UPS (UPS) can take steps including facility closures, reduced line haul and pickup and delivery costs, and overhead savings to offset the lost revenue from a reduction in business with Amazon (AMZN), UBS said in a note Wednesday.

The parcel delivery company's Chief Financial Officer Brian Dykes said on an earnings call last month that the company reached an agreement in principle with Amazon "to significantly reduce" the amount it delivers for them. Dykes said Amazon's volume by H2 of 2026 will decrease by over 50% compared to what it was at the start of 2024.

A key question for investors is whether UPS can reduce its costs enough to fully offset the estimated $5 billion in lost revenue from Amazon over a two-year period, UBS analysts said.

The analysts said they estimate that overhead costs make up 10% of the domestic package expenses while operating costs are divided into three main categories. Pickup and delivery is the largest category, accounting for 40% while sorting/building and line haul costs each represent about 30%. UPS plans to close 10% of its about 1,000 domestic package facilities in 2025/2026 and the analysts estimate that the move will also result in a 10% reduction in line haul costs. These savings would total $1.5 billion annually. Reducing P&D routes could be more challenging, and they estimate a 7.5% reduction in these routes, which would also save about $1.5 billion. In addition, $400 million to $500 million in overhead savings would bring total savings to around $5 billion, which would help offset the lost revenue from Amazon.

The analysts said that while the changes with Amazon are occurring, UPS is also seeing the insourcing of its Surepost volumes. They estimate UPS is handling about 3 million Surepost packages per day, with roughly 40% of them already delivered by UPS drivers. When factoring in the 7.5% reduction in routes, the loss of 2.5 million Amazon packages per day, and the full insourcing of Surepost, the analysts estimate an increase in packages delivered per route from 203 to 212, which should improve UPS's efficiency. Additionally, the percentage of business-to-business volume in domestic deliveries will rise from 42% in 2024 to 48% after the Amazon change. This increase in packages per route and higher B2B volume will support UPS's efficiency and cost management, the analysts said.

UBS has a buy rating and a price target of $141 on the stock.

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