UPS’ Holiday Season Performance: The Story So Far

December 26th, 2014 by Trefis Team
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For courier companies like United Parcel Service (NYSE:UPS), it is that time of the year when their logistics capabilities are tested to the limit. During the holiday season, package volumes rise to phenomenal levels, severely stressing package delivery networks. Last year, bad weather and overwhelming package volumes cost UPS millions of dollars in refunds and exposed the company to a lot of bad press. However, in order to avoid recurrence of last year’s fiasco, UPS had taken precautions this year, which are likely to temper its annual earnings. In this article, we look at how UPS prepared itself for the holiday season and how it has been holding up.

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In anticipation of the high package volume during this year’s holiday season, UPS worked hard to expand its package handling capacity. At its third quarter earnings conference in October, UPS announced that it would have 47 new, expanded or temporary sorting facilities ready in time for the peak season. [1] These sorting facilities would help increase its capacity by 5%. UPS also hired 90,000–95,000 seasonal employees and accelerated the rollout of its route optimization software, ORION, which helps reduce delivery times and costs.

UPS also invested in the development of around 30 new technology solutions that would strengthen its package handling capability.  These innovations include “mobile delivery villages” and automated scanning and sorting systems. Mobile delivery villages are modular units with loading doors and conveyor belts that can help dispatch 60-90 vehicles from a center. [2] Its automated scanning system can scan a package from all six sides at the same time to read the delivery address, saving time wasted during shifting a package to scan the address. [3] The automated sorting system then flashes instructions pointing out which chute or belt the package has to be placed on. With this automated sorting system, workers are able to process 15% more packages a day. [4]

These preparations generated significant additional costs for UPS, amounting to $500 million in additional capital expenditure and $175 million in added operating expense. It is because of these cash outflows that UPS reduced its earnings per share guidance from $5.05-5.30 to $4.90-5.00, representing a 7-9% increase over 2013. [5]

UPS’ Performance During The Holiday Season

UPS had forecast December 22 to be its busiest day in the holiday season, with 34 million packages. [2] Though the on-time delivery rates for that day are not yet available, given UPS’s performance during Thanksgiving and Cyber Monday, it is likely that on-time rates will have been higher than last year. According to ShipMatrix, a logistics software firm, UPS had achieved a 95% on-time delivery rate during Thanksgiving week, compared to 89% last year. [6] UPS’ deliveries during the week of Cyber Monday also improved, with 97% on-time rate compared to 93% last year. [7] Additionally, with reports of UPS capping deliveries of retailers exceeding agreed-upon limits, [8] we believe  its package volumes will have been within manageable limits.

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Notes:
  1. United Parcel Service’s (UPS) CEO David Abney on Q3 2014 Results – Earnings Call Transcript, October 24, 2014, www.seekingalpha.com [↩]
  2. UPS Ready for 2014 Peak Season, Forecasting Record Holiday Deliveries, October 29, 2014, www.ups.com [↩] [↩]
  3. UPS hopes for a merrier Christmas in 2014, December 14, 2014, www.usatoday.com [↩]
  4. A Test for UPS: One Day, 34 Million Packages, December 21, 2014, www.wsj.com [↩]
  5. UPS Delivers Strong 3Q Results; 3Q EPS Moves 13.8% Higher, October 24, 2014, www.ups.com [↩]
  6. FedEx and UPS are doing a better job of delivering your Christmas gifts, December 8, 2014, www.shipmatrix.com [↩]
  7. Holiday Shipping Deadlines A Gamble For Retailers, December 15, 2014, www.shipmatrix.com [↩]
  8. UPS, FedEx Cap Holiday Deliveries Amid Late Surge, December 23, 2014, www.wsj.com [↩]