UPS’s new C-suite led by Carol Tomé has its work cut out for it: Negotiate an increasingly risky relationship with Amazon that has juiced Domestic Package volumes but compressed margins; make real progress on the challenge of B2C delivery density; drive international volume growth; and stabilize earnings.

Most of this report is devoted to deconstructing the effects of e-commerce on UPS’s financial and operating results. E-commerce is widely thought to be a tailwind for UPS’s business, but we find that volume growth has come at the expense of substantial margin and profitability degradation. Initiatives like SurePost and Access Points, meant to lower B2C costs, have not yet reversed worrisome trends in delivery density specifically or Domestic Package results more broadly.

To some extent, UPS is an asset-intensive carrier optimized for on-time performance during the Q4 holiday spending season, which hinders asset utilization, network balance and margins in the rest of the year. We are watching for evidence that UPS will aggressively lean into commercializing new B2B relationships, especially in growing high-margin verticals like health care. More visibility into the significance of that segment would be helpful (Marken had ~$45 million EBITDA in 2015, pre-acquisition). As it sells into SMB e-commerce shippers, we’d want a more thoughtful approach to revenue management that takes into account intraweek demand, seasonality, network balance and time sensitivity, in addition to traditional dimensional pricing.

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