United Parcel Service Inc. (UPS), the leading package delivery company has expanded its Less Than Container Load (LCL) services to additional networks in Asia, Europe, the Middle East, Africa and South America. This brings the company’s LCL network to 17,000 direct LCL lanes serving 116 countries. UPS’ efforts to expand its LCL lanes that not only support its ocean business but also ensures cost savings against expensive airfreight.
Given the slackness in the economy, the company believes yield pressure will continue due to the changing business mix, resulting from customer shift from premium products to cost effective logistic solutions. As a result, the company’s expanding presence in the LCL space would imply a shift from its airfreight business. This would ultimately benefit the cost structure and serve as an attractive opportunity to add customers in the present economy.
UPS has also added LCL lanes to countries like Vietnam considering its low labor cost. Over the next few years, the company plans to invest in new technology and facility expansion in markets including France, Latin America, Vietnam, China and Korea. In tune with this expansion spree, the company augmented phase 1 of its European hub operations at Cologne/Bonn Airport in Germany to increase capacity by 65%.
The expansion would cost about $200 million, with the entire project is slated for completion at year-end 2013. Overall, UPS projects capital expenditures of $2.4 billion for the year, which is concurrent with its capital-spending estimate of 4% of revenues over the next five years.
However, we remain concerned about volatile economic conditions that continue to restrict market demand. Further, the company is also exposed to unionized workforce and intense competition from giants like FedEx Corporation (FDX).
UPS has a Zacks Rank #3 (Hold).
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