UPS profit beats expectations as demand for next day service surges

United Parcel Service said on Wednesday a jump in demand for its Next Day Air service drove better-than-expected profit in the second quarter as large retailers rushed packages to online shoppers.

Shares of UPS jumped 8.6% to $114.33 in midday trading as the world’s biggest package delivery company also reiterated its 2019 forecast and said it was taking U.S. air volume from rivals.

UPS has been spending billions of dollars to modernize its network. Those investments - which include more automated package sorting facilities and new cargo planes - are helping to contain the cost of delivering small numbers of e-commerce packages to far-flung home addresses.

“We’ve got momentum here and we believe we can continue,” said Chief Executive David Abney, who added that the company is at an “important turning point” in its nearly 112-year history.

Next Day Air volume surged an unexpected 30% in UPS’ key domestic business during the second-quarter, as Amazon.com Inc and other large retailers adopted one-day shipping.

Abney said some competitors lost second-day air business to its Next Day Air service.

“FedEx would be the only other rival that offers such a service,” said Cathy Morrow Roberson, founder of consulting firm Logistics Trends & Insights.

FedEx in June declined to renew its U.S. Express air shipping contract with Amazon, which is building a shipping network to rival those of established delivery companies like UPS, FedEx and Deutsche Post DHL Group.

Several analysts said the Next Day Air volume bump likely came from Amazon.
UPS said high-margin healthcare shipments also contributed to second-quarter net income that grew 13.5% to $1.69 billion, or $1.94 per share. Analysts had expected a profit of $1.92 per share, according to IBES data from Refinitiv.

Revenue grew 3.4% to $18.05 billion.

Shippers and retailers are gearing up for the peak holiday shipping season, when package volumes tend to soar. This season will be shorter than last year, due to Thanksgiving falling six days later in November.

“We’re set up for a very good peak,” said Abney, who told Reuters the company’s U.S. customers remained confident about the domestic economy.

Chief Financial Officer Richard Peretz said “results in the second half of the year will be considerably stronger than the first half,” even as global growth cools, U.S. industrial output softens and as Britain’s exit from the European Union and the ongoing U.S.-China trade war disrupt trade.

Nevertheless, Peretz said, “we remain concerned about the growing headwinds from trade uncertainty.”