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UPS Underscores Economy's Woes

The package shipper doesn't see a turnaround until next year.
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offered a sobering economic outlook on Thursday, saying the current quarter will likely be even worse than the first and the recovery will not begin until 2010.

The biggest package shipper, which saw its first-quarter profit drop 43%, is an important economic indicator because, at any given moment, it has 6% of the U.S. GDP and 2% of the world's GDP in its system.

Based largely on economic data and Easter's move from March to April, UPS said it anticipates current quarter earnings of 45 cents to 55 cents a share. Analysts had been estimating 65 cents. UPS shares were 4% lower at midday, when they traded at $52.45 a share.

"Hopefully we'll hit bottom later this year and begin seeing growth at the end of this year or early next year in the U.S.," said CEO Scott Davis, during an earnings conference call. He said Asia would likely recover at the same pace, but Europe "most likely will lag the rest of the world in the pace of its recovery."

For UPS, declining economic trends mean lower package volumes and lower package rates. "Industrial production numbers were horrible in the first quarter," Davis said. "Whenever (they) decrease, it challenges the weight of our packages, which does put pressure on us." During the quarter, average domestic package weights fell by 8%.

On the positive side, UPS -- like competitor



-- says it is gaining market share due to the decision by DHL to largely cease its U.S. operations. UPS "captured a little more than half of

its revenue with the remainder split up" among competitors, said CFO Kurt Kuehn. DHL customers' tendency to ship lighter packages was a factor in declining UPS average weight.

Both UPS and FedEx say they will reduce costs this year by $1 billion. UPS has reduced its U.S. workforce by more than 10,000 people.

Meanwhile, railroad data released on Thursday seemed to support a glum assessment.

Union Pacific


, a principal shipper of container cargo, said

first-quarter revenue

from container shipping fell by 22%, while revenue from shipping industrial products fell by 29%. Union Pacific did, however, beat earnings estimates.

Rail shipment data compiled at also provided little indication of an impending recovery. In the first quarter, rail shipments in several key areas declined precipitously, then rebounded. But in recent weeks shipments have leveled off or declined.

"Intermodal traffic is dragging along at a low level," said Drew Robertson, who maintains the site and heads New York-based transportation consulting firm Atlantic Systems. "And I am surprised by continuing weakness in coal traffic and grain. People aren't buying U.S. grain and fewer factories are using electricity."

As far as an economic recovery, "everyone was hoping for a V, which would be a sharp recovery," Robertson said. "Now they expect a U, a slow recovery stretched out over time, and they aren't making purchase decisions." In the worst case, he said, the pattern could become a W, "where the recovery sinks back down."

In its first quarter, excluding items, UPS reported earnings of $517 million, or 52 cents a share. Analysts surveyed by Thomson Reuters expected 56 cents. Revenue fell $13.7% to $10.9 billion and missed expectations of $11.4 billion. In the same period a year earlier, UPS earned $906 million, or 87 cents a share.

The per-share earnings exclude an impairment charge of 12 cents related to the earlier-than-expected retirement of aging aircraft, as UPS moved to set aside its entire fleet of 44 DC-8 aircraft. Including this noncash charge, the company earned 40 cents a share.

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Consolidated average daily volume fell 3.9% to 14.54 million packages, down from 15.13 million a year earlier. Average revenue per piece declined 6.9%, reflecting changes in product mix, lower fuel surcharges and weight per package, and negative currency impacts.