Delivery service UPS has momentarily reached a deal with the Teamsters union, averting a labor strike. Third Bridge Senior Analyst Anthony DeRuijter examines the state of labor negotiations and the drag it may have on postal carriers like UPS, ultimately asking the question of whether shippers will "stick around for the drama [or] will Teamsters be similarly powerful?"

This post was written by Luke Carberry Mogan.

Video Transcript

- Well, UPS and the Teamsters Union reaching a tentative deal just days before their contract was set to expire.

The Teamsters saying agreement adds $30 billion of new money, while UPS isn't confirming those numbers.

CEO Carol Tome says the deal is a win-win-win agreement.

Shares of UPS dropping on the news.

Joining us now is third bridge senior analyst Anthony Deruijter.

Anthony, you could argue crisis averted for UPS.

But in the long run, this does increase the cost pressures for the company.

How do you assess the agreement that came down?

ANTHONY DERUIJTER: Hey, guys.

Thanks so much for having me.

So yeah, when we talk this UPS-Teamsters deal, it's best to frame it in terms of pros versus cons.

So pros, obviously, the customer and shipper churn people were worried about if service were to be impacted.

That should be largely mitigated given that service should continue as usual now.

Our experts had previously estimated that up to 10% of the UPS business could have been immediately up for grabs, if not more, depending on the strike duration.

And there are UPS numbers out there saying $170 million per day of revenue, applied 12% margin, what's that?

$20 million per day in all profit.

Adds up.

Now the cons though, as you pointed out, is that this is likely to be very cost inflationary, right?

If we talk about the terms of the deal, higher part time pay, no two tier wage system.

You know, outfitting the vans of AC for example.

It's clear that costs are going to go up for UPS, and that eats into their margin outlook for the year.

That wouldn't be an issue if they could pass on those costs.

But our experts don't think they can just because the shipper base is sensitive right now.

They could lose quite a bit of business if they try and use yield as a lever.

Now one last thing to point out.

Longer term, the question is in five years' time, what do they do?

Are shippers going to stick around for the same drama?

Will Teamsters be similarly powerful?

Big questions.

- So should investors, based on at least the data that we know right now, which there is very minimal of, just the statements that we've seen come through, should they be confident in the fact that a deal was done ahead of this deadline that was looming?

Or should they be kind of kicking the tires on this one once we get a little bit more about what the actuals were that was necessary for them to kind of forfeit or make sure that they were conceding in order to reach a deal?

ANTHONY DERUIJTER: So I guess again, the positives would be that had UPS not reached a deal with Teamsters and a strike event happened, any business that would have been lost, our experts indicated that would have been permanently lost or at least very difficult to get back.

So I think the positive for UPS that investors might look at is that there's top line that's going to stay put.

Obviously, the cons is how are they going to deal with the margin compressive factors that I outlined earlier, right?

I mean, if they can't price it through, they're going to have to eat it themselves, and that's obviously something that they're going to struggle with, especially if markets stay soft, like we saw in Q1.

- Let me pick up on that point about what we saw in the lead-up to a potential strike volume.

Levels did go down because a lot of customers were seeking out alternatives.

To what extent does that business come back automatically as a result of this.

And to your point, yes, cost pressures.

But it's also about boosting efficiency to compete in the market.

How do you think UPS is positioned?

ANTHONY DERUIJTER: So with the first point, from what we've heard, a lot of the business that was sniffing around at other carriers, so say FedEx or OnTrac-LaserShip post-merger or even the Postal Service, a lot of that was looking for an alternative carrier.

So it may not have been actually lost.

And perhaps now, that risk is abated.

Onto your point of operating efficiency, obviously for UPS, if they keep those volumes, they can leverage their network more fully and realize those efficiencies.

So they haven't lost the volume to sort of backstop that, right?

If they had lost that volume, they would have definitely-- well, they would have potentially experienced a loss of scale economics.

- Anthony Deruijter, appreciate you joining us today.

Thanks so much for your time.

ANTHONY DERUIJTER: Thank you.