UPS 2014 Annual Report Download - page 49

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
37
2013 compared to 2012
Overall adjusted operating expenses for the segment increased $319 million in 2013 compared with 2012. This increase
was driven by the cost of pick-up and delivery, which increased $195 million for the year, largely due to higher package
volume.
The cost of operating our international integrated air and ground network increased $111 million for the year, also largely
due to higher package volume; however, network costs were mitigated by a 0.4% reduction in average daily aircraft block hours
resulting from ongoing modifications to our air network. This was achieved even with a 6.4% increase in international export
volume and several air product service enhancements that occurred during 2013.
The remaining increases in adjusted operating expenses for the year were largely due to the costs of package sorting,
which was impacted by volume growth, and indirect operating costs, which were affected by increased expenses associated
with aviation security.
Excluding the impact of currency exchange rate changes, the total adjusted cost per piece for the segment decreased 2.7%
in 2013 compared with 2012.
Operating Profit and Margin
2014 compared to 2013
Adjusted operating profit increased by $109 million in 2014, while the adjusted operating margin increased 20 basis
points. These increases were largely due to moderate revenue growth combined with the mitigation of expense increases
through improved productivity.
In addition to the aforementioned factors, the net impact of fuel (fuel surcharge revenue grew faster than fuel expense)
and the net impact of currency (remeasurement and translation gains) resulted in a favorable impact on operating profit of $127
million when comparing 2014 with 2013. Fuel surcharge revenue was favorably impacted during 2014 by rate increases to the
fuel surcharge index. Operating profit in 2014 was negatively impacted by $21 million due to a restructuring charge and related
costs in Europe.
2013 compared to 2012
Adjusted operating profit contracted by 0.8% in 2013 compared with 2012, while the adjusted operating margin
decreased 40 basis points. The solid volume growth in 2013 was largely offset by reductions in revenue per piece, leading to
only slight growth in revenue. The net impact of fuel (fuel surcharge revenue decreased at a faster rate than fuel expense) as
well as currency remeasurement and translation losses combined to decrease operating profit by $219 million when comparing
2013 with 2012. The combination of low revenue growth and the adverse impact of fuel and currency led to the reduction in
adjusted operating margin.