That's a tough sell. The new rules will let you upgrade Z with miles and $500. If they allow upgrades from Z with SWU's, they are leaving money on the table-- money they might get from the sale of a C or D fare, money from the $500, money from the reduction in liability on the balance sheet from the use of miles. It is the same reason that UA will not (my prediction) allow SWU's to be used on S/T/K/L fares...
As the European and Asian carriers get away with allowing all revenue biz fares to be upgraded, I don't think that this is a financially unwise decision.
After all you could use that same Z fare on an LH operated flight and then use your UA SWU to ug that very flight...
I fully understand that the lowball coach classes are ineligible for intl. upgrades though.