UPS United Parcel Service

By Laura Stevens 

United Parcel Service Inc. reported profits nearly tripled in the fourth quarter, exceeding Wall Street expectations, as more customers shipped via air and higher prices and cost-saving efforts paid off during its all-important holiday season.

The delivery giant also gave an upbeat earnings forecast for 2016 on strong e-commerce demand even as industrial production falls in key countries amid a weaker global economic outlook.

UPS set out this past holiday to prove to investors it can balance costs with late-year surges in e-commerce volume--deliveries to consumers accounted for about 60% of all U.S. deliveries in December, up from about 45% in the third quarter.

Despite peak holiday volumes coming in slightly under forecast, UPS posted earnings of $1.33 billion, or $1.48 a share, up from $453 million, or 49 cents a share, a year earlier.

UPS missed earnings expectations the previous two holidays, first because it wasn't able to deliver all its packages on time, then because it over prepared for volume that came in unevenly. Both those years it overspent by $200 million.

The company said it lowered costs by shifting more than 35% of its SurePost package deliveries--typically delivered to the door by the U.S. Postal Service--back into its own network to increase the number of packages a driver delivers at each stop. Other initiatives also started to pay off, including driver-routing software Orion, now 70% installed, and the introduction of Access Point locations where customers can pick up their packages.

Just a 10% increase in packages per stop creates about $200 million in operating profit improvement, Chief Commercial Officer Alan Gershenhorn told analysts Tuesday on an earnings call. "The things that we're doing to our network now are going to enable us to handle bigger and bigger peaks," he added.

UPS said it hired between 90,000 and 95,000 seasonal workers, as expected, but brought them on later, reducing hours by 8%. Its summer acquisition of Coyote Logistics also lowered outside transportation costs.

Holiday volume came in lower than UPS expected, as it delivered 612 million packages between Black Friday and New Year's Eve, down from the expected 630 million. Chief Financial Officer Richard Peretz in an interview attributed that in part to more holiday returns being shipped later than expected, in January.

Ground package volume also grew below expectations, in part due to slowing industrial production, as well as UPS's decision to drop some low-yield customers. An increase in air volumes helped make up for that, as its U.S. deferred air product grew nearly 15%, while next-day overnight products were up 10%.

Retailers were using air to ship packages farther and faster, Mr. Peretz said, as more retailers aim for two-day delivery. Air pricing has also become more competitive with ground due to the lower price of fuel.

Industry analysts attributed part of the shift to consumers ordering more online later in the season, requiring retailers to ship it by air for on-time delivery.

Amazon.com Inc.'s delivery ambitions have weighed on UPS's stock prices in recent weeks, after reports the e-commerce giant was leasing its own cargo aircraft. UPS Chief Executive David Abney said nothing he has seen points to any substantial effect on pricing in the market

Mr. Abney told analysts that Amazon is a good customer and the two companies have a mutually beneficial relationship. "We do add capacity, and for large customers such as Amazon we do it, though we ensure we have the proper economic return," he said.

UPS's revenue edged up 1% to $16.05 billion in the fourth quarter. Excluding currency effects, revenue would have risen 2.4%.

Adjusted earnings were $1.57 a share. Analysts had expected earnings of $1.42 a share on revenue of $16.28 billion, according to Thomson Reuters.

Despite concerns about worsening macroeconomic conditions, the company gave an optimistic 2016 earnings forecast of $5.70 to $5.90 a share, a 5% to 9% increase over adjusted 2015 results. Analysts were expecting $5.73 a share.

"Our guidance range is really set at a high and a low, because we realize that the macro environment is not clear. But as important is what we're doing inside UPS," including adjusting international routes and modernizing package-sorting hubs, Mr. Peretz said in the interview.

UPS share prices remained largely unchanged, flat at $94.42 in early afternoon trading.

Anne Steele contributed to this article.

Write to Laura Stevens at laura.stevens@wsj.com

(END) Dow Jones Newswires

February 02, 2016 14:24 ET (19:24 GMT)

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