With truckers and shipping firms increasingly warning of a potential slowdown, United Parcel Service (UPS - Get Report) should feel lucky to have its huge consumer and e-commerce holiday season right around the corner. But after two straight years of Christmas disappointments, the pressure is on for UPS to deliver.
Earlier this week Atlanta-based UPS reported earnings that topped estimates despite missing on revenue by nearly $200 million. Company CEO David Abney told investors UPS has seen "some softness" in the U.S. economy, particularly among manufacturers, but said the company expects holiday-related deliveries to grow 10% year-over-year to more than 630 million packages carried between Thanksgiving and year's end.
In recent years the holiday season has been nothing to celebrate at UPS. Two years ago the company dealt with an onslaught of criticism after it failed to increase capacity enough to handle a surge in demand and some presents never made it under the tree. Last year it overcompensated, adding significant capacity in the quarter but with it added expense that torpedoed fourth-quarter 2014 results.
This year, according to Cowen & Co. analyst Helane Becker, UPS is in "prove it mode," with the company eager to avoid opening the door for archrival FedEx (FDX - Get Report) and others to take share in the ground market while attempting to maintain profitability. "Customers must know they can rely on UPS to deliver packages and meet any needs that creep up," Becker said. "We believe management knows turning away business means it will end up with other carriers and may not come back to UPS in the end."
The company has been planning for the fourth-quarter peak period since just about last Christmas, including better coordination with large shippers so it is better prepared for a surge. It has also made investments in its technology in hopes of being able to better flex its network as needed.
The holiday season was also likely in mind when UPS in July committed $1.8 billion to acquire Coyote Logistics from Warburg Pincus. Chicago-based Coyote manages trucking capacity over a network of more than 35,000 transport companies, matching available trucks to customer freight shipments.
UPS could use Coyote this year to secure added trucks on a temporary basis. Just as important, Coyote can also be used to help avoid the earnings disappointment of last year, allowing UPS to sell any excess capacity and fill half-empty trucks should the company overestimate demand and scale up too much.
Even if UPS finally gets the season right, there is still some concern the economy plays the role of the Grinch. Barclays analyst Brandon R. Oglenski notes that containerized exports from Asian ports to both Europe and the United States are "marginally improved at best," leading to concern that this holiday season might not be what shippers -- and retailers -- have hoped.
"We are concerned holiday activity may not be quite as robust as years past," Oglenski wrote. The analyst said he does expect UPS to better manage costs and show more flexibility in the operating model, however, "with limited visibility into package markets ... we are going to sit this fourth quarter on the bench."
The rise of e-commerce has flooded shipping firms with new business, but resulted in mostly headaches for UPS investors the last two holiday seasons. With other parts of the economy faltering, this Christmas UPS needs to deliver.