How Jimmy Hoffa is Helping Us Dig for Ideas
Nothing against unions, but our job is to make our clients money. It’s not exactly a characteristic we chase to find.
The employment market is very strong. At home, our unemployment rate is 5.4%. South of the border, it’s only 3.6%. Because many employers recall the difficult time they had filling job vacancies coming out of the pandemic, many have thankfully been quite hesitant to lay anyone off. Today, labour unions have strong leverage at the negotiating table.
Higher expenses erode profits to shareholders, which leads to pressure on the stock price. Consequently, our firm is carefully avoiding investments in companies with a large labour presence.
The usual suspects are industrials (think planes, trains, automobiles, or any other form of transportation that requires many people to keep the company moving [no pun intended]).
For the last two weeks, a strike at the B.C. port halted trade between Canada and our global peers. This likely caused harm to our reputation abroad as a reliable trading partner. Experts say the supply chain bottlenecks created during the 13-day strike will take several weeks to resolve. Potash producer Nutrien was unable to export its fertilizer out of Vancouver and consequently cut its guidance because of the strike.
Over the weekend, the United Airlines and its pilots’ union agreed to a 4-year deal costing $10 billion that will increase pilot salaries by up to 40%. To put that into context, United Airlines has a market capitalization of $17.5 billion. Warren Buffett once said that:
The airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You've got huge fixed costs, you've got strong labour unions and you've got commodity pricing. That is not a great recipe for success.
As we speak, the Teamsters are renegotiating an agreement affecting 340,000 UPS workers that expires on July 31. If there’s an August strike, millions of customer deliveries will be delayed. Its new president, who recently succeeded a retiring James Hoffa (son of Jimmy Hoffa), said on television that Amazon drivers will be his next target “to organize.”
Meanwhile, the United Auto Workers’ president said this week that 150,000 members will strike this summer if General Motors, Ford Motors, and Stellantis (Chrysler) do not meet their demands.
We all remember the 2008 financial crisis when General Motors and Chrysler nearly went bankrupt. Ford Motors was in the worst shape and tapped the bond market for money before the crisis happened. Otherwise, they would have shared the same fate as their North American peers.
While the rails have been very good investment over time, the last decade has been marked with “precision scheduled railroading” (a fancy way of saying “cost cutting”). It was largely invented by the late Hunter Harrison, a veteran rail executive that successfully improved efficiencies.
Notwithstanding all this, the demise of unions has sadly widened the gap between the rich and less fortunate. Canada and the U.S. have both seen a steady decline in the union participation rate in its private sector. Canada’s private sector union participation rate is just under 14% (public sector is 74%). The union membership in the U.S. is only 10%. We believe the c-suite and the people on the front lines should have a more even distribution of income.
With a strong labour market, we’re cognizant about avoiding investments in companies vulnerable to labour unrest. We instead prefer companies with more predictable expense growth.
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