UPS Cuts Profit Forecast After Attacks

Friday September 28, 4:53 pm Eastern Time
UPS Cuts Profit Forecast After Attacks
By Karen Jacobs

ATLANTA (Reuters) – United Parcel Service Inc., the world's No. 1 package-delivery company, on Friday cut its third-quarter earnings estimates, citing a sharp drop in shipping activity immediately after the Sept. 11 attacks on the World Trade Center and Pentagon.

The news removed a measure of uncertainty about how badly package shippers had been affected by the attacks, prompting investors to bid up the stocks of UPS and its biggest rival, FedEx Corp.. Wall Street was also cheered by reports of a rebound in package shipping volumes.

“Previously there was uncertainty about what the total effect (from the attacks) was going to be. Removal of uncertainty means less risk and higher prices,'' said Donald Broughton, a transportation analyst at A.G. Edwards.

“We're hearing that things are actually pretty strong, and that freight flow for trucking especially seems to be back to the same kind of conditions we saw the week of Sept. 4.''

UPS stock closed up $2.26, or 4.55 percent, to $51.98 on the New York Stock Exchange. FedEx rose 5.76 percent, or $2, to $36.75.

PROFIT ESTIMATES CUT

During the week of the attacks, shipping volume fell more than 10 percent nationally, UPS said. Although business has rebounded, volume is not yet back to early-September levels, particularly in the air operations and internationally.

UPS said it now expects to earn 45 to 48 cents a share, down from its earlier reduced guidance of 52 to 55 cents per share. Atlanta-based UPS had lowered earnings expectations in July, citing depressed shipping volumes amid U.S. economic weakness.

Wall Street analysts had been looking for earnings of 48 to 57 cents a share, with a mean estimate of 52 cents, according to research firm Thomson Financial/First Call. A year earlier, UPS earned 60 cents a share.

“The financial impact of this event on UPS in the third quarter will be approximately $130 million,'' UPS Chief Financial Officer Scott Davis said. “This represents the additional costs we incurred to maintain service and lost revenue as a result of lower package volume since the attacks.''

Broughton said UPS's profit adjustment shows the biggest economic impact of the attacks was on the shutdown of air operations. He said he now expects UPS to earn 46 cents in the third quarter.

''I think it's almost predictable to say this is a shock wave to the economy, it hurts consumer demand, this could push us over to a recession,'' Broughton said. But he said other big shippers told him in recent days that business seems to be bouncing back.

UPS said its new earnings guidance does not include the impact of funds available from the Airline Stabilization Act, which will provide $15 billion in federal funds to U.S. air carriers to help prevent bankruptcies and minimize financial hardships from the attacks. U.S. commercial air traffic was suspended for two days after the attacks, and since flights resumed volume is running at less than half of normal.

Norman Black, a UPS spokesman, said UPS has filed the necessary paperwork to receive funds under the act. But he declined to say how much UPS might receive, saying the Department of Transportation would issue a list of participating carriers.

Meanwhile, Greg Rossiter, a spokesman at FedEx Corp., the world's No. 1 air-express package shipper, said on Friday that it has not yet received any payments under the act. He declined to say how much FedEx might receive.

FEDEX PROFIT DROP

Last week, FedEx reported a 36 percent drop in earnings for the first quarter ended Aug. 31, and said it was not able to say how the attacks would affect its financial results.

FedEx's Express operation, which accounted for about 51 percent of its operating profit in its fiscal first quarter, was badly disrupted by the U.S. aviation shutdown after the attacks. FedEx said last week that the Express business had not yet returned to pre-attack levels.

Rossiter told Reuters that FedEx, based in Memphis, Tenn., had no plans to give additional earnings guidance until mid- to late October.

Analysts currently expect FedEx to earn 21 to 46 cents a share in its second quarter ending in November, with a consensus of 34 cents per share, according to Thomson Financial. In the year-earlier second quarter, FedEx earned 67 cents per share.