UPS, Teamsters and the matter of unintended consequences

The combat has ended, but a question that nagged folks during the negotiations remains unanswered: Did the Teamsters’ aggressive negotiating posture compromise UPS’ cost structure, volume growth and profit margins to the extent that the company will institute union layoffs in order to align higher expenses with lower top- and bottom-line levels?

O’Brien’s twofold endgame was to achieve the best possible economic deal for 340,000 UPS union workers and to send a message to Amazon.com Inc. (NASDAQ: AMZN) that the union is prepping to get its nonunion warehouse workers a similar deal should the Teamsters represent them.

A labor-friendly UPS contract was somewhat foreordained because the last agreement, in 2018, ended up allowing UPS to bypass much of the post-pandemic employment-cost spikes that brought higher employee costs on rival FedEx Corp., (NYSE: FDX) among others. O’Brien also had the dual tailwinds of a supportive White House and improving public sentiment toward organized labor.

Labor talks are as much a behavioral game as an economic set-to. Behind the emotion, however, are smart and pragmatic people on both sides tasked with determining how much they can ask for and concede without giving away the store.

Throughout its history, UPS has effectively adapted its costs to demand fluctuations. It also has long experience adjusting to wage and work-rule changes wrought by Teamster contracts. As for the Teamsters, “I’m assuming they can do math and do volumetrics,” said Michael C. Duff, professor of law at the Saint Louis University School of Law.

Duff, a former Teamster who remains well connected in organized labor circles, said O’Brien and his negotiators recognized that UPS bargaining-unit jobs might be lost due to slowing demand and the company’s push toward automation. However, they also knew that 7,500 full-time jobs would be created over the contract’s life by combining part-time hours, while three times that many open jobs would be filled during the cycle, Duff said. 

“I believe the Teamsters, at some point, just said that ‘These are costs we are willing to live with,’” he said, referring to the potential for job losses.

Duff believes that O’Brien and company will not yield in their efforts to extract as much economic benefit as possible from union employers. Part of that effort is a sense of urgency to return labor to prominence after being on the back foot for more than 40 years, he said. For all the media chatter about 2023 being the “summer of strikes,” the fact remains that organized labor represented in the private sector hit a record low of 6% in 2022 despite a pro-union administration in the White House. (See chart.)

UPS declined comment. The Teamsters did not respond to a request for comment.

Will diverted volumes return?

The jury will be out for a while on UPS’ ability to win back diverted volumes. Over 116 years, the company has built a reputation for reliable, high-quality service. Executives have expressed confidence that it will win back all diversion as shippers recognize the unique value of its network. 

According to UPS’ estimates, as of mid-October it had recovered 600,000 of the daily diverted parcels. FedEx said on its last analyst call in late September that it captured 400,000 daily UPS parcels. UPS has said it has recaptured 300,000 of them. 

According to ShipMatrix data, about 1.25 million daily parcels were diverted. The 1.5 million figure cited by UPS included business that actually never existed because consumers were doing more in-store shopping and shifting their spending from goods to services, according to Satish Jindel, ShipMatrix’s president.

Of the 1.25 million packages, 750,000 went to FedEx, 315,000 to the U.S. Postal Service and 185,000 to regional delivery carriers, said Jindel. Those estimates were as of the end of August. UPS said that many customers waited until the contract was ratified before returning their volumes.

Ian Reagan, an analyst at consultancy The Colography Group LLC, said he expects UPS to eventually recover 900,000 daily parcels through volume recapture and new business. It may not happen by the end of the year, Reagan said. UPS executives have said that full volume recapture will likely be a 2024 story. 

Michael H. Belzer, professor of economics at Detroit’s Wayne State University and one of the nation’s foremost transport labor relations experts, said he expects shippers to return to UPS because they will receive the service they want and are accustomed to from the carrier. UPS “will be successful in getting back the business as long as the service is there,” Belzer said.

Not everyone is so sanguine. Jindel said UPS will be saddled with higher costs and lower volumes through the life of the contract, and will be challenged to recover parcels in an increasingly competitive delivery marketplace. In 1997, UPS won back virtually all business lost during a 15-day Teamsters strike because shippers had effectively nowhere else to go, Jindel said. Today’s shippers, by contrast, have multiple alternatives, such as FedEx Ground, FedEx’s ground-delivery unit; Amazon; the Postal Service; and a slew of regional delivery carriers, among other providers, Jindel said.

Broughton told the Yahoo! Finance TV outlet at the end of July that UPS stands little chance of winning back parcels from FedEx unless FedEx falls down on service, a scenario that Broughton said was unlikely.

Alan Amling, who spent 27 years at UPS before retiring in 2019 as vice president of corporate strategy, said UPS will likely need to manage through a period of lower volumes caused by this summer’s diversions and a general slowing of delivery demand. As fewer packages move through facilities that already have substantial fixed costs, the average cost of every package rises, said Amling. This challenges the company’s core approach of building density to optimize its network, streamline processes and take out costs, said Amling, who today is assistant professor of practice at the University of Tennessee’s Global Supply Chain Institute.

“UPS has shown it is willing to sacrifice margin in their win-back efforts,” said Amling. “However, unless it reverses its strategic direction, it will have slow volume growth at best.” Fewer packages mean fewer workers, he said.

Technology the catalyst

Technology will be the catalyst, Amling said. “As wages rise, the relative cost of technology drops,” he said. “I expect you will see accelerated investments in technology that help employees become more productive, and in some cases, replace them. With the rise of AI, this will extend into the white-collar workforce as well.”

Amling doesn’t expect significant layoffs at UPS. Rather, he sees low to zero employee growth.

An industry executive who asked not to be identified said that UPS frequently adjusts driver manpower based on current volume trends. “With volume trends normally being up, UPS is not regularly laying off drivers. However, it does lay off drivers when volume is soft, but it doesn’t tell anybody they are laying drivers off. Given current downward volume trends, it is safe to assume that drivers are being laid off,” the executive said.

The company told analysts in late September that it will aggressively invest in technology to automate certain tasks inside its facilities. A byproduct of these investments is to lower the 140,000 part-time-employee head count in its sortation centers over the next few years, analysts were told. Collectively, these part-time unionized workers represent about $3 billion a year in potential cost savings, according to analysts.

Language in the contract requires UPS to negotiate with the Teamsters at least 45 days before it introduces technologies into the workplace. Much of the public discussion centered on technology like autonomous vehicles and drones that support transportation functions. A Teamsters spokesperson said the union has established a Committee on Technological Change to ensure the contract is adhered to and members are protected.

No one outside UPS knows for sure the type of business that was lost over the spring and summer. It may very well be that a good chunk of diverted volumes did not fit the carrier’s profit profile to begin with. Through CEO Carol B. Tomé’s “better not bigger” strategy introduced when she took over in June 2020, UPS focused on higher-margin traffic at the expense of big volume, lower-margin parcels. In went an emphasis on B2B traffic, lucrative verticals like health care, and small to midsize (SMB) customers that lacked the volume leverage to demand significant discounts. In turn, lower-priced e-commerce business-to-consumer traffic from enterprise customers — notably Amazon — were deemphasized.

According to Amling, UPS has over the past three-plus years built its higher-margin B2B, health care and SMB volumes. “This strategy played like a symphony during the high-demand pandemic period,” he said. “But that core capability becomes more difficult without the volume growth.”

Josh Taylor, senior director of professional services for consultancy Shipware LLC and a former UPS executive, said that long before contract talks heated up, UPS was selective about the type of business it would accept. Now with higher operating costs, lost volumes and slow demand, UPS is no longer as picky, he said.

“Unless it’s really lousy business, they will accept it,” Taylor said.