UPS 2008 Annual Report Download - page 37

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Also in January 2007, we modified the fuel surcharge on certain U.S.-related international air services by
reducing the index used to determine the fuel surcharge by 2%. The fuel surcharge for products originating
outside the United States continues to be indexed to fuel prices in our different international regions. Total
international fuel surcharge revenue increased by $12 million during the year due to increased volume, but was
partially offset by the reduction in the fuel surcharge index.
International Package operating profit increased $121 million, or 7.1%, for the year, primarily due to the
volume and revenue per piece improvements described above. The change in operating profit was also positively
affected by $153 million during the year due to favorable currency exchange rates, net of hedging activity.
International Package operating profit was adversely affected in 2007 by charges related to the aircraft
impairment ($62 million) and the SVSO ($7 million), both of which are discussed further in the “Operating
Expenses” section. Operating profit was negatively impacted by fuel, as the increase in fuel surcharge revenue
was more than offset by the increase in fuel expense. The adverse impact of the aircraft impairment, SVSO
charge, and fuel were the primary causes of the 100 basis point decline in operating margin to 17.8%.
Supply Chain & Freight Operations
2008 compared to 2007
Supply Chain & Freight revenue increased $489 million, or 5.8%, for the year. Forwarding and logistics
revenue increased $382 million, or 6.5%, for the year, primarily due to growth in international air freight, North
American air freight, distribution services and mail services. Revenue growth in this business was affected by
fuel and security surcharges, expanded air freight service offerings, overall market growth and improved
customer retention rates. Growth was negatively impacted by weakness in the ocean freight business. Revenue
declined by $98 million in the fourth quarter of 2008 compared with 2007, as difficult worldwide economic
conditions, slowing world trade, and unfavorable currency exchange rate movements negatively impacted the
forwarding and logistics business. The overall change in forwarding and logistics revenue was positively affected
by $166 million during the year due to favorable currency exchange rates, but was negatively impacted by $58
million in the fourth quarter of 2008.
UPS Freight increased revenue $83 million, or 3.9%, for the year, as a result of improved yields and higher
fuel surcharge rates, but partially offset by a decline in average daily LTL shipments. Average LTL shipments
per day decreased 4.6% during the year, reflecting the weak LTL market in the United States in 2008 as
compared with 2007. However, LTL revenue per hundredweight increased 7.3% for the year, due to an increase
in base rates in 2008 and an increase in fuel surcharge revenue as a result of higher diesel prices. The weak U.S.
LTL market declined further in the fourth quarter of 2008, which led to a revenue decline of $41 million, or
7.8%, from the comparable quarter of 2007. Fourth quarter average LTL shipments per day decreased 8.2%, with
LTL revenue per hundredweight declining 2.4%, partially due to declining fuel surcharge rates.
In January 2008, UPS Freight announced a general rate increase averaging 5.4% covering non-contractual
shipments in the United States and Canada. The increase became effective on February 4, 2008, and applies to
minimum charge, LTL and TL rates.
The other businesses within Supply Chain & Freight, which include our retail franchising business and our
financial business, increased revenue by 5.9% during the year. This revenue growth was impacted by increased
revenue from our contract to provide domestic air transportation services for the U.S. Postal Service.
Operating profit for the Supply Chain & Freight segment decreased by $383 million for the year, primarily
due to a $548 million goodwill impairment charge recorded in the fourth quarter in the UPS Freight business
unit, as discussed further in the “Operating Expenses” section. Operating profit improved in the forwarding and
logistics business, primarily resulting from revenue management initiatives and a focus on asset utilization. The
change in operating profit was also positively affected by $12 million in 2008 due to favorable currency
exchange rates.
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