Though the company has suffered from the recession over the past year-plus, an improving global economy with an increase in trade in international shipping is expected to fuel growth. U.S. industrial production, which is expected to rise going forward, will drive the company's volume growth.
United Parcel Service has taken a number of steps to counter the prospect of falling revenues, including the consolidation of operating districts, a reduction in air segments and the elimination of certain package handling operations. It is also streamlining its domestic district and regional operating structure to improve performance within its U.S. small-package operations. The new structure is expected to be in place by the second quarter of 2010.
Though the net savings impact during 2010 is expected to be minimal as a result of related expenses such as relocation costs, for 2011 and beyond the company expects an annualized benefit of roughly $0.10 per share.
Within the U.S. domestic hub, United Parcel Service completed the first phase of a multi-year expansion of the fully automated Worldport air hub in Louisville, Kentucky. With the completion of this expansion next year, Worldport's sort capacity will be 416,000 packages per hour, a 37% increase. This expansion would enable more cost-effective package processing and improved network efficiencies.
Currently, the most significant impact on United Parcel Service is the global economic slowdown, hurting revenues and margins. This is affecting the company in a number of ways. First, volumes are falling, as demonstrated by the fourth quarter 2009 drop in consolidated average daily package volume of 0.2%, with the steepest decline of 2.9% in the U.S. Ground segment. Second, reduced fuel surcharges and lower average weight per piece caused the average revenue per piece to drop 4.0%, with the largest declines in U.S. Domestic Next Day Air (14.3%) and Deferred (12.3%). With the economy recovering at a snail's pace, we expect pressure on growth in the near term.
In the LTL market, the U.S. recession has shrunk shipments and pressured pricing due to an increased competition as carriers reduced prices to defend market share. Near-term LTL operating environment will likely remain soft due to the lower demand for freight forwarding products and services. Thus we expect the profitability of United Parcel Service's Supply Chain & Freight segment to remain under pressure at least through the first half of 2010.
Yields continue to be hurt by the company's changing business mix due to growth in lower revenue businesses, such as the domestic Saver product (priced 10%15% less than the next-day AM business) and shorter routes and lighter-weight freight in the international market, as well as slowing volume growth in the higher margin next-day air.
United Parcel Service has a high pension funding liability of $2.4 billion for 2010. The contribution to the pension plan will dent cash from operations and will pressure earnings. This concern led Standard and Poor's to confer a negative rating outlook on the company's long-term rating.
United Parcel Service earns a major portion of its revenue from international operations, which has been growing faster than that of the U.S. It has built a strong network in Europe, Asia, Canada, Latin America and the Caribbean through significant investments over several decades. The Asian region, particularly India and China, are witnessing improved demographic and economic trends remain a high growth area. The company has steadily increased air service between the U.S. and Asia over the last few years and is eyeing a greater market share in these two fastest growing economies of the world. United Parcel also remains upbeat about its European operations.
From the balance sheet perspective, we believe United Parcel Service stands strong with fiscal 2009 year ending cash and marketable securities of $2.1 billion and shareowners' equity of $7.7 billion. The company carries short-term credit ratings of "P-1″ and "A-1+" and long-term credit ratings of "Aa3″ and "AA-", from Moody's and S&P, respectively.
The company has a stable outlook from Moody's; however, subsequent to the year-end, S&P changed its outlook for the company from "stable" to "negative" on concerns of high pension liability. The company also raised its quarterly dividend by 4.4%, which confirms management's clear visibility about the expectation of a strong operating performance, going forward.
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