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UPS puts US$5.3b in air power behind Asia, Europe expansion

Friday, October 28, 2016 - 10:40

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United Parcel Service Inc is deepening its bet on international expansion by ordering 14 Boeing Co 747 jumbo jets with a list value of US$5.3 billion.

[ATLANTA] United Parcel Service Inc is deepening its bet on international expansion by ordering 14 Boeing Co 747 jumbo jets with a list value of US$5.3 billion.

Daily package volume in UPS's international division has climbed 58 per cent in the past decade. US volume, meanwhile, has increased just 16 per cent.

Though overseas volume remains smaller - 2.8 million packages in the third quarter internationally versus 15.4 million in the US - the China and Hong Kong markets have been particularly strong recently.

Business among small and mid-size Chinese companies is "growing at rates we've never seen before," James Barber Jr, international president, said Thursday on a conference call after the Atlanta-based company reported earnings.

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Overseas operating profit jumped 14 per cent in the past quarter from a year earlier, UPS said.

The 747-8 freighters primarily will be used on routes with heavy package volumes between the US and Asia, Europe and the Middle East, said UPS spokesman Mike Mangeot.

The greater size of the 747-8 will allow UPS to carry more packages than it currently can with 747-4 jets, which will be redeployed to the US The courier has 237 aircraft in its own fleet and uses 413 more from vendors, according to a regulatory filing earlier this year.

The 747 order was the courier's first aircraft purchase since 2013, prompting RW Baird & Co analyst Ben Hartford to label the intervening three years a "capex holiday of sorts".

The order is warranted, he said, as the courier recorded double-digit growth in Asian exports in the third quarter and smaller gains within Europe.

The holiday's end worried some investors, though, concerned that UPS may have to cut back on its share buybacks and dividends as it puts more cash toward capital expenses. 

"The underlying air market is not strong enough to support that kind of expansion," said Jack Atkins, an analyst at Stephens Inc.

"Obviously, they feel like that plane fits in well with their network."

UPS also has options for 14 more 747 freighters. Discounts are customary on large aircraft purchases.

After the plane order was announced, UPS's shares dropped as much 2.5 per

cent - the biggest intraday drop in almost three months - before rebounding. The stock ended the day down just 0.5 per cent in New York at US$108.08.

Chief executive officer David Abney said the company's investments will boost free cash flow as they generate business and already have paid off with seven consecutive quarters of double-digit profit growth in the international package division. 

UPS is spending US$2 billion expanding in Europe. Two years ago the company almost doubled the size of its major European air hub in Cologne, Germany. The facility now processes about 190,000 packages an hour, or slightly less than half what UPS's largest US air hub, in Louisville, Kentucky, can handle.

"We think Asia, and China in particular, has stabilised," Mr Abney said in an interview, cautiously.

"We're not saying China's back into the heyday where their GDP was growing eight or nine per cent."

Adjusted earnings increased from a year earlier to US$1.44 a share, meeting the average of analyst estimates compiled by Bloomberg. Revenue rose 4.9 per cent to US$14.9 billion, while analysts predicted US$14.7 billion.

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