Imagine millions of packages crisscrossing the skies daily, connecting urban and rural areas, carrying people's expectations and dreams. Supporting this vast operation is an intricate air cargo network that's now undergoing a significant transformation. The United States Postal Service (USPS) is ending its two-decade air transport partnership with FedEx, turning instead to UPS. This shift represents more than just a contract change—it reflects the evolving competitive landscape of the logistics industry.
UPS Gains Strategic Advantage With USPS Deal
UPS recently announced it secured a crucial air cargo contract previously held by FedEx. The agreement took immediate effect and expands the existing relationship between UPS and USPS. After a transition period, UPS will become the primary air cargo provider for most of USPS's domestic shipments, creating a new growth opportunity for its air division.
FedEx Loses Longstanding USPS Partnership
Meanwhile, FedEx disclosed in an SEC filing that its FedEx Express subsidiary's contract with USPS will expire on September 29, 2024. This marks the end of a 20-year relationship that provided domestic transportation services for USPS. The loss represents a significant blow to FedEx's operations.
Changing Priorities Reshape Air Cargo Needs
Satish Jindel, president of SJ Consulting, notes that USPS's air cargo requirements have evolved dramatically over two decades, particularly regarding its Priority Mail service. Originally designed for two-day delivery to compete with FedEx and UPS deferred services, USPS's First Class mail and packages once promised next-day delivery on certain routes but now take 2-5 days.
"These changes reduced the need for overnight transportation," Jindel explained. "The air cargo contract has shrunk significantly, aligning with Postmaster General Louis DeJoy's 'Delivering for America' plan from March 2021."
Jindel questioned FedEx's claim that pricing made the contract unattractive: "USPS sought cost reductions and found UPS willing to handle this business at acceptable rates. Some suggest UPS took on unprofitable business, but that's unlikely. UPS has operated an integrated network for over 20 years and can transport packages via various methods while meeting service commitments."
Pandemic Accelerated Transition
Gordon Glazer, a USPS expert at Shipware, observed that the shift from FedEx to UPS began during the pandemic's early days through a "coopetition" model—collaboration between competitors. He noted that in early 2020, FedEx advanced its SmartPost service transition while Postmaster DeJoy implemented permanent changes to USPS's air transport operations, including extended delivery windows and shifting First Class mail from air to ground transportation.
Strategic Differences Between Carriers
"This makes sense," Glazer said. "UPS already derives much revenue from Amazon, while FedEx shed a smaller portion of Amazon business when it discontinued air service in 2019. Now UPS must manage two major clients—Amazon and USPS—that could adversely affect operations if either contract terminates suddenly."
Glazer highlighted that FedEx now handles nearly all its ground economy business internally, allowing focus on B2C operations while UPS emphasizes B2B. He also noted UPS's selective approach to SurePost deliveries, keeping high-density packages while passing lower-margin ones to USPS for final delivery.
Financial Impact on FedEx
Rob Martinez, Shipware's founder, emphasized that losing any major contract—especially one worth over $1 billion—represents a significant revenue loss. "Just two weeks ago, FedEx executives expressed optimism about negotiations," he said. "Clearly FedEx needed structural contract changes to maintain profitability as USPS implemented its transformation plan."
Martinez compared the situation to FedEx's 2019 separation from Amazon, noting it took over a year—and a global pandemic—for FedEx to fill its network again. "One person's trash is another's treasure," he observed. "This is a great deal for UPS, which has struggled to find volume for its network."
Industry Perspectives on the Shift
Jerry Hempstead of Hempstead Consulting suggested FedEx may have taken the USPS business for granted. "When Postmaster DeJoy arrived with logistics experience, he rationalized the network," Hempstead said. "Mail and e-commerce packages often aren't urgent, so USPS expanded ground transport alternatives while maintaining service standards."
Five Key Takeaways
Andre Winters of HudsonWinters & Co. outlined critical implications:
1. UPS Expansion: Acquiring USPS's Priority and First-Class business represents significant capability growth, enhancing competitiveness against FedEx and Amazon.
2. Mutual Benefits: UPS gains potential new revenue streams while USPS focuses on core operations and infrastructure modernization.
3. Consumer Impact: Competition may drive rate reductions as UPS co-loads USPS shipments with existing cargo.
4. FedEx Challenges: The loss creates revenue and market share pressures amid ongoing labor negotiations and network integration.
5. Industry Adaptation: FedEx may accelerate workforce reductions or pursue new partnerships, including potential reconciliation with Amazon.
This realignment of air cargo operations will profoundly impact the logistics sector. UPS's ascendance, FedEx's strategic adjustments, and USPS's transformation will shape industry dynamics, potentially benefiting consumers through more efficient services.