UPS says fuel surcharges are not dampening demand
Top UPS executives said this morning that they believed high fuel surcharges are not pushing customers away from premium services.
As they discussed UPS first quarter results with analysts this morning, chief executive Scott Davis and chief financial officer Kurt Kuehn pointed to strong performances in UPS premium international products and domestic US next-day services.
UPS has taken the edge of some of the fuel surcharges, the executives said, by raising their base rates, as part of a company-wide effort to bring shipping prices more in line with the “value” of the services provided.
The re-structuring of fuel surcharges has seen a “less dramatic” difference between ground and air surcharges, they added.
“It’s been a big priority for us following the spike in fuel in 2008 to revisit the structure of our fuel surcharges and in general, the surcharges are lower because we have continued to move some of that into the core rates,” said Kuehn this morning.
The UPS executives told analysts that although high fuel costs were being passed on to customers through surcharges, the company was working with its customers to improve their supply chains to counter some of these increased costs.
Surcharges have shielded UPS from much of the impact of oil prices lifted by social unrest in North Africa and the Middle East, but the executives said rapid rises in fuel prices can take a toll, since there can be a two-month lag from price increases to surcharge adjustments.
Davis and Kuehn blamed the weather and a late Easter for the quarter’s decline in US domestic package volumes – average daily volumes dipped from 12.73m seen last year to 12.67m – rather than higher fuel surcharges.
Nevertheless, the UPS executives did reveal concerns about the long-term impact of fuel prices on the economy. A $105-110 per barrel oil price was expected to have a “couple of tenths” impact on global GDP this year, said Davis.
The UPS chief said: “The real concern for us is how long, and how high the fuel price will go, because that will probably impact on the economy.”
Economy
Speaking with analysts this morning, the UPS executives stated a belief that global trade continues to be fairly “resilient” to current pressures.
The economy has been a little softer than executives predicted three months ago, with recent growth figures coming in at around 1.9%, and global GDP dropping slightly from 3.7% to 3.5%, but Davis said the trade figures were actually “encouraging” considering the challenges.
Things were expected to improve from the second quarter of 2011, following the slow February in Asia with the Chinese New Year and the weather problems in the US passing.
Worldwide, the UPS executives noted possible forthcoming Free Trade Agreements between the United States and Korea, Colombia and Panama, and also reported on the impacts of the Japanese disaster. Davis said the earthquake and tsunami of March 11 had not seen too much disruption so far, although there were some concerns of long-term impact on Japanese economy.
“While the immediate impact on the global economy, and UPS, is not expected to be substantial, the current implications on global supply chains are still not clear,” he said.
