As the last FedEx cargo plane loaded with USPS packages touches down, it may mark the conclusion of a significant chapter in shipping history. The recent announcement that UPS secured a "significant air transportation contract" with the United States Postal Service (USPS) has ended FedEx's 20-year monopoly, triggering a major reshaping of the parcel delivery industry landscape. Experts are analyzing the profound implications of this shift for all parties involved.
UPS Expands Partnership as FedEx Contract Expires
According to UPS, the new contract took immediate effect, deepening the relationship between the two organizations. Following a transition period, UPS will become USPS's primary air cargo provider, handling most of its domestic air freight operations. Meanwhile, FedEx confirmed in an SEC 8-K filing that its FedEx Express subsidiary's contract with USPS will expire on September 29, 2024.
USPS Service Adjustments and Cost Control Drive Changes
Satish Jindel, president of SJ Consulting, noted that USPS's air contracts and network have undergone significant changes over the past two decades. The postal service is adjusting its Priority Mail service levels, originally designed to compete with FedEx and UPS's deferred services by offering a two-day delivery network.
"With First Class mail delivery times extended to 2-5 days, the need for overnight air transportation has dramatically decreased," Jindel explained. "This change stems from Postmaster General Louis DeJoy's strategic adjustments in USPS's ten-year 'Delivering for America' plan released in March 2021."
Jindel added that if FedEx failed to adjust its network to accommodate USPS's reduced demand, the contract might no longer be attractive. He questioned FedEx Chief Customer Officer Brie Carrere's claim about seeking price increases, suggesting instead that USPS found UPS willing to handle the business at acceptable rates.
Changing "Coopetition" Model: Pandemic Accelerates Industry Shifts
Gordon Glazer, a Shipware consultant and USPS expert, believes the transition from FedEx to UPS actually began during the pandemic's early days, when a "coopetition" model emerged. In early 2020, FedEx transformed its SmartPost service, eliminating USPS's last-mile delivery role. Simultaneously, Postmaster DeJoy implemented permanent changes to air transportation, including revised delivery standards and shifting First Class mail from air to ground transportation.
Glazer noted that while UPS derives significant revenue from Amazon, FedEx had shed a smaller portion of Amazon-related business when it discontinued air services in 2019. He pointed out that UPS's SurePost service delivers about half of its parcels itself, while FedEx Ground Economy now handles nearly all economy parcels internally.
FedEx's Challenge and UPS's Opportunity
Shipware founder Rob Martinez argued that losing a major contract—regardless of how FedEx spins it—represents a significant blow, particularly for business worth over $1 billion. He compared the situation to FedEx's 2019 breakup with Amazon, noting it took over a year and a global pandemic to refill its network.
"One man's trash is another man's treasure," Martinez said. "This is a good deal for UPS, which has been struggling to find volume to fill its network. The USPS contract ensures important air cargo business with a high-value customer for the next four years."
Martinez emphasized that while the transition will be painful for all parties in the short term, UPS stands to gain by consolidating its position against competitors.
Long-Term Implications and Market Competition
Jerry Hempstead of Hempstead Consulting suggested that FedEx's 20-year relationship with USPS might have led to complacency. He recalled that the original agreement between former Postmaster Bill Henderson and FedEx founder Fred Smith came when USPS needed to replace the failing Eagle Network operated by Emery.
Andre Winters of HudsonWinters & Co. LLC offered five key observations about the shift:
- UPS expands its footprint: The deal represents significant expansion for UPS, potentially enhancing its competitiveness against FedEx and Amazon.
- Mutual benefits: UPS gains access to a broader customer base while USPS can focus on core business improvements.
- Consumer and competitive impact: The move may alter industry dynamics, potentially leading to lower rates through cost-sharing.
- Revenue and market share loss for FedEx: The transition could significantly impact FedEx's revenue and market position.
- Potential FedEx responses: The company may need to reevaluate strategies, possibly seeking new partnerships or efficiency improvements.
The UPS-USPS agreement marks a pivotal moment in parcel delivery, reflecting USPS's cost-control priorities and service adjustments. The partnership's long-term effects will reshape competitive dynamics, potentially spurring innovation across the shipping industry.