The U.S. Postal Service shipped fewer packages and letters by air and reduced spending by 43% in the first three months after UPS took over a primary air cargo contract from FedEx, but incomplete data collection makes it difficult to determine whether the carrier met on-time performance requirements, according to the agency’s inspector general.
The watchdog also found that postal employees failed to properly scan packages before transferring them to the airline and a small number of hazardous material shipments mistakenly slipped into the UPS (NYSE: UPS) network. It urged the postal operator to improve network planning and how it measures UPS’s performance to capitalize on the arrangement’s advantages and address inefficiencies.
“These issues could limit the Postal Service’s ability to assess performance, ensure timely mail delivery, and maintain mail visibility…. While the new agreement is favorable to the Postal Service, improper handling and lack of visibility over the mail moving through the air cargo network could degrade service performance and customer expectations,” the inspector general said in an audit issued last week.
In October, UPS assumed full responsibility for shipping first-class, Priority Mail and Priority Express packages for the Postal Service after winning a major contract, previously held by FedEx (NYSE: FDX) for more than 20 years, with a minimum base period of 5.5 years. The new agreement is officially valued, according to the report, at about $10 billion — $2.5 billion more than UPS last year said it expected to receive. It supports the postal agency’s plan to save money by shifting more mail delivery from air transport to less expensive ground transportation under a multi-year transformation strategy for reversing financial losses and improving customer service.
The Postal Service achieved those goals during the first quarter of fiscal year 2025. In an audit issued last week, the Office of Inspector General said the Postal Service assigned 7% less volume to the air network (327 million pounds) and spent $364 million, a 43% decrease compared to the same period in 2024.
Historically, the Postal Service has spent over $3 billion annually across multiple air carriers to support mail movement.
The new air cargo agreement is more favorable to the Postal Service than the one with FedEx in terms of cost, number of destinations, with lower volume commitments, more planned capacity and greater operational flexibility. UPS, for example, is using its extensive ground network for packages that can be delivered more cheaply and still meet service commitments. The company is also handling mail in its existing daytime flight operation with limited addition of aircraft and moving some volume directly between city gateways without routing everything through its global hub in Louisville, Kentucky.
Additionally, the new agreement increases the required percent of mail and packages transported on time, compared with the last contract.
FedEx carried 71% of all air cargo (984 million pounds) tendered by the Postal Service in fiscal year 2024 while UPS received 18% of the air volume. A handful of other airlines carry mail on a few select routes. In the first quarter of the new contract, the national post routed 85% of all air cargo to UPS. FedEx still transports mail requiring special handling, including hazardous materials, live animals and perishable goods. During the same period, it handled 4% of domestic air mail.
Despite the cost savings, the Office of Inspector General said the postal operator needs to improve network planning and how it measures UPS’s performance to capitalize on the arrangement’s advantages and address inefficiencies, the report said.
According to the audit, the Postal Service can’t accurately measure on-time performance because the carrier scoring system excludes pieces when flights are delayed for circumstances beyond UPS’s control and doesn’t count pieces moved under a contract provision that allows a later delivery time, on Sundays, for some mail tendered on Saturdays. Payments can be reduced for late deliveries.
“Misrepresentation of performance, whether by overstating or understating the carrier’s actual results, can significantly affect decision-making and accountability. Inaccurate data may also obscure true performance trends, hindering efforts to identify areas for improvement or replicate successful strategies, ultimately leading to inefficient operations. Furthermore, trust from customers, partners, and stakeholders, who rely on precise performance metrics to evaluate reliability and efficiency, may be compromised due to incorrect reporting,” the IG report said. “These inaccuracies can result in resource misallocation, such as focusing on non-existent problems or neglecting critical issues.”
Management said it added a new reporting tool in January that will soon allow the agency to better reconcile deliver performance against the benchmark.
Hazmat mixups
The IG also reported that postal employees are improperly accepting and tendering packages identified as hazardous material to UPS, resulting in delayed mail and potentially dangerous conditions. Hazmat shipments are supposed to be sent to FedEx or moved by surface transportation. When they end up at the UPS hub, they are sorted from the package flow and sent to a local Postal Service facility for reprocessing and distribution. In the first quarter, UPS reported a total of 2,411 hazmat-marked packages at its main hub, some of which still had FedEx labels on them. And 84 packages slipped through UPS monitoring and were flown to their final destination.
The IG acknowledged that mishandled pieces represent a small fraction of total hazmat shipments — FedEx moved 29,000 hazmat pieces during the quarter — and the number of routing errors declined from October through December 2024 because the Postal Service has moved to address the problem. Steps taken include installing new software on mail processing machines to detect hazmat markings and conducting in-person training sessions for retail clerks on proper hazmat acceptance procedures.
The IG recommended that the Postal Service implement additional measures to hold accountable clerks who fail retail acceptance tests, noting that less than 80% of 630 clerks in a test demonstrated correct hazmat procedures, such as inspecting packages and asking customers whether packages contain lithium batteries or other hazardous substances.
The audit also identified a problem with postal employees not performing required scans of mail moving to and from the UPS hub by truck, reducing the Postal Service’s ability to track parcels and efficiently schedule employees. At three surface feeder sites it visited, the IG said it observed mail handlers not performing required scans of individual parcels or bins while loading and unloading trailers. During the quarter, employees at all nine surface terminals failed to perform outbound scans 97% of the time and inbound scans 93% of the time because of connectivity issues with wireless networks and poor communication from headquarters.
Management said it would implement by November processes to ensure surface feeder sites report daily scans and to determine if they are performed.
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