By Angela Chen 

United Parcel Service Inc. said higher-than-expected seasonal expenses dragged down its earnings in the fourth quarter as the shipping giant took steps to avoid a repeat of the holiday shipping snafus that plagued its network in 2013.

Chief Financial Officer Kurt Huehn said the extra capacity UPS added was necessary to handle the high volume on the days just before Christmas. But demand was less than expected on other days. That resulted in a decline in productivity, increased contract carrier rates and costs tied to overtime and training hours.

Shares dropped 10% in early trading on his comments, also weighing on rival FedEx Corp., which declined more than 2%. FedEx sought to reassure its investors in the wake of UPS' warning by affirming its outlook for the year ending in May.

After millions of packages were delivered late during the Christmas season in 2013 thanks to bad weather and last-minute surges in online shopping, both UPS and FedEx sought to upgrade their networks to handle higher volumes.

In addition to hiring more people, UPS spent about $500 million on projects including automated sorting systems to rapidly identify ZIP Codes and swiftly reroute packages in the event of bad weather. And FedEx accelerated delivery by at least one day in more than two-thirds of the U.S. and introduced a new reporting system to help with delivery planning.

The moves appeared to pay off for customers. According to tracking-software developer Shipmatrix Inc., UPS and FedEx delivered an estimated 98% of express packages on time on Dec. 24.

UPS had said it expected to ship an estimated 585 million packages in December, an 11% increase over 2013. On Dec. 22 alone, it expected to deliver 34 million packages, more than any other day in its history. FedEx, meanwhile, expected a 9% increase in packages shipped between Black Friday and Christmas Eve from 2013.

In the days leading up to the December rush, UPS, like FedEx, limited shipments of some packages to ensure their networks operated smoothly. The volumes forced FedEx again to be out delivering on Dec. 25--not a standard delivery day--to make sure all its packages arrived.

Among the other things weighing on both companies in the fourth quarter was the ongoing West Coast port dispute, which has affected shipments for multiple retailers and caused problems due to volume fluctuations.

And UPS said its international operating profit was below expectations, mostly due to unfavorable currency rates.

For the fourth quarter, Atlanta-based UPS expects to report earnings, excluding special items, of $1.25 a share, well below the $1.47 predicted by analysts polled by Thomson Reuters, but flat from the previous year. Revenue was generally in line with expectations.

Chief Executive David Abney called the results "disappointing" and said the company plans to reduce operating costs and implement new pricing strategies.

For the current year, the company expects earnings growth to be less than its previously announced target of 9% to 13%, due to declining interest rates, low oil prices that reduce fuel surcharges, increased pension expense of $180 million and currency headwinds that are expected to decrease profits by $50 million.

Shares of UPS, which is set to report fourth-quarter results Feb. 3, had risen 17% over the past 12 months through Thursday's close.

Write to Angela Chen at angela.chen@dowjones.com

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