The Economy

UPS Profit Hit By Costs of ‘High Quality’ Holiday Service

The delivery service muscled up for Christmas to avoid delivery problems, but demand came in below expectations.
Matthew HellerJanuary 26, 2015
UPS Profit Hit By Costs of ‘High Quality’ Holiday Service

UPS’ improved performance over the holiday season has turned out to be a double-edged sword. Although it delivered about 98% of express packages on time on Dec. 24, avoiding a repeat of the delivery problems of a year earlier, the improvement came at a cost to its bottom line.

UPSThe company announced on Friday that its fourth-quarter financial performance was “disappointing” and cut its 2014 earnings forecast to $4.75 per share from between $4.90 per share and $5 per share. Industry analysts had been looking for earnings of $4.96 per share.

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UPS CEO David Abney blamed its heavy investment on ensuring holiday season deliveries would be made on time. Among other things, Fortune reports, the company nearly doubled seasonal hiring and spent about $500 million on automated sorting systems “to quickly identify ZIP Codes and have the ability to re-route packages in the event of the kind of bad weather that in 2013 created all sorts of chaos.”

“Though customers enjoyed high quality service, it came at a cost to UPS,” Abney said in a news release.

According to tracking-software developer Shipmatrix, some 98% of UPS and FedEx express packages were delivered on time on Dec. 24, up from about 90% for FedEx and 83% for UPS a year earlier. UPS had previously forecast it would ship about 585 million packages in December, up 11%.

The company added capacity to prepare for the “extreme spike” in volume on Cyber Monday and on Dec. 22, which is a peak delivery day before Christmas. But Fortune said demand for the other 59 days of the holiday season “came in below UPS expectations, meaning a lot of that extra holiday muscle went unused.”

Abney indicated that retailers would bear more of the cost next Christmas period. “Going forward, we will reduce operating costs and implement new pricing strategies during peak season,” he said. But Fortune warned that such a move would “add to the growing tension between retailers and the delivery companies.”

In trading Friday, UPS stock fell almost 10% to close at $102.93.

Image: Thinkstock