Menlo integration goes smoothly, UPS officials say
UPS is on track to increase profits this year by 16 to 20 percent, is experiencing a rebound in U.S. domestic volume and has unlocked greater than expected benefits from the integration of Menlo Worldwide Forwarding's heavy air freight operations, company officials said in an upbeat mid-quarter assessment.
UPS expects to achieve operational savings of $50 million to $100 million in 2006 from blending Menlo and UPS systems and at least $200 million in 2007, Scott Davis, the company's chief financial officer said at a briefing in New York for investors and Wall Street analysts.
'That's not bad for a $260 million acquisition,' he added.
A big chunk of the savings will be achieved by reducing Menlo's underutilized fleet of dedicated cargo aircraft by 65 percent, UPS officials said.
Menlo leased 27 planes to fly their domestic network and UPS feels it can reduce that fleet to 11 planes by shifting freight to its own airline that hauls small packages, said Michael Eskew, chairman and chief executive officer.
Other savings are coming from closing many Menlo facilities and routing cargo through existing UPS hubs, as well as consolidating technology and people. UPS has already announced plans to shut down Menlo's main sorting center in Dayton, Ohio, and build a hub adjacent to its Louisville, Ky., package hub. UPS is also building regional freight hubs at five airports where the parcel delivery company already operates.
UPS is one of the few companies that could have successfully absorbed Menlo because it could bolt Menlo's freight operations onto its package delivery operations and save money. Officials said they are taking advantage of extra capacity on their planes to haul freight much the same way cargo gets a free ride from airlines looking for extra revenue on their passenger planes. If planes are full cargo will get bumped and moved like a typical freight forwarder does through another airline.
Bob Stoffel, president of UPS Supply Chain Solutions, said UPS is retaining Menlo's transportation management system because of its excellent routing, manifesting and other functions and combining it with UPS superior track and trace systems and customs brokerage.
Officials said air freight offers the most immediate area of growth for UPS Supply Chain Solutions, the company's third-party logistics arm. Davis said Supply Chain Solutions, a relatively new part of the company, is poised to be profitable, adding he is 'confident we can get to 6 to 8 percent profit growth' faster than the company was able to earn profits after a long build-out of its international network.
David Abney, president of UPS International, said the UPS hub in Cologne, Germany, is increasing its sorting capacity by more than 80 percent and that the company will soon introduce a direct lane between Cologne and Louisville for next-day air service.
Disappointed by fourth quarter growth of 1.6 percent for domestic package volume, UPS instituted cost-cutting and other operational changes in January that officials say are now paying off. Domestic volume is increasing 'well ahead' of the Atlanta-based company's 2 percent guidance, they said. The company also said it is seeing results from its new strategy to aggressively court small and mid-sized companies for package and supply chain services.
Top executives spent a large portion of the day briefing investors and analysts on the rollout of their package flow technology, saying it is on track after some hiccups to improve route planning, vehicle loading and package delivery. The system is designed to automate the process of loading a vehicle by giving dockworkers a map of how to lay out packages in the delivery car in the correct order for most efficient delivery rather than having to rely on their memory of addresses.
Davis said capital spending would remain at or below 6 percent of revenue, at the low end of UPS's historical range. He said UPS would continue to consider acquisitions if they were in 'attractive markets and offer compelling synergies that leverage our strengths.'