UPS (NYSE:UPS) has outlined details of its 2012 rate hike with the world’s largest package delivery company set to impose a net increase of 4.9% on all domestic and international packages.  The higher rates incorporate a reduction in fuel surcharges, which will fall by one percentage point for ground packages and two percentage points for domestic and international air mail. Freight charges are also set to rise, with next-day air freight and 2nd-day air freight both facing an increase of 5.9%. UPS 3-Day freight charges will remain unchanged. Given that the rate hikes mirror its 2011 price increases, UPS appears confident of continuing to grow revenue per package for both the domestic and international sectors. Its price hike outpaces competitor FedEx (NYSE:FDX), which had said it will raise rates by 3.9% next year. 
Revenue Growth Steady at Home and Abroad
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The two key delivery services offered by UPS are Domestic Ground Packages and International Export Packages. Ground shipments account for 36% of the company’s stock price and have seen rising revenues in recent years as UPS passes on ever-higher fuel costs. As long as demand holds steady with the higher rates, we forecast that Domestic Ground Package revenues will continue growing from $7.88 per item this year to $9.88 by 2018.
Meanwhile, International Export Packages account for 30% of the stock price and have a broadly similar outlook with average revenue of $38.60 expected to hit $51.80 by 2018. In contrast to domestic packages, however, demand for overseas packages was severely affected by the 2008 global recession – when revenues fell sharply from $40.50 in 2008 to $35.60 in 2009.
Global Slowdown May Have Muted Effect
Alongside its projected revenue growth, we expect UPS to maintain its margins of 20% for domestic packages and 25% for international exports. While it remains possible that a slowdown in the global economy could hit international revenues, two factors will work in the company’s favor should such an eventuality arise.
First, for the 2012 rates UPS has nominally cut its fuel surcharge despite oil prices remaining elevated. This should allow the company to argue against future surcharge reductions – which consumers might otherwise expect during a downturn – thereby temporarily shielding international revenues. Second, UPS has a relatively low exposure to international cargo and freight operations, which would be the biggest victim of a major global slowdown.
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