Here’s Why What Happened to Yellow (Probably) Won’t Happen to UPS
![Here’s Why What Happened to Yellow (Probably) Won’t Happen to UPS Here’s Why What Happened to Yellow (Probably) Won’t Happen to UPS](https://g.foolcdn.com/editorial/images/743383/long-haul-truckers-16-wheeler-truck-shipment-delivery.jpg)
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Earlier this week, trucking company Yellow Corporation (YELL -4.62%) filed a Chapter 11 bankruptcy petition with the Delaware district’s U.S. Bankruptcy Court, simultaneously announcing it would begin winding down all operations. The company’s been largely unprofitable for years now, and with no end to these losses in sight, CEO Darren Hawkins notes, “It is with profound disappointment that Yellow announces that it is closing after nearly 100 years in business.”
The announcement, however, also took a parting shot at the labor union representing Yellow’s workers. It reads, “We faced nine months of union intransigence, bullying, and deliberately destructive tactics. A company has the right to manage its own operations, but as we have experienced, IBT [International Brotherhood of Teamsters] leadership was able to halt our business plan, literally driving our company out of business, despite every effort to work with them.”
Is that truly the root cause of the bankruptcy? Maybe. Or maybe not. It’s a complicated matter and difficult to point to a culprit.
One thing is for sure, though. Yellow’s bankruptcy raises questions about United Parcel Service‘s (UPS -1.20%) future. The shipping giant has also been involved in tense negotiations with the International Brotherhood of Teamsters of late. After reaching a tentative deal with the union UPS cautioned shareholders that the subsequent pay raises would take an unexpectedly bigger bite out of this year’s previously projected profit margins.
UPS has something Yellow didn’t have when it made the decision to call it quits, though — lots of wiggle room.
UPS can afford to spend (relatively) less than Yellow
The logistics business can be an expensive one to run; trucks don’t come cheap.
Its single biggest operating cost, however, isn’t equipment. Nor is it fuel, maintenance, or related services. It’s people. Roughly half of every dollar’s worth of revenue a shipping company collects is passed along to drivers and other workers in the form of pay or benefits. That’s certainly true for United Parcel Service. For Yellow, the proportion is slightly higher.
That being said, fuel and other supplies aren’t a cost to simply dismiss. They account for about one-fifth of Yellow’s total operating costs. Purchased transportation (a logistics company’s procurement of third-party shipping services when it’s cheaper to do so than ferry goods yourself) can cost between 15% and 20% of revenue. The “other” spending that doesn’t fit neatly into one category can rack up costs pretty quickly as well.
Add all those costs up, and you’re not left with a ton of operating profit.
The graphic below comparing Yellow’s 2022 operating expenses to UPS’s puts things in perspective, illustrating how the two seemingly similar businesses can end with completely different profit results. UPS spends markedly less on compensation, fuel, and maintenance, allowing it to spend more on other items and still leave behind a healthy bottom line.
![Chart comparing Yellow's operating expenses to UPS's operational spending.](https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F743383%2F080823-ups-dfs-operating-expenses.png&op=resize&w=700)
Data sources: United Parcel Service, Yellow Corp. Chart by author. Dollar figures are in billions.
What’s fueling the differences? Neither company says as much, but the big distinguishing factor here is scale and the leverage that comes with it. UPS has it. Yellow doesn’t. United Parcel Service does roughly 20 times as much business as Yellow, allowing it to dictate terms to suppliers, vendors, and even customers. With Yellow, it’s largely the other way around.
Persistently profitable for a reason
But will the newly forged agreement with the Teamsters change UPS’s profit profile going forward? Maybe a little, but not a lot, if at all.
Again, while it’s a logistics company‘s single-biggest expense, pay and benefits only chews up about half of a shipper’s revenue. And for UPS, in 2022 it was less than half, falling from pre-COVID-19 norms of just above 50%. Last quarter’s slight relative rise in this cost is a taste of what’s to come, but the company’s employed unionized drivers and workers for some time now. It’s got a long history of keeping these cost pressures in check.
For that matter, while gasoline and diesel prices are also somewhat dialed back from last year’s levels, they’re still high by historical standards. Presuming they’ll normalize in the foreseeable future, look for 100 to 200 basis points’ worth of wider profit margins on that front soon as well.
More than anything, though, notice that United Parcel Service has found a way to maintain and even widen profit margin rates in an environment where doing so couldn’t have been easy. Last quarter’s operating profit of 12.6% of revenue is actually still above its pre-pandemic and post-pandemic average of around 11.2%.
![Chart showing United Parcel Service's historical operational spending.](https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F743383%2F080823-ups-historical-operating-expenses.png&op=resize&w=700)
Data source: United Parcel Service. Chart by author. Dollar figures are in billions. Notice the consistency of UPS’s expenses as a percentage of revenue.
Connect the dots. There’s some room here for the moderately higher paychecks UPS drivers have in their future. The logistics company should be able to continue finding ways to squeeze out other kinds of costs.
Nothing worth sweating
Don’t misunderstand. UPS has a brewing wave of cost increases to figure out. That works against shareholders while the company adjusts; it might work against them on a permanent basis if these rising costs can’t be offset in other ways.
If you’re specifically steering clear of United Parcel Service because of Yellow’s Teamster-prompted bankruptcy and wind-down, though, don’t. Yellow was struggling to maintain profitability for years prior to this week’s announcement. UPS doesn’t have such a problem, even when it’s been forced to come up with new deals with its workers’ labor union. That’s not apt to change now.
Then there’s the other not-so-small difference. That is, whereas Yellow largely serves the business-to-business market, UPS caters to consumers looking for at-home deliveries of goods ordered online. That market’s in no immediate jeopardy of drying up the way the business-to-business market is starting to struggle in the wake of the economic slowdown. Indeed, online shoppers have shown rather surprising resilience even in the shadow of higher shipping costs — even when they’re buried in higher online retail prices and labeled as “free.”