UPS Warns Profits Will Be Lower Due to Pay Increases for US Workers
Shipping giant UPS has announced that its profits for this year will be lower than expected, citing the pay increases it agreed to grant US workers in a recent labor deal. The company stated that the average full-time driver will earn approximately $170,000 annually, including healthcare and other benefits, by the end of the five-year contract. This is an increase from the current average of $145,000.
The pay raises come as the US experiences the most serious bout of inflation in 40 years. Prices have risen by 3% over the past 12 months, following a leap of over 9% in the previous year. Rising living costs have strained household budgets, leading to labor tensions and unionization campaigns at companies like Starbucks, as well as strikes across the country.
The threat of a strike by the Teamsters union recently impacted UPS, as customers diverted around one million packages per day to rival companies, resulting in a loss of approximately $200 million in sales. In an investor update call on Tuesday, UPS stated that the deal reached with the Teamsters, which is expected to be approved by workers in a vote this month, will also impact its profits. The company now anticipates an adjusted operating margin of 11.8% for this year, down from the 12.8% expected in May. The decrease is also attributed to a decline in shipments as the economy weakens.
UPS has the largest unionized workforce of any company in the US and is known for its relatively strong compensation offering. Prior to the new deal, drivers earned an average of $95,000 in pay annually, or about $42 an hour, along with an additional $50,000 in benefits. The agreement reached with the Teamsters last month raised starting pay for part-time staff to $21 an hour, recognized Martin Luther King Jr Day as a holiday for the first time, and secured improvements in working conditions, including air conditioning in new delivery vehicles.
The Teamsters union, which represents over 300,000 UPS staff, stated that the new contract will provide drivers with a pay boost of $2.50 an hour this year and $7.50 an hour over the five-year duration of the deal. Labor leaders praised the agreement as setting a standard, and workers at companies like Amazon have already pointed to the UPS deal in their push for higher wages.
Economists are closely monitoring the pay increases, as some express concerns that they could contribute to an inflation problem that began with pandemic-related supply issues and shocks from the war in Ukraine. In June, wage growth in the US outpaced price growth for the first time in over two years. The average hourly pay in the US was nearly $34 in July, while the average compensation cost for employers was approximately $43 an hour this spring, according to the most recent data from the US Labor Department. Salaries accounted for about two-thirds of the cost, with benefits making up the remaining third.
What long-term benefits does UPS expect to achieve by investing in its workforce, despite the impact on short-term profitability
Cost the company $1 billion over the course of the contract, will have a significant impact on its profits. UPS is now expecting its adjusted earnings per share for the year to be in the range of $11.75 to $12.50, compared to its previous forecast of $12.90 to $13.30.
Despite the lower profits, UPS believes that investing in its workforce is important for its long-term success. The company stated that the pay increases are necessary to attract and retain skilled workers in a competitive labor market. UPS has been facing labor shortages and increased competition from e-commerce companies like Amazon, which are also offering higher wages to workers.
In addition to pay increases, UPS has also committed to hiring 100,000 new employees for the holiday season to handle increased package volume. The company is expecting a record-breaking holiday season as online shopping continues to surge.
While the pay raises may impact short-term profitability, UPS is confident that investing in its workers will result in long-term benefits. The company is focused on improving customer service and efficiency in its operations, and believes that a well-compensated and motivated workforce is crucial for achieving these goals.
Overall, UPS’s decision to increase wages for its US workers reflects the current labor market dynamics and the need to address labor shortages. While it may result in lower profits in the short term, the company believes that it is a necessary investment for its future success.