Brian Dykes
Executive Vice President, Chief Financial Officer at United Parcel Service
Thank you, Carol, and good morning, everyone. Our financial performance in the fourth quarter was better than we expected due to our focus on revenue quality and excellent cost management. The positive momentum that we began in the third quarter continued throughout our busiest time of the year. This morning, I'll cover four areas.
Starting with our fourth quarter results followed by a review of our full year 2024 results, including cash and shareowner returns. Then I'll provide more detail on the business and operational changes we are making. And I'll close with our expectations for the market and our financial outlook for 2025. Starting with our consolidated performance.
In the fourth quarter, we delivered revenue and operating profit growth and margin expansion. This is a continuation of the momentum that we showed in the third quarter and the first time in three years that we've shown growth in the fourth quarter on all three of these financial metrics. In the fourth quarter, we generated $25.3 billion in consolidated revenue, an increase of 1.5% compared to the fourth quarter of last year. Consolidated operating profit was $3.1 billion, an increase of 11.2% versus the fourth quarter of 2023.
And consolidated operating margin was 12.3%, an increase of 110 basis points compared to the fourth quarter of last year. Diluted earnings per share was $2.75, up 11.3% from the fourth quarter of 2023. Now moving to our segment performance. U.S. domestic delivered strong fourth quarter results, driven by gains in revenue quality and outstanding cost management. During the compressed 2024 peak season, our average on-time service led the industry by 470 basis points over our closest competitor, which drove high demand for our services, allowing us to continue winning new customers throughout peak. For the quarter, U.S. average daily volume, or ADV, was flat to last year.
Ground average daily volume increased 2.1% year over year, while total air average daily volume was down 12.9%. Excluding the volume decline from our largest customer, total AR ADV grew driven by demand from healthcare and high-tech customers. Within ground, SurePost ADV, as a percentage of total ADV, increased slightly compared to the third quarter of 2024. Through the power of our matching algorithm, we increased SurePost Redirect by 660 basis points sequentially from the third quarter, which resulted in half of the surplus volume being delivered by UPS drivers.
For the quarter, total B2B average daily volume was down 1% year over year. However, we saw B2B growth from healthcare customers, including healthcare SMBs. On the B2C side, average daily volume was up slightly year over year and made up 64.7% of our volume. In terms of customer mix, we saw strong ADV growth from SMB customers, which grew 4.5% in the fourth quarter, driven by double-digit growth in December.
In the fourth quarter, SMBs made up 27.8% of total U.S. volume. This was the highest fourth quarter concentration we've seen in 10 years. For the quarter, U.S. domestic generated revenue of $17.3 billion, up 2.2% compared to last year, due to the strength of small package in December and increases in air cargo. In the fourth quarter, the revenue per piece growth rate flipped positive for the first time this year and was up 2.4% year over year, which was a sequential improvement of 460 basis points from the third quarter of this year. Breaking down the components of the 2.4% revenue per piece improvement, base rates increased the revenue per piece growth rate around 250 basis points. Strong keep rates on our holiday demand surcharge increased the revenue per piece growth rate by 110 basis points.
The net impact of customer mix combined with product mix and lighter weights decreased the revenue per piece growth rate by 80 basis points. Lastly, fuel drove a 40-basis-point decline in the revenue per piece growth rate. Turning to cost. Total expense increased 1.3%.
Since we lapped the first year of our labor contract at the end of July, this was the first full quarter at a lower contractual union wage growth rate. In fact, the average increase over the prior four quarters was 10.5%. In the fourth quarter of this year, union wage rates increased by only 3%. Through our Network of the Future initiative, we exceeded our initial target by completing 49 operational closures this year, including 11 buildings.
By leveraging our technology and increasing automation, we processed and delivered the same amount of volume in the fourth quarter as last year, but we did it with three million fewer hours, while delivering excellent service. We lowered small package block hours within our air network in response to changing volume levels. Purchased transportation and other expenses declined as we insource 50% of SurePost volume during the fourth quarter, and we tightly manage rental equipment through peak. Lastly, our safety performance was better than we expected and drove a benefit in casualty expense.
Looking at cost per piece, throughout the fourth quarter and the peak period, we leveraged technology and our proven practices to hold the increase to just 0.9%. The U.S. domestic segment delivered $1.8 billion in operating profit, an 11% increase compared to the fourth quarter of 2023, and the operating margin was 10.1%, a year-over-year increase of 80 basis points. Moving to our international segment.
For the second quarter in a row, our international business grew revenue and operating profit and expanded operating margin. Total international average daily volume growth flipped positive for the first time in three years and was up 8.8% year over year. International domestic average daily volume increased 5.8% compared to last year, driven by strong performance in Canada. And on the export side, average daily volume increased 11.7% year over year with all regions delivering ADV growth.
Asia export average daily volume was up 15.4%, delivering growth for the third consecutive quarter. And at the country level, 17 of our top 20 export countries grew export ADV, led by Mexico and Germany. And in Germany, which is our largest export market, export average daily volume increased 8.6% compared to last year. In the fourth quarter, international revenue was $4.9 billion, up 6.9% from last year, with all regions growing revenue year over year.
International generated positive operating leverage driven by our ongoing network optimization and cost management efforts. Operating profit in the international segment was $1.1 billion, an increase of 18.1% year over year. Operating margin in the fourth quarter was 21.6%, an increase of 210 basis points from a year ago. Moving to Supply Chain Solutions.
In the fourth quarter, revenue was $3.1 billion. Revenue decreased $306 million, with the reduction impacted by $588 million in revenue from Coyote in the 2023 period. Revenue within our forwarding and logistics businesses increased $282 million. Looking at the key drivers, air and ocean forwarding revenue was up 10.3% led by continued strong market demand out of Asia.
And logistics revenue grew by 16.2%. In the fourth quarter, Supply Chain Solutions generated operating profit of $284 million, down $24 million year over year, which included an impact of $13.5 million of operating profit from Coyote in the same period in 2023. Operating margin in the fourth quarter was 9.3%, an increase of 20 basis points compared to last year. Walking through the rest of the income statement, we had $229 million of interest expense.
Our pension income was $67 million, and our effective tax rate for the fourth quarter was approximately 20.5%, lower than our expectations due to discrete items. Now let me comment on our full year 2024 results. For the full year 2024, revenue was $91.1 billion, a slight increase over 2023. We delivered operating profit of $8.9 billion and a consolidated operating margin of 9.8%.
We generated $10.1 billion in cash from operations and continue to follow our capital allocation priorities. We invested $3.9 billion in capex. We distributed $5.4 billion in dividends. We repaid $3.8 billion in debt that matured during the year.
And at the end of the year, our debt-to-EBITDA ratio was 2.25 turns. Lastly, we completed $500 million in share buybacks in 2024. And in the segments for the full year, the U.S. domestic operating profit was $4.5 billion and operating margin was 7.5%.
The international segment generated $3.4 billion in operating profit and operating margin was 18.7%. And Supply Chain Solutions delivered operating profit of $1 billion and operating margin was 8%, which brings us to 2025. As Carol described, we are taking a set of strategic actions to address the challenges facing our U.S. business head on.
Execution is already well underway, and these actions together will create a more agile and profitable UPS. Let me provide more detail on what we're doing. I'll start with the agreement in principle we've reached with our largest customer to significantly reduce the volume we deliver for them. The accelerated decline has already begun and will step up meaningfully so that by the second half of 2026, their volume will be down by more than 50% of what it was at the beginning of the year.
The speed of the glide down is 5x faster than our initial glide down efforts between 2021 and 2024. The result of this change will be lower overall volume levels but an improved customer mix at a significantly higher revenue per piece. We are deliberately shifting our business and increasing our focus on growing higher-yielding volume and value share. Lower overall volume levels from this customer will lead to lower revenue dollars in the near term.
However, we expect to grow revenue per piece through shifting our customer mix and by leveraging our architecture of tomorrow pricing technology. This will enable us to continue the strong base rate improvements in 2025 that we delivered from our enterprise and SMB customers in the second half of 2024. Additionally, we will double down on growing volume and revenue in the best parts of the market for us, including SMB, healthcare and B2B. And in terms of SMBs, this year, we expect to take the SMB percent of our U.S.
Volume to 32%, and the momentum will continue for the longer term. Now looking at costs. As we bring volume down, we will not only reduce the hours of miles associated with this volume, we will be able to take out fixed costs to match our capacity to our new expected volume levels. All facets of the network are included in the reconfiguration.
And we expect to close up to 10% of our building, cut back our vehicle and aircraft fleets and reduce labor. The rightsizing of our U.S. capacity allows us to accelerate our Network of the Future initiative. We will be able to more quickly bring down less efficient capacity while further investing in automation across the network, getting us to a more efficient U.S. networks faster. The capital requirements to run our reconfigured network will also decrease. We will share more details on our execution plan on our first quarter earnings call in April. Now turning to the changes we made with SurePost.
As of January 1, we began delivering 100% of our SurePost volume, and in mid-January, we implemented a 9.9% average rate increase on SurePost. Offering a reliable economy service is an important part of our product portfolio and overall value proposition. The changes we made give us greater point-to-point operational control and the ability to provide better service to our customers, which brings me to our Efficiency Reimagined initiatives. Lower overall volume and a reconfigured U.S.
Network created opportunity for us to increase efficiency by redesigning processes from end to end. Through Efficiency Reimagined, we expect to deliver approximately $1 billion in savings. Pulling it all together, even while we're undergoing the largest network reconfiguration in our history, we expect to expand U.S. domestic operating margin in every quarter of 2025 with the full year operating margin approaching 9%.
As the impact of our cost-out efforts increase over the next 18 months, we expect the pace of operating margin improvement to accelerate into 2026, where we expect by the fourth quarter to generate a 12% U.S. operating margin and we see even more upside potential in the longer term. Turning to guidance for 2025. Starting with the macro, S&P Global forecast global GDP of 2.5% compared to 2024.
Real exports and global industrial production are both expected to increase around 2% year over year. In the U.S., manufacturing is expected to turn positive for the first quarter of 2025 after seven quarters of negative year-over-year growth, and the consumer is expected to remain resilient. Moving to our 2025 financial outlook. For the full year 2025, on a consolidated basis, revenue is expected to be approximately $89 billion and operating margin is expected to be approximately 10.8%.
Our guidance for 2025 does not reflect any significant potential global trade implications due to changes in tariffs. Now let me give you a little color on the segments. Looking at U.S. domestic. As a result of the actions we're taking, full year 2025 revenue is expected to decline 2.3% year over year, driven by an ADV reduction of about 8.5%, partially offset by strong expected revenue per piece growth of approximately 6%, and we will wrap the newly onboarded USPS air cargo business. We expect the intended volume and revenue declines to accelerate as we progress throughout the year. Full year operating margin is expected to be approximately 8.8%, an increase of 130 basis points compared to 2024. And to provide a little shape for the first quarter, which has one fewer operating day compared to the first quarter of 2024, we expect revenue to increase nearly 1% year over year despite ADV being down approximately 4%, and we expect to expand operating margin by approximately 140 basis points year over year.
Moving to the international segment. We expect mid-single-digit ADV growth throughout the year, but with lower demand-related surcharges than we've seen in prior years. For the year, we expect 2025 revenues to increase approximately 2.5% year over year with an operating margin of around 18.6%. And looking at the first quarter, we expect revenue to be flattish compared to the same period last year and operating margin to be moderately down year over year due to lower demand-related surcharges.
And in Supply Chain Solutions, for the full year 2025, we expect revenue to be approximately $11 billion and operating margin to be approximately 8.5%. And SCS in the first quarter, revenue is expected to decline about $500 million due to the reduction in revenue associated with Coyote in the same period last year. Operating margin in SCS in the first quarter is anticipated to be low to mid-single digits due to pressure from purchase transportation costs related to our mail innovations business. We expect the first quarter to be the lowest SCS operating margin in 2025.
For modeling purposes, in total below the line, we expect approximately $780 million in expense with a little more than half in the back half of the year. We expect pension expense to be approximately $37 million for the full year 2025, which is $306 million higher than in 2024, primarily due to the impact of market shifts in interest rates on our pension assets last year. We included a slide in the appendix of today's webcast deck to provide you more detail on pension. The webcast deck is available on the UPS investor relations website.
Now let's turn to our expectations for cash and the balance sheet. We expect free cash flow to be approximately $5.7 billion, including our annual pension contribution of $1.4 billion. Capital expenditures are expected to be about $3.5 billion. While we are accelerating our Network of the Future initiative, our reconfigured U.S. network should require less investment in vehicles and aircraft as we rightsize the capital base.
We are planning to pay out around $5.5 billion in dividends in 2025, subject to board approval. We expect to buy back around $1 billion of our shares. And lastly, we expect the tax rate for the full year to be approximately 23.5% as we expect the current U.S. corporate tax regime to remain. We've covered a lot today. We are moving quickly to continue our momentum. The results of our actions will be an even stronger, more agile and more profitable UPS that's growing in the best parts of the market that value our end-to-end integrated network.
With that, operator, please open the lines for questions.
