UPS 2009 Annual Report Download - page 39

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Fuel Surcharges
UPS applies a fuel surcharge on our domestic air and ground services. The air fuel surcharge is based on the
U.S. Energy Department’s Gulf Coast spot price for a gallon of kerosene-type jet fuel, while the ground fuel
surcharge is based on the U.S. Energy Department’s On-Highway Diesel Fuel Price. Based on published rates,
the average fuel surcharge for domestic air and ground products was as follows:
Year Ended December 31, Change
2009 2008 2007 2009 / 2008 2008 / 2007
Next Day Air / Deferred ............... 4.0% 25.2% 12.2% (21.2)% 13.0%
Ground ............................ 3.3% 8.0% 4.3% (4.7) 3.7%
On January 5, 2009 and December 31, 2007, we modified the fuel surcharge on air services by reducing the
index used to determine the fuel surcharge by 2%. The 2009 decrease and 2008 increase in the air and ground
fuel surcharges are due to the significant variations in jet and diesel fuel prices (in addition to the reduction in the
index on the air surcharge). Total domestic fuel surcharge revenue, net of the impact of hedging, decreased by
$1.924 billion in 2009, primarily due to the lower fuel surcharge rates discussed above, as well as the decline in
volume for our air and ground products. In 2008, fuel surcharge revenue, net of the impact of hedging losses,
increased by $1.119 billion, primarily due to the higher fuel surcharge rates but partially offset by the decline in
volume for our air and ground products.
Operating Profit and Margin
2009 compared to 2008
Operating profit in 2009 was adversely impacted by the U.S. economic recession, decreased network
efficiencies due to the decline in volume, changes in package characteristics, and a shift in product mix away
from our premium services. Operating profit was also negatively impacted as we incurred a larger decline in fuel
surcharge revenue compared with the decline in fuel expense. We adjusted our air and ground networks to better
match these lower volume levels, as well as reduced labor hours and employee headcount, resulting in cost
savings. Operating profit trends improved during the fourth quarter of 2009 due to both improving volume trends
and the positive impact of continued cost and production efficiencies, which combined to improve the operating
margin to 10.1% for the quarter.
2008 compared to 2007
Operating profit in 2008 was adversely impacted by the U.S. recession, lower asset utilization due to the
decline in volume, lower average package weights, and a shift in product mix away from our premium services,
partially offset by the increase in the fuel surcharge relative to the cost of fuel. Because fuel costs decreased
rapidly in the latter half of 2008, operating profit benefited from the approximate two month time lag between
the fuel price changes and when the monthly surcharge rates are applied to package shipments. Because of this
time lag, fuel positively impacted the change in operating profit during 2008, which is the opposite effect the
company experienced in 2007, when fuel costs rose much faster than the fuel surcharge rate and operating profit
was adversely impacted.
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