UPS to hike prices next year
The increases show that the shipping company is confident in its business and its per-package revenue growth.
The higher rates incorporate a reduction in fuel surcharges, which will fall by one percentage point for ground packages and two percentage points for domestic and international air mail. Freight charges are also set to rise, with next-day air freight and two-day air freight facing an increase of 5.9%. Three-day freight charges will remain unchanged.
UPS shares have fallen more than 2% this year and were trading Wednesday at $71.32.
Given that the rate hikes mirror its 2011 price increases, UPS appears confident about continuing to grow per-package revenue in the U.S. and internationally. Its price hike outpaces the 3.9% increase announced by competitor Fedex (FDX).
Revenue growth steady
The two key delivery services offered by UPS are Domestic Ground Packages and International Export Packages. Ground shipments account for 36% of the company's stock price and have seen rising revenue in recent years as UPS passed on ever-higher fuel costs. As long as demand holds steady with the higher rates, we forecast that Domestic Ground Package revenue will grow from $7.88 per item this year to $9.88 by 2018.
Meanwhile, International Export Packages account for 30% of the stock price and have a broadly similar outlook, with average revenue of $38.60 expected to hit $51.80 by 2018. In contrast to domestic packages, however, demand for overseas packages was severely affected by the 2008 global recession. Per-package revenue fell sharply from $40.50 in 2008 to $35.60 in 2009.
Global slowdown may have muted effect
Alongside its projected revenue growth, we expect UPS to maintain its margins of 20% for domestic packages and 25% for international exports. While it remains possible that a slowdown in the global economy could hit international revenue, two factors will work in the company's favor should such an eventuality arise.
First, for the 2012 rates, UPS has nominally cut its fuel surcharge despite oil prices remaining elevated. This should allow the company to argue against future surcharge reductions -- which consumers might otherwise expect during a downturn -- thereby temporarily shielding international revenue. Second, UPS has a relatively low exposure to international cargo and freight operations, which would be the biggest victim of a major global slowdown.
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