United Parcel Service’s cost-cutting program is not shrinking the company, but positioning it for profitable growth as it moves to pursue higher volumes of business than short-haul courier services on Amazon volumes, a senior executive said last week.
Analysts give UPS (NYSE: UPS ) strong indications that it is implementing the largest network integration in its history so far without a significant impact on service levels.
“As we come out of the second quarter we will have a more agile, more profitable network that we can grow with the right kind of volume,” said Brian Dix, chief financial officer at Raymond James Industrial Conference. “Less e-commerce, more small and medium business, more B2B, more healthcare. That really sets the growth path for us as we go into the back half of ’26 and into ’27.”
The significance of his remarks was not so much the new revelations, but the level of detail and color he gave about the strategic change at UPS. FedEx indicated last month how it is prioritizing last-mile delivery to high-value B2B segments and premium e-commerce.
In 2024, the packaging and supply chain management giant launched an aggressive strategy to reduce and automate its delivery network with the goal of increasing profitability through improved compliance capacity and operations with lower parcel volumes. Slow growth in e-commerce sales and the rise of last-mile delivery competitors have pressured demand for UPS’s smaller packages, but the main reason was a deliberate decision to cut its volume with its biggest customer, Amazon (NASDAQ: AMZN ), by 50% by mid-2026 because it wasn’t making money.
After cutting 34,000 full-time operations positions, 25 million operating hours and 93 owned or leased facilities by 2025, UPS announced plans to cut 30,000 jobs in January and close 24 parcel sorting centers this year. It offered union delivery drivers a $150,000 bid. By the end of June, UPS will reduce its Amazon production by 2 million pieces per day and cut $5 billion in revenue in less than two years.
Automation in the rest of the facility helps eliminate the number of configuration changes, further reducing unnecessary capacity.
The company said it expects a softer earnings environment with operating adjustment costs to weigh on profits in the first half, and results to improve the rest of the year as efficiency measures trickle down to the bottom line. The company clarified that first-quarter domestic margins should be in the 4%-5% range on revenue in the low to mid-single digits from last year. Domestic revenue is expected to increase by low single digits compared to last year, with an operating margin of approximately 8%.
In addition to the capacity facts, a number of violations add additional costs to the parcel logistics power. The Atlanta-based company is taking on shipping costs as it moves some of its Ground Saver Economy product back to the U.S. Postal Service for last-mile delivery after it proved difficult to get to all the stops for a year. The costs of hiring third-party cargo airlines, which lost out on MD-11 capacity when the fleet was phased out, and later retired, for safety reasons, will be reduced during the year as several 767-300 freighters from Boeing join the fleet.
Global income growth is also challenged by tough comparisons in the first half of 2025. Last year, importers from China and other countries moved to pre-order lists before a wave of U.S. tariffs took effect, and the Trump administration’s repeal of duty-free treatment for small-dollar parcel shipments decimated e-commerce traffic.
Stock analysts generally agree that the restructuring shows UPS’s discipline and ability to execute, as demonstrated by fourth-quarter results that beat consensus expectations on revenue of 2% and earnings up 8%.
Parcel industry experts say FedEx (NYSE: FDX ) and UPS should be aware that service could deteriorate as they rationalize their networks and cut staff. So far, delivery performance appears unaffected, but some observers on social media are concerned about a decline in UPS sales and account support.
Despite the closure of about 10% of UPS buildings last year, the company has not had any problems with service, Dix said. “It’s important because when you want to talk to a customer about a 5.9% general rate increase, you better get to your service metrics. You’re better than your competition. Good service translates into good revenue every part of the next year. We know we’re a premium provider. We expect to deliver premium service, and we’ve done that 8 years in a row.”
According to ShipMetrix, UPS had the highest on-time delivery rate during the holiday shipping season at 97.2% compared to 96.5% in 2024.
Network carriers such as UPS need higher package density per route to make deliveries economical, according to analysts. The risk of stressing Amazon’s volumes is that costs rise with less density because they are spread to fewer customers each way, creating upward pressure on prices. FedEx and UPS have aggressively raised base rates and seasonal surcharges over the past two years in an effort to offset slow revenue growth, which has pushed more online retailers to lower-cost independent couriers.
The operations team at UPS, led by U.S. President Nando Cesarone, has an “extraordinary” job in taking on the costs, ShipMatrix president Satish Jandal said in a telephone interview. “The speed at which they execute is faster than the speed at which FedEx connects their two networks. If it weren’t for that, their profits would have been cut big time.”
UPS, unlike FedEx, did not have additional facilities. It’s putting them off because Amazon’s volume is contracting, the parcel industry consultant added.
UPS has continued to maintain its culture through turbulent times. “If they find an ounce of fat in the body, they’re going to cut it. They’re a great operating company and they’re proving that in managing this Glide at Amazon volume,” Jindal said.
Research by Barclays equity analyst Brandon Oglinski shows that UPS’s forecast for flat domestic operating income in 2026 contrasts with historical periods of volume declines this century, when revenue declines far outpace volume declines in percentage terms.
The parcel carrier has a hand in the Amazon business that remains profitable. The portion that is spilled is outbound deliveries from local Amazon fulfillment centers located within 50 miles of residential delivery addresses. “You don’t need an end-to-end integrated network to move that kind of volume. Amazon has invested heavily in their supply chain. They can do it really, really well. And so we’ve decided they can outsource that part of the business, and we’ll focus on other parts of the business. They’ll still be one of our biggest customers,” Dykes said.
UPS, for example, will continue to handle large volumes of Amazon merchandise through the UPS Store network and support smaller sellers in the Amazon marketplace.
“I think it’s still a very collaborative relationship. We’ve got multi-year contracts in other areas of the business. But this will allow us to really focus our business on the areas where we want to invest and grow,” Dykes told investors.
UPS also avoided tracking volume when it saw unprofitable Chinese e-commerce customers injecting low-value parcels into the UPS network, which contributed to a 10.6% drop in average daily volume during the fourth quarter. The carrier made the decision after pulling out of its USPS partnership because new regulations require major carriers to drop off parcels at upstream distribution centers instead of destination post offices for last-mile delivery. UPS decided to handle all deliveries due to concerns about service disruptions and raise prices to cover the higher cost, effectively squeezing out Shen, Timo and other Chinese vendors.
Dykes predicts that UPS will close Chinese e-commerce ties this quarter and begin to show mid-single-digit revenue growth from small and medium-sized businesses as the year progresses.
“It’s not a company downsizing strategy. It’s a growth strategy. But it’s a growth strategy in places where we can grow faster. So our focus is really on how you can grow our enterprise customers, especially in the B2B and healthcare and industrial verticals where we can get higher revenue per segment and especially with better features for small business networks with crossborder networks,” Dix said. By integrating the solutions into their e-stores and management systems.
A better customer mix allowed UPS to grow earnings per segment by 8.3% in the fourth quarter. More than a third of the gains were from base price increases, another third were driven by higher harvest volumes and the remainder by higher fuel costs.
“Healthcare, high-value products, complex supply chains are really sticky. When you’re delivering 99.99% on time for a clinical trial drug, they don’t care if you do it by raising the price by 5%. It’s a ball game if you’re talking about a T-shirt to a residence,” Dykes said. UPS’s guidance is for earnings per share to grow 6.5% in 2026 and then settle at a 3% growth rate in subsequent years.
T-shirt is now a dirty word for legacy carriers. FedEx Chief Customer Officer Bree Carey said during last month’s Investor Day event that FedEx no longer has much interest in shipping T-shirts.
UPS shares have risen 21% in the past three months, before falling after the U.S. and Israel attacked Iran over concerns about high oil prices and slow global trade.
Click here for more FreightWaves/American Shipper stories by Eric Kolsch.
Write to Erik Kulisch at ekulisch@freightwaves.com.
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