Domestic Package Diversions and New Labor Contract to Pressure UPS’ Near-Term Results

UPS UPS is the giant among global small-parcel delivery companies, and it’s one of three commercial providers that dominate the landscape; FedEx and UPS are the major U.S. incumbents, while DHL Express leads in Europe. UPS has also raised its exposure to the asset-light third-party freight brokerage market, especially with its 2016 acquisition of truckload broker Coyote Logistics. The company divested its less-than-truckload division, UPS Freight, in the second quarter of 2021 as part of new CEO Carol Tomé's “better, not bigger” framework.

Despite its unionized workforce and asset intensity, UPS produces operating margins well above those of its competitors, thanks in large part to its leading package density—it’s been around much longer than FedEx in the U.S. ground market. In the United States, FedEx’s express and ground units together handled 13.4 million average parcels daily in its four fiscal quarters ended in November 2021, while UPS moved 21.5 million in calendar 2021. Shippers appreciate the convenience of using the same driver to handle both express and ground packages in UPS’ single network, but during peak holiday season, FedEx’s separately run ground division’s variable-cost model shows merit.

Despite near-term normalization in 2023, favorable e-commerce trends should remain a longer-term top-line tailwind for UPS’ U.S. ground and express package businesses. That said, growth won’t be costless; UPS is attempting to mitigate the challenges of painful wage hikes from its new union contract and a rising mix of lower-margin business-to-consumer deliveries.

Amazon has been insourcing more of its own last-mile delivery needs at a rapid pace to supplement capacity access amid robust growth. This removes some incremental growth opportunities for UPS while creating risk that Amazon decides to take in-house the shipments it currently sends though UPS; the retailer made up 11.3% of UPS’ total revenue in 2022. That said, we believe Amazon still needs UPS’ capacity (on average through the freight cycle), and taking that all in-house would likely require heavy incremental investment.