With both sides under pressure to move negotiations along quickly, the Teamsters and UPS reached an agreement in October on a six-year contract for drivers and package sorters, and union members are expected to ratify the agreement.
According to many analysts, the agreement was unique in that talks began very early in the cycle — the contract expires July 31, 2008 — and it shows that both sides were eager to settle the matter for their own reasons.
UPS's Supply Chain & Freight Division, which includes LTL carrier UPS Freight, reported a third-quarter profit of $98 million compared to a loss last year in that period of $19 million. Some '06 losses were attributed to merging Motor Cargo and Overnite Transportation. LTL revenues grew 12.1% to $521 million compared to third-quarter '07, with more than 13% more shipments.
The forecast is not so rosy for LTL carriers, however. According to ATA chief economist Bob Costello, freight volumes could get worse, and may not improve until mid-'08. Speaking at ATA's recent Management Conference, he said tonnage had fallen 2.2% during the first eight months of '07 compared to the same period in '06. He pegged the downturn mainly on the impact of a soft housing sector.
Many stock analysts agree. A November report from R.W. Baird noted: “…demand trends were more mixed to start 4Q, with some signs of a worsening demand environment in October, typically one of the strongest freight quarters of the year. Importantly, outlooks from our contacts and the trucking company's on our coverage list have grown even more cautious on the timing of a recovery.”
“One reason UPS was eager to settle the issue is that it did not want to scare away major customers with the uncertainty of a strike,” said one analyst. “But the same could be said for the union. If UPS loses customers, they lose jobs.” He noted that fearing a strike in '02, UPS saw customers defect as the Teamsters and the carrier reached agreement only weeks before the contact was due to expire.
Another, more important reason may be the pension issue. UPS was eager to get the Central States pension plan off their liabilities list and transfer it to the union. Some observers say the Teamsters were eager to dispatch the matter as well. “The Teamsters were under pressure to get something done by the end of this year because of the new pension law that takes effect January 1,” said Arthur Hatfield, analyst at Morgan, Keegan & Co.
The Pension Protection Act of 2006 requires that under-funded pension funds be shored up. “The Central States plan was 70% under-funded and the Teamsters would have to do some radical things to change the financial dynamics of that contract,” Hatfield added.
As part of the contract with the union, UPS agreed to make a one-time contribution of $6.1 billion to withdraw from the plan. “The net after-tax amount will be approximately $3.9 billion. We'll make this payment in the fourth quarter upon ratification of the contract,” said Chairman Mike Eskew in a recent conference call.
UPS's pension decision is rippling throughout the industry: analysts view Yellow Roadway's pension liability — which was estimated several years ago as between $3 billion and $4 billion — as debt, while other carriers, such as Arkansas Best, may have pension liabilities ranging from $800 million to $850 million, according to Central States' calculations.
According to David Campbell, analyst at Thompson, Davis & Co., UPS was trying not to be confrontational towards the union because of the sensitive issue of union involvement at Overnite. “The union was able to see their way through a lot of the tough issues because of the company's willingness to let them gain control over those former Overnite operations. That, I think, set the table for an early settlement.”
Analysts say both sides believe they got the better of the other, although the scale may be tipped slightly in favor of the union.
Added Hatfield: “If both sides are happy, usually it means it's a fair deal.”