Past missteps trip up UPS as it strides into the future

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Posted 2:04PM on Tuesday, November 5, 2002

United Parcel Service Inc. chairman Michael Eskew envisions a day when his company will be known for tackling complex business problems as well as for package delivery. For now, investors are just hoping that Eskew and his management team can repair damage lingering from UPS's labor problems - especially as the company heads into the critical holiday season. UPS actually had relatively little strife with the Teamsters union this year. In one of the biggest accomplishments during his first 10 months as chief executive, Eskew negotiated a new six-year contract in July with the union that represents nearly two-thirds of UPS's 370,000 workers. But fears that the Atlanta-based company might see a repeat of the two-week 1997 strike that delayed deliveries across the country cost UPS scores of customers. Preying upon anxieties of a possible repeat, FedEx and other competitors wooed away companies that didn't want to risk another costly interruption. The poaching lowered UPS's daily delivery volume by as much as 5 percent, or 500,000 packages, before the company and the Teamsters struck a deal. The hemorrhaging dissipated by the end of the summer, but UPS's third-quarter shipping volume was 2 percent below the same time last year, averaging 13 million daily package deliveries. UPS has warned that all the lost business might not return until next year, which raises concerns that some defections will be permanent. "The customers aren't coming back as much as management thought they would," said industry analyst Stephen Jacobs of U.S. Bancorp Piper Jaffray. "The competition looks a lot tougher this time around." Rivals keep trying to turn UPS's new labor agreement into an albatross, suggesting that the contract is so expensive, UPS will be forced to raise its rates more than it has in the past. The new contract calls for an average annual wage-and-benefit increase of $1.46 per hour, up from 98 cents in the previous deal. UPS also is required to add 10,000 full-time jobs during the final four years of the contract. Seeking to reassure customers, UPS management told analysts last month that its 2003 rate increase for ground deliveries will be in its traditional range of 2.5 percent to 3.5 percent. The company is trying to determine whether the labor headaches that temporarily shut down 29 West Coast ports in late September and early October will work to its advantage. On the possible plus side, UPS is helping businesses catch up with delayed shipments by adding six more weekly cargo flights between Asia and the United States, a 17 percent increase. But, while helping UPS's air transport operations, the port troubles threaten to slow the recent rapid growth of its freight services business, which depends on free-flowing traffic on ocean and rail lines. Like most other companies, UPS also has been hurt by the economic downturn. Shipping volume is nearly 6 percent below the levels of two years ago and management doesn't envision an upturn this year, particularly with the late Thanksgiving holiday wiping out a week of the traditional Christmas shopping season. The lethargic conditions prompted UPS to project fourth-quarter quarter earnings of 55 cents to 60 cents per share, below the consensus estimate of 61 cents among analysts surveyed by Thomson First Call. The lowered expectations followed a disappointing summer. UPS posted third-quarter net income of $578 million, or 51 cents per share, 3 cents shy of analysts' consensus estimate. UPS believes the economy won't pick up speed until late next year. To compensate for the weak conditions, the company has been cutting its budget, limiting capital expenditures to $1.9 billion this year and $2 billion next year, down from $2.4 billion in 2001. This year's capital expenditures will be less than 6 percent of total revenue, off the peaks of 8 percent of annual revenue during better times. "We've been in business for 95 years and we have been through a lot of downturns and upturns," Eskew said. "We think we know how to manage in these times."