A substantial slowdown in the shipping business has caused United Parcel Service, Inc. (NYSE:UPS) to deliver lackluster first-quarter results on Tuesday.
When compared to the same period last year, revenue declined 5.3% and operating profit was down 31.5% when adjusting for inflation.
The large drop in operating profit stems from recent salary negotiations between UPS and the Teamsters, the labor union that represents the company's employees.
The historic wage negotiation closed last August and hit the UPS balance sheet by guaranteeing a $170,000 salary for delivery truck drivers over the next five years. Negotiations affect 340,000 UPS teamsters with higher wages and overall better working conditions, making the $170k salary the new average for UPS employees.
Nonetheless, shares of the company were up by 2.4% as Tuesday progressed, as quarterly profit beat analyst expectations, although they were on the decline for five consecutive quarters.
The company is boasting several positive news from recent times, including a new contract with the United States Postal Service (USPS) to provide air cargo services.
The USPS dropped FedEx Corp (NYSE:FDX) earlier this month as its main domestic air carrier, deciding not to renew a contract worth $1.5 billion, and choosing UPS instead. The new contract will go on at least for five-and-a-half years and have UPS as the primary contractor for the USPS' first-class mail, priority mail and priority express mail.
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The shift was considered a win-win for both competitors, as FedEx is looking to reduce its operations and take out $4 billion in structural costs by the end of fiscal year 2025.
On its previous quarterly call, UPS CEO Carol Tomé called 2023 "a difficult and disappointing year." The company experienced declines in volume, revenue, and operating profit in all three of its business segments, causing analysts to cut their forecasts.
Tomé blamed the macro environment, as well as the new employee deal as reasons behind recent drops in revenue.
This time, the executive showcased a more hopeful attitude. While average daily volume continued to decline, the rate of decline was slower in the first quarter both domestically and internationally.
To compensate for the decline in volume, the company announced earlier this year plans to shed 12,000 positions, representing about 14% of its managerial workforce, potentially saving the company $1 billion in 2024.
Tomé is expecting the USPS deal to bring in at least part of the revenue the company needs to compensate for losses in volume. The CEO said the deal will contribute to top-line growth, fitting "beautifully with our strategy to grow our B2B business."
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