4 minutes

Dennis Katsnelson

According to the company, 40% of diverted flows have been recovered from the lowest levels.

UPS Inc. reported on Thursday that it has recovered almost 40% of the business it lost during the tumultuous contract discussions with the Teamsters union, despite greater daily volumes being diverted to competitors than it had anticipated. The Atlanta-based corporation reported that customers' worries over a potential Teamsters strike that never happened resulted in the diversion of almost 1.5 million deliveries every day. That exceeds the 1.1 million packages that the business first estimated would be diverted.

According to UPS officials, around half of the 600,000 items that have returned to the network are from main rival FedEx Corp. (NYSE: FDX). For its part, FedEx claims to have retrieved the majority of the approximately 400,000 misdirected UPS parcels it received each day.

August was the lowest point for UPS (NYSE: UPS), as average daily volumes were estimated to be 15% down year over year (y/y). CEO Carol B. Tomé informed investors on Thursday that part of the reason for the August figures was that clients wanted to hold off on returning volumes to UPS until early September when the Teamsters contract was completely finalized. UPS said that average U.S. daily volumes decreased 11.5% y/y for the quarter.

According to business officials, the five-year arrangement increased UPS's third-quarter expenses by almost $500 million. In the first year of the deal, there is anticipated to be a substantial increase in remuneration, and union salary rates increased by 11% in the third quarter. According to UPS, the first year bears 46% of the total salary hikes.

According to UPS, the average daily volume in August was almost 16 million shipments. That increased to over 19 million as of October, according to the business. UPS had to deal with lower demand for deliveries in addition to volume diversions as a result of customers shipping fewer items as a result of a weakening economy, more customers going back to shops, and American consumers transferring their spending from things to what is now known as "experiences."

According to Tomé, American consumers are still in good health but are "spending their dollars differently."

UPS's U.S. package volumes have returned to pre-COVID levels, Tomé said, a clear reminder of the 180-degree shift the U.S. package delivery industry has undergone since the conclusion of the large rise in pandemic-related internet buying.

Customers want to return to UPS before the peak because of its "superior service," Tomé said in response to a question about whether the pace of diversion may slow down heading into peak season because they may be reluctant to disrupt their operations during the cycle. UPS has also not incurred any material expenses in winning back diverted business.

Simultaneously, the corporation retracted prior estimates that y/y volumes would level off by the end of 2023, stating that there will still be a single-digit shortfall as the year progresses.

A bumpy ride in Q3

UPS was unabashed about the challenging macroenvironment that was impacting its worldwide operations. International markets continued to be poor, and in some instances, were even weaker than the company had anticipated for the quarter. Executives of UPS stated that overcapacity on international commerce channels adversely affected the company's profit margins.

The problem of overcapacity is most pronounced in the domestic product market of the United States. On a daily basis, the market possesses an estimated 110 million parcels of capacity, as determined by ShipMatrix. ShipMatrix notes that this does not account for the capacity that Amazon.com Inc. is expected to augment as it expands its Amazon Shipping service to offer daily pickups. In contrast, current estimates place average daily volumes at approximately 69 million, according to the consultancy.

ShipMatrix anticipates a 7 to 9 percent decline in peak parcel volumes compared to 2022 levels. According to Satish Jindel, CEO of ShipMatrix, parcel transporters are opposing the entire seasonal delivery surcharges that the carriers are demanding as a result of declining demand. He stated that rather than paying a $1.50 per-package surcharge, transporters might propose paying a third or even less.

Jindel stated that the anticipated peak deficit is a component of the parcel carrier industry's most difficult environment in years, which is developing due to the collision of overcapacity and declining demand. Additionally, he expressed disapproval of UPS's strategy to recruit up to 100,000 seasonal employees, arguing that the anticipated surge in holiday demand fails to warrant the additional cost of labor. The exact number of seasonal personnel that UPS employs for peak demand is never disclosed.

UPS anticipated a turbulent third quarter due to macroeconomic headwinds, volume diversion, and increased operating expenses resulting from the Teamsters contract. It truly was. Revenue decreased 12.8% year-over-year to $21.1 billion for the entire organization. The operating profit decreased by 47.7% year-over-year to $1.3 billion. Adjusted diluted earnings per share were $1.57, which was a 1-5 cent increase over consensus estimates but a 47.5% decrease from the previous year.

The three business segments of UPS were adversely affected by the headwinds. Its main business, domestic, reported a revenue decline of 11.1% to $13.6 billion and an adjusted operating margin of $665 million, a decline of nearly $1 billion. ShipMatris stated that the 19.6% year-over-year decline in deferred air revenue reflected Amazon's, UPS's largest individual customer and a substantial user of its deferred air services, long-planned wound down of business.

Comparatively, international revenue decreased from nearly $4.8 billion in the previous year's quarter to $4.26 billion. The adjusted operating profit decreased from just over $1 billion to $675 million. The average daily volume decreased by 6.6% as Asia and Europe trade channels continued to experience weakness.

Revenue decreased by 21.4% to $3.13 billion for Supply Chain Solutions, which comprises all of UPS' non-package operations. This decline was caused by reduced volumes and margin weakness in freight forwarding and truck brokerage, which were partially offset by growth in the unit's health care business.