UPS labor deal could pressure delivery firm's annual outlook, say analysts

investing.com:

By Aishwarya Nair

(Reuters) — A tentative labor deal between United Parcel Service (NYSE:UPS) and the Teamsters union on Tuesday could pressure full-year outlook for the world's largest parcel delivery firm, according to analysts.

The five-year contract, which the head of the union claims to be worth $30 billion in new money, covers about 340,000 U.S. employees and provides wage increases, and one more paid holiday among other benefits.

UPS shares closed down 1.9% on Tuesday signaling investor worries about the labor deal's impact on costs. The company's workers have until Aug. 22 to vote on the tentative deal.

While the delivery firm has managed to avert a strike that could have caused a multi-billion dollar impact on the U.S. economy, analysts expect the contract would raise overall labor inflation, pressuring the outlook for the year.

«We think the incremental wage concessions by UPS to part-time workers was considerable and could be an incremental risk to FY23 guidance and 2024 consensus expectations,» Stephens analyst Jack Atkins said.

Analysts say the new agreement could weigh on the company's margins at a time when most operators are cutting costs to protect profits amid an industry-wide slowdown.

Rival FedEx (NYSE:FDX) has been slashing costs to protect profits amid waning demand.

Susquehanna analyst Bascome Majors expects the new deal could drive UPS' cost per piece 2.5% higher than the brokerage's current expectations.

«While this is expected to drive some modest pressure on costs per package for UPS, the real question… is whether the industry competitive backdrop supports sufficient pricing power to enable UPS to sustain or improve upon its current operating margins,» BMO analyst Fadi Chamoun said.

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