UPS Inc. should be able to offset the higher labor costs from its tentative five-year contract with the Teamsters union with manageable domestic price increases over the life of the agreement, Deutsche Bank said Wednesday.

After analyzing the 48-page master contract as well as union documentation, Amit Mehrotra, Deutsche Bank’s primary transport analyst, said in a note that UPS’ total union wages — excluding benefits — currently total $21 billion. Mehrotra estimated that the tab will increase by $2.45 billion in the first 12 months, which would carry from the second half of 2023 through the first half of 2024. The increases would taper off to $530 million each in 2025 and 2026, $700 million in 2027 and $1.6 billion in 2028, the fifth and final year, he estimated.

Average hourly wages, which are currently at $30.13 per hour, would rise to $38.36 by year five, Mehrotra estimated. Again, the biggest increases would come in years one and five.

With those estimates, UPS (NYSE: UPS) will need to raise domestic prices by $1.11 per package, or 8.8% cumulatively, to offset the entire cost increase over the contract’s five-year duration, Mehrotra said. This figure is “very manageable” considering that core prices are up 5% this year during a period of slack volumes.

The estimates are conservative because they assume no growth from current levels and no offsets from higher productivity, Mehrotra said. The agreement is expected to allow UPS to lean in more heavily on automation in order to drive down its cost per package.

The “absolute numbers” are not as relevant as what level of pricing growth is needed to offset the level of inflation while maintaining the potential for profit improvement and margin expansion, Mehrotra said. “In this context, we are very positive” on the deal.

While acknowledging that the company will absorb a “big pay increase,” Mehrotra said the contract strikes a solid balance between rewarding UPS workers and continuing down the “path to profitable growth.” He has a buy rating on UPS shares.

The tentative contract, agreed to July 25, was overwhelmingly endorsed by leaders of 262 Teamster locals on Monday. The contract will go out to the 340,000 rank-and-file members Thursday. Voting ends Aug. 22.

Mehrotra’s bullish thesis runs in stark contrast to recent remarks on LinkedIn by Donald Broughton, a longtime transport analyst and principal and managing partner at Broughton Capital LLC. Broughton said the cost increases in hourly pay alone will result in margin pressure that’s 300 basis points higher than what bullish analysts are forecasting.

UPS “caved” to the Teamsters’ contract demands because it was losing “increasingly larger amounts” of market share to rival FedEx Corp. (NYSE: FDX) due to shipper uncertainty, Broughton said. UPS management “obviously concluded that they couldn’t let the bleeding continue,” he wrote. Broughton did not publish market share data in his note.

ShipMatrix Inc., a consultancy with extensive data sets on parcel trends, said UPS lost about 5% of total U.S. average daily volume, almost entirely to FedEx, as shippers diverted traffic to FedEx. This amounted to about 1 million parcels per day, according to the firm’s estimates.

In his note, Broughton said the volumes lost to FedEx will not return to UPS unless shippers experience service issues with FedEx.

The post UPS can offset higher labor costs with modest rate hikes, analyst says appeared first on FreightWaves.

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