FedEx Corporation (FDX) has reached an agreement with its Air Line Pilots Association (ALPA) to provide a 3% pay hike annually. The agreement holds good for one or two years at the union’s option and includes perks such as 1% lump sum payment up to $2,600 to its pilots, new safety programs and expanded foreign duty assignment.

FedEx and the ALPA reached this agreement in less than six months and it was approved by approximately 68% of the pilots participating in the vote. The ALPA represents 4,500 FedEx pilots and approximately 84% of its members had participated in the ballot.

Currently, the agreement is regarded as a stop gap arrangement by both ends as it does not emphasize on key areas such as work rules and improved retirement benefits.

The company expects the agreement to be valid till 2013 provided the union does not call it off in a year. In such a scenario, pilots will no longer be eligible for another 3% hike. The agreement comes with a written assurance to address these underlying issues in the next round of negotiation.

Management believes the temporary settlement balances the interest of pilots, customers and shareholders as well as facilitates FedEx to station more pilots abroad to serve international shipping growth by establishing a foreign duty assignment in Cologne, Germany.

FedEx International Express is the fastest growing segment, with mounting demand for the service. Hence, the agreement will provide grounds to retain more pilots and its short duration will provide room for changes in future contracts.

However, on the labor front, the company faces the risk of FedEx Express’ elimination by the U.S. Congress as the unit accounts for the bulk of its revenue from legal protections by the Railway Labor Act (RLA) and places it under the regulations of the National Labor Relations Act.

A change in FedEx Express’ status could potentially ease the union’s ability to organize the unit’s non-pilot employees as FedEx Express’ pilots are already represented by the ALPA.

We believe an increasingly unionized workforce creates long-term risks of reduced labor flexibility and higher costs, which could result in lower margins and reduced free cash flow along with growing competition from its primary competitor United Parcel Service Inc. (UPS).

Currently we maintain our long-term Neutral recommendation on FedEx supported by a Zacks #3 Rank (Hold).

 
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