In a turbulent landscape of rising labor costs and strikes that have shaken major corporations to their core, United Parcel Service Inc. (UPS, Financial), the world’s largest package delivery company, appears to have found an unexpected glimmer of relief. While automotive, airline and retail giants grapple with labor shortages, the company has been navigating the challenging labor environment successfully thanks to recent strategic decisions.
UPS shares have dropped more than 18% since talks between UPS and the International Brotherhood of Teamsters began, and the company lost over a million packages per day in volume during the turbulent weeks leading up to the eventual labor deal with the union.
Last month, the company revised its full-year revenue and profitability targets downward, citing unforeseen labor costs and the impact of prolonged labor union contract negotiations. With the improving outlook from a labor availability front, UPS seems attractively valued at a forward price-earnings ratio of 16.2.
UPS avoids costly strike with landmark Teamsters deal
In a high-stakes labor standoff that had the potential to send shockwaves throughout the global supply chain, UPS has successfully negotiated a landmark five-year deal, effective from Aug. 1, 2023 to July 31, 2028, with the Teamsters Union. Reaching this win-win agreement avoided what could have been one of the costliest strikes in recent history.
The negotiations, which began in April, took an ominous turn in June when Teamsters members authorized a potential UPS strike, casting a looming shadow of uncertainty over the logistics giant's future. July brought a ray of hope as UPS and the union reached a preliminary labor agreement that included substantial raises for both full-time and part-time workers, effectively averting a widespread work disruption.
The stakes were high, with Michigan-based Anderson Economic Group estimating the potential losses from a 10-day strike to exceed a staggering $7 billion. This projection encompassed not only the financial toll on UPS, but also anticipated customer losses of $4 billion and lost wages exceeding $1 billion.
This labor accord is a significant chapter in the history of UPS, a company that handles millions of daily deliveries and plays a key role in the global supply chain. A strike of this magnitude could have ignited supply chain disruptions, exacerbating inflationary pressures at a time when supply chains are already stretched to their limits.
Details of the labor deal
The deal, valued at $30 billion according to Teamsters General President Sean O’Brien, entails an increase of at least $21 an hour for existing part-time workers, who currently earn around $20 an hour. Over the next five years, part-time wages will increase to $23 per hour. Full-time employees will earn an average of $49 an hour, with current workers receiving $2.75 more an hour this year and an additional $7.5 an hour over the contract's duration. The agreement also marks an end to mandatory overtime on drivers' days off, according to an outline provided by Teamsters.
UPS prepares for holiday season amid rising demand
As the new wage deal settles, UPS is gearing up for a holiday season fraught with logistical challenges. The company is anticipating handling a volume of packages comparable to the previous year, despite the ongoing labor cost concerns. With U.S. holiday e-commerce sales projected to increase by 1% year over year to $273 billion, the stakes are exceptionally high.
To manage the surge in demand, UPS is implementing a 5.9% average rate hike for its ground, air and international services on Dec. 26. Additionally, the company is set to levy higher surcharges during the upcoming peak season compared to the previous year, surpassing its rival FedEx Corp. (FDX, Financial) in some cases.
UPS embraces automation and AI for enhanced efficiency
In its pursuit of operational excellence, UPS has embarked on a transformative journey centered around automation and artificial intelligence technology. The company's automation hubs, equipped with advanced technology, are pivotal in sorting and processing packages with precision and efficiency. UPS has been committed to automation since 2014, when it announced plans to automate 30 tier-one hubs responsible for handling 60% of its shipping volume. This strategic move has allowed the company to minimize manual scans, reduce misrouting errors and achieve significant cost savings.
The positive impact of automation is evident in the company’s recent financial performance. Last year, 53% of the volume processed by UPS hubs in the United States passed through an automated hub. This year, that figure has risen to 57%, showcasing the tangible benefits of automation in enhancing the company's efficiency. Moreover, UPS is implementing cutting-edge technologies within its facilities, including automated label application, automated bagging and robotic small sort induction, further streamlining its operations.
AI also plays a pivotal role in the company’s strategy for agility and efficiency. UPS leverages next-generation planning technology, harnessing the power of AI and machine learning to help UPS drivers optimize planning, scheduling and volume management across its vast network. The results have been remarkable, with a nearly 10% reduction in hours in the U.S. while also enabling the reduction of semi-variable and fixed costs.
Takeaway
UPS has emerged as a notable outlier in an environment marked by significant challenges. The groundbreaking labor agreement not only solidifies the company’s market position, but also plays a pivotal role in safeguarding a global supply chain heavily reliant on the company's services. With labor costs representing the primary operating expense within the U.S. domestic segment, UPS now possesses a vital asset: a clear and predictable labor cost outlook for the next five years. This certainty positions UPS for robust growth in an environment where predictability is highly valued. Further, the company's proactive adoption of automation and AI is giving it a strategic advantage. UPS seems well-positioned to navigate the challenging macroeconomic conditions successfully and emerge as a more efficient, profitable company in the next few years.
