continues to be based on the U.S. Energy Department's Gulf Coast spot price for a gallon of kerosene-type jet fuel. Based on published rates, the average fuel surcharge on domestic air products was 25.17% in 2008, an increase from the 12.17% in 2007, due to the significant increase in jet fuel prices in early and mid-2008, but partially offset by the 2% reduction in the index. The ground fuel surcharge rate continues to fluctuate based on the U.S. Energy Department's On-Highway Diesel Fuel Price. Based on published rates, the average fuel surcharge on domestic ground products increased to 7.97% in 2008 from 4.30% in 2007, due to significantly higher diesel fuel prices in early and mid-2008. Total domestic fuel surcharge revenue, net of the impact of hedging losses, increased by $1.119 billion in 2008 compared with 2007, primarily due to the higher fuel surcharge rates discussed above, but partially offset by the decline in volume for our air and ground products.
U.S. domestic package operating profit increased $5.438 billion in 2008 compared with 2007. Operating profit for 2007 was adversely affected by a charge to withdraw from the Central States, Southeast and Southwest
Areas Pension Fund ("Central States Pension Fund"), an aircraft impairment and a Special Voluntary Separation Opportunity ("SVSO") charge (all discussed further in the "Operating Expenses" section), which reduced domestic operating profit by $6.100 billion, $159 million and $53 million, respectively. The absence of these charges in 2008 favorably affected the operating profit comparison between periods.
Operating profit in 2008 was adversely impacted by the current U.S. recession, lower asset utilization due to the decline in volume, lower average package weights, and a shift in product mix away from our premium services, partially offset by the increase in the fuel surcharge relative to the cost of fuel. Because fuel costs decreased rapidly in the latter half of the year, operating profit benefited from the approximate two month time lag between the fuel price changes and when the monthly surcharge rates are applied to package shipments. Because of this time lag, fuel positively impacted the change in operating profit during 2008, which is opposite of the effect the company experienced in 2007, when fuel costs rose much faster than the fuel surcharge rate and operating profit was adversely impacted.
2007 compared to 2006
U.S. Domestic Package revenue increased $529 million, or 1.7%, in 2007, due to a 1.6% improvement in revenue per piece and a 0.4% increase in average daily package volume. Next Day Air volume increased 0.8% and Ground volume increased 0.6% for the year, largely as a result of a solid peak season in the fourth quarter, when our Next Day Air volume rose 2.2% and Ground volume increased 1.5%. Deferred air volume declined 1.9% in 2007. Our domestic air and ground products have been impacted by the slowing U.S. economy and weak small package market in 2007. Trends in U.S. industrial production and business-to-consumer shipments in 2007 were not favorable to the overall small package market, which places pressure on our domestic package volume.
The increase in overall revenue per piece of 1.6% in 2007 resulted primarily
from a rate increase that took effect earlier in the year, but was negatively
impacted by lower fuel surcharge revenue and an unfavorable shift in product
mix. Next Day Air revenue per piece declined 0.9%, and was negatively impacted
by strong growth in our lower-yielding Next Day Air Saver products. Deferred
revenue per piece increased only 0.4%. The change in revenue per piece for all
our air products was negatively impacted by a lower fuel surcharge rate
(discussed further below). Ground revenue per piece increased 2.9%, primarily
due to the rate increase, but was also impacted slightly by a higher fuel
surcharge due to higher diesel fuel prices in 2007 compared with 2006. Overall
product mix reduced revenue per piece, as our premium air products suffered
volume declines while our ground volume grew 0.6%.
Consistent with the practice in previous years, a rate increase took effect on January 1, 2007. We increased the base rates 6.9% on UPS Next Day Air, UPS 2nd Day Air, and UPS 3 Day Select, and 4.9% on UPS Ground. Other pricing changes included a $0.10 increase in the residential surcharge, and a $0.75 increase in the charge for undeliverable packages after three delivery attempts.
In January 2007, we modified the fuel surcharge on domestic air services by reducing the index used to determine the fuel surcharge by 2%. This fuel surcharge continued to be based on the U.S. Energy Department's Gulf Coast spot price for a gallon of kerosene-type jet fuel. Based on published rates, the average fuel surcharge on domestic air products was 12.17% in 2007, a decline from the 14.02% in 2006, primarily due to the 2% reduction in the index. The ground fuel surcharge rate continued to fluctuate based on the U.S. Energy Department's On-Highway Diesel Fuel Price. Based on published rates, the average fuel surcharge on domestic ground products was 4.30% in 2007, an increase from 4.13% in 2006, due to higher diesel fuel prices. As a result of the air products index rate reduction and fuel market price movements, total domestic fuel surcharge revenue decreased by $110 million in 2007.
U.S. Domestic Package incurred an operating loss of $1.531 billion in 2007, compared with a $4.923 billion operating profit in 2006, largely due to a $6.100 billion charge related to our withdrawal from the Central States Pension Fund. Additionally, Domestic Package operating results were negatively impacted by low revenue
growth, the aircraft impairment charge, the SVSO charge, and the impact of fuel. The aircraft impairment and SVSO charges reduced domestic operating profit by $159 million and $53 million, respectively. Fuel negatively impacted the change in operating profit during 2007, as fuel costs rose much faster than the fuel surcharge rate. These factors were partially offset by cost controls, including, among other categories, lower self-insurance expense. The expense associated with our self-insurance accruals for workers' compensation claims, automotive liability and general business liabilities declined as a result of several factors. The Central States Pension Fund withdrawal, aircraft impairment, and SVSO charges, as well as the impact of lower self-insurance expense, are discussed further in the "Operating Expenses" section.
International Package Operations
2008 compared to 2007
International Package revenue improved $1.012 billion, or 9.8%, for the year, driven by a 6.8% volume increase for our export products and a 6.1% increase in total revenue per piece. The growth in revenue per piece was primarily due to rate increases, the impact of currency exchange rates, and increased fuel surcharge rates. However, as the global economic recession deepened throughout the year, fourth quarter revenue trended downward compared to the prior year fourth quarter, declining $230 million, or 8.0%, including the impact of unfavorable currency exchange rate fluctuations discussed later.
Export volume increased in each region throughout the world in 2008, however volume began to slow in the latter half of 2008 due to difficult worldwide economic conditions. Intra-regional volume continued to experience solid growth, especially in Europe. Asian export volume continued to benefit from our geographic service expansion, including the connection of several cities to our new air hub in Shanghai, China. Export volume growth was negatively impacted by declines in shipments to the U.S. from other regions in the world, due to the slowing U.S. economy. Export volume trends weakened in the latter half of the year, due to the severe global economic slowdown, with fourth quarter export volume increasing at a much slower rate than what has been experienced over the last several years. Non-U.S. domestic volume increased 1.6% for the year, and was impacted by volume growth in our domestic businesses in the Euro zone and Canada, but negatively affected by the weak economic conditions in the United Kingdom.
Export revenue per piece increased 3.7% for the year, largely due to base rate increases, higher fuel surcharge rates, and favorable currency exchange rates, but was adversely impacted by relatively higher growth in lower revenue per piece transborder products and a shift away from our premium services. Domestic revenue per piece increased 6.0% for the year, and was affected by rate increases, higher fuel surcharge rates, and favorable exchange rates. Total average revenue per piece increased 2.7% on a currency-adjusted basis, and the overall change in segment revenue was positively affected by $324 million during the year due to currency fluctuations, net of hedging activity. Total revenue per piece declined 8.2% in the fourth quarter of 2008, primarily due to the strengthening of the U.S. Dollar (currency-adjusted revenue per piece declined 3.0%), but also impacted by an acceleration in the shift away from our premium services and lower package weights. Fourth quarter 2008 total segment revenue was negatively impacted by $144 million due to the currency fluctuations, net of hedging activity.
On December 31, 2007, we increased the base rates 6.9% for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service). Rate changes for international shipments originating outside the United States vary by geographical market and occur throughout the year.
Additionally, we modified the fuel surcharge on certain U.S.-related international air services by reducing the index used to determine the fuel surcharge by 2%. The fuel surcharge for products originating outside the United States continues to be indexed to fuel prices in our different international regions, depending upon where the shipment takes place. Total international fuel surcharge revenue increased by $586 million in 2008, due to higher fuel surcharge rates caused by increased fuel prices as well as an increase in international air volume.
International Package operating profit decreased $251 million, or 13.7%, in 2008, and the operating margin declined to 14.0% from 17.8% in 2007. The decline in operating profit and operating margin were affected by reduced asset utilization resulting from changes in economic conditions and trade flows, such as the reduced import volume into the United States. Operating profit and margin were also negatively affected by a shift in product mix away from our premium services, as well as expenses associated with integration activities in our delivery network. Global economic weakness resulted in a weakening operating profit trend, with fourth quarter operating profit declining 34.3%.
Because fuel costs decreased rapidly in the latter half of the year, operating profit benefited from the approximate two month time lag between the fuel price changes and when the monthly surcharge rates are applied to package shipments. As a result of this time lag, fuel positively impacted the change in operating profit during 2008, which is opposite of the effect the company experienced in 2007, when fuel costs rose much faster than the fuel surcharge rate and operating profit was adversely impacted. The change in operating profit was also positively affected by $136 million during the year due to favorable currency exchange rates, net of hedging activity.
Operating profit in 2008 was adversely impacted by a fourth quarter $27 million impairment charge incurred on certain intangible assets in our domestic package business in the United Kingdom (discussed further in the "Operating Expenses" section). Operating profit for 2007 was adversely affected by the aircraft impairment and SVSO charges ($62 million of the aircraft impairment charge and $7 million of the SVSO charge impacted the International Package segment), and the absence of these charges in 2008 favorably affected the operating profit comparison between periods.
2007 compared to 2006
International Package revenue improved $1.192 billion, or 13.1% in 2007, driven by a 10.4% volume increase for our export products and an 8.3% increase in total revenue per piece. The growth in revenue per piece was positively impacted by base rate increases and the weakening of the U.S. Dollar against several major foreign currencies in 2007, but was adversely affected by a lower fuel surcharge rate applied to our U.S. origin international air products.
Export volume increased throughout the world. Asian export volume grew strongly in key markets during the year, especially China. Asian export volume continues to benefit from our geographic service expansion, as well as strong economic growth, which benefits our intra-Asian package business. To continue this expansion, we received authority in 2007 to operate six daily flights between the U.S. and Nagoya, Japan, and began constructing a package and freight air hub in Shanghai, China that will link Shanghai to our international air network, with direct service to Europe, Asia, and the Americas.
European export volume also grew solidly, largely due to continued growth in the transborder business and improved economic and industrial output in the European Union. U.S. export volume increased at a slower pace. Non-U.S. domestic volume increased 2.2% for the year, and was impacted by growth in several major European countries and Canada.
Export revenue per piece increased 3.9% for the year, largely due to rate increases and favorable exchange rates, but was adversely impacted by relatively higher growth in lower revenue per piece transborder products, and a reduction in certain fuel surcharge rates. Non-U.S. domestic revenue per piece increased 9.6% for the year, and was affected by rate increases and favorable exchange rates. Total average revenue per piece increased 2.7% on a currency-adjusted basis, and the overall change in segment revenue was positively affected by $464 million in 2007 due to currency fluctuations, net of hedging activity.
In January 2007, we increased rates 6.9% for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service). Rate changes for international shipments originating outside the United States vary by geographical market and occur throughout the year.
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