UPS and FedEx Face Higher Labor Costs



Leadership at the International Brotherhood of Teamsters and United Parcel Service (UPS) have successfully negotiated a new labor agreement. Although the deal is awaiting ratification, it has managed to avert a potentially costly strike. Nonetheless, as investors consider the agreement, it is important for them to focus on areas such as inflation, competition, and earnings.

Key Details of the Agreement

The newly established labor agreement, spanning five years, includes wage increases that aim to align with the cost of living. Teamsters leadership has referred to the agreement as being valued at $30 billion. While this number may seem substantial, it should not be cause for alarm. Roughly speaking, this figure represents an approximate 30% increase in the total wages paid to union workers by UPS over the course of the entire five-year term. This outcome was largely expected.

However, it is important to note that average wage increases will range between 5% and 6% per year. Evercore ISI analyst Jonathan Chappell highlights this point in a recent report, stating that their initial estimates factored in a lower increase of around 4% for the first year and 3% for subsequent years. Consequently, there is the potential for cost per package inflation to surpass their projections by several hundred basis points throughout the forecast horizon. Nevertheless, it is possible that productivity offsets may help mitigate these figures.

Impact on the Industry and Analyst Outlook

While there may be concerns about rising costs, Chappell suggests that price inflation will actually benefit the entire industry. Based on his analysis, he rates UPS shares as Hold and maintains a price target of $187 for the stock. On the other hand, Stifel analyst Bruce Chan rates UPS stock as a Buy with a price target of $202 per share.

In conclusion, despite the need for ratification, the labor agreement between the International Brotherhood of Teamsters and United Parcel Service has successfully averted a potentially damaging strike. As investors evaluate the agreement, it is crucial for them to consider the implications of inflation, competition, and earnings in order to make informed decisions about their investments.

Title: UPS and FedEx Face Higher Labor Costs

As the labor costs in the parcel industry continue to rise, UPS and FedEx are expected to seek offsetting price increases to maintain their profit margins. According to analyst Chan, these price increases by UPS will likely affect market pricing for all players in the industry, including FedEx.

While FedEx has a mostly nonunion workforce, it faced the pressure of higher labor costs earlier than UPS did. However, this may turn into a positive factor for FedEx in 2023 and the years ahead. Although FedEx might benefit slightly more from the recent UPS-Teamsters deal, it does not necessarily spell bad news for UPS stock. Analyst Amit Mehrotra suggests that UPS management would not agree to a deal that hampers the company’s ability to achieve profitable growth.

With these developments, consumers should be prepared for potential increases in shipping costs.

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