By Jennifer Williams

The world was a different place when United Parcel Service said it would vastly reduce its work for Amazon.com. Since the company announced the breakup with its largest customer in January, tariff-fueled trade wars have fanned economic uncertainty and crashed consumer sentiment, and UPS last week said it is cutting 20,000 jobs.

But the delivery giant's finance chief still says the company made the right decision.

"The world changed tremendously," Brian Dykes said. "But the actions we're taking with Amazon, they are all about giving us more control over our financial outcome."

Dykes said the decision to cut more than half of its delivery business with Amazon by June 2026 was years in the making. A main motivation was finding a way to deliver packages that is more profitable. The answer: Cutting back on lighter deliveries that travel short distances.

A sweater, for instance, shipped 20 or 30 miles brings in less revenue for UPS than larger Amazon shipments, the CFO said. The partial breakup will leave UPS with Amazon packages that executives say are better for margins, such as returns and heavier packages shipped longer distances.

But with Amazon shipments accounting for nearly 12% of UPS's total revenue last year, or about $10.7 billion, UPS has had to adjust. The company is slashing costs and focusing on other areas of growth, one of which is struggling with President Trump's new tariff regime.

The cost cuts have already started, totaling around half a billion dollars in the first three months of the year. Total savings this year are expected to come to $3.5 billion, including by cutting around 20,000 operational positions from the company's roughly 490,000 employees as well as closing 73 facilities. Cuts in 2026 are expected to amount to "roughly the same" amount in savings, Dykes said.

While scaling back the Amazon business, UPS is focusing on areas for growth. One is healthcare transportation and logistics: UPS agreed to buy Canada's Andlauer Healthcare Group for roughly $1.6 billion last month on the heels of unveiling plans to acquire a pair of healthcare logistics providers last fall. UPS expects revenue from its healthcare-logistics operations to nearly double to $20 billion by 2026 from roughly $10.5 billion in 2024, executives said this year.

Another is small and midsize businesses. The smaller business set is better for margins because they use more of UPS's services and have less negotiating power than larger customers, so UPS can charge more to ship packages, analysts said. These businesses made up around 31% of UPS's business in the three months ended March 31, a figure that executives expect will increase to 35% next year.

A challenge now is that some small and midsize businesses are under strain by the global trade landscape. Smaller customers don't have the same resources as larger ones to deal with the tariff changes, UPS executives said last month. UPS expects average daily U.S. volume to be down roughly 9% for the three months ending in June compared with a year earlier.

UPS customers are familiar with navigating tariffs, according to Dykes, who pointed to import levies that Trump imposed during his first term. Smaller businesses may cut back on shipments as they work to adjust supply chains, but disruptions are likely to be short-lived, he said.

Analysts welcome UPS's partial split with Amazon. "Obviously it makes it harder to do something like this if you're in a much more precarious economic situation," said Jason Seidl, a senior transportation analyst at TD Cowen. "You want to do this when everything is humming and smooth, " but the decision to cut out less profitable deliveries still makes sense, he said.

Rival FedEx went through the process of cutting Amazon from its delivery network in 2019, as Amazon was building up its own delivery network to handle its packages. UPS, meanwhile, has been trying for years to scale back its business with Amazon. The recent move accelerates the timeline, which may in part stem from a relatively new labor contract, analysts said.

UPS in 2023 agreed to a five-year labor agreement with the International Brotherhood of Teamsters, lifting annual pay and benefits for some average full-time drivers by around $25,000, to $170,000. The company has been working since to offset the higher costs, including with head count reductions.

UPS executives may have seen the latest contract renewal with Amazon as an important opportunity to make more for delivering packages, potentially offsetting some of the higher labor costs, said Bernstein analyst David Vernon.

"I think when UPS went back to them to try to get a price increase to cover the cost of the Teamsters increase, that really tested that logic" of the agreement with Amazon, he said. "And so they said, 'I'm sorry, but we have to break up.'"

Write to Jennifer Williams at jennifer.williams@wsj.com

(END) Dow Jones Newswires

May 08, 2025 06:00 ET (10:00 GMT)

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