UPS should risk short-term Teamsters strike to gain flexibility, analyst says

UPS Inc. should risk a short-term strike by the Teamsters union if that's what it takes to win contractual concessions that provide the labor flexibility it needs to compete in a more demanding environment spawned by the growth of e-commerce, an investment firm said today.

Wolfe Research LLC, which has followed the transportation sector for years, said it's unlikely the Teamsters will strike UPS. However, it added that the Atlanta-based company should not only prepare for it but perhaps embrace it as a means to an end. The Teamsters and UPS are negotiating a new collective bargaining agreement to replace the current five-year pact that expires July 31.

Scott H. Group, Wolfe's lead transport analyst, said in a note that "this is a really important labor contract for UPS to get right if it wants to start leveraging strong e-commerce growth." Group said that UPS "needs significantly more labor flexibility" in the upcoming contract, and that taking a strike should be considered if it leads to "long-term labor flexibility and thus better operating leverage for shareholders."

The last time the Teamsters struck its largest employer was in August 1997, when members stayed out for 15 days. The strike cost UPS about $950 million, inflicted a huge public relations black eye, and resulted in business defecting to rivals like Memphis-based FedEx Corp. Some of that lost business never returned to UPS.

Earlier this week, UPS' 268,000 unionized workers voted overwhelmingly to authorize its leaders to call a strike if talks break down. The move does not mean a strike is imminent or inevitable; in fact, it is seen as pro forma, because union leaders would need the legal tools to take action if there is no other recourse.

The negotiations come amid a different landscape than what existed in 2013. Today's environment is increasingly influenced by the growth of e-commerce—which today accounts for about 9.1 percent of all retail sales, the development of high-tech tools to process and deliver parcels, and the rise of Amazon.com Inc. as a bona fide logistics provider and a possible competitor to UPS.

UPS has made clears that it wants to explore technologies like drones and autonomous vehicles as a means to more efficiently handle the e-commerce delivery surge. The Teamsters, on the other hand, see such technologies as a possible threat to their jobs.

In a survey of 50 shippers conducted over the past two days, 4 percent of current UPS customers have shifted their traffic this year as a result of the talks, according to Group. This is up slightly from less than 1 percent of shippers, reported in the last survey, in April, he said.

Following the strike authorization vote, 17 percent of current UPS shippers said they expect to shift volumes, while another 30 percent are preparing contingency plans, according to the Wolfe survey. "Comments from shippers suggest that share shifts away from UPS will accelerate more materially if UPS doesn't announce a tentative deal by the end of June, and for sure by late July," Group wrote.

Steve Gaut, a UPS spokesman, declined comment on the Wolfe report and the status of the negotiations. In an e-mail, Gaut said that "we are confident that UPS and the Teamsters can achieve a pact that is good for both the company and employees."

Rob Martinez, co-founder and CEO of Shipware LLC, a parcel consultancy, said he hasn't seen any shifts away from UPS as a result of the negotiations. He predicted that lead negotiators would reach a tentative agreement in 30 days on a national contract.

The national contract would not take effect until it is ratified by the rank and file and the various local agreements, known as "supplementals," are approved by the respective union locals.