Looming UPS labor strike, Yellow’s cash crunch threaten to upend parcel, LTL segments

Hello and welcome into CCJ MarketPulse, your monthly look at statistics and trends in the broader economy and how they're impacting freight markets. Jason Miller, supply chain professor at the Eli Broad College of Business at Michigan State joins us each month to break it all down.

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Okay, so welcome back in Jason.

Hey, thanks so much for having me.

So this month we're going to do something a little bit different and jump right into a couple of stories that are dominating the headlines, not just in trucking, but nationally. The two looming labor strikes threatened to upend the parcel and less than truckload segments. Let's start with UPS. So work stoppage there, which could come as early as August 1st would cause major disruptions in a lot of markets. So what industries do you think are most exposed to disruptions in parcel freight?

So on the parcel side, what is getting by far the most attention and rightly so, is the business to consumer piece. Roughly 57% of UPS's volumes is that B2C eCommerce space, but that leaves about 43% of volumes that are business to business. Now, we don't know UPS's exact portfolio, that's obviously proprietary, but we can proxy from the commodity flow survey that the Census Bureau and Bureau of Transportation Statistics do, like what industries really rely a lot on parcel shipping. And if I had to sort of categorize it really comes down to those high value, fairly low volume industries, volume on a physical basis.

So we're talking medical devices, wholesalers of drugs and medical supplies. So think your Cardinal Health and your McKesson. Apparel, so not only the wholesalers, but also the few remaining apparel manufacturers in the United States. So if you go to the shoe store, don't be surprised that they may not have the stock because those shoes get replenished typically on a daily basis from a warehouse to the store via a parcel carrier like a UPS. And then your electronics products, so your wholesalers of commercial and professional equipment, a lot of that's going to be computer related, electrical components. So if you're a manufacturer making a lot of those products, actually the jewelry supply chain, we haven't talked about that too much, but we'll see gold, rings, things of that sort. And then the spare parts supply chain. So spare parts for motor vehicles, spare parts for farm equipment and things like that. So there's going to be various industries affected and so just realize this is not just a business to consumer concern.

So then it's safe to say that this isn't just like an end consumer demand sort of situation we're facing.

No, exactly. This is a situation that not only are end-consumers going to be affected, but companies buying input. So defense manufacturers buy a lot of electronics components that go into their products. A lot of those components are going to be shipped by parcel carriers. So this disruption is going to be felt really across all tiers of the supply chain. It isn't just a retail phenomenon, but it's those wholesalers and it's also going to be manufacturing as well.

So there's not much capacity available in the parcel market. So how much of UPS's volumes could get absorbed if we see a prolonged work stoppage?

This is one where there's sort of some different estimates out there. The one thing we can for sure say is that we are in a better capacity situation today than we were two years ago at this time.

So, if you take a look and you want to say, okay, how many total hours are worked by folks in the sector? That's down about anywhere between 7 and 10% from the peak period that we saw in 2021 on a seasonally adjusted basis. And when you take a look at the average hours worked per week, that's actually down about 13% from the peak in 2020 and 2021. So when you factor that in and you say UPS is roughly 25% of parcel volume, they're a little bit more than 33% of employment in this industry. My guess is probably on a short term basis, we could absorb 15 to 25% of their volumes by other carriers.

We do have UPS saying that their non-union workforce could maybe handle a quarter of their volume. I personally think that's a little overly optimistic because for example, you have the pilots saying they will strike, so you just excluded the air arm all of a sudden as well. So I think best case scenario, maybe they're handling 10, 15% of their volume. So maybe because we have a little bit of excess capacity, FedEx and the United States Postal Service can handle 15-ish, 20-ish percent. You're going to have a lot of the parcel integrators that are going to aggregate and do injections into the post office network, they can maybe pick up a little more. But it will be very disruptive. This is just too big of a player to absorb a lot of the volume.

In terms of a long-term strike implication, the number I've seen from Satish Jindel of ShipMatrix is UPS could lose up to 30% of their long-term volumes if there were to be a prolonged strike. Because unlike 1997, there are alternatives and there is a strong sense that shippers are going to be less tolerant this time around and they will divert volumes on a more permanent basis.

So moving from parcel over to the LTL segment, Yellow, which has been struggling for years, is now literally on the ropes and the Teamsters union there is threatening a walkout of Yellow's, 22,000 union employees over missed payments to health and pension funds. And the ramifications of a stoppage or bankruptcy on the LTL side could be enormous.

No, they certainly could be. So if we frame it Yellow is depending on how you want to cut it, let's say 10 to 12% of less than truckload activity. And so if we take a look at an aggregate basis right now, LTL activity in terms of total number of labor hours worked is actually at the lowest level since June of 2020 on a seasonally adjusted basis. So we are talking still in the midst of the COVID pandemic. We're lower than we were in 2018 and 2019 and we're down about 11% from that peak period that we saw in 2021, call that sort of peak LTL demand. And so if we've got work hours down about 11%, Yellow's 10% industry capacity, and then when we take a look at the average hours worked per employee, it's right now at about 38 versus 43 before COVID and a shocking 45 during that peak period before carriers could really add capacity.

So on aggregate, we can absorb most of Yellow's volumes, but that is an important phrase here, on aggregate. When we start getting down to the individual shipper level, things are going to be much more challenging for some shippers relative to others. There are some shippers that have a lot of exposure to Yellow. I've talked to industry context where 40% of LTL spend for this shipper is with Yellow. A shipper like that is going to have some major disruptions because chances are your ODFLs, your Sias, your SDs, your ArcBest, et cetera, they're not going to be able to absorb all of your freight, even if you've got them as secondary carriers in your routing guide, they're not going to absorb all of it. So you're going to face the disruptions. You may be having to rely on some really small partial TL spot shipments to get stuff to customers in time.

For other shippers that have minimal exposure to Yellow, this won't likely be that much of a disruptive event because your existing carriers do have a modest amount of capacity right now. And so my guess is that a disruption for Yellow or disruption stemming from a failure of Yellow, let's say that happens in the next two weeks, it will be a rough August for some shippers, possibly even into a rough September. But you give this a little bit of time, we will be able to work through this. Again, this is not 2021. If we would've had a failure of Yellow in 2021 when there was zero excess capacity in the industry, then you would've had a nightmare scenario. So kind of the one lesson from both of these stories is UPS strike would be very, very, very disruptive. On a one to seven scale, I give that a five. And six being near cataclysmic and seven is reserved for a railroad strike that would shut down the entire economy. So that's about a five.

Yellow on aggregate is probably a 2, maybe a 2.5. But for some shippers with a lot of exposure, it's probably going to be a 4 on that scale. But that is certainly of the two stories, the Yellow piece is far less concerning sort of as a broad macroeconomic standpoint. Let's say we'd have a failure in the end of July, early August, we would probably see the LTL sector running fairly smoothly by October-ish. So it would take some time, but we would get those volumes absorbed.

So for those shippers that are really exposed by this potential Yellow shutdown, it is sort of a case study in the need to diversify a carrier mix, right?

No, it is, and this can be challenging because obviously Yellow is the low cost big carrier that is out there. And so when you're looking at your balance sheet, and we've went through two years where transportation expenditures have increased tremendously, it's very attractive to go to that carrier. And for some shippers, their freight just fits in Yellow's network. It's a very nice relationship. You've worked with them a long time. The challenge is that we've known Yellow has been financially struggling for a very long time. And so I think it's not only a case of making sure you do have a diverse supplier base for the service, but it's also taking a very close look at the finances of your suppliers. And so that's I think one of the other key lessons that we're going to walk away, especially if there is a Yellow failure, is why were we not paying closer attention to the fact that, as you mentioned Jeff, Yellow has kind of been on death's doorstep since about 2009,

So we're going to have plenty to talk about in next month's segment of MarketPulse then is everything shakes out.

Yeah, I think by next month we'll know what's going on with UPS. And quite frankly, as we're filming this content right now, it's becoming increasingly difficult for me to see how Yellow is going to be able to stay around as we're seeing more and more and more reporting of shippers stopping tendering freight to Yellow and starting to move towards those alternative arrangements. And so it starts to feel, I hate to say it, kind of like Silicone Valley Bank in March when you could just see that money getting pulled out and there was no way there was enough liquidity.

Okay, well, we'll put a pin in the discussion and pick it up here again in August. So thank you, Jason for your time. We appreciate it.

Hey, thanks so much for having me on, Jeff.

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