After the disappointing earnings FedEx recently reported,
all eyes have now turned towards UPS. UPS reports its quarterly earnings
October 23 but already analysts are expecting a similar if not worse report. It
does not look promising for UPS as the global economy, the TNT acquisition and
the multiemployer pension plans weigh on UPS. All of these issues have resulted
in Standard & Poor downgrading UPS’ credit rating from AA- to A+ last
week.
The global economy has not been kind to many logistics and
transportation providers this year – high oil prices, lack of demand and
capacity issues - have all been among the problems facing providers. Like
FedEx, UPS has seen a trade-down from premium services to economy services as
shippers seek ways to cut costs amidst the manufacturing slowdown in Asia, the US and Europe. But,
according to Dan Brutto, President of UPS International, “We’re very bullish in
the long term. I think this is just a cycle.”
Along with the economy, the European Commission’s (EC)
approval of the TNT acquisition is proving to be another headache for UPS. The
company originally had expected to close the deal this year; however, it now
has been pushed into 2013, if even then. According to a recent Wall Street
Journal article, the acquisition may result in formal objections from European
antitrust regulators as it now appears the regulatory authority is utilizing a much
narrower definition of the market than the companies had expected. The EC is
concerned the combined UPS/TNT would have too much control within the
overnight-delivery segment in particular, thus stifling competition. As a
result, the commission is assessing this segment on a country-by-country and
even route-per-route basis, worried in particular about the combined company's
dominance of the market in the Netherlands and Belgium. "We're arguing
there are far more than three competitors in Europe”, said Brutto. "There
are 13,000 registered courier companies in Europe doing the same thing as us in
the European Union. It's a very fragmented market and there are inefficiencies
in the marketplace." UPS
acknowledges that the deal hasn't gone according to plan but remains
optimistic. "We'd hoped to get the deal done earlier," Brutto said.
Finally, the multiemployer pension plans are yet another
concern for UPS. In 2007, UPS withdrew from the Central States pension plan by
paying $6.1bn. This resulted in the first credit downgrade in UPS history. Last month, the company announced an
agreement with the New England Teamsters and Trucking Industry Pension Fund to
restructure its plan. As one of the largest employers of Teamster employees,
this will likely remain a problem for the company in the coming years.
UPS faces many headwinds as it copes with the economy, the
TNT acquisition and the pension plans. Despite the likelihood of a similar
earnings report as FedEx, UPS has deep pockets and the ability to pull through
these trying times as evidence during the last recession. At that time, the
company undertook a restructuring plan within its domestic market and by all
accounts positive results have been achieved. It will not be a surprise to see
another restructuring effort as the company adjusts its networks to reflect the
changes within the global economy.
