The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.



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(UPS) - Get Report

has outlined details of its 2012 rate hike and is set to impose a net increase of 4.9% on all domestic and international packages. 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 second-day air freight both facing an increase of 5.9%. UPS three-day freight charges will remain unchanged. Given that the rate hikes mirror its 2011 price increases, UPS appears confident of continuing to grow revenue per package for both the domestic and international sectors. Its price hike outpaces competitor


(FDX) - Get Report

, which had said it will raise rates by 3.9% next year.

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full Trefis analysis for UPS


Growth Steady at Home and Abroad

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 passes on ever-higher fuel costs. As long as demand holds steady with the higher rates, we forecast that Domestic Ground Package revenue will continue growing 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, when revenue fell sharply from $40.50 in 2008 to $35.60 in 2009.

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 the company's international revenue, two factors will work in the company's favor.





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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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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.