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UPS and other shippers have a new vulnerability: their workers

The load is getting heavier for package-delivery companies as they wrestle with higher worker pay while demand shrinks across their industry.

The latest reminder of those twin challenges came Tuesday when United Parcel Service (UPS) reported a sharp drop in revenue and profit during the second quarter.

The shipping giant pared its annual revenue outlook and operating margin, citing the costs associated with a new labor agreement that would sweeten pay and benefits for roughly 340,000 workers.

The new contract between UPS and the International Brotherhood of Teamsters averted a potential strike that could have cost the US economy billions. The union said the deal was worth $30 billion. Rank-and-file members are voting this month to ratify the pact.

UPS CEO Carol Tomé told analysts during a call Tuesday that the second quarter was "challenging," and said the new contract was a "win-win" for both parties. She also said the company's drawn-out negotiations with the union caused it to lose customers, some of which have returned.

CEO and Director of United Parcel Service, Carol Tome
UPS CEO Carol Tomé. (Photo by JIM WATSON/AFP via Getty Images)

"One thing that was very important for Teamster leadership was to front load some of the wage inflation and we agreed to do that," Tomé said. "So that does put a little pressure on the margin...We'll have a bit of pressure for the next year, through August of next year, but then the inflation is very manageable."

UPS stock was down roughly 1% in midday trading.

UPS isn’t the only shipper feeling such pressures as the industry adjusts to waning demand that peaked early in the pandemic.

Union pilots at FedEx (FDX) are pressing for a significant step up in pay, and trucking company Yellow (YELL), blamed the same union – the International Brotherhood of Teamsters – for propelling it into bankruptcy earlier this week.

Box trailers are seen at Yellow Corp. trucking facility Monday, July 31, 2023 in Nashville, Tenn. The troubled trucking company is shutting down and filing for bankruptcy, the Teamsters said Monday. An official bankruptcy filing is expected any day for Yellow, after years of financial struggles and growing debt. (AP Photo/George Walker IV)
Yellow Corp. filed for bankruptcy this week. (AP Photo/George Walker IV)

"What we're seeing now is actually workers exercising their ability to demand more," Patricia Campos-Medina, executive director of Cornell University’s School of Industrial and Labor Relations Worker Institute. "So they are a liability for companies because workers now are not willing to believe that a company cannot take on less profits by giving them more wages."

Teamsters President Sean O’Brien has made it clear the union has its sights on Amazon (AMZN) too.

In July, O’Brien told Bloomberg that he planned to use the agreement reached with UPS as a template to attract Amazon delivery workers and to "set the tone" for worker benefits.

Amazon doesn't hire its drivers directly and instead uses drivers employed by third party companies.

Sean M. O'Brien, Teamsters General President, talks with UPS teamsters and workers before a rally Friday, July 21, 2023, in Atlanta, as a national strike deadline nears. The Teamsters said Friday that they will resume contract negotiations with UPS, marking an end to a stalemate that began two weeks ago when both sides walked away from talks while blaming each other. (AP Photo/Brynn Anderson)
Sean O'Brien, general president of the International Brotherhood of Teamsters. (AP Photo/Brynn Anderson)

"UPS has one of the best contracts now, and that emboldens workers to ask Amazon to do better, to ask FedEx to do better," Campos-Medina said.

Brian Newman, UPS executive vice president and chief financial officer, told analysts the company saw more customer loss than anticipated as noise levels around its labor negotiations increased.

During the quarter, UPS's total average daily volume was down 9.9% and in June volumes fell 12.2%.

Increased labor costs and a softening economy proved more consequential for Yellow.

After failed negotiations with the Teamsters in July, the company laid off all 30,000 of its workers, including 22,000 union members, and filed for bankruptcy.

In a federal lawsuit against the Teamsters, Yellow blamed the union for causing negotiation delays that kept Yellow from carrying out a financial restructuring plan.

In its bankruptcy petition, Yellow reported total assets of $2.15 billion falling short of total debt of $2.59 billion. The delivery service received a $700 million loan in 2020 under a pandemic government relief program.

At FedEx, negotiations are underway between the company and its 5,200 unionized pilots, represented by Air Line Pilots Association. The pilots turned down the company’s latest offer for a 30% pay bump and 30% increases in pension benefits.

In its fourth quarter, the company's most recent report, it posted revenue of $21.93 billion, down from $24.4 billion in the same quarter last year.

Alexis Keenan is a reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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