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UPS Results Don’t Give Clues to U.S. Coal Mining Economy

Written by The Anand Market

Updated on:

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It’s no surprise that UPS’s results are considered a bellwether for the U.S. economy. It delivers about a quarter of American packages. UPS trucks transport the equivalent of 6 percent of the country’s gross domestic product.

Weak fourth-quarter profits and disappointing 2024 guidance point to tough times ahead for UPS. But bad news doesn’t necessarily reflect America’s economic outlook. UPS has its own structural problems.

By most measures, 2023 was a year to forget for the largest package delivery company in the United States. Higher labor costs and lower package volume led to a 9 percent drop in revenue to $91 billion and a 42 percent drop in net profit for 2023.

This year, the situation will not improve much since incomes will increase by perhaps 3 percent. The adjusted operating margin, which fell by almost 3 percentage points to 10.9 percent in 2023, is expected to fall by another 0.5 percent. To counter this, UPS announced plans to cut 12,000 management positions. It also wants to sell its Coyote Logistics truck brokerage unit, acquired in 2015.

In response, the market caused UPS’s stock price to fall 8 percent, or $11.2 billion, on Tuesday. He blamed the deterioration in macroeconomic conditions. Still, a much more moderate 2 percent drop in shares of its main rival FedEx suggests that UPS faces particular problems.

For starters, UPS will experience significantly higher payroll after reaching its new five-year labor agreement. The threat of a nationwide strike last summer during contract negotiations prompted customers to divert some deliveries to competitors, weakening shipment volume.

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Then there is Amazon. The e-commerce giant spent $83.5 billion on maritime transport in 2022 and wishes to be less dependent on third-party carriers. Amazon has invested heavily in its own network and operates over 1,000 installs in the United States, according to logistics consultant MWPVL International. This is in addition to Amazon’s fleets of vans, long-haul trucks and airplanes.

FedEx ended its partnership with Amazon in 2019. UPS tried to wean itself off Amazon. It represented 11.8 percent of UPS’s revenue in 2023, compared to 13.3 percent in 2020. This figure can only go down. Amazon reportedly delivered 5.9 billion packages in the United States last year. That’s not far behind UPS which, in annualized terms, processed about 6.9 billion units.

Beyond meeting its own logistics needs, Amazon’s third-party shipping service could transform into a new business line similar to its cloud computing. Indeed, those watching for canaries in the mines would do well to watch what Amazon says in its fourth-quarter results, due later this week. This could offer a better idea of ​​the outlook for the U.S. economy.

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Lex is the FT’s concise daily investment column. Expert editors from four global financial centers provide informed and timely opinions on capital trends and big business. Click to explore