UPS United Parcel Service

By Mike Esterl in and Doug Cameron in 

Atlanta

Chicago

United Parcel Service Inc. is forecasting record holiday shipments after traffic surged in the third quarter, spurred by rising e-commerce in the U.S. and robust growth in Asia and Europe.

In the wake of both the good news and growing competition, UPS said Thursday it is boosting capital spending and buying 14 jumbo-sized Boeing Co. airplanes to be delivered between 2017 and 2020. It is the first order for planes by the parcel delivery giant since 2008. UPS and Boeing didn't disclose the cost of the Boeing 747-8s, which have a total list price of $5.3 billion before discounts.

The plane order comes as some pockets of Asia, including China and Hong Kong, are growing at rates UPS has never seen before, Jim Barber, president of UPS International, told analysts on Thursday's earnings call. Europe, he said, "continues to speed itself up." UPS says demand for international cross-border online sales is growing six times faster than the broader economy.

The Atlanta company expects to handle more than 700 million packages globally between Thanksgiving and New Year's Eve, up 14% from last year's holiday season. This year has two extra shipping days; without them, the increase is closer to 5%.

Average daily package volume rose 5.7% in the U.S. in the three months ended Sept. 30, compared with the same period last year. That is more than double the 2.5% year-on-year growth in the second quarter.

Daily export volumes for international packages soared 7.1% in the latest quarter, compared with 3.9% growth in the second quarter. The acceleration was fueled by double-digit percentage gains out of Asia and a high-single-digit increase in cross-border shipments within Europe.

UPS is stepping up investments after chief rival FedEx Corp. bought Dutch parcel delivery company TNT Express NV in May for nearly $5 billion, FedEx's largest acquisition ever. The heightened spending also comes as Amazon.com Inc., a key UPS and FedEx customer, lays the groundwork for its own shipping business.

"We're doing this [increasing investments] because we have to move packages as part of our growth strategy," both in terms of revenue and profit, UPS Chief Executive David Abney said in an interview.

UPS cautioned it expects to make a year-end, mark-to-market pension accounting adjustment in the fourth quarter that could be material. It reiterated it expects earnings-per-share of $5.70 to $5.90 in 2016 without the accounting adjustment.

The company's share price was down 0.7% at $107.85 in afternoon trade on the New York Stock Exchange after third-quarter profit met analysts' consensus estimate and topped revenue expectations.

Mr. Abney said the company is spending $2.8 billion on capital expenditures this year, up about $500 million from 2015. He noted UPS has spent about 4.5% to 5% of revenue on capital expenditures in recent years, down from 6% to 8% historically.

In the U.S., business-to-consumer deliveries rose 11% in the quarter, compared with 2% growth for business-to-business shipments. Most of the latter came from online retail returns. About one in five e-commerce packages shipped to consumers are returned.

Executives said the new, larger Boeing 747-8 jumbo freighters will fly mostly intercontinental routes. The new planes have 16% more capacity than its Boeing 747-400 cargo planes, some of which will be redeployed to the U.S.

UPS has opened or expanded 15 hubs across the U.S. to prepare for this year's holiday-shipping season. It also will fully deploy its new route navigation system, Orion, for the first time and has added thousands of delivery car positions.

The company plans to hire about 95,000 temporary workers, the same as last year, as it leans more heavily on automation to handle the increased package traffic.

UPS's jumbo freighter order doubled Boeing's order book for the jet and is a huge boost for the 747-8 program as both the passenger and freighter versions have been slow sellers. Airlines have opted for smaller planes and the moribund air cargo market has led others to cancel planned purchases.

Boeing has halved production to six planes a year and warned in regulatory filings that it may stop making them unless market conditions improve.

UPS is expected to have secured steep discounts from Boeing and may be able to unload some of its older 747 cargo jets to Boeing as part of the deal, said one aircraft financier familiar with the negotiations.

The plane maker has just 15 firm orders for the 747-8, including six for the freighter version after securing a deal for four this year from AirBridgeCargo Airlines LLC.

Boeing has been renting rather than selling some of the new planes and has more than $1 billion in exposure to 747 leases on its balance sheet, according to a regulatory filing.

It has produced some 747-8s that still lack a customer, but Boeing said the UPS planes would all be newly built. UPS also has an option to buy 14 additional planes.

Boeing Chief Executive Dennis Muilenburg said on the company's quarterly earnings call this week that 747 production was sustainable at six a year. The U.S. Air Force is due to acquire two of the planes for use as the future Air Force One fleet.

The biggest operators of the 747-8 cargo jet are Cargolux Airlines International SA and Cathay Pacific Airways Ltd., with 14 apiece.

Write to Mike Esterl at mike.esterl@wsj.com and Doug Cameron at doug.cameron@wsj.com

(END) Dow Jones Newswires

October 27, 2016 15:36 ET (19:36 GMT)

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