Lower Cost Logistics Likely to Drive UPS’ Freight Delivery Business

by Trefis Team
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United Parcel Service (NYSE:UPS) is trying to capitalize on the shift in customer preference towards economical means of shipping freight and packages. UPS recently announced the addition of a low-cost rail solution for transporting full container loads (FCL) between China and Europe. [1] The adoption of the low-cost rail service and improving trade relations between China and Europe, should help drive UPS’s freight volume and revenues.

We have a price estimate of $102.81 for UPS, almost in line with the current market price.

China-Europe rail option will help reduce time and costs for customers

The new rail service introduced by UPS will run from Chengdu, China, to Lodz, Poland, and from Zhengzhou, China, to Hamburg, Germany. This service will be combined with the extensive coverage and flexibility offered by trucks in order to provide efficient service to customers. UPS believes that the rail service will help reduce delivery times by 50% compared to freight delivery via ocean and is 70% less costly compared to freight delivery via air.

As more and more customers look towards economical freight delivery, UPS’s new rail service will prove to be an attractive option. Increased adoption of UPS’s rail service will help boost freight volumes and revenues.

Growth in China-Europe trade will help drive volume

China is the second biggest trading partner with the European Union with daily trade value of around €1 billion. [2] Despite this, relations between Europe and China have not been stable primarily due to Europe’s trade deficit with China, and China’s lack of transparency and stringent regulations towards foreign investments. Europe’s solar panel dumping accusation against China has further strained their trade relations.

However, in November 2013, Europe and China announced that they will work towards European Union-China Investment Agreements that will help improve trade relations. Since then, negotiations between the European Union and China have progressed considerably with Chinese businesses signing multi-billion dollar agreements with their European counterparts. [3] This shall ensure growth in trade between Europe and China in the years to come.

Chinese and European businesses will be attracted towards low-cost shipping solutions to support their trade and will likely choose UPS for their logistics needs. This should help drive UPS’ freight volumes.

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Notes:
  1. UPS Broadens Multimodal Express Portfolio with China-Europe Rail Offering, June 30 2014, www.ups.com []
  2. China, European Commission []
  3. What China’s Xi Jinping wants from Europe, April 2 2014, www.cnn.com []
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