UPS said its freight forwarding business lost customers in the past two quarters, but Chief Financial Officer Scott Davis said the unit "has been winning new business recently."

UPS reported a 10.5 percent gain in overall net income for the first quarter driven by strong package volume worldwide, but said operating profit in its supply chain and freight division fell by $34 million even though revenue rose.

That segment reflected weakness for the Menlo Worldwide Forwarding unit that UPS acquired at the end of 2004, Davis said, while the UPS Freight trucking operations (formerly Overnite) had "solid results."

Davis told analysts in a conference call following the company's April 20 earnings report that the forwarding results were "a disappointment," but said much of it was related to the costs incurred "when you have a major integration in a short time."

The integration moves should start to pay off soon, he said. "However, we are taking additional steps now," to improve the forwarding business, Davis said.

UPS has been spending money and attention on new technology for the Menlo forwarding business, staff training and facilities as it prepares to absorb those heavy freight operations into the regular UPS airline system by the end of June.

At that point, it will activate a new air freight network to put the freight onto its own planes that now rides on leased aircraft, shift the Menlo hub from Dayton, Ohio, to the UPS Worldport hub at Louisville, Ky., and rebrand the forwarder business.

But besides the costs involved, he said the UPS forwarding employees had been so focused on the integration and training efforts that "they had less time to spend with customers."

Davis said he expects the forwarding unit to be "closer to breakeven" in the second quarter, before making more gains after the new UPS air freight network takes flight.

John D. Boyd