While domestic markets continue to support margin expansion at UPS (NYSE:UPS), volume growth is being largely driven by international operations. The company continued to pursue opportunities in the international markets, the past quarter, as it announced significant expansion of the Cologne air hub in Europe and expanded services in Asia. UPS is especially bullish on the intra-Asia and intra-Europe theaters as Asia trades more with itself and the continuing migration of integrated supply chains in Europe drives the intra-European shipments. As per our estimates, the International operations contribute significantly to the UPS stock value at about 40%, while accounting for only a quarter of value for major competitor, FedEx Corp. (NYSE:FDX). Below, we take a closer look at the international expansion strategy for UPS.
Europe Expansion To Drive Cost Efficiencies And Volume Growth
This September, UPS announced plans to significantly expand its European air hub facilities at Cologne-Bonn Airport in Germany. The $200 million expansion will increase the hub’s package sorting capacity from 110,000 to 190,000 packages per hour and position UPS for continued growth at its international express business. UPS has seen its European export volumes increase at an annual rate of more than 10% over the last decade.
The expansion will drive efficiencies with increased throughput of larger containers leading to improved utilization and operations efficiency. Further, higher capacity at the hub means expanded capabilities for handling irregular size shipments and increased ground unloading capability reducing ground transportation expense.
Capacity Reduced In Asia As U.S. Demand Softens
As the weakening macro-economic outlook in the U.S. led to a slowdown in exports from Asia, UPS witnessed volume declines on the Asia-to-U.S. lane. While year-over-year capacity out of Asia was lowered about 10%, UPS still remains heavily invested in Asia, especially in its intra-Asia network.
The company also remained positive on other lanes in Asia including Asia to Europe. UPS began operating new flights into Chengdu, the inland city of China, this July. With the Chengdu flight, UPS will connect Europe and Asia with a total of 24 flights per week, providing more next day options than any logistics carrier.
We have a $83.60 Trefis price estimate for UPS, which is ~20% ahead of the current market price. We are presently looking to update this to incorporate the yield and volume guidance issued by the company along with the Q3 results.