Sunday, September 23, 2012

Trying times for UPS

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.