A lesson in Cost Management: UPS Announces Its Highest Operating Margin in 15 Years

FedEx and other carriers can learn a few lessons from UPS, which reported a third quarter with its highest consolidated operating margin in 15 years. This article examines how UPS accomplished this through capacity and cost management.

Inside the Numbers

For the third quarter, consolidated revenue rose 4.2% year-over-year to $24.2 billion, and operating profit grew 6% to $3.1 billion. The consolidated operating margin expanded to 13%, a 20-basis-point improvement from Q3 2021.

How UPS Achieved Success

Despite a softening global economy and what Chief Financial Officer Brian Newman described as a dynamic macro environment, UPS successfully managed its network to match volume levels. Overall, however, average daily volumes declined across all UPS segments. The most significant declines in average daily volumes were Domestic Deferred, down 10.7% year-over-year, and International Domestic, down 9.4% year-over-year. The lowest declines were in International Exports, down 0.6%, and Domestic Ground, down 0.7%.

The U.S. Domestic segment recorded $1.7 billion in operating profit, a 19.2% year-over-year increase, while the operating margin expanded 100 basis points to 11%.

UPS successfully grew one of its strategic markets — small and medium businesses (SMBs). SMB average daily volume, including platforms, increased by 1.9%, representing 28.3% of UPS's total U.S. volume during the third quarter.

In addition, UPS' Digital Access Program (DAP) continues to grow, with more than 3 million merchants shipping with DAP year-to-date through September. UPS generated over $1.6 billion in revenue from DAP and expects to exceed its $2 billion DAP revenue target this year.

UPS Touts Efficiency Gains, Too

Meanwhile, CEO Carol Tomé and Newman noted during the Oct. 25 earnings call several operational efficiency gains, including the following:

  • Optimized trailer loads by eliminating nearly 1,000 loads per day compared to the third quarter of last year.
  • Launched a total service plan to run a predictable on-time network. To date, on-time computer departures and arrivals improved by 6.5% compared to last year, reducing idle time in the network.
  • Newman also said UPS is leveraging automated tagging, robotic small store induction, and autonomous vehicles to improve efficiency.

UPS is also working on an exciting project, an upstream delivery density solution. "Here we are building a digital platform that goes upstream to look at orders — in other words, packages at the shopping card level. We then match this new order with other orders with the same delivery day commitment, creating delivery density," Tomé said. "We have gone live with one customer and are delighted with the results we have seen. We are currently onboarding several new customers to the platform."

The efficiency improvements, DAP, and surcharges are helping to drive density into UPS' network. Density equates to profitable volume; if a shipper's volume is not profitable, they will either pay more or have to turn to alternative last-mile carriers.

Rising Per-Piece Revenue Drives Margin Expansion

Since 2019, U.S. revenue per piece has increased by 23%. Tomé said this has been achieved by "renegotiating on longer-term contracts, by leaning into the parts of the market that value our end-to-end network through some demand surcharges, a little help from fuel… We have also driven productivity during that timeframe, but the revenue per piece growth has driven the margin expansion."

Tomé further noted that there would be more of a balance between revenue per piece and productivity to expand its margin. "We think that's just the right thing to do. As we continue to drive productivity inside of our business, we are willing to give some of that back to our customers through a revenue share — I think a third for the customer, a third for the shareholder, and a third for UPS."

Holiday Peak Season Outlook

The holiday peak season appears to have returned to normal. UPS expects volumes to peak later in December than last year as more consumers are likely to return to pre-pandemic shopping behaviors. While expecting lower fourth-quarter volumes than last year, the company plans to use technology to match daily capacity with customer demand and optimize air and ground to "make room for new customers where we can add the most value."

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