There are three main drivers of revenue growth for United Parcel Service (UPS): package volumes, product mix and pricing, and fuel surcharges. Package volumes and product mix and pricing are in turn driven by economic growth.
Increasing economic growth increases e-commerce demand, which in turn increases demand for courier services. In 2014, economic growth in the United States grew at a moderate pace. Industrial production and retail sales followed suit. This resulted in demand growth for omni-channel sales and e-commerce, which has been the main reason for increased package volumes.
However, worldwide economic conditions remain challenging. Economic conditions in Europe deteriorated with strong growth in the United Kingdom, offset by poor growth in Germany, France, and Italy. Asia continues to grow, while growth in China has slowed down.
This uneven growth along with a shift toward intraregional trade has changed trade patterns and resulted in overcapacity in some of UPS’s trade lanes. This in turn results in customers opting for more standard products rather than the premium ones, both in Asia and Europe.
US domestic volumes were driven mainly by increased retail sales and e-commerce demand in the country. Growth in international volumes were due to an increase in exports, which was led by the healthcare, retail, automotive, and industrial sectors.
Pricing is affected by base rates, average weight per package, and product mix. While both base rates and average weight per package increased for UPS, a change in customer preferences from UPS’s premium products to standard ones resulted in pricing degrowth in UPS’s domestic and international segments. International prices were also affected by the adverse currency impact.
UPS applies a fuel surcharge on domestic air and ground services. According to UPS, the air fuel surcharge is “based on the U.S. Gulf Coast (USGC) prices for kerosene-type jet fuel as reported by the U.S. Energy Information Administration…for the month that is two months prior to the adjustment, rounded to the nearest cent.” The ground fuel surcharge is “based on the National U.S. Average On Highway Diesel Fuel Price as reported by the U.S. Energy Information Administration…for the month that is two months prior to the adjustment, rounded to the nearest cent.”
Fuel surcharge revenue decreased for the domestic segment, while it improved slightly for the international segment. However, the impact on both segments remained largely flat.
UPS forms the largest holding of 7.6% in the iShares Transportation Average ETF (IYT). Similar companies included in the ETF are FedEx (FDX), Expeditors International (EXPD), and Con-way (CNW), with 13.14%, 4.19%, and 3.19% holdings, respectively.