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That UPS results are seen as a bellwether of the US economy is no surprise. It delivers about a quarter of American parcels. UPS trucks haul the equivalent of 6 per cent of the country’s gross domestic product.
Weak fourth-quarter earnings and disappointing guidance for 2024 suggest challenging times ahead for UPS. But the bad news does not necessarily reflect America’s economic prospects. UPS has structural problems of its own.
By most metrics, 2023 was a year to forget for the largest package delivery company in the US. Higher labour costs and lower package volume resulted in a 9 per cent drop in revenue to $91bn and a 42 per cent slide in net income for 2023.
This year will not improve much as revenue grows perhaps 3 per cent. Adjusted operating margin, which fell nearly 3 percentage points to 10.9 per cent in 2023, should drop another half per cent or so. To counter this, UPS announced plans to cut 12,000 management jobs. It also wants to sell its Coyote Logistics truck brokerage unit it acquired in 2015.
In response the market knocked 8 per cent — or $11.2bn — off UPS’s share price on Tuesday. It blamed weaker macroeconomic conditions. Yet a much milder 2 per cent decline in the shares of arch-rival FedEx suggests UPS has some unique problems.
For starters, UPS will have a sharply higher wage bill after agreeing its new five-year labour agreement. The threat of a nationwide strike last summer during contract negotiations prompted customers to divert some deliveries to rivals, weakening its shipping volume.
Then there is Amazon. The ecommerce giant spent $83.5bn on shipping in 2022 and wants to have less dependence on third party carriers. Amazon has invested heavily on its own network and operates more than 1,000 facilities throughout the US, according to the logistics consultant MWPVL International. That is on top of Amazon’s fleets of vans, long-haul trucks and planes.
FedEx ended its partnership with Amazon in 2019. UPS has tried to wean itself off Amazon. It accounted for 11.8 per cent of UPS revenue in 2023, down from 13.3 per cent in 2020. That figure can only fall. Amazon reportedly delivered 5.9bn US packages last year. That is not far behind UPS which, annualised, handled about 6.9bn units.
Beyond meeting its own logistics needs, Amazon’s third-party shipping service could mushroom into a new business area akin to its cloud computing. Indeed, those listening for canaries down the mines would do better to observe what Amazon says in its fourth-quarter results, due later this week. That may offer a better gauge of the outlook for the US economy.
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