Parcel shipping: UPS eyes cost-cutting measures through pilot concessions
Early June deadline in place for company to meet stated cost reductions by 2011
Jeff Berman, Group News Editor -- Logistics Management, 5/29/2009
ATLANTA—Various reports have stated that UPS is looking to save $40 million this year in cost savings from pilots that do not involve furloughs. This is part of the company’s goal to save $131 million in wages over the next three years.
An Associated Press report noted that the UPS pilots union is considering leaves of absence for pilots, early retirements, reduced-pay-guarantee routes, and job-sharing. It added that if UPS does not achieve its required savings, about 300 pilots—ten percent of the company’s union pilots—could be furloughed or idled.
Along with its $40 million cost savings goal for 2009, the Atlanta Journal-Constitution reported that UPS and its pilots inked a memorandum of understanding on April 9, which gives the pilots a June 8-9 deadline to cut $38 million in 2010 and $53 million in 2011.
The recession and declining demand and volumes have had a major impact on UPS’ financial condition, as evidenced by the company’s first quarter revenue being down 13.7 percent at $10.9 billion and quarterly profit at $401 million off by 55.7 percent. When UPS released its earnings, company officials said the “continuing deterioration in global economic activity resulted in decreased revenue and profitability across all business segments.”
This was particularly evident with its depressed volume levels—especially on the air and express side—and continues to be the case until demand and economic conditions meaningfully recover. Earlier this month, UPS retired its DC-8 Fleet, with company spokesman Michael Mangeot telling the AP that it needs fewer crew members as a result of the economy and currently has 300 more pilots than it presently needs.
In terms of other cost-cutting measures, UPS previously announced it has taken steps to consolidate operating districts, reduce air segments, and eliminate some package handling operations, as well as freeze management salaries and suspend its 401(k) plan company match. These steps—along with reducing 2009 capital spending by $200 million, which will bring its 2009 capital expenditures below $2 billion—are expected to reduce total company costs by $1 billion.
“UPS is looking at every nook and cranny to cut costs, and it is the smart thing to do in a highly competitive environment right now,” said Doug Caldwell, executive vice president of ParcelPool, an Orem, Utah-based small parcel delivery consultancy and services provider. “UPS is very good at rapidly adjusting internal costs to market conditions; it is probably as good at this as any carrier in the world. The company is trying to maintain and grow market share, as is FedEx. Any new packages that come into its system need to come from a competitor. When this occurs, it is typically done on price.”
Caldwell added that the economy is not growing to the point where new packages are coming online. Instead, for existing customers, both UPS and FedEx are seeing continued declining volumes.
This was supported by a recent research report from Stifel Nicolaus analyst David Ross, which noted that FedEx’ Newark, N.J. air hub is operating at 50 percent capacity and handles a lot of deferred traffic that never makes it on to a plane.
This situation is acute on the air and express side, where demand remains down and modal shifts in the U.S. and Europe from air to ground are ongoing—and taking a toll domestic and international air and express volumes.
“This is where demand is down the most,” said Caldwell. “Pilots know fully well how full their planes are running. You can cut out a certain amount of routes and redundancies in an air network, but at a certain point you cannot cut anymore routes to save money, because you are then cutting into service. No carrier can afford to do that. When service [goes bad] is when you start losing customers.”
While things are still on the bleak side, Caldwell noted that it appears the bottoming of the market may have occurred for small package carriers both in the U.S. and Europe, with some early signs of volumes stabilizing and coming back a bit. Part of the reason for this, he explained, is low fuel costs with a 60-day lag for fuel surcharge prices—and current express fuel surcharge prices at 0 percent (according to ParcelPool data). This is the lowest level they have been at since 2002.
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