UPS profit tops Street view, sees challenges ahead

SCHENECTADY, New York (Reuters) - United Parcel Service Inc UPS.NY)N>, the world's largest package-delivery company, reported a 9.9 percent drop in quarterly profit on Thursday, not as bad as Wall Street had feared, but said it expects nervous consumers to cut back on holiday gift purchases.

That anxiety, plus a deteriorating world economy, has the company planning cost cuts, including layoffs, in 2009. It said it expects profit for 2008 toward the low end of a range it forecast in July.

"With consumer confidence approaching new lows, we're concerned that Santa's sleigh will be lighter this year," Kurt Kuehn, chief financial officer, said on a conference call with analysts. "It will be several more quarters before any turnaround becomes evident."

Like its main rival, FedEx Corp , UPS is regarded as economic bellwether because it carries an enormous volume of packages for consumers and businesses.

Demand for its services fell off particularly sharply at the end of the third quarter as the worst of the global financial crisis hit.

"In September we saw precipitous declines," Kuehn said.

Analysts attributed the better-than-expected third-quarter results to the decline in fuel prices of the past few months. UPS, like its rivals, has imposed surcharges to compensate for soaring diesel and jet fuel prices in recent years.

Those surcharges lag real fuel prices by about two months, so as fuel prices tumbled rapidly over the past few months, UPS saw its costs decrease and, for a time, continued to collect higher surcharges.

"Falling oil and the two-month lag in fuel surcharges helped boost earnings," UBS equity analyst Rick Paterson wrote in a note to clients.

UPS shares rose $1.58, or 3.4 percent, to $47.97 in morning trade on the New York Stock Exchange.

BEATS WALL STREET VIEW

The Atlanta-based company, known for its brown delivery trucks, said third-quarter net income was $970 million, or 96 cents a share, compared with $1.08 billion, or $1.02 a share, a year earlier.

Analysts' average forecast was 89 cents a share, according to Reuters Estimates.

Revenue rose 7.4 percent to $13.1 billion.

UPS said it now expects 2008 earnings "toward the lower end" of its previous forecast of $3.50 to $3.70 per share. It did not provide a 2009 target. Kuehn said UPS expects U.S. delivery volumes to be down 4 percent in the fourth quarter.

UPS said it has cut its 2008 capital expenditure budget by $200 million, to $2.8 billion, and expects to reduce 2009 capital spending as well. Its cost-reduction plans for next year will include job cuts, Kuehn said.

FedEx last month reported a 22 percent drop in quarterly profit. FedEx and UPS margins have suffered as customers have increasingly shifted to the companies' cheaper ground delivery services from higher-priced air delivery.

So far this year, UPS shares are down 33 percent, compared with a 20 percent slide in the Dow Jones transportation index<.DJT>.

(Editing by Matthew Lewis and John Wallace)

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