UPS 2014 Annual Report Download - page 48

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
36
2013 compared to 2012
Total average revenue per piece decreased 2.5% in 2013 on a currency-adjusted basis, and was impacted by changes in
base rates, customer and product mix, and fuel surcharge rates.
On December 31, 2012, we increased the base rates 6.5% for international shipments originating in the United States
(Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service), while
reducing fuel surcharge indices. Rate changes for shipments originating outside the U.S. are made throughout the year and vary
by geographic market.
Currency-adjusted export revenue per piece decreased 3.7% in 2013, as the shift in product mix from our premium
express products to our standard products more than offset the increase in base rates. Currency-adjusted export revenue per
piece was also negatively affected by the faster growth among our larger customers, which tend to have a lower yield than
middle market and smaller accounts. Additionally, currency-adjusted export revenue per piece was adversely impacted by
shorter average trade lanes (due to faster growth in intra-regional shipments), as well as a small impact on pricing from
overcapacity in the Asia outbound freight market.
Currency-adjusted domestic revenue per piece decreased 0.4% in 2013. Domestic revenue per piece was adversely
impacted by the faster domestic volume growth in our lower-yielding standard service, as well as product and customer mix
changes in several developed markets.
Fuel Surcharges
We maintain fuel surcharges on our international air and ground services. The fuel surcharges for international air
products originating inside or outside the United States are indexed to the DOE's Gulf Coast spot price for a gallon of kerosene-
type jet fuel, while the fuel surcharges for ground products originating outside the United States are indexed to fuel prices in the
international region or country where the shipment takes place. In connection with our base rate increase on December 31,
2012, 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%.
Total international fuel surcharge revenue increased by $2 million in 2014, as the combined impact of international air
volume growth and modifications to the fuel surcharge indices were largely offset by declining fuel prices. Total international
fuel surcharge revenue decreased by $135 million in 2013, largely due to declining fuel prices and the 2% reduction in the
index; however, this was partially offset by increases in international air volume.
Operating Expenses
2014 compared to 2013
Overall adjusted operating expenses for the segment increased $450 million in 2014. This increase was driven by the cost
of pick-up and delivery, which increased $201 million, as well as the cost of operating our international integrated air and
ground network, which increased $150 million. The increases in pick-up and delivery and network costs were largely driven by
higher package volume and higher expense for outside transportation carriers (which was impacted by network capacity
constraints in Europe). However, network cost increases were mitigated by reductions in average daily aircraft block hours
(1.1% decrease in 2014), as a result of ongoing modifications to our air network; this was achieved even with a 7.8% increase
in international export volume and several air product service enhancements.
The remaining increase in adjusted operating expenses in 2014 was largely due to the costs of package sorting, which
increased $52 million, and was impacted by volume growth. Additionally, indirect operating costs increased $47 million in
2014, and were affected by various factors, including restructuring charges, foreign currency remeasurement losses, legal
contingency accruals, bad debt expense, and several other factors.
Excluding the impact of currency exchange rate changes, the total adjusted cost per piece for the segment decreased 1.6%
in 2014.