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 dropped as much as 2.4%. FedEx then sought to reassure its investors in the wake of UPS' warning by affirming its outlook for the year ending in May.

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.

Those moves were taken after millions of packages were delivered late during the Christmas season in 2013 as delivery companies were overwhelmed by bad weather and last-minute surges in online shopping.

The efforts appeared to pay off for customers. According to tracking-software developer Shipmatrix Inc., UPS and fellow delivery service 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 the same month in 2013. On Dec. 22 alone, it expected to deliver 34 million packages, more than any other day in its history.

Among the other things weighing 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 international operating profit was below expectations, mostly due to unfavorable currency rates.

For the fourth quarter, the Atlanta-based shipping giant 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.

Investors have questioned whether the delivery giant can adjust to the new economics created by e-commerce, which increasingly has its drivers dropping off single packages at houses spread out in residential areas instead of multiple packages at businesses. Executives have said they need to cut costs faster to offset declines in per-package revenue. In general, UPS has been making progress on this front as new technology leads to productivity gains, and wages drop as the company hires more seasonal workers.

UPS is set to report fourth-quarter results on Feb. 3.

Shares 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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