United Parcel Service Inc.’s union labor deal will boost the cost of wages and benefits by an average of 3.3% over five years, with the biggest increase coming in the first year.
Wages will jump about 10% in year one of the five-year contract, which took effect Aug. 1. The company, which released its details about the contract for the first time on Monday, will absorb 46% of the deal’s total cost in the first year of the deal. Wage gains will be smaller in the subsequent years.
The costs include adjustments to pension and health benefits and other expenses such as adding a new paid holiday, the company said in a slide presentation and a transcript of a pre-recorded message from Chief Financial Officer Brian Newman.
“We are happy with the outcome given the current inflation levels compared to historical trends and the present labor environment,” Newman said in the transcript.
UPS said in August that contentious labor talks caused about 1.2 million packages per day of lost volume — either directly to competitors or new business that didn’t occur. The company now seeks to regain that volume while it grapples with higher labor costs and a decline in deliveries from their record high during the pandemic.
The front-loaded labor contract will cost about $500 million more than UPS expected in the second-half of this year, Newman said. In the three subsequent years, the wage increases cool considerably before rising to about a 5% jump in the fifth year.
UPS didn’t address the Teamsters’ calculation of the contract containing $30 billion of additional money over the previous five-year labor deal.
The hit to operating profit will be the highest in the current third quarter and begin to ease in the fourth quarter. This means “some of the operating profit the street has modeled in the Q3 needs to shift to 4Q,” Newman said.
Analysts are expecting operating profit margin of 8.3% for UPS’s US domestic unit in the third quarter and 10.4% in the fourth quarter, according to a Bloomberg survey of 14 analysts estimates. In the third quarter last year, operating margin was 11% for the US business. The company still has a long-term goal of 12% for that unit.
Under the contract with union workers, UPS retains its ability to use new technology to boost efficiency and will maintain pricing discipline to help make up for the higher costs, Newman said. The 3.3% average increase of wages and benefits over the life of the deal doesn’t factor in productivity gains, UPS said — or any potential rise in package volume.
“We have many levers to pull to offset the increase and get back to margin expansion,” Newman said, adding there’s “tons” of opportunities to increase automation in UPS buildings.