UPS Inc. should be able to offset the higher labor costs from its tentative five-year contract with the Teamsters union with manageable domestic price increases over the life of the agreement, Deutsche Bank said Wednesday.
After analyzing the 48-page master contract as well as union documentation, Amit Mehrotra, Deutsche Bank’s primary transport analyst, said in a note that UPS’ total union wages — excluding benefits — currently total $21 billion. Mehrotra estimated that the tab will increase by $2.45 billion in the first 12 months, which would carry from the second half of 2023 through the first half of 2024. The increases would taper off to $530 million each in 2025 and 2026, $700 million in 2027 and $1.6 billion in 2028, the fifth and final year, he estimated.
Average hourly wages, which are currently at $30.13 per hour, would rise to $38.36 by year five, Mehrotra estimated. Again, the biggest increases would come in years one and five.
With those estimates, UPS (NYSE: UPS) will need to raise domestic prices by $1.11 per package, or 8.8% cumulatively, to offset the entire cost increase over the contract’s five-year duration, Mehrotra said. This figure is “very manageable” considering that core prices are up 5% this year during a period of slack volumes.
The estimates are conservative because they assume no growth from current levels and no offsets from higher productivity, Mehrotra said. The agreement is expected to allow UPS to lean in more heavily on automation in order to drive down its cost per package.
The “absolute numbers” are not as relevant as what level of pricing growth is needed to offset the level of inflation while maintaining the potential for profit improvement and margin expansion, Mehrotra said. “In this context, we are very positive” on the deal.
While acknowledging that the company will absorb a “big pay increase,” Mehrotra said the contract strikes a solid balance between rewarding UPS workers and continuing down the “path to profitable growth.” He has a buy rating on UPS shares.
The tentative contract, agreed to July 25, was overwhelmingly endorsed by leaders of 262 Teamster locals on Monday. The contract will go out to the 340,000 rank-and-file members Thursday. Voting ends Aug. 22.
Mehrotra’s bullish thesis runs in stark contrast to recent remarks on LinkedIn by Donald Broughton, a longtime transport analyst and principal and managing partner at Broughton Capital LLC. Broughton said the cost increases in hourly pay alone will result in margin pressure that’s 300 basis points higher than what bullish analysts are forecasting.
UPS “caved” to the Teamsters’ contract demands because it was losing “increasingly larger amounts” of market share to rival FedEx Corp. (NYSE: FDX) due to shipper uncertainty, Broughton said. UPS management “obviously concluded that they couldn’t let the bleeding continue,” he wrote. Broughton did not publish market share data in his note.
ShipMatrix Inc., a consultancy with extensive data sets on parcel trends, said UPS lost about 5% of total U.S. average daily volume, almost entirely to FedEx, as shippers diverted traffic to FedEx. This amounted to about 1 million parcels per day, according to the firm’s estimates.
In his note, Broughton said the volumes lost to FedEx will not return to UPS unless shippers experience service issues with FedEx.
John Dixon
I find it interesting how, just as most controlled and one way information sites are, that anything disagreeing with towing the union line tends to not get posted. Even though the comment meets all guidelines other than not agreeing with pro union views.
John Dixon
Guess the rest of the world can pay higher prices so you can be overpaid and continue to drain companies to the bankruptcy courts. UPS service and quality already is crap and now it will higher priced crap. Maybe try a little harder with your day to day service for the money you get paid for non skilled jobs.
ka
last few years fedex and ups raised prices the same % each, maintaining parity.
lets see what happens.
Midwest Teamster
The bottom line is that we now have a completely bifurcated labor market in trucking, with Teamster companies that are not run by criminals doing very well, non-union companies that pay well doing really well, and the other half is everybody else. Note that in the everybody else category there is endless talk about what they will do. The reason is their entire business model is a race to the bottom to find the cheapest labor possible. All you need to do is watch Aurora’s CEO on CNBC today and look at who their partners are, including FedEx.
By all means, if you are a start-up shipper you really have no choice but to chase price. If you are a larger shipper who needs reliability and to keep your promises, this is a no-brainer. If you just hate unions, that is your prerogative, but fair warning here on jumping on the race to the bottom scam. You get what you pay for.
Stephen Webster
FedEx is also going have raise pay for subcontractors or they will move to UPS as soon as opening becomes available..Amazon employees in New York city are applying to U PS in large numbers for the fall season. $20.00 U P S is going to try to hire Amazon workers when openings happen.