UPSadopts control tower process to cope with peak holiday surge

United Parcel Service Inc. is anticipating an 11 percent spike in shipments during the December crunch and said this time it's ready to handle it.

The world's largest package-delivery company said it will keep a closer watch on its biggest customers and will even impose a surcharge for excessive volumes.

UPS is trying to avoid a repeat of last year, when unseasonably cold and snowy weather combined with a surge in late, online orders and overwhelmed its ability to process packages, leading to missed deliveries on Christmas. It vowed to perform better.

Measures Atlanta-based UPS is taking include implementing a "control tower" process, which entails comparing big retail customers' actual shipping volumes to those they originally projected, and going back to them to "mute" their demands if volumes get too high, Myron Gray, president of U.S. operations, told analysts on a conference call.

UPS's forecast for December deliveries follows FedEx's prediction this week of record shipments of packages between Black Friday and Christmas Eve. Memphis, Tennessee-based FedEx sees an 8.8 percent increase from last year, as e-commerce hits a peak.

UPS plans to spend $175 million on improving its operations during the holiday rush. It's opening 14 temporary shipping facilities to help expedite deliveries, upgrading its Orion software to plot the best route for drivers, and is hiring as many as 95,000 seasonal workers to field packages.

Aggressive Policing

"We are committed to investing in our network, enabling UPS to capitalize on sustained growth," Chief Executive Officer David Abney told analysts on a conference call. "Let me assure you UPS is ready for the opportunities and challenges we expect to face this year."

UPS will likely be more aggressive in policing its Worldport air hub in Louisville, Kentucky, said Kevin Sterling, an analyst at BB&T Capital Markets in Richmond, Virginia. UPS ran into trouble last year when big customers dropped off trailers full of parcels without letting the facility know in advance what was in them. This year, Sterling expects UPS to demand more notice and cooperation in processing the trailers' contents.

Chief Financial Officer Kurt Kuehn suggested UPS' new controls this peak season are a collaboration with big retailers, not a cap on customers' shipments. UPS will try to accommodate big retailers' needs, but may have to impose surcharges on certain customers, or defer some of their package volume for a day to catch up, he said.

Earnings Beat

"I think the best way to look at it is it's a refinement with increased visibility and increased collaboration, both internally and externally," Kuehn told analysts.

UPS today reported third-quarter earnings of $1.32 a diluted share, up from $1.16 a year ago, surpassing analysts' average estimate of $1.28 a share. It also confirmed its full- year 2014 earnings estimate of $4.90 to $5.00 a share.

Results in the quarter were boosted by a 9.4 percent gain in international exports, with strong growth in Asia and Europe, and a 6.9 percent increase in U.S. daily packages.

Total revenue rose 5.7 percent to $14.3 billion, as UPS shipped 1.1 billion packages around the world, a record for a non-peak quarter.

Executives fielded several analysts' questions about the growth of business-to-consumer deliveries, which account for 45 percent of domestic shipments and is growing. The company earns less money per package on these residential deliveries, because they typically involve only one or two items per household, whereas commercial deliveries involve several.

UPS announced earlier this month that it will expand its Access Point delivery system, where UPS delivers packages to convenience stores or UPS Stores near customers' homes in the U.S. The move is meant to reduce UPS' costs per delivery.

The shares rose 1.25 percent to $101.74 at 12:20 p.m. in New York. UPS's shares have declined 4.4 percent this year through yesterday, trailing FedEx's 13 percent gain and the 5.5 percent increase on the Standard & Poor's 500 Index.