In the fiercely competitive logistics market, the shifting of contracts often signals subtle changes in industry dynamics. The recent announcement that UPS has won a "significant air cargo contract" with the U.S. Postal Service (USPS) from its main competitor FedEx has drawn widespread attention. This development not only strengthens UPS's partnership with USPS but also marks a new competitive landscape in the U.S. air cargo market.
I. Contract Shift: The Result of Market Competition and Strategic Adjustments
What factors led USPS to abandon its 20-year partnership with FedEx in favor of UPS? Understanding this transition requires examining USPS's strategic adjustments, market competition dynamics, and the interests of all parties involved.
USPS's Strategic Transformation: The "Delivering for America" Plan
SJ Consulting President Satish Jindel notes that USPS's air cargo network has evolved significantly over the past two decades. Under Postmaster General Louis DeJoy's leadership, USPS launched its 10-year "Delivering for America" plan in March 2021, aiming to achieve sustainability through service adjustments and cost reductions. A key component was modifying Priority Mail service standards.
Previously positioned to compete with FedEx and UPS's deferred services with two-day delivery, USPS has since adjusted First-Class mail delivery times from "next day" to "1-5 days" and then to "2-5 days," significantly reducing air transport needs. This diminished reliance on air cargo to meet time-sensitive requirements allowed USPS to reduce the scale of its air cargo contract needs.
FedEx's Profit Pressures and Strategic Choices
If FedEx failed to adjust its network to accommodate USPS's reduced demand, maintaining the original contract could have challenged its profitability. As FedEx Executive Vice President and Chief Customer Officer Brie Carrere indicated, FedEx might have been dissatisfied with the existing contract's pricing and sought increases. However, with USPS prioritizing cost reductions, FedEx's price hike requests likely became the decisive factor in losing the contract. Jindel believes USPS ultimately chose UPS because it offered more competitive pricing, demonstrating how price factors dominate contract negotiations in intensified market competition.
UPS's Strategic Opportunity: Network Integration and Efficiency Gains
For UPS, securing USPS's air cargo contract represents a significant strategic opportunity. With its mature integrated transportation network, UPS can flexibly utilize air and ground transport to meet USPS's needs. Jindel suggests UPS will handle this business differently than FedEx, optimizing transport solutions for cost efficiency. Additionally, the contract will improve UPS's network utilization, creating economies of scale that enhance overall profitability.
II. Market Impact: Evolving Competitive Landscape and Service Models
The transfer of USPS's air cargo contract affects not just UPS and FedEx but will reshape the entire logistics market.
Reshaping the Competitive Landscape
Shipware Senior Consultant and USPS expert Gordon Glazer notes that FedEx and USPS began developing a "coopetition" relationship early in the pandemic. In early 2020, FedEx proceeded with transforming its SmartPost business, eliminating USPS's last-mile delivery role. Meanwhile, under DeJoy's leadership, USPS permanently adjusted service standards, including extending delivery times, canceling next-day services in some areas, and shifting some mail and packages from air to ground transport.
Glazer believes UPS's close relationship with Amazon and FedEx's 2019 termination of air service cooperation with Amazon also influenced market dynamics. With the USPS contract, UPS now faces the challenge of managing two major clients simultaneously. FedEx, meanwhile, can focus more on internal operations without serving as a competitor's long-haul air cargo provider. FedEx Ground Economy now handles nearly all economy package deliveries itself, allowing greater B2C market focus while UPS emphasizes B2B. UPS's SurePost still relies on USPS for some last-mile deliveries, highlighting service model differences.
Service Model Adjustments
Shipware founder Rob Martinez calls losing the USPS contract a significant blow to FedEx, especially given its $1+ billion value. Despite FedEx executives claiming "substantial progress" in negotiations two weeks prior, no agreement was reached. Martinez suggests FedEx needed structural contract adjustments to improve profitability, but USPS wanted lower costs without guaranteed volumes, making consensus difficult.
Martinez compares this to FedEx and Amazon's 2019 split, estimating FedEx may need over a year to replace lost volume. He notes UPS stands ready to absorb new business and strengthen its USPS partnership, demonstrating how service model adjustments prove crucial in market competition.
Excess Capacity and Price Competition
With current market overcapacity, carrier competition has intensified. Glazer points out that during the pandemic, UPS adopted selective strategies, shedding many low-margin large clients to focus resources on more profitable smaller shippers, showing how carriers must flexibly adjust client structures and service strategies amid market changes.
III. Strategic Responses: Adjustments and Future Outlook
Following the USPS air cargo contract transfer, UPS, FedEx, and USPS must implement responsive measures to adapt to the new market environment.
UPS: Consolidating Position and Optimizing Networks
Winning the USPS contract represents a major boon for UPS. Martinez suggests that amid declining Amazon business, the USPS contract provides stable air cargo volume to boost network utilization. However, UPS must carefully manage relationships with both Amazon and USPS to avoid over-reliance on single clients.
FedEx: Seeking Breakthroughs and Transformation
Losing the USPS contract undoubtedly challenges FedEx. Hempstead Consulting President Jerry Hempstead believes FedEx may have overestimated its USPS partnership security. To offset lost volume, FedEx must aggressively pursue new growth avenues, like strengthening e-commerce platform cooperation, expanding internationally, and improving service quality. Additionally, FedEx must continue advancing transformation strategies, optimizing network structures and operational efficiency to counter intensifying competition.
USPS: Cost Reduction and Service Innovation
Under DeJoy's leadership, USPS actively advances its "Delivering for America" plan to achieve sustainability through cost reductions, efficiency gains, and service innovations. Selecting UPS as its air cargo partner marks a key cost-cutting measure. Moving forward, USPS must continue driving transformation strategies, including infrastructure modernization, new service expansions, and enhanced customer experiences to remain competitive.
IV. Conclusion: Strategic Choices in Industry Transformation
The transfer of USPS's air cargo contract results from market competition, strategic adjustments, and interest balancing. This event impacts not just UPS and FedEx but will reshape the entire logistics market. In this new environment, all parties must proactively adapt strategies, seize opportunities, and meet challenges to maintain competitive positions.