Date: Wednesday, July 19, 2023
The union representing UPS pilots says they will not cross picket lines if Teamsters drivers and package sorters walk off the job when the current contract expires Aug. 1, resulting in the immediate shutdown of the express logistics company’s global air operations.
UPS (NYSE: UPS) has 3,300 pilots who are represented by the Independent Pilots Association (IPA), a separate union from the Teamsters.
“If the Teamsters are on strike, we will honor that strike and we will not fly,” IPA spokesman Brian Gaudet told FreightWaves.
UPS pilots are allowed under their collective bargaining agreement to honor primary picket lines and did that for 16 days during the Teamsters’ strike in 1997.
In 1997, 100% of our pilot group respected your picket lines by not ‘turning an aircraft wheel’ on behalf of the company, IPA President Robert Travis said in a July 3 letter to Teamsters President Sean O’Brien that was posted on the IPA’s website on Tuesday. The IPA will “honor any potential IBT [International Brotherhood of Teamsters] strike and act in sympathy with our fellow workers at UPS by not working. No one wants a work stoppage, but should a legal IBT strike be initiated, you and the IBT can count on the IPA for support.
Even with freighters in service, a strike by 340,000 package car drivers, truck drivers and warehouse workers would effectively ground most UPS Airlines operations because there would be few, if any, personnel to load and unload aircraft, process packages and deliver them to and from airport facilities. UPS says it is training nonunion employees to handle packages in the event there is a labor disruption. Parcel consulting firm ShipMatrix estimates management could move about 22% of the 18.6 million daily parcels in its system through contingency plans.
The Teamsters union has a $300 million to $350 million fund to support workers with strike pay, but UPS pilots who don’t report to work will bear the burden on their own.
“We don’t have a strike fund,” said Gaudet.
UPS pilots ratified a two-year contract extension last August.
Bascome Majors, a senior transportation equity analyst at Susquehanna International Group, estimated in a research note that the Teamsters’ fund could last at least two weeks. Part-time workers would end up making about $210 less than their normal weekly pay, while full-timers would make about $1,450 less, which “could splinter enthusiasm for an extended strike and hurt Teamster solidarity.”
Barring a solidarity action by pilots, UPS likely would use a skeleton fleet to protect some international and overnight flights to its Worldport hub in Louisville, Kentucky, said Derek Lossing, founder of Cirrus Global Advisors, in an interview.
FedEx Express (NYSE: FDX) is the only air carrier that can realistically absorb UPS overnight, next-day package volumes, he explained. FedEx will try to take on as much of that business as it can because it is lucrative. Shippers that have a big relationship with UPS and only tender small volumes to FedEx are likely paying $6 to $8 more per parcel. FedEx can realistically handle 5% of UPS overnight volumes, Lossing added.
UPS management and the Teamsters union are at an impasse over wages and other economic issues after previously agreeing on other terms.
Rich labor deal poses risks
Analysts say UPS is in a bind because it already is experiencing some shipment diversion to rival FedEx and could drive away more customers if it sharply raises rates to help cover the cost of an overly generous Teamster deal.
A new Teamsters contract could drive the cost per parcel about 2% higher than current expectations and cut a dollar from UPS’ earnings per share next year, said Majors. Parcel consultants are forecasting that shippers can expect rate hikes of 6% to 10% in 2024, before a Teamsters contract is finalized.
Majors predicts the Teamsters’ contract will boost wages by 18% for part-time workers and 7% for full-timers, with another 3% to 4% increase in costs for inflation and other factors.
Many businesses that felt burned by UPS during the last three years, when demand soared and the carrier didn’t bend on applying steep rate hikes, could be willing to look for alternative carriers.
“If UPS gives away too much in labor costs, it’s going to be forced to raise rates to shippers and significantly lose a share of their wallet because the 12- to-18 month outlook doesn’t justify price increases,” wrote Lossing, a former logistics manager at Amazon who helped the online retailer build out its private cargo airline and international last-mile delivery network, on LinkedIn.
For every 10% increase in labor costs UPS negotiates, it will lose 4% of its average daily volume over the next two years, according to modeling conducted by Cirrus Global Advisors. If UPS tries to maintain margins by passing on costs to customers, a portion of its parcel business will spill to FedEx, the U.S. Postal Service, logistics companies that specialize in downstream parcel injection into the postal system, regional parcel carriers and Amazon’s own delivery network. FedEx would pick up about 180,000 daily ground packages, followed by Amazon (175,000), regional carriers (70,000), with the U.S. Postal Service and postal consolidators taking the remainder. If the Teamsters union wins a 20% increase in compensation, UPS could lose 140,000 daily packages to regional competitors.
Labor is UPS’ largest expense item, consuming nearly half of global revenue. According to UPS, delivery drivers on average earn $95,000 per year and part-timers earn $20 an hour, plus health and pension benefits. With FedEx and Amazon using an independent contractor model with nonunion workers for final-mile delivery, UPS has to control labor costs or risk “a slow spiral” that makes it uncompetitive, Lossing said.
Online shoppers will experience slower deliveries if there is a UPS strike and e-commerce companies will be forced to cancel free shipping and increase shipping charges, he predicted.
Companies that haven’t integrated other carriers besides UPS into their transportation planning systems could face significant operational and financial impact from a potential strike, logistics experts say.