UPS (NYSE: UPS) has a plane problem. The company said last week that "overcapacity in the global air freight market" has been a surprising drag on the business this year, and earnings will come in lower than expected as a result.
Very patient shippers
UPS is dealing with a major shift in demand for overseas shipping. Customers are fleeing from super-quick international delivery services, making that business a much less-profitable one. FedEx (NYSE: FDX), for example, has seen shippers increasingly choose its "economy" international service, which arrives in two to five days, over its "priority" option that's delivered in one to three days. That shift has taken a whack at earnings. FedEx's express segment profits were down 66% last quarter, dragging operating income lower by 28% companywide.
Luckily for UPS, it isn't expecting nearly as big a hit to its own business. The company says that profits this year should now come in between $4.65 and $4.85 a share. While that's lower than expected, it's still 3% to 7% more than last year's total. UPS has been able to rely on a strong ground business in the U.S., which grew by 5% last quarter. A multi-year surge in e-commerce shipments has kept the ground operation humming, and the company should continue to benefit from that trend.
Traffic jam in the skies
However, there isn't an easy answer to the oversupply of freight space. UPS maintains about 560 planes now, or 30 more than last year's total. And, while FedEx has been retiring aircraft, it's trying to modernize its fleet, not significantly shrink it. The company has 660 planes in service, down a bit from 688 last year.
Because of long-term purchasing contracts, though, neither company can trim its fleet quickly. In fact, UPS's will be getting bigger this year. It has committed to take delivery of eight new Boeing aircraft in 2013 after buying seven of the same model in 2012. So the overcapacity problem looks set to hurt both companies, at least through this year.
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