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UPS wins air cargo contract with Postal Service, replaces FedEx

US Postal Service contract with FedEx expires in September

UPS will use a portion of its fleet to operate daytime routes for the U.S. Postal Service. (Photo: Jim Allen/FreightWaves)

UPS will replace FedEx as the dominant provider of domestic air cargo for the U.S. Postal Service for the first time in more than 20 years. The express delivery giant on Monday announced that the Postal Service has awarded it a “significant” contract to move the majority of the mail agency’s air cargo in the United States.

The contract will take effect on Sept. 30 and calls for a 5.5-year minimum base term, according to the Postal Service. FedEx’s (NYSE: FDX) contract with the U.S. Postal Service expires Sept. 29.

“Together UPS and USPS have developed an innovative solution that is mutually beneficial and complements our unique, reliable and efficient integrated network,” said UPS CEO Carol Tomé in a statement.

The Postal Service is one of FedEx’s largest customers, but it was clear the relationship would change this year. The Postal Service has been shifting more air parcels to its ground network since 2021 as part of a productivity drive. The agency’s transportation strategy intends to reduce overall transportation costs by $3 billion over the next two years, including $1 billion in airfreight costs savings already achieved. 

Lower postal volumes have left FedEx with excess fixed infrastructure for its daytime air network and higher operating costs per unit. FedEx officials have said the contract with the Postal Service was barely breaking even and that they were prepared not to renew the contract if better terms couldn’t be arranged.

FedEx’s revenue from its Postal Service contract in the fiscal year ending Sept. 30, 2022, fell $236 million to $1.9 billion and was expected to continue decreasing. The contract previously generated annual revenue of at least $2 billion.

How UPS will be better able to turn a profit is unclear. The company declined to provide further details.

But it’s likely the new deal involves a streamlined daytime network that focuses more on truck routes and smaller aircraft, and doesn’t commit as many aircraft to dedicated Postal flying, something that FedEx officials said they were trying to achieve in negotiations.

During FedEx’s third-quarter earnings call on March 21, Chief Customer Officer Brie Carere said the sides were making progress on an agreement that would provide service to fewer markets and allow FedEx to adjust the service to demand. FedEx is in the midst of restructuring its own air and ground networks and said it needed any Postal work to fit within its new, more efficient structure.

“FedEx and the United States Postal Service have had a long and productive relationship for more than 20 years. Over time, our respective strategies have shifted as we transform our networks and operations for the future,” FedEx said in a statement. “We have long said we would extend the contract with the USPS if we could agree to commercial terms in the best interests of FedEx shareholders. Although we were unable to reach mutually agreeable terms, we remain committed to delivering outstanding service through the completion of our contract in September. 

“Upon the conclusion of the contract, we will implement adjustments to our network that will drive efficiencies and create more flexibility. The elimination of structural costs currently in place to support postal service volume will be addressed and, in conjunction with our DRIVE efforts, FedEx profitability will improve in FY25 and beyond.” 

DRIVE is the name of FedEx’s cost-reduction initiative.

Equity analysts have argued that FedEx’s airline was much bigger than necessary, in part because of commitments to fly postal shipments during the daytime in addition to its overnight express operation. UPS operates a smaller daytime network and only flies shipments when ground transportation can’t meet two-or-three day delivery commitments.

FedEx devotes about 100 aircraft to carry postal business at an annual cost of about $3 billion, according to an earlier analysis by Brandon Oglenski, senior transportation and logistics analyst at Barclays Bank. In its December earnings report, the company identified the Postal Service contract as a $400 million drag on earnings. The Priority Mail packages that FedEx primarily hauls have a similar service (two to three days) and pricing profile to packages moved by ground transport, which translates to lower yields and margins when using air transport. Oglenski estimated FedEx could cut 50% of its daytime network capacity if it doesn’t renew the postal contract, which could save the company $1.5 billion.

Still, the Postal Service breakup could represent a loss of 1% to 1.5% of FedEx revenue, Morgan Stanley analyst Ravi Shankar said in a client note. Analysts were uncertain about how quickly can FedEx can further shed structural costs associated with the postal business and improve profit margins.

“Finalizing this agreement is a key step toward achieving our operational and financial sustainability goals,” the U.S. Postal Service said in a statement.

UPS investors don’t appear enamored with the Postal Service contract. Shares are down 1.2% during early trading on Monday.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

Twitter: @ericreports / LinkedIn: Eric Kulisch / [email protected]


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  1. MAN

    For the sub-par cheerleader, madness was last month, so stating opinions over facts is 2nd string cheer for those that didn’t walk in quarterback shoes. I’ve worked for both, UPS 1yr. (Union vs Management created nothing but division & Malis) FedEx going on 36yrs (Best company to work for above and beyond) Fact: FedEx Express (Airline / Interline) FedEx companies, intra / inter state Ground services. (UPS didn’t like that ruling). Worldwide employment / Travel, Pension, equal peer representation, I’m absolutely positively proud to be a (your term: scab) with 6 figures I’m flying, FedEx will be fine, so enjoy your box car & keep on railing.

  2. Joe J

    First, FedEx is not a union scab company its pilots have been ALPA for many decades. It’s true that their ground workers are not union, but I don’t ever recall them going on strike and having scabs cross the picket line.

    Unfortunately, FedEx treats their contractors like employees with scheduling and control, but refuses to recognize their value in compensation. As I see it, the problem is from this stated quote in the article. FedEx said in a statement.
    “We have long said we would extend the contract with the USPS if we could agree to commercial terms in the best interests of FedEx shareholders…

    So it seems shareholders are holding the reins not employees and not customers. Just for that reason I would say it’s a good move for USPS to go with UPS. Also a strong union culture in every employee except clerks.

  3. P. Turner

    If unions are the answer, we are ALL in trouble. We don’t use FedEx anymore due to the high cost of shipping, and using the postal service is about half the cost and flys on the same plane. At the end of the day, the only thing that matters is it gets there on time, nobody cares who does it.

  4. John H.

    The Postal Service should have moved to United Parcel Svc. years ago. When you deal with a non union scab outfit like FedEx, you get sub-par service and when you deal with UPS. A union company you get superior service with people who take pride in their work. The postal service should also look at moving mail and parcels by rail as well, although some postal service traffic goes by rail there should be more moving by rail.

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Eric Kulisch

Eric is the Supply Chain and Air Cargo Editor at FreightWaves. An award-winning business journalist with extensive experience covering the logistics sector, Eric spent nearly two years as the Washington, D.C., correspondent for Automotive News, where he focused on regulatory and policy issues surrounding autonomous vehicles, mobility, fuel economy and safety. He has won two regional Gold Medals and a Silver Medal from the American Society of Business Publication Editors for government and trade coverage, and news analysis. He was voted best for feature writing and commentary in the Trade/Newsletter category by the D.C. Chapter of the Society of Professional Journalists. He won Environmental Journalist of the Year from the Seahorse Freight Association in 2014 and was the group's 2013 Supply Chain Journalist of the Year. In December 2022, Eric was voted runner up for Air Cargo Journalist by the Seahorse Freight Association. As associate editor at American Shipper Magazine for more than a decade, he wrote about trade, freight transportation and supply chains. He has appeared on Marketplace, ABC News and National Public Radio to talk about logistics issues in the news. Eric is based in Vancouver, Washington. He can be reached for comments and tips at [email protected]