UPS Replaces FedEx as Air Cargo Carrier for USPS With New Contract
UPS will replace FedEx as the chief air cargo partner of the United States Postal Service (USPS).
The Atlanta-based parcel delivery firm was awarded a “significant” air cargo contract by the USPS, which expands the existing relationship between the two organizations, UPS said. Financial terms of the new agreement have not been disclosed, but the deal will last 5.5 years, said USPS.
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UPS will move the majority of air cargo in the U.S. for the postal service following a transition period, according to UPS. This marks the end of a more than 20-year partnership between FedEx and USPS.
FedEx and the USPS had been in months-long negotiations for a new contract, which is set to expire on Sept. 29. USPS was FedEx’s largest customer ahead of the new deal, with FedEx Express providing domestic airport-to-airport transportation services for the agency’s U.S. Mail, Priority Mail and Priority Mail Express services. Instead, UPS will now be filling that role across U.S. airports.
An SEC filing from FedEx indicated that both parties were unable to reach agreement on mutually beneficial terms to extend the deal, with extensive talks concluding on March 29, 2024.
“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 new deal for UPS comes amid the logistics giant’s news that it would be cutting $3 billion in expenses by the end of the 2028 fiscal year, with ambitious goals to increase revenue per piece (RPP) faster than cost per piece (CPP).
For FedEx, the expiration would negatively affect profitability for a company that is undergoing plenty of cost cuts of its own in an effort to save $4 billion in costs by 2025. In its third quarter filing, FedEx said profitability could be negatively affected in one of two ways: if it couldn’t adjust costs at the FedEx Express network following a potential USPS contract expiration, or if USPS terminated the existing contract.
In a March earnings call, FedEx chief customer officer Brie Carere had said “significant progress” had been made in contract negotiations, noting that the company was “days or weeks away from knowing if we will have a contract.”
But Carere had signaled some discontent out of the FedEx camp in the prior earnings call in December, when she asserted that “it will take quite a significant change in contractual terms and agreement to renew that contract.”
Thomas Goldsby, professor and Haslam Chair of Logistics at the University of Tennessee’s Global Supply Chain Institute, told Sourcing Journal the move wasn’t entirely surprising.
“There just aren’t many alternatives in that space for comprehensive air network coverage,” Goldsby said.
If anything, the question becomes how the new volume ties into UPS’ plans to be more selective with customers as part of the company’s “Better and Bolder” growth strategy, according to Goldsby.
“How gaining business that FedEx felt was not sufficiently lucrative to keep lends to enhanced profitability for UPS is curious to me,” Goldsby said, acknowledging that although the terms of the deal are not public, that “it might suggest that UPS went too far in the ‘selectivity’ play to have the capacity to take on this business.”
The shift comes as USPS was already transitioning more of its volumes from air to it higher-margin ground service. In August, Postmaster General Louis DeJoy said that the USPS reduced volume moved by air by more than 90 percent over the two years prior. As part of a $5 billion cost-cutting plan through the end of 2025, the agency is hoping the air-to-ground shift can cut $1.5 billion of those expenses to help reduce regional network transportation.
“PG DeJoy has tried to shift as much mail volume through the USPS ground network as possible,” said Goldsby. “It’s always cheaper to keep cargo on the ground so long as the service commitments can be met. By some estimates, this leaves only $3 billion of USPS mail/parcels traveling by air. It’s not a negligible amount, but it’s not a game changer for UPS, either.”
For the three-month period ending Dec. 31, USPS’ air transportation expenses dropped a meaningful 30 percent year-over-year to $704 million.
FedEx has been open about the impacts of the air-to-ground shift on its FedEx Express segment. The Memphis-based company attributed the unit’s 11 percent decline in average daily freight pounds in the third quarter, and 16 percent decline in the first three fiscal quarters of 2024, due both weak global economic conditions and the lower air volume from USPS.
FedEx Express, which is FedEx’s largest operating segment, has seen revenue declines for six straight quarters, including a 2.4 percent dip in the most recent period to $10.1 billion. In the quarter, FedEx Express represented 46.5 percent of total revenue at FedEX.
In total, USPS’ payments to FedEx shrank to about $1.7 billion in fiscal 2023, from $2.4 billion during the fiscal year ended September 2020.
Upon the conclusion of the USPS contract on Sept. 29, FedEx says it will implement adjustments to its network that will “drive efficiencies and create more flexibility,” an ongoing theme for the delivery company seeking to save billions.
“The elimination of structural costs currently in place to support postal service volume will be addressed,” FedEx said in a statement. “In conjunction with our Drive efforts, FedEx profitability will improve in FY25 and beyond.”
