UPS is set to take over USPS air cargo contract from FedEx

Atlanta-based global freight transportation and logistics services provider UPS said earlier today it has been awarded what it labeled a “significant air cargo contract” by the United States Postal Service (USPS).

UPS officials said that this contract takes effect immediately while also expanding the existing relationship between UPS and USPS. And the company added that after a transition period, UPS will be the primary air cargo provider for USPS, moving the majority of USPS’s United States air cargo.

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

Additional details regarding the contract were not made official by UPS, and USPS officials did not reply for comment at press time.

UPS takes over the USPS contract from its biggest rival, Memphis-based FedEx.

In an 8-K statement filed with the United States Securities and Exchange Commission today, FedEx said that the contract between its FedEx Express subsidiary and the USPS—in which it provides domestic transportation services for the USPS, “will expire by its terms” on September 29, 2024.

This development does not come as a total surprise, considering that on FedEx’s fiscal second quarter earnings call late last year that FedEx President and CEO Raj Subramanian called 2023 a “particularly difficult year” for the company’s Express unit, which saw revenue fall 6% annually to $10.2 billion, with operating income off 60% to $137 million. One reason for the loss, he explained, was related to USPS’s strategy to shift more of its volume handled by FedEx from air to ground, which Subramaniam viewed as a headwind.  And he also noted that FedEx’s ability to drive near-term margin improvement was partially constrained by the year-over-year decline in USPS volume, combined with minimum service obligations associated with UPS’s contract with USPS.

Like Subramaniam, FedEx Executive Vice President, Chief Customer Officer Brie Carere also labeled the current situation regarding USPS as a headwind on that same earnings call.

“From a negotiation perspective, we are having very collaborative negotiations with the Post Office, but I think we've also been very clear that it will take quite a significant change in contractual terms and agreement to renew that contract,” she said on the December earnings call.

“We continue to value the partnership. We're both at the table. And of course, we are honoring our service commitments. And with the current volume levels, that is a headwind this fiscal year. So, we're still negotiating. As soon as we have a renewed contract or a decision, we'll let all of you know. I am optimistic one way or the other we will improve the profit situation at Express regardless of our relationship with the Post Office.”

The shifting of USPS volume from air to ground in the FedEx network was evident in the 18% decline in total average daily freight pounds in the fiscal second quarter, which was impacted by the shift.

What’s more, the USPS continues to deal with ongoing revenue losses amid a series of steps it has taken in recent years to reduce them and eventually see a profit. Taking steps to counter that, it has cut back the total of volume it moves via air by 90% going back to 2021, according to Postmaster General Louis DeJoy, putting it on track to reduce approximately $1 billion from its annual air transportation costs.

As previously reported, in February 2017, FedEx Express and the USPS extended their express air transportation contract, which was originally inked in April 2013, with the deal intact through September 29, 2024. FedEx said that the modified contract was expected to generate revenue of approximately $1.5 billion per year for FedEx Express, with FedEx Express providing airport-to-airport transportation of USPS Priority Mail Express and Priority Mail within the United States.

And in May 2019, FedEx announced its plan to integrate FedEx Smart Post package volume, which have traditionally gone to the United States Postal Service for daily residential deliveries, into its FedEx Ground standard operations, as well as also increasing large package capabilities. The company said, at the time, this comprises nearly 2 million FedEx SmartPost packages, which will be more frequently integrated into its FedEx Ground operations and will be handled by the same service providers that are already handling its FedEx Ground residential packages.

A Reuters report stated that USPS, FedEx Express’s customer, was prepared to walk away from the parties’ 22-year relationship if existing contract terms between the parties did not improve, adding that FedEx has been very focused on monitoring expenses, amid lower freight demand and a “bloated cost structure.” What’s more, the article said that the expiration of this contract would take out around $2 billion in annual business that fund hundreds of FedEx pilot jobs, with whom it has yet to renew a contract with. It also said that losing this business would lead to FedEx to reduce its air capacity. 

Rick Watson, Founder and CEO of New York-based, RMW Commerce Consulting, did not mince words in assessing this situation, calling it significant news.

“Sadly, it represents more of the decline of FedEx to the point where in five years, are they even a significant player in the parcel and freight markets anymore?” stated Watson. "Four years ago, UPS was adjusting to the rise of Amazon and made a non-obvious choice of Carol Tome' as leader.  Whether you like everything she has done and had to deal with, she has a plan, and a strategy to expand the business into profitable channels, and away from areas where they cannot compete (i.e. vs Amazon head-to-head). New [FedEx] management is needed and soon. Fred Smith is out of new ideas, for investors to see him return would be a significant negative development. The company needs fresh ideas and its possible those fresh ideas could come from the Chinese air freight market, or one of the larger regional shippers like OnTrac.”

Andre Winters, Founder & Principal of St. Paul, Minn.-based HudsonWinters & Co. LLC, described the parting of the ways between FedEx and USPS as volume utilization and rationalization.

“UPS decided to be more aggressive than FedEx on the rates for weekend flying USPS and or co-loading with UPS cargo, he told LM. “I am not surprised I was at DHL Express when there was a discussion about UPS acting as the uplift for DHL Express in 2007.”