United Parcel Service Inc. (NYSE: UPS) has seen only a slight increase in their first quarter profit of 7.5%. This lead the company to lower their 2008 earnings forecast.  This is due to the US economic recession that will not make a turn for the better any time soon. The slow retail sales are causing a slow period for UPS and their delivery services, particularly domestic deliveries.  When the US economy is hurting, UPS takes the hurt two-fold.

United Parcel Service Inc. handles an average of 15 million shipments a day world-wide, or roughly 2 to 3% of the U.S. gross-domestic product. With the US economic slump, people are spending less on retail products as they are forced to spend more on inflated gas and food prices.

UPS is not alone.  Major US have tightened spending and taken other cost-cutting measures to withstand the economic slowdown. This has lead to a restraint among US demands for freight deliveries for more than a year with rising fuel costs remaining the unpredictable variable that is squeezing profits. UPS spent $950 million in the quarter for their vehicles, up 54% from the year earlier. The company said its overall fuel costs drove down profit by at least 2 cents to 3 cents a share, or by $30 million to $50 million.

The first quarter reflected write-downs and severance charges in the year-earlier period and strong growth in business outside the U.S. Net income for UPS was $906 million, or 87 cents a share, up from $843 million, or 78 cents a share, from the year earlier.  Revenue climbed 6.5% to $12.68 billion.

The Atlanta-based UPS delivery service is the largest in the world.  International sales have protected UPS from being packed away into the US closet. Revenue from overseas packages jumped nearly 16%. UPS said US export volume growth was "strong, leading to a balanced global performance with Asia, Europe and the U.S. each experiencing a double-digit increase."

Like FedEx, UPS is considered to be a barometer for the U.S. economy as a whole. Fewer deliveries by transport companies are seen as a sign that domestic business is slowing down, while the factors behind the declines provide the supporting thesis. In this case, higher fuel costs are prompting a rise in delivery costs while consumers are likely spending less money.  

Mr. Kuehn, CFO for UPS, said, "At this point we see no immediate signs of economic improvement. We expect the U.S. package market to be flat to down this year. … Domestic margins will be under pressure for rest of year."

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Liberty Mutual Group Inc., a property and casualty insurer, announced it is buying Safeco Corp. (NYSE: SAF) for about $6.2 billion. The sale is the biggest U.S. property and casualty insurance deal since St. Paul Cos. and Travelers Property Casualty Corp. completed a $17.9 billion merger four years ago.

Industry analysts expect more deals to come as a soft economy has created attractive pricing and more willingness to deal. The property and casualty insurers that are cash-rich often take such opportunities to make attractive acquisitions.

"The addition of Safeco significantly expands and strengthens [Liberty Mutual]", CEO Ted Kelly said in a statement. The deal will create the fifth-largest U.S. property and casualty insurer according to the press release for the news.

More than strengthening Liberty Mutual, the deal strengthens the pocketbooks of Safeco shareholders. Liberty Mutual will pay $68.25 a share in cash for Safeco, a 51 percent premium over yesterday's $45 closing price.

Safeco shares are up over 46% as of morning trading to over $66 a share.

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UAL Corporation (NDAQ: UAUA) shares dropped nearly 40 percent after the carrier was slammed with skyrocketing fuel costs. As a result, the United Airlines parent was forced to reduce its domestic business to maintain adequate liquidity. Analysts also expressed doubts on a conference call that debt covenants may experience problems, although this was quickly dismissed by the airline's Chief Financial Officer.

The quarterly decline also prompted the troubled airline to revise its five-year plan that it was forced to make when it emerged from bankruptcy. Now, UAL plans to reduce its domestic capacity by 9% by the end of the year; eliminate 30 older aircraft from its operations; target another $200 million in nonfuel cost savings; cut another 1,100 jobs; and reduce planned capital spending in 2008 by about $200 million.

The trouble airline carrier also commented that it would participate in mergers and acquisitions when and if the right deals became available and it made sense for employees, customers and shareholders. However, UAL did not comment on reports that it is involved in a potential combination with Continental Airlines. Although, investors already know that the two parties have held advanced talks in the past!

The argument for consolidation in the industry lies on the fact that a larger entity will be able to collectively bargain for more favorable terms for fuel and other expenses. Meanwhile, the larger capital base will give it the ability to raise more financing on better terms and remain better capitalized. Combined, these factors have convinced many analysts that mergers like the proposed one between Delta and Northwest may give them a shot at sustainable profitability.

In the end, UAL Corporation still has a long way to go before it gets out of this mess. Any consolidation may be welcomed by shareholders who are now sitting on substantially greater losses. However, absent of any such deals, the airline may have to continue cutting while it waits for fuel prices to lower in the future to relieve pressure on its margins.

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