UPS Spending $175M to Add Holiday Shipping Capacity

Jul 31, 2014 5:48 PM  By

UPS announced on its Q2 earnings call this week that it was spending $175 million to increase its capacity during the holiday shopping season, including adding 50 new hub sorts at its existing facilities – bumping up capacity by 5% – and going from limited to full operations on Black Friday.

Last year, UPS, FedEx and Amazon took a lot of heat for their role in holiday shipping delays that led to many items arriving after Christmas. The carriers blamed the mess on weeks of bad weather, higher ecommerce demand and a shorter holiday shopping season. UPS and Amazon offered refunds to customers who didn’t get their packages on time.

“UPS is focused on staying ahead of the holiday shipment surge that starts during cyber week,” said COO and incoming CEO David Abney during the call with analysts and investors. “While this benefits the network by leveling volume fluctuations, it will drive additional operating costs.”

UPS CFO Kurt Kuehn said the $175 million cost of these ramp-up and implementation projects to increase holiday shipping capacity was $75 million higher than the company’s original estimates.

“Over time (the moves) may generate more revenue but the real purpose is to smooth out operations,” Kuehn said. “So the majority of the change in the added expense is in the fourth quarter.”

Asked about a recent request from the U.S. Postal Service for lower rates for businesses and other customers who use commercial plus and commercial base online shipping services, UPS Chairman and CEO D. Scott Davis said it’s not unusual to see competitors offer rate changes.

“The USPS though really does not offer the same level of service and capabilities that we do at UPS,” Davis said. “I think the technology is a differentiator, our integrated service offerings are a differentiator, and our guarantees are different.”

Regarding discussions with customers about adjusting their holiday shipping plans so more volume happens when the UPS network has more flexibility and capacity, Executive Vice President and Chief Commercial Officer Alan Gershenhorn said many of those talks center on customers’ omnichannel strategies. He said those discussions also include working with customers on special weekend operations.

“We’re working very closely with them … on whether or not they should be fulfilling from their DCs or fulfilling from their stores,” Gershenhorn said of the omnichannel piece. “And that certainly helps us manage their business better and also do it at a more effective cost.”

“One of the parts of our peak planning has been joint commitment sessions with our customers certainly focusing on the highest peak periods and making sure that we have capacity that’s needed,” Davis added. “And if there’s volume in excess of that, then there may well be a yield adjustment for that incremental volume.”