Last week, pilots at package delivery giant United Parcel Service (NYSE:UPS) voted to authorize a strike if negotiations with the company break down. The pilots still need to be released from negotiations by the National Mediation Board for a strike to be legal, something that rarely occurs. As a result, UPS has characterized the strike vote as merely "a symbolic gesture" by the union.
While it may be a symbolic gesture, it's not a meaningless one. With the threat of a pilot strike during the busy holiday season -- even if it's a low-probability outcome -- and UPS drivers promising to support any pilot strike, customers could worry about relying too heavily on UPS. FedEx (NYSE:FDX) may be able to capitalize on this uncertainty to gain market share.
Pay envy rising
Frustration with management is clearly reaching a boiling point among the UPS pilots as negotiations have dragged on for four years with no resolution. Of the 2,260 pilots who participated in the strike authorization vote, just eight voted no.
The fact that pilots at rival FedEx just got a big raise is clearly aggravating the tensions at UPS. Today, pilots at the two delivery companies earn roughly the same wage rate. However, now that FedEx pilots have ratified a new six-year contract, they will get a 10% raise in November, followed by 3% annual raises thereafter. FedEx pilots will also get hefty signing bonuses of $20,000-$35,000 each.
By the end of the contract, FedEx widebody captains will be making more than $335/hour at the top of the wage scale. That's 28% ahead of where they, and top-of-scale UPS pilots, are today.
UPS can't let this linger
The ratification of a new pilot contract at FedEx could help move the negotiations forward at UPS. The pilots aren't likely to agree to anything less than a match of the raises that their peers at FedEx are getting. As long as UPS agrees to match the pay terms, the two sides should be able to agree on that key aspect of a new contract.
There are other issues that need to be resolved, though, especially related to work rules. UPS pilots want more rest time between flights, which could add to the company's costs by hurting productivity.
UPS needs to achieve a contract that won't significantly dent its profitability, so it can't just concede on this issue. However, now that FedEx has its pilots under contract through 2021, it's more important than ever for UPS to reach an agreement with its own pilots.
That's because UPS risks losing business from wary customers as long as its pilots continue to threaten a strike. For example, an e-commerce retailer can't afford to have a disruption in holiday season deliveries. Thus, even if it didn't think a strike at UPS was likely, the retailer might give some business to FedEx and the USPS just to keep its options open.
Furthermore, UPS has had a rocky time during the last two holiday seasons. In 2013, it was overwhelmed by packages and bad weather in the last few days before Christmas, causing many presents to arrive after the holiday. Last year, the company added a lot of capacity to avoid a repeat of its poor 2013 performance, but that drove up costs, leading to a big Q4 earnings miss.
UPS has gotten back on track this year. Its Q1 and Q2 earnings exceeded analysts' estimates, and the company also reported solid Q3 results this week. If UPS can deliver a smooth holiday season performance, it would ease a lot of investors' worries.
On the flip side, if demand falls short of UPS' forecast due to customer concerns about the labor situation, the company could be in for a third straight Q4 earnings wipeout. That would likely send UPS stock even lower.