UPS continues to reduce flight activity in its air network to maximize asset utilization and improve efficiency amid deteriorating shipping volumes.
Executives said during Tuesday’s earnings briefing that they are optimizing the domestic air operation and further reducing scheduled flights on the international front in an effort to curb costs.
The parcel delivery giant reported operating profit fell 22% to $2.5 billion in the first quarter, with average daily package volume down several points from a year ago. International revenue decreased 7%. Management said weakness worsened toward the end of the March period.
Asia exports were a notable soft spot as retail sales in the U.S. and other markets decelerated. While international total average daily volume came in 6.2% lower year over year, Asia volume was down 8.9% and included a 20% drop on the China-to-U.S. corridor.
UPS (NYSE: UPS) is adjusting by pivoting its network to match the lower demand.
Internationally, the company has reduced scheduled flights “while ensuring we maintain agility in the network to quickly add flights where needed if volume returns more strongly than we expect,” said CFO Brian Newman.
In Asia, the express delivery giant reduced aircraft utilization by 14% — more than the actual decline in export volume. And more block hours will be shaved off during the current quarter, said CEO Carol Tomé.
Within the United States, UPS is adjusting package flows to maximize utilization of Next Day Air flights, which enables it to reduce block hours — time in flight and taxiing at the airport — in the two-day operation. The idea is to fill the overnight flights that have to move to meet delivery commitments so there’s less need to operate as many daytime flights, according to management.
UPS began retiring its fleet of older MD-11 aircraft in January. A total of 42 tri-jet freighters will be discharged over the next few years and replaced by 28 new Boeing 767 medium widebody aircraft, the first six of which are scheduled for delivery this year. The 767s offer lower operating costs, with better reliability and fewer emissions.
FedEx is taking more drastic steps, including consolidating maintenance and pilot bases, because it has a lot more redundant capacity and overlapping networks. And DHL Express has also scaled back flight hours.
Volumes across the non-express air cargo industry are down about 12% year over year, according to market intelligence firms.
The decrease in UPS flight hours dovetails with cutbacks by other express and cargo operators. Freighter aircraft utilization worldwide, a leading indicator of freight demand, declined 3% year over year in March, BMO Capital Markets said in a recent research note. That was a slight improvement from the negative 4.4% and negative 7.7% contractions in February and January, respectively, but likely due to an easy comparison to the prior year as the Chinese economy reopens.
Within North America flight hours dropped 6.1% year over year in March, compared to -5.3% in February and -4.3% in January, with the 12-month moving average showing the pace of contraction accelerating, BMO said. In the North America – Asia lane flight activity was down 6.4% versus -11.8% in February and -15.5% in January as exports increased from China. Flight activity was down 12.9% between North America and Europe.
(Clarification: UPS expects to receive six 767-300 freighters from Boeing this year, one less than previously reported.)
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