Why Furlough?



After posting a Q2 operating profit of $975 million and a Q3 operating profit of $950 million paced largely by growth in international air revenue, UPS is displacing pilots (moving captains back to copilot and copilots beck to engineer) and talking about layoffs. Sure, it could be posturing for upcoming negotiations with the IPA; but is there another motivation here? Are they trying to cut costs so aggressively to boost the stock value that they are going to damage their ability to respond to international growth? The company just got expanded air rights from Hong Kong to the Phillipines and Cologne-- once Wall Street finds out they are cutting flight crew instead of positioning to exercise these rights, I believe these actions could have the opposite effect on stock values. What are they thinking???




Overall our volume is on a downward slope...has been for more than two years. Fredex is taking our bread and butter on the ground, which is our cash flow. They are able to undercut our prices and the typical customer is more interested in price right now (soft economy) than anything else. The rate increase is based on published rates, which don't get translated to contract rates for months, if at all.

As for the International, I'm sure the flights will be put up as the volume dictates. There is no desire to pull back from expanding overseas. In fact, the reason we've been given expanded rights is because we lobbied for them.

Right now we are cutting costs to maintain as much profitability as possible. That's the duty of management in a for-profit enterprise. Increasing profit margins will not happen in the near future, both for competitive and economic reasons.

But I'm sure that won't keep the IPA from asking for the moon. UPS must be faking the numbers and crying Chicken Little....eh?


IPA will ask for what we're worth based on the value we bring to the company and market value of airline crewmembers. Even after concessions by UAL, DAL, et al, we're still well behind in that area. UPS will ask for more control and system flexibility by changing work rules. Ultimlately I imagine a federal mediator will have a lot to say about whose argument has more merit. That's how contract negotiations work. On a positive note, both sides have agreed to interest-based bargaining under NMB supervision, so the tone should be more civil and rational.

The company's profit situation looks pretty strong, especially compared to the rest of US business. Of course, you can always try to get blood from a turnip by squeezing harder, but there are diminishing returns from that strategy. It takes time and a lot of money to train and requalify flight crew members. Based on the October, 2003 kickoff date for exercising these routes and Capt Karen Lee's statement that there is a training lag of 6-9 months, crewmembers will have to be in school starting April at the latest. Just about the time the effect of the displacements will be felt in the system. Ultimately, I believe Wall Street will have the final say whether this is a prudent strategy.



"The company's profit situation looks pretty strong, especially compared to the rest of US business. Of course, you can always try to get blood from a turnip by squeezing harder, but there are diminishing returns from that strategy."

It's in part the "squeezing" that keeps our profitability from evaporating like some other companies have seen. Agreed that in a growth environment this is not the wise strategy, but in the current negative growth environment it would be imprudent to do otherwise.

UPS management has the responsibility to be sure that all aspects of the cost picture add up to reasonable levels of profit. This includes work rule and flexibility changes to mitigate increases in labor rates. The mediators are typically pretty savvy...and don't have blinders on.

BTW, our profits are not increasing, either in raw form or as a percent to revenue. Look for employment cuts in all areas of the business, management included, in the first quarter. Whether they will be announced for the street's benefit, I don't know. I suspect not, given our conservative nature and the (hopefully) small number of cuts.



I agree with you on the trade-off between flexibiliy, work rules, and labor costs. That's why I personally refuse to get all spooled up about contract negotiations. UPS will get some of what they need, IPA will get some of what we need, and a couple of years down the line we'll have an agreement; sooner if both sides negotiate in good faith using the interest-based bargaining process. You are correct, the mediators are pretty savvy about balancing interests and determining what's legitimate. And of course I'm in favor of growth-- because UPSCO is such a young organization, our airline seniority list is growth-driven, not retirement driven. I've been in the industry long enough to appreciate that your pay and quality of life is influenced more by moving up the seniority list and less by the contract you negotiate. But there is a difference between negative growth and losing money. UPS is still highly profitable, just not increasing its profit in the current environment-- who is? I don't think it is good business practice put people on the street when we aren't remotely close to being in red ink. Apparently, many business analysts agree; please see article below my sig. Enjoying our discussion!


USA Today Thur, Nov 21, 2002

Poor leadership leads to layoffs

By Jason Jennings

The Business Roundtable last week announced the results of a survey of its
membership - 150 chief executives of leading U.S. companies - that had one
truly astonishing finding: 60% of these CEOs expect their total employment
to decline in 2003. In other words, the top leaders of three out of five
major firms believe the weak economy will continue, that they must cut costs
and that they have no choice but to fire people.

These CEOs have embraced the conventional wisdom of Wall Street analysts: If
you don't have layoffs during tough times, your firm isn't lean and mean,
and you don't have a prayer of becoming highly productive. But what if that
conventional wisdom is wrong?
Lost jobs

The top three reasons employers cited for extended
layoffs at their companies in this year's third quarter:

Internal company restructuring.
Completion of seasonal work.
Lack of demand for products, services.

Source: U.S. Department of Labor.

Don't balance books on workers' backs

I recently completed a major research project on the relationship between
layoffs and productivity, and I was surprised to discover that the world's
most productive firms almost never lay off workers. In fact, they make an
explicit promise that their books won't be balanced through layoffs - not
even during deep recessions. Instead, they cut costs and boost demand in
other ways.

After evaluating the finances of more than 4,000 public and private firms
worldwide, my research team and I settled on 80 that topped their peers by
every reasonable measure of productivity. Simply put, these firms sold more,
spent less and made more profit per employee than their competition, year
after year.

The most striking trait these 80 productivity superstars shared was their
passionate opposition to layoffs, even when the economy was in the dumps.
Consider Nucor, America's largest steel maker, which manufactures rolled
steel and steel joists. Nucor has reduced the time it takes to produce a ton
of steel from 11 hours to 30 minutes - while increasing its earnings for 30
years in a row.

More than 40 U.S. steel companies, stuck with high fixed-cost structures
that make it hard to be nimble, have gone bankrupt in recent years. Yet
Nucor continues to thrive. It pays its steelworkers $70,000 to $100,000 per
year, far above the industry average. And it has never gone through a

"When business is bad, as it's bound to occasionally be in a highly cyclical
industry like ours, the first thing to go is every executive perk and bonus,
followed by every plant manager and supervisor giving up theirs," says
Nucor's CEO, Dan DiMicco. "Only then are the workers affected. We'll reduce
the workweek to five days and then four and, on rare occasions, even three,
but we don't lay people off."

'Cure' causes more woes

Leaders such as DiMicco don't act this way for altruistic reasons. They
understand that, except in rare cases, layoffs create more problems than
they solve.

When layoffs begin, workers become afraid, distracted and preoccupied with
their own financial security. It's hard for them to focus on doing good
work. Teamwork suffers as they spend more time covering their rear ends and
looking over their shoulders.
Companies that routinely use layoffs to solve short-term problems risk
losing their most valuable workers to more stable environments. A great deal
of institutional memory also is lost.
Firms that downsize when business is bad face huge recruiting, hiring and
training costs to refill jobs when demand recovers. Add the costs of
layoffs, including severance packages, and savings evaporate.
My advice to those elite CEOs of the Business Roundtable contemplating
layoffs: Focus on your shareholders' long-term interests, not the current
quarter's profits. Stop trying to impress the Wall Street analysts by
cutting staff at the first sign of a downturn. Inspire your workers to help
you cut costs and boost demand. And above all, stop talking about layoffs as
if they're beyond your control. Ultimately, layoffs are not caused by a weak
economy, or industry trends, but by uninspiring leadership.

Jason Jennings, a management consultant, is the author of Less Is More: How
Great Companies Use Productivity as a Competitive Tool in Business.



"Nucor has reduced the time it takes to produce a ton of steel from 11 hours to 30 minutes - while increasing its earnings for 30 years in a row."

I'm used to seeing this type of argument. It is typically applied to a product-oriented organization, not a service organization. You are not going to see the time needed to delivery 130 stops shrink from 9 hrs to 20 minutes by asking your employess to look for other ways to enhance productivity. Some would argue that UPS is TOO production-oriented. And since the major input to cost in a service organization is labor, this is where the cost equation will come to bear.

"Inspire your workers to help you cut costs and boost demand. And above all, stop talking about layoffs as if they're beyond your control. Ultimately, layoffs are not caused by a weak
economy, or industry trends, but by uninspiring leadership."

If a company doesn't respond to market conditions it is likely to fail in the long term and the short term. Fortunately UPS mgt operates far enough into the future to insure that job cuts are through attrition and reassignment, not layoffs, thereby negating one of the central arguments to the study: "When layoffs begin, workers become afraid, distracted and preoccupied with their own financial security."

One of most signficant limiters of growth is pricing. In a soft ecomony shippers look to maintain their margins by applying pressure on the service providers to accept less. They also trade down in service. The JIT concept is worth less when the pipeline is not jumping. The fact that UPS raised its ground rates more than the air rates is a confirmation...we will still be charging more but it is less for the shipper than air rates.

International is the place to be, at least for now. Business Week has a big article about China and the upcoming upheaval their arrival to the world market in more sophisticated products will be to every other country. The article pointed out that there is a near-limitless supply of $100 per week labor.

For now we don't have to worry about Chinese competition in the US, but what about when they decide to compete with us in the distribution business? Think they will be paying their pilots what US pilots make?


I do not believe ups would lay off unless it was ablsolutely necessary. In 30 yrs of management at ups I have never seen anyone laid off. They may have to go to a different job or their fellow employees took time off. I have been retired for quite some time now and things may have changed. Perhaps being a publicly traded company has changed things but I doubt that ups has given up on a philosophy and business plans that have made them succesfull over the long haul. UPS is tough on fat in operations and I hope will continue to do that.
In regards to Mr Jennings research I wouldn't be surprised that ups may not be one of those companies. I think that in the past ups has done a good job in planning for volume fluctuations, seasonal volume, and other factors that with out good planning would necessitate layoffs. I do think that flexible work rules help to prevent layoffs. Sometimes unions want to do away with flexibilities that can and some times due come back to haunt them. I do think that flexible work rules help to prevent layoffs.
When you are required to garauntee hours, full time jobs, regular pay for working out of classifications, etc it may be ok in good times but when things get tough the company has no flexibilities and are forced to lay off. Sometimes people ask for things that they are really not sure about what they are asking for then cry foul when what they ask for gets them something like a lay off.
If and when ups hits an extended period of decreasing volume they will be forced to trim the fat and I don't think it is wise to wait until it is to late to take action.
Flight crews might ask themselves what work rules have you negotiated or want to negotiate that might make it difficult to keep your job if there is tough sailing. Are you willing to work in other jobs rather than take a layoff? What am I willing to sacrifice to keep my fellow upser working? Are you listening to rumors about layoffs or have they already occured and do you know the real reason for them? Does it always have to be underhanded company actions or do you not own up to the facts and always say the company reasons are lies?
I somehow get the feeling that it doesn't matter the reason for the layoffs the company just doesn't care or they are setting us up in negotiations. Its company greed, etc.



The current aviation bilaterals make it extremetly unlikely UPS will compete against the Chinese head-to-head in the international air market. I guess they could set up a state-run version of DHL, but how successful they would be is another matter. Let's not give them any ideas! Point taken on JIT-- We all know UPS is ultra-conservative in its approach to risk, and furlough talk is probably a good example. Problem is, as I stated, it takes longer to swing from a downsizing mode to a recovery mode due to FAA-mandated aircrew training program content. I believe the economy has bottomed and is on the upswing. Even war with Iraq will not stop the recovery (might actually help it-- witnes where the markets went after the Gulf War), although another 9/11-type attack certainly could. I don't want to see UPS's conservative approach cause us to miss opportunity that will result in profit growth. Let's just say I hope you are wrong about the need to furlough and I am wrong about the likelihood it will backfire if we do furlough.


I agree with your point about contract provisions and work rules having unforseen consequences; I can cite specific examples myself. Many of the flexibilities the company wants would probably cause reduced staffing, so I'm not sure they would benefit our crews, but I can assure you our pilots are looking at doing everything to keep our fellow UPSers working. No layoffs have occured, but displacements to lower positions are occuring. The System Chief Pilot stated he cannot rule out furloughs and more displacements, and I believe him. I have publically stated on my union website that I don't believe this is an attempt at "unionbusting", because management isn't stupid-- they know this displacements and furloughs have the opposite effect in the short- and long-run, especially if the company isn't bleeding red. I think it is exactly what Tune has stated-- an attempt to shore up the bottom line and boost the share price. I haven't suggested the company is lying in any of my posts, not have I made any value judgment about the company's motive, as you suggest. As I said, I'm a shareholder and I'm for growth; both to help my portfolio and my career. Growth will help all of us more than the best contract in the world, but I certainly expect contractual improvements that benefit both IPA crews and the company. I simply think this is a potentailly bad business decision that will come back to haunt the company sooner or later. We will have to agree to disagree on what the outcome will be, but I share your hope UPS will take every action to avoid furloughs of anyone-- crewmembers, managers, and ground personnel alike.



Capt Z
haven't suggested the company is lying in any of my posts, not have I made any value judgment about the company's motive, as you suggest.

I stand corrected. I missunderstood your "unbelievable" post.


The company and IPA are back at the table this week aren't they?

It may seem silly to say/ask, because I think the furlough issue is rather important, but what are some of the other issues that will be discussed during negotiations?