The Relative Size of Labor Costs of UPS, FedEX and USPS by Workplace Economics

Excerpts: USPS Integrated Financial Plan 2007 - Continued Workhour Reductions
"The FY 2007 plan reduces workhours by 40 million from the estimated FY 2006 total in spite of adding 1.9 million delivery points. The FY 2007 planned workhour reduction target is equal to approximately 20,000 full-time equivalent employees. The workhour reductions are a product of process improvements, capital investment programs, and a projected volume decline. The FY 2007 workhour plan follows seven consecutive years of productivity improvements." (9/29/06)

Mail Processing Equipment
The FY 2007 capital plan for equipment is $1.6 billion or 44 percent of the total capital plan. The majority of this is for programs that raise productivity and reduce operating costs.

Phase-One of the Flat Sequencing System (FSS) program will deploy 100 systems to multiple facilities. The FSS will fully automate the Delivery Point Sequencing of flat mail for selected delivery sites, reducing carrier in-office sorting of flat mail. This system sorts flat mail in carrier delivery point sequence at a rate of 40,000 pieces per hour and has two-pass operational throughput nearing 18,000 pieces per run hour.

The tray handling systems automatically deliver first, second and final sweep mail to system feeders and dispatch points. The FSS includes automatic induction, mail prep stations, buffer/transport, and auto-feed on first pass.

The Advanced Facer Canceller System (AFCS) 2000 program upgrades the aging AFCS by eliminating end of life issues on parts, reducing maintenance hours, and providing operational improvements. The program replaces the aging scanning and controls technology, while also improving mail tracking and reducing mechanical jams. Existing scanners and indicia detectors get replaced and a switchback module is added to correctly face all lead and trail mail in one direction.

The third phase of the Automated Package Processing Systems (APPS) continues to automate small parcel and bundle sorting and improve productivity. The APPS provides greater processing capacity through automatic package singulation and address reading through an Optical Character Reader/Bar Code Reader/Video Coding System.

Labor Negotiations
Labor negotiations with the four largest unions will take place this fall, as current contracts with the National Association of Letter Carriers, AFL-CIO (NALC), American Postal Workers Union, AFL-CIO (APWU), National Rural Letter Carriers’ Association (NRLCA), and the National Postal Mail Handlers Union (NPMHU) all expire on November 20, 2006. The plan assumes that negotiations will result in labor cost increases of one percent less than the Employment Cost Index (ECI), consistent with the rate filing before the PRC. Variances from this assumption, either through collective bargaining or legally mandated arbitration, could affect financial results for the year.

source: USPS Integrated Financial Plan FY 2007 (PDF)

USPS Transformation Plan 2006-2010 - Establish and Maintain Market-Based Compensation

Maintaining market comparability is a key Postal Service strategy and opportunities to keep wages and benefits in line with the private sector will be reviewed. The Postal Service must ensure that compensation is comparable to the private sector, and must not pass on any unnecessary costs to its customers. The Postal Service continues to use comprehensive studies of bargaining and nonbargaining unit jobs to establish and maintain wages and benefits comparable to the private sector, which is in keeping with its statutory mandate. In negotiations with unions, the Postal Service has applied the principle of moderate restraint of wage growth in seeking to address wage rates that exceed comparability standards.

Postal executives have long managed operations that are equivalent to the size and complexity of a Fortune 500 company. For example, these executives effectively balance service to customers, manage tens of thousands employees, and oversee operating budgets and revenue goals often in excess of a billion dollars, while receiving compensation below private sector levels.

The Postal Service will continue to work with other agencies to explore potential modifications to other compensation components to achieve the current statutory comparability mandate. Retirement plans, injury compensation, unemployment compensation, territorial cost of living allowances, and the salary cap are all linked by law to federal sector practices, but do not necessarily reflect private sector levels of compensation. Any modification would require action on the part of Congress

Aggressively Manage Workers' Compensation

The focus of the workers' compensation program has been to ensure that postal employees receive the appropriate medical care for on-the-job-injuries while managing the associated cost. The First Health program has been successful in reducing medical costs through their medical network. This program has resulted in gain share payments and additional savings through cost avoidance. The Outplacement Rehabilitation Program has been successful as over 500 former employees have either been placed with a new employer, retired, or had a compensation reduction. Successes of these and other programs are tied to the close working relationship and common goals with the Department of Labor. The Postal Service will improve the First Health process to capture greater savings. The Postal Service is also exploring a prescription drug card program and is currently obtaining bids from major prescription drug networks to reduce costs.

Manage Employee Availability

Employee absences from work as a result of on- and off-the-job injuries and illnesses also represent a significant cost for the Postal Service. Employee absences from work will be managed by expanding the Resource Management system from a sick leave tracking system to a comprehensive tool to manage and increase employee availability. By the end of 2007, this comprehensive approach to resource management, which includes a national wellness program, will be measured by the percentage of employees available for duty.

USPS Transformation Plan 2006-2010

APWU Response to Papers submitted to Postal Commission by Michael Wachter and Michael LeRoy concerning Employee Wages (posted Feb. 2003)

The Relative Size of Labor Costs

AT UPS, FEDEX AND

THE U.S. POSTAL SERVICE

Prepared for APWU by:

Workplace Economics, Inc.

Washington, D.C. 20033-0367

202/223-9191

January 27, 2002

Labor costs account for considerable portion of U.S. Postal Service operating expenses. By contrast, labor costs, at first glance, appear to represent a smaller proportion of operating expenses at competitors such as United Parcel Service (UPS) and Federal Express (FedEx). Given that the hourly wage rates applicable to most full-time nonmanagement employees performing similar work have been shown to be similar among these three organizations1, large differences in the portion of total operating costs consumed by labor costs may be accounted for by operational differences or by a the use of a different mix of labor resources. However, as shown below, apparent differences in the proportion of operating expenses attributable to labor costs in large part disappear when each organization’s operating expenses are adjusted to account for the larger international and domestic transportation services and related equipment that characterize the operations of UPS and Fedex as compared to the U.S. Postal Service2.

UPS and FedEx are two major courier service providers that are each marked by a broad and increasing global presence. Although the courier service industry is sometimes characterized as dealing primarily with express shipments of documents, in fact, most large multinational courier service enterprises provide a wide range of document, small package and freight transport services. As a consequence, the range of cargo handled and transported by these companies is probably greater than that typically handled by many government postal services. At the same time, such firms provide significant related logistical services to their customers and, further, even provide military passenger air transport services to the U.S. government. All these activities have spurred UPS and Fedex to acquire and operate substantial air transportation and highway transportation equipment and to spend proportionately greater amounts on transportation and fuel than expended by the U.S. Postal Service. Yet, courier service firms may be distinguished from traditional cargo or freight transportation companies by their emphasis on providing primarily time-definite services for moving packages and freight that typically does not consist of large bulk shipments of agricultural products, natural resources or finished manufactured goods.

With these distinctions in mind, the consolidated operating revenues and expenses of UPS, Fedex and the U.S. Postal Service (USPS) are examined and compared in Table 1 to determine the labor cost impact of removing transportation related expenses from each organization’s operating income statement. In particular, labor costs as a percent of total unadjusted operating expenses are compared with labor costs as a percent of total operating expenses adjusted to remove transportation related expenses. As shown in Table 1, the impact of adjusting for transportation related costs is dramatic. For example, while labor costs (salaries and benefits) as a percent of total unadjusted operating costs for the most recently available full fiscal year were 65% for UPS, 47% for Fedex and 78% for the U.S. Postal Service, after adjusting the accounts of all three organizations to remove the bulk of transportation costs, labor costs as a percent of total adjusted operating costs for the same fiscal year were 82% for UPS, 76% for Fedex and 89% for the U.S. Postal Service. In short, after simply controlling for one aspect of operating costs (i.e., transportation costs), labor costs as a percent of operating costs at all three organizations were more closely clustered3. (See Table 1 below).

The results shown in Table 1 should not be surprising, given the relatively strong investment in air and ground transportation equipment and infrastructure (e.g., airport landing rights, etc.) made by UPS and Fedex as compared to the U.S. Postal Service.

A salient development in recent years has been the growth of the role of "integrators" such as UPS and Fedex in the movement of air cargo. These companies offer one-stop shopping to their customers by integrating services previously offered by a combination of air cargo carriers and freight forwarding companies. Focusing attention on domestic and international express shipments, these integrators have grown substantially relative to traditional air cargo operations. Integrators, such as UPS, FedEx, TNT, DHL and others have come to dominate the international express portion of the air cargo market. At the same time, the importance of express freight transport in the global economy has grown in response to:

1. changes in business customer manufacturing and/or distribution approaches in an effort to reduce inventory costs (e.g. "just-in-time" manufacturing) and to adapt to the "global marketplace";

2. changes in business customer and residential customer views on document transmittal in a time-sensitive, quality assured (by document tracking) manner;

3. large scale, intensive marketing campaigns to induce demand for quicker and/or time-sensitive package and document services;

4. improvements in available technology (such as sophisticated computer systems to mark, track, bill and otherwise process packages) which facilitates time-sensitive, reliable delivery and makes it more widely available at a relatively cheaper price;

5. deregulation or liberalization of postal regulations permitting private companies to enter previously protected postal markets, especially high-margin, time-sensitive package delivery;

6. gradual changes in business organizations opening the door to the contracting out of distribution functions to fully integrated freight transportation companies;

7. availability of used and new commercial aircraft at relatively reasonable prices due to excess capacity among passenger carriers, particularly after airline deregulation, in the United States; and

8. increasing liberalization of bilateral treaties governing air transportation routes between different countries and continents.

Some of these developments have stimulated the demand for time-definite services provided by multinational couriers, while others have stimulated the worldwide growth of all-cargo air transport capacity. (For a more detailed review of these developments see Stanley C. Wisniewski, Multinational Enterprises in the Courier Service Industry: Aspects of Employment and Working Conditions in Selected Enterprises, Geneva: International Labor Offices, Working Paper No. 81, 1997.)

Another significant recent development is that business organizations have sought to simplify their distribution function worldwide by using only a few delivery modes and, more recently, have taken this notion to its logical conclusion by contracting out their entire distribution function to fully integrated transportation companies. This development is reflected in the growing "logistics" portion of the integrators' business.

For a long time, commercial airlines, known primarily for carrying passengers, have also been major freight carriers world-wide -- in some cases rivaling or surpassing all-cargo carriers in tonnage carried. For example, among airlines known for passenger service, large amounts of freight are carried by such airlines as Northwest, KLM, Lufthansa, Air France, American Airlines and British Airways. Such freight may be carried in the bellies of passenger planes or by dedicated freighter aircraft operated by passenger airlines. With the global expansion of such courier service and cargo service carriers as FedEx and UPS which can offer a more integrated delivery service to customers, the commercial passenger carriers can no longer take their cargo transport revenues for granted. Thus, while the courier service industry is often seen as presenting a challenge to the postal-communications industry, another dimension to the courier service industry is its challenge to traditional airline cargo carriers.

Pressure has been building for increased liberalization in the system of bi-lateral treaties between governments which govern both air traffic and cargo traffic, even when the latter is carried by all-cargo airlines. Large integrators, not surprisingly, have been in the forefront seeking changes to current bi-laterals, in order to facilitate the expansion of their delivery networks worldwide. For example, both FedEx and UPS have been aggressive in pushing for greater route authority and airport access. This means that the large, dominant multinational courier enterprises are given greater access to international markets and an enhanced ability to bring more aircraft capacity into such markets.

The bottom line of all these trends has been to encourage the acquisition of greater air transport capacity by Fedex and UPS. By contrast, the U.S. Postal Service has not been involved in making itself over as an integrator in the same way and, consequently, has not invested in the same fashion by operating its own air transportation equipment. Indeed, the transportation agreement reached by the U.S. Postal Service in August, 2000 with Fedex resulted in the Postal Service relying on Fedex air transport equipment to move "significant portions of Express Mail, Priority Mail, and First-Class Mail" (See USPS 2001 Comprehensive Statement on Postal Operations at p.25).

The dimensions of the UPS and Fedex air transport operations can be gauged by a review of the size of their respective fleets. The air transportation fleets operated by UPS and Fedex are substantial. UPS owned or leased (capitalized leases) 253 large transport aircraft (B727-100 or larger airlift capacity) and utilized an additional (usually smaller) 346 aircraft on a chartered or short-term lease basis in the year ended December 31, 2001. At that time, UPS also had firm commitments to purchase an additional ten Boeing MD-11 aircraft and 72 Airbus A300-600 aircraft by 2009 and options to purchase an additional 22 Boeing MD-11 aircraft and 50 Airbus A300-600 aircraft between 2004 and 2010. Fedex’s fleet as of May 31, 2002 consisted of 347 large transport aircraft (B727-100 or larger airlift capacity) and 301 smaller aircraft – with 509 aircraft owned by Fedex and the remainder operated under lease. In addition, Fedex had firm commitments to purchase eight DC10s, three MD11s, seven A300s and three A310s to be delivered through 2006 and ten Airbus A380-800F aircraft ( a new high-capacity, long-range aircraft) to be delivered during the period 2008 – 2011, with options for ten additional A380-800F aircraft. (See UPS 2001 10-K and Fedex 2002 10-K.) The large transport aircraft operated by both companies are operated and maintained by company employees (pilots and mechanics). By contrast, the U.S. Postal Service makes no similar aircraft investments.

The U.S. Postal Service does have a substantial ground transportation vehicle inventory that included 215,530 owned or leased vehicles in FY01. Despite the size of this fleet, it is not clear how much utilization is achieved. For example based on reported vehicle operating trends (2001 Comprehensive Statement on Postal Operations at p.26), the average mileage accumulated per year per vehicle in the Postal Service inventory was 5,525 miles – or just over 21 miles per day of operation under the assumption of 260 operating days per year (or 5 days per week)4. Therefore, the fuel costs associated with operating the vehicles in this fashion are likely to be lower than if the vehicles were more intensively utilized. Unfortunately mileage statistics are not readily available for Fedex and UPS to permit direct comparison with the U.S. Postal Service vehicle utilization measures, although Fedex and UPS delivery routes and time-sensitive emphasis may, in-fact, accrue more mileage per vehicle on average than those of the Postal Service and therefore incur higher fuel and maintenance costs per vehicle. Yet, though fleet utilization may be greater at Fedex and UPS, the size of such vehicle fleets is of comparable density to that of the U.S. Postal Service relative to the size of each organization’s respective workforce. For example, Fedex in FY02 operated one ground transport vehicle for every 3.7 full-time equivalent employees (50,000 vehicles, 184,953 FTE employees), while the U.S. Postal Service operated one ground transport vehicle for every 3.6 career employees (208,318 owned vehicles, 752,949 career employees).

While differences in transportation expenditures have been highlighted in this paper as a means of showing how labor costs as a percentage of total operating costs for UPS and Fedex as compared to the U.S. Postal Service cannot be meaningfully calculated without adjustments that take into account major operating differences between these organizations, adjustments for transportation cost differences do not exhaust the range of operating differences between these entities. For example, while the Postal Service spent $148 million on advertising in FY01 in generating $65.8 billion in revenues, Fedex spent $226 million on advertising in generating $20.6 billion in revenues. A detailed review of accounts at a finer level of detail than currently available in general annual reports no doubt would provide quantifiable examples of other operating differences.

Operating differences are also reflected in the assets purchased by these organizations. For example, nearly 77% of the value of assets at cost (or $13.5 billion) posted on the Fedex balance sheet is accounted for by equipment (aircraft and related equipment, package handling and ground support equipment and vehicles, and computer and electronic equipment). Similarly, some 78% of the value of assets at cost (or $18.8 billion) posted on the FY01 UPS balance sheet is accounted for by equipment (aircraft, vehicles and plant equipment). By comparison, equipment accounts for only 41% of the value of assets at cost (or $16.4 billion in FY02 and $15.4 billion in FY01) on the U.S. Postal Service balance sheet. Buildings, land and leasehold improvements account for the majority of Postal Service assets. (See 2002 Fedex 10-K, 2001 UPS 10-K and 2002 Annual Report of the U.S. Postal Service.)

Finally, not all products and services offered by the U.S. Postal Service are similar to those services offered by UPS and Fedex. A review of the duties of a postal window clerk provides examples of many services obtained by the public at postal facilities that are not available at the other organizations in question. Similarly the nature of what is delivered by the Postal Service to and for its customers, especially in the case of first class mail (used to facilitate transactions and correspondence) and periodicals (used for publications), is distinguishable in significant part, from the nature of deliveries made by UPS and Fedex.

In short, a large part of the apparent differences between UPS and Fedex labor costs as a percent of total operating costs on the one hand as compared to the same ratio for the U.S. Postal Service are readily explained by differences in the nature of the operations of each of the three respective organizations. Adjusting for just one of these major differences – transportation related expenditures – substantially narrows the differences in the ratio between the three organizations.

source: APWU: The Relative Size of Labor Costs at UPS, Fedex and the US Postal Service