UPS Freight 'never turned out to be what we thought it would be'

Updated Feb 8, 2021

For a little more than 15 years, UPS attempted to shoehorn a less-than-truckload segment into its parcel delivery monolith.

Last week, the CCJ Top 250 No. 1 carrier announced the end of the experiment and the sale of its UPS Freight business to TFI International (CCJ Top 250, No. 8) for $800 million – about $400 million less than UPS paid in 2005 for Overnite Transportation, the acquisition that gave rise to the division.

While UPS at the time lauded its new subsidiary for its “extensive transportation network, a strong focus on operational efficiency and flexibility,” the parent company’s inability to leverage that efficiency and flexibility was ultimately its undoing, said Donald Broughton, Principal and Managing Partner at Broughton Capital.

“Every single transportation company has one thing in common and that is their biggest expense as a percentage of sales is labor,” he said. “When UPS acquired the old Overnite, they believed they could run it as a non-union silo and [unionized labor] has been a sticking point since the moment they bought it.”

With its LTL operation, UPS had hoped to leverage its existing customer relationships in the parcel business into business for its LTL segment, said Rick Paterson, an analyst at Loop Capital. “They thought it could be an easy cross-sell,” he said of rolling strong parcel-customer relationships into LTL loads.

“Those aspirations never worked out to the degree they’d clearly hoped it would,” he said. With new CEO Carol Tomé at the helm, the company was looking to make a change in a segment where margins were much lower than its parcel business, said Paterson. And now, he added, the company has an extra $800 million “to put back into the war chest” for other uses and pay down debt.

"UPS Freight is a capital-intensive low returning business," Tomé said this week during UPS' earnings report. "We do not need to own this business to provide an LTL solution for our customers."

Tomé, a UPS Board member when the company purchased Overnite, noted she was focused on evaluating UPS Freight's fit in the business as soon as she took over as CEO last year "because we had to impair it shortly after we bought it, and it’s never turned out to be what we thought it would be."

The complexities that come with managing union employees and rigid contracts, Broughton believes, prevented UPS from deeply integrating its UPS Freight platform with its home delivery businesses like so many of its peers, noting that FedEx pushes much of its ground volume through its LTL system.

“With LTL, you have to optimize the line haul – both the capacity utilization and the velocity – and that requires technology, creative people and thinking ahead,” he said. “You would think you could push parcel through it. That’s what FedEx is doing because it makes it easier to juice the line haul velocity. XPO uses their Con-way assets to move their final mile e-fulfillment business. Their LTL moves the line haul part. There’s something in the construct of the labor that prevents [UPS] from doing it.”

Big technology spends are often intended to increase efficiency and drive down costs, but union contracts often blunted any real impacts to that end for UPS while LTL competitors reaped benefits all along the way.

“[UPS] is competing against FedEx Freight, and XPO, and Old Dominion and Estes and all these other guys who are not only non-union but are investing hand over fist in technology to make their systems more efficient and minimize the amount of labor they need,” Broughton said, “and they have a lower cost of labor that is a lot more flexible.”

An analysis of the transaction from Baird Equity Research says approximately 60% of UPS Freight employees are Teamster union members. TFI says the new LTL venture, TForce Freight, will comply with all collective bargaining agreements.

“The only unionized LTL out there is Yellow,” he added, “and Yellow can’t make money.”

TFI’s acquisition of UPS Freight includes nearly 200 terminals across the U.S., and more than 6,000 trucks and 23,000 trailers, according to a TFI presentation to investors.

As part of the terms of the deal, the LTL operation under the UPS Freight banner will run independently under existing management, while the truckload division will run under TFI’s truckload group. In addition to a five-year freight relationship in which TFI will utilize UPS Freight’s network, UPS will also provide up to three years of IT, back office and other support to minimize disruption when the deal is completed.

According to TFI, the acquisition brings with it UPS Freight’s network of more than 26,500 one- and two-day lanes between metropolitan areas, along with cross-continent four-day service. UPS Freight also brings in 197 terminals – 147 owned terminals and 50 leased. Additionally, UPS Freight has 5,400 LTL tractors, 935 truckload tractors, 21,800 LTL trailers and 1,660 truckload trailers. TFI’s LTL segment currently has around 2,500 employees, 38 terminals and 886 trucks.

Felipe Capella, president and COO of digital freight firm Loadsmart, which received a round of investment last year partially funded TFI, said the acquisition bolsters TFI's footprint in e-commerce freight arena, "at a time when consumer purchases of shipped goods has increased significantly," he said. The deal allows "continued strategic expansion across the U.S.," he said.

UPS will retain all pre-existing assets and liabilities relating to all pension, retirement and other benefits plans. UPS Freight union employees do not participate in any multi-employer pension plans, TFI added. Non-union employees will be moved to a defined contribution pension plan at closing.

Baird noted in its financial analysis that the sale of UPS Freight is consistent with UPS’ overarching “better not bigger” corporate strategy.

“The divestiture eliminates future capital investments required to maintain/improve UPS Freight’s market position,” the analysis says. “UPS will now be even more focused on the core pieces of its business that drive the greatest value for customers/shareowners.”

UPS Freight is expected to generate $3.149 billion in revenue for 2020 at a low single-digit adjusted operating margin of around 1.2%, Baird noted.

Overall, the Freight business accounted for about 3.8% of UPS’ consolidated revenue in 2020 and about 1.3% of the company’s operating profit.