In a Supply Chain Matters commentary posted about a month ago, we again pointed to both UPS and FedEx business predictions as good indicators of what we can anticipate in global supply chain activity in the coming months. Both have staffed themselves with very talented economists and forecasters of business and supply chain activity with lots of reliable data gathered over the years.
In June, FedEx CEO Fred Smith predicted that a fundamental change in global freight business is underway and could well change assumptions regarding transportation lead times and service levels. In essence FedEx indicated that the airport-to-airport transport model is in decline, that suppliers, manufacturers and retailers are opting for less costly methods of transportation for movement of components and finished goods. Meanwhile, the explosion of online commerce is driving increased B2C activity for carriers.
Earlier this week, UPS formally reported its fiscal second quarter earnings and UPS CEO Scott Davis essentially confirmed the same trends. Davis indicated that UPS Q2 earnings were primarily driven by its Domestic Express business unit but that the company’s international business, especially exports from Asia to the U.S., continue to decline. International domestic daily volume declined 3.2 percent and supply chain and freight revenue was down 1.6 percent. Revenue per package declined 2.4 percent for the international segment. UPS acknowledged that many international shipping customers have been electing deferred delivery options over premium delivery services. The company is now planning an additional 10 percent reduction in Asian air capacity to Europe and the U.S., on top of a similar cutback that occurred last quarter.
In spite of these trends, UPS delivered an overall operating profit gain of 4.4 percent along with a 1.2 percent total revenue gain. Operating margin increased to 13.4 percent from 13.2 percent. Also on the positive side, UPS garnered a 3.5 percent gain in U.S. domestic package volume driven almost entirely by B2C online commerce activity. However, UPS elected to cut its profit forecast for the full year but further indicated that it does not anticipate another U.S. recession. Readers may have also noticed that in the U.S., one tends to observe UPS delivery vans operating well into the nighttime hours because of the pressures of more residential deliveries and the effect of a cumulative cutback in drivers since the last global recession.
In essence, both UPS and FedEx concur that volume and shipment activity across global supply chains has turned toward less costly alternatives, and the global economy will remain highly uncertain in the months to come. Notice also that both global providers have been quick to respond in reduction of overall transport capacity in effected shipping lanes, while trying to maintain a consistency in delivery contracts. That contrasts with ocean container carriers, who continue to slow down ships to save on fuel costs, while continuing to raise rates.
Supply Chain Matters believes that international shippers will face added challenges for the remainder of 2012 and into 2013 as these structural changes continue to take hold. We again advise supply chain teams to plan accordingly.
Finally, the last thing that global supply chains need right now is higher increases in fuel prices and fuel surcharges.