UPS said soaring fuel costs and the sluggish U.S. economy sent second quarter profit skidding by 21 percent, to $873 million. On a per-share basis, earnings fell 18.3 percent, to 85 cents a share.

The slide came despite a 6.7 percent gain in revenue, to $13 billion.

Per-share profit was two cents better than the lower end of UPS' guidance, but nearly 20 cents lower than the $1.04 of second quarter 2007. Year-ago net profit was $1.1 billion.

The latest result was on target with analysts' consensus forecast of 85 cents per share, lowered after UPS issued a profit warning on June 23, its second in two quarters.

UPS, based in Sandy Springs, is the world's largest package carrier, with more than 400,000 employees worldwide.

Despite fuel and economic woes, UPS said it saw continued strength in its supply chain and freight businesses during the second quarter, which ended June 30.

UPS' stock dipped to a five-year low of $56.44 on July 15, although shares have regained more than $4 since then.

Scott Davis, UPS chairman and CEO, told analysts in a conference call that UPS has had "tough economic times" in the past and used the opportunity as a "launching pad for innovation that led to years of growth."

He added: "Although downturns in the economy are painful, the strongest companies, like UPS, will come out in the best competitive position."

Still, UPS is operating in a tough sector.

Fuel costs were a "big headwind that put us on our heels in the second quarter," said Kurt Kuehn, UPS' chief financial officer during the call.

UPS' second quarter fuel bill rose 67.4 percent increase to $1.17 billion from $697 million a year ago. Kuehn called the rise in fuel prices during the quarter, from $100 to $140 per barrel, "unprecedented."

And Moody's placed Deutsche Post's investment grade debt ratings under review, following profit warnings earlier this quarter from UPS and rival FedEx. Deutsche Post, Europe's largest postal service, owns DHL, a third UPS competitor both domestically and worldwide.

Analysts wanted more information on a proposed contract between DHL and UPS. The deal would make DHL the largest client for UPS, at about $1 billion a year. It would entail UPS flying DHL's domestic air cargo. Kuehn said they are trying to finalize the deal "as soon as possible" to start flying DHL cargo by the end of the year.

The proposal has drawn fierce opposition from workers and officials at DHL's Wilmington, Ohio, hub, which is only 150 miles from UPS' air hub in Louisville, Ky. About 8,000 workers, including pilots, stand to lose jobs if the deal goes through. UPS could hire to deal with the increased volume.

UPS' second quarter financials showed that package volume worldwide remained flat, at 15 million packages a day, over the same period last year. Domestic volume decreased slightly to 13.1 million packages, while international volume rose to 1.93 million packages a day.

Revenue per piece rose 5.9 percent, reflecting in part higher international rates.

Still, while UPS' bright spot has been the growth of its foreign business, the company still derives about 60 percent of its income from the U.S. market. And international shipping didn't grow as quickly.

"The international segment performed significantly below expectations," said Davis, blaming fuel prices and "slowing economic conditions."

The company said that there will be some weakening in Europe in the third quarter due to a slow August.

The supply chain business, however, grew again, creating an operating profit of $148 million during the quarter. UPS ended the quarter with $1.7 billion in cash and short-term investments.

Analyst Ed Wolfe with Wolfe Research, noted in a report today that he sees "UPS as a great 2009 and beyond story," given the benefits from a new Teamsters contract, the proposed DHL contract and "a better market position relative to FedEx. ... There is nothing in the UPS report to change our view and we continue to recommend buying UPS aggressively at current levels."