UPS Earnings Call: Cost Reset Amid Volume Pressure

United Parcel Service ((UPS)) has held its Q4 earnings call. Read on for the main highlights of the call.

UPS Earnings Call Balances Cost Wins With Volume Pain

United Parcel Service’s latest earnings call struck a cautiously optimistic tone, as management showcased meaningful gains in revenue quality, aggressive cost-cutting, and automation — all underpinning solid cash generation — while clearly flagging substantial near-term pressure from declining volumes, international trade headwinds, and transition costs. Executives stressed that 2026 will be a “two‑half year,” with margins strained in the first half as network changes and the Amazon volume glide‑down flow through, followed by a stronger second half as savings and automation benefits begin to materialize. Overall, the company argued that structural improvements and a leaner network position UPS well beyond 2026, but execution risks and macro uncertainty remain key watchpoints for investors.

Strong Q4 and 2025 Results Anchor the Story

UPS closed 2025 with a solid financial foundation despite weaker volumes. Fourth-quarter consolidated revenue came in at $24.5 billion, generating operating profit of $2.9 billion and an operating margin of 11.8%, translating to diluted EPS of $2.38. For the full year, UPS posted $88.7 billion in consolidated revenue, $8.7 billion in operating profit, and a 9.8% operating margin. While top-line growth was limited by significant package volume declines, especially in the U.S., the company’s ability to protect margins in this environment underpinned management’s confidence that its pricing discipline and cost actions are working.

Revenue Quality and Pricing Drive Higher Yield

With volumes under pressure, UPS leaned heavily on revenue quality and pricing to support profitability. U.S. revenue per piece improved sharply, rising 8.3% year over year in the fourth quarter and 7.1% for 2025. The company credited base rate increases and more profitable package characteristics for about 340 basis points of Q4 improvement, while a favorable shift in customer and product mix added another ~320 basis points. This combination suggests UPS is successfully moving away from lower-yield volume and extracting better economics from the packages it does handle — a key lever as overall demand softens.

Strategic Shift Toward SMB and B2B Customers

UPS continues to reshape its customer mix, tilting toward higher-yield segments such as small and medium-sized businesses (SMBs) and business-to-business (B2B) shipments. SMB penetration reached 31.8% of total U.S. volume in 2025, with Q4 SMB share at 31.2%, up 340 basis points from a year ago — a record fourth-quarter level for this segment. B2B volume also gained ground, representing 42.3% of U.S. volume for 2025, with Q4 B2B at 37.5%, up 220 basis points year over year. This mix shift helps lift revenue per piece and buffers UPS against cyclical e-commerce softness, but it also increases exposure to broader industrial and commercial demand trends.

Network Reconfiguration Unlocks Billions in Cost Savings

The company is in the midst of a sweeping reconfiguration of its network aimed at permanently lowering its cost base. In 2025, UPS delivered $3.5 billion in savings from “efficiency reimagined” initiatives and restructuring its operations. Looking ahead to 2026, management is targeting roughly another $3.0 billion in savings, much of it tied to the planned reduction in Amazon-related volume and associated network changes. These efforts are intended not just to offset lost revenue, but to create a more streamlined, flexible system capable of producing higher margins when demand normalizes.

Automation Raises Productivity and Cuts Unit Costs

Automation is central to UPS’s long-term margin story. In 2025, the company deployed automation in 57 buildings, and by year-end, 66.5% of U.S. volume flowed through automated facilities. UPS aims to push that figure to about 68% by the end of 2026. The payoff is significant: automated facilities currently operate at roughly 28% lower cost per piece than conventional buildings. As more volume shifts into these automated hubs and older, less efficient sites are shut down, the structural cost per package should fall, setting up margin expansion over the next several years.

Workforce and Footprint Shrink to Match Lower Demand

To match its network to lower volumes, UPS has taken aggressive steps to trim labor and facilities. The company removed 26.9 million labor hours in 2025 and reduced its workforce by roughly 48,000 operational positions, including 15,000 fewer seasonal roles. On the infrastructure side, UPS closed 195 operations, including 93 buildings, as part of its reconfiguration plan. While these actions bring near-term severance and transition costs, they are key to aligning fixed expenses with reduced volume and enhancing operating leverage when growth returns.

Digital and Healthcare Businesses Provide Growth Engines

Beyond the core parcel network, UPS is building out faster-growing and higher-value verticals, especially in digital and healthcare. Revenue from its Digital Access Program jumped about 25% year over year to $4.1 billion globally, while UPS Digital offerings such as Roadie and Happy Returns posted growth in the mid‑20% range. On the healthcare side, acquisitions of Frigo Trans and Ann Lower Healthcare Group helped push healthcare logistics revenue to $11.2 billion in 2025. These businesses not only diversify UPS’s revenue base but typically carry attractive margins and stickier customer relationships.

Cash Generation Supports Shareholder Returns and Investment

Despite the operating turbulence, UPS remains a strong cash generator. In 2025, the company produced $8.5 billion in cash from operations and returned $6.4 billion to shareholders, including $5.4 billion in dividends and $1.0 billion in share repurchases. Looking into 2026, UPS expects free cash flow of about $6.5 billion and plans capital expenditures around $3.0 billion. This combination provides room to fund fleet renewal, automation, and network upgrades while maintaining a robust dividend and potential for continued buybacks, subject to conditions.

Fleet Modernization: MD‑11 Exit and 767 Expansion

UPS is accelerating the modernization of its air fleet, which should enhance efficiency and reliability over time. In 2025, the company took a one-time after-tax write-off of $137 million to retire its MD‑11 aircraft, part of total GAAP charges of $238 million including transformation costs. The MD‑11s will be replaced with 18 Boeing 767s, with 15 expected to arrive in 2026. While the transition brings temporary incremental lease and capacity costs, management expects the newer fleet to improve fuel efficiency, maintenance expenses, and overall network flexibility.

Operational Performance Remains Strong Amid Disruption

Even as UPS reshaped its network and grounded the MD‑11 fleet, it maintained its reputation for service reliability. The company delivered industry-leading on-time performance during the peak season for the eighth consecutive year, a notable achievement given widespread industry capacity and labor challenges. Management highlighted the efficiency of peak operations despite the aircraft grounding, suggesting that reconfiguration efforts have not compromised service standards — a critical factor for retaining high-value commercial and SMB customers.

Volume Declines and Mix Headwinds Weigh on Growth

Underneath the solid pricing and cost work, volume trends remain a clear weak spot. Average daily volume (ADV) for 2025 declined 8.6% overall. In the fourth quarter alone, U.S. ADV fell by 2.4 million pieces, down 10.8% year over year. Air ADV slipped 11.9%, ground ADV dropped 10.6%, and Groundsaver volume plunged 27.7%. Business-to-consumer (B2C) ADV fell 13.8%, reflecting softer e-commerce demand and the company’s strategic emphasis on higher-yield segments. While this supports revenue per piece, the lower volume base dilutes network efficiency and increases the importance of cost cuts and automation.

International Under Strain From Trade and Policy Shifts

International operations are facing a challenging environment, driven in part by trade and policy changes. In the fourth quarter, international ADV was down about 4.7%, with exports declining 5.8% year over year. U.S. imports were particularly weak, falling 24.4%, led by declines of roughly 30.5% on Canada and Mexico lanes and about 20.9% on the China‑to‑U.S. lane. These drops are tied to tariff and de minimis policy shifts that have reshaped cross-border flows. International operating profit fell by $154 million in Q4, and management warned that international profits could be down around 30% in the first quarter of 2026, underscoring continued near-term pressure in this segment.

Near-Term Margin Pressure and Transition Costs in Focus

Management was upfront about the margin squeeze expected in the first half of 2026. UPS anticipates about 100 basis points of U.S. margin pressure during this period, driven by a timing mismatch between declining Amazon volume and the ability to take out fixed costs, transition expenses from outsourcing its Groundsaver product to the U.S. Postal Service, and incremental aircraft lease costs following the MD‑11 grounding. In Q4, U.S. cost per piece rose 8.9% year over year, illustrating the effect of lower volume spreading fixed costs over fewer packages. Investors will be watching closely for evidence that cost reductions can catch up with the volume reset.

MD‑11 Grounding Triggers Extra Costs and Charges

The exit of the MD‑11 fleet comes with both ongoing and one-time financial impacts. In Q4, the grounding and retirement of these aircraft drove about $50 million in incremental lease and air capacity costs, with management guiding that this figure will roughly double to around $100 million in 2026, approximately 90% of which will hit in the first half. For 2025, GAAP charges totaled $238 million, or $0.28 per share, tied primarily to the $137 million after-tax MD‑11 write-off and $101 million in broader transformation charges. While these are largely nonrecurring items, they add to the near-term earnings drag as UPS transitions its air network.

Supply Chain Solutions Hit by Rate and Mail Weakness

UPS’s Supply Chain Solutions segment also felt the impact of softer markets and pricing. Fourth-quarter revenue in this unit was $2.7 billion, down $388 million year over year, largely due to lower market rates in air and ocean freight forwarding and weaker mail innovation volumes. Logistics revenue declines were partially offset by continued growth in healthcare logistics, which remains a bright spot. Despite the revenue drop, Q4 operating margins improved, pointing to disciplined cost management and a more selective approach to lower-margin freight.

EPS Outlook Clouded by Temporary Factors

Earnings growth remains constrained in the near term. Management expects 2026 EPS to be roughly flat with 2025, even though 2025 included a $0.30 benefit from a sale-leaseback transaction that will not recur. UPS does not assume significant tariff changes in its guidance, meaning any new policy moves could shift the outlook. The company acknowledged that upside to EPS is limited until the full benefits of its network reconfiguration, Groundsaver and SurePost changes, and automation build-out are realized, with more meaningful gains expected by 2027 as these programs mature.

Safety Incident Casts a Somber Note

The call also addressed a serious safety incident: a crash of UPS flight 2976 that resulted in fatalities. Management expressed condolences and described the company’s response as both a human and operational priority. While financial details were not the focus, the event underscores the operational risks inherent in running a global air network and may carry reputational and community implications that UPS must manage alongside its financial and operational transformation.

Timing Lag in Cost Reductions Adds to Near-Term Pressure

A recurring theme was the lag between volume declines and the realization of cost savings. UPS noted that while it has plans to reduce fixed and semi-variable costs through attrition and voluntary separation programs, these measures take time to fully implement. This timing mismatch means earnings will feel pressure in the short term even as the company executes on a robust slate of savings initiatives. Investors will be tracking how quickly UPS can close this gap and convert announced plans into tangible margin improvement.

Guidance Points to Flat Revenue and Margin Rebuild in 2026

For 2026, UPS guided to consolidated revenue of approximately $89.7 billion and an operating margin around 9.6%, with diluted EPS expected to be roughly flat versus 2025. The company targets about $6.5 billion in free cash flow, including a roughly $1.3 billion pension contribution, and plans capital expenditures of around $3.0 billion. UPS expects to pay about $5.4 billion in dividends and projects total below-the-line expense of roughly $760 million with a tax rate near 23%. Segment-wise, U.S. Domestic revenue is guided to be roughly flat, with average daily volume down mid-single digits but revenue per piece up mid-single digits; domestic margins are expected to be flat for the year, with mid-single-digit margins in the first half and a stronger second half that exits toward a healthy double-digit margin. Another 1 million pieces per day of Amazon volume is slated to roll off in 2026, with associated savings targeted at around $3.0 billion, including elimination of about 25 million operational hours, up to 30,000 positions, 24 building closures in the first half, and automation processing roughly 68% of U.S. volume by year-end. International revenue is forecast to grow low single digits with mid-teens margins, though profit is expected to fall about 30% in Q1 before improving. Supply Chain Solutions is projected to deliver high single-digit revenue growth with low double-digit margins. The guidance assumes deliveries of 18 Boeing 767 aircraft (15 in 2026) and incorporates around $100 million in incremental MD‑11-related lease costs, mostly in the first half, while assuming no major changes in the current tariff environment.

In sum, UPS’s earnings call presented a company in transition: revenue quality, automation, and structural cost cuts are clearly moving in the right direction, but meaningful volume declines, international trade pressures, and timing lags on cost reductions will weigh on results through at least the first half of 2026. For investors, the story hinges on whether management can execute its ambitious savings and network plans on schedule, paving the way for stronger margins and earnings beyond 2026. The near-term path looks bumpy, but the long-term setup, if delivered as outlined, could leave UPS leaner, more automated, and better positioned for the next upcycle in global shipping and logistics.