How Big Is Purchased Transportation Cost For UPS?

Around 20% of United Parcel Service’s (NYSE:UPS) total expenditures goes toward purchased transportation, which includes the costs of transportation services including truck and air freight, purchased from third party contractors. This figure has been going up for the company over the last few years, as it partnered with third party vendors to meet the volume growth. However, it is lower than that for its peer FedEx. While purchased transportation costs between 2016 and 2018 have increased $4 billion (nearly 44%), we believe that UPS’s attempts to reduce these costs would have had a sizable negative impact on revenues due to lower delivery volumes. Over the recent years, UPS has seen steady revenue and expenses growth. However, its total expenses as a percentage of revenue has largely remained in the range of 92% to 94%. In this note we discuss the key drivers of UPS’ total expenses. Look at our interactive dashboard analysis ~ UPS Expenses: How Does United Parcel Services Spend Money? ~ for more details.

UPS’ Total Expenses Were $67.1 Billion, With Operating Expenses of $64.8 Billion, $1.2 Billion In Tax Expenses, And $1.0 Billion In Non-Operating Expenses In 2018.

• Breakdown of UPS’ Total Expenses in 2018 :
• Total = $67.1 Bil
  • Operating Expenses = $64.8 Bil
  • Provision for income taxes = $1.2 Bil
  • Non-operating expenses = $1.0 Bil

UPS’ Net Income Margin Has Fluctuated In The Recent Years. It Saw An Uptick In 2017, Due To Certain One-Time Charges

UPS’ Total Expenses Have Increased From $57.5 Billion In 2016 To $67.1 Billion In 2018

• UPS’ total expenses have grown from $57.5 billion in 2016 to about $67.1 billion in 2018.
• The jump in 2018 can be attributed to higher fuel costs, given the move in fuel prices, and overall volume growth.
• For 2020, we expect total expenses to be around $74 billion, which comprises of
  • 1) Operating Expenses: $71.3 billion
  • 2) Non-Operating Expense: $1.1 billion
  • 3) Income Taxes: $1.6 billion
• Below, we take a look at how the company’s key expense components have trended and the key reasons for the change.

1. Operating Expenses Have Increased From $55.4.0 Billion In 2016 To $64.8 Billion In 2018, Primarily Driven By (A) $2.5 Billion Increase In Compensation & Benefits, (B) $4.3 Billion Increase In Purchased Transportation, (C) $1.3 Billion Increase In Fuel, And (D) $1.2 Billion Increase In Other Operating Expenses.

• (A) Compensation & Benefits grew from $34.8 billion in 2016 to $37.2 billion in 2018, driven by volume growth. As a % revenues, compensation & benefits has declined from 57% to 52% over the same period.
• (B) Purchased Transportation expenses have increased from $9.1 billion in 2016 to $13.4 billion in 2018, driven by higher third party carrier charges, amid volume growth. As a % of revenues, purchased transportation has increased from 15% to 19% over the same period.
• (C) Fuel expenses increased from $2.1 billion in 2016 to about $3.4 billion in 2018, led by higher fuel prices. As a % of revenue, fuel have increased from 3.5% in 2016 to 4.8% in 2018. We expect a slight uptick in fuel expenses despite favorable prices in 2019, reflecting the impact of overall volume growth.
• (D) Other operating expenses have increased from $5.7 billion in 2016 to $6.8 billion in 2018, driven by higher equipment and facility rentals. As a % of revenues, other operating expenses have hovered around the 9.5% mark during the same period.

2. UPS’ Non-Operating Expenses Are On A Rise

• UPS’ non-operating expenses grew from $0.3 billion in 2016 to $1.0 billion in 2018, driven by higher interest expenses relating to increased long term debt, partly offset by higher interest income from its investments.

3. UPS’ Income Tax Expense Has Fluctuated In Recent Years. Effective Tax Rate Has Largely Declined, Partly Due To Impact of Changes In The U.S. Taxes, And Certain One-Time Benefits.

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