Imagine millions of packages flowing daily through an expansive logistics network like blood through veins. The lifeline of this system is maintained through fierce competition among logistics giants. Recently, UPS secured a "significant air cargo contract" from the U.S. Postal Service (USPS), previously held by rival FedEx, introducing new dynamics to this competitive landscape. This isn't merely a transfer of contracts but signals subtle shifts in the logistics industry's structure.
UPS and USPS: Enhanced Collaboration for Mutual Growth
According to UPS officials, the contract took immediate effect and will establish UPS as USPS's primary air cargo provider for most domestic shipments after a transition period. UPS emphasized that this partnership represents an expansion and deepening of their existing relationship. This development allows UPS to further increase its market share in U.S. logistics while improving overall operational efficiency.
FedEx: Departing USPS and Strategic Pivot?
In contrast to UPS's gains, FedEx faces a strategic setback. In an SEC 8-K filing, FedEx revealed that its FedEx Express subsidiary's contract with USPS will expire on September 29, 2024, concluding a 20-year partnership. Industry observers are now questioning whether FedEx will recalibrate its business strategy in response.
Industry Experts Weigh In: Opportunities and Challenges
SJ Consulting President Satish Jindel noted significant changes in USPS's air cargo needs over two decades, particularly after adjustments to its Priority Mail service. Originally designed to compete with FedEx and UPS's deferred services with two-day delivery, USPS has since extended First Class mail delivery from next-day to 2-5 days, reducing air cargo demand. This aligns with Postmaster General Louis DeJoy's "Delivering for America" decade-long plan to optimize networks and lower operational costs.
Jindel suggested that if FedEx failed to adapt its network to USPS's declining requirements, the contract might have lost its appeal. He disputed FedEx executive Brie Carrere's claims about unsatisfactory pricing, arguing that USPS prioritized cost reduction while UPS offered acceptable terms. He believes UPS can manage this business differently and ultimately benefit.
Shipware USPS expert Gordon Glazer observed that the transition from FedEx to UPS began during the pandemic when their relationship became "coopetitive." In early 2020, FedEx transformed its SmartPost service, ending last-mile delivery through USPS. Simultaneously, DeJoy implemented permanent changes to air transport limitations, including revised delivery standards and shifting First Class mail from air to ground transportation.
Glazer noted UPS's strong Amazon partnership contrasts with FedEx's limited Amazon engagement since 2019. This makes UPS more motivated to handle USPS air cargo. However, managing two "whale" clients (Amazon and USPS) poses risks if either contract terminates abruptly. FedEx Ground Economy now handles nearly all economy parcel deliveries internally, allowing FedEx to focus on its core business rather than supporting a key competitor. While FedEx emphasizes B2C, UPS increasingly prioritizes B2B. UPS SurePost delivers about half its parcels internally, only outsourcing lower-margin last-mile deliveries to USPS.
Shipware founder Rob Martinez considers losing a billion-dollar contract damaging regardless of FedEx's explanations. He referenced FedEx executives' recent optimism about reaching a USPS agreement, suggesting FedEx needed structural contract adjustments for profitability. While wanting to continue air and Priority mail services, FedEx sought to shed high-cost operations while securing volume guarantees from USPS.
Martinez compared this to FedEx's 2019 Amazon breakup, noting FedEx took over a year—and a global pandemic—to refill its network. After publicly "firing" Amazon, FedEx was excluded from Amazon's primary carrier considerations while UPS strengthened its USPS position. He views this as UPS's opportunity to secure vital air cargo volume for four years, offsetting declining Amazon business. Martinez emphasized that shippers constantly evaluate carrier relationships, performance, cost, and value. While non-incumbents often set favorable terms to win business, deeper integration makes switching providers harder for shippers (or USPS). He predicts this transition will prove painful for all parties—FedEx, USPS, and UPS—in the short term.
Hempstead Consulting President Jerry Hempstead suggested FedEx might have taken the USPS business for granted after 20 years. He recalled the contract originated when Postmaster General Bill Henderson partnered with Fred Smith to replace Emery's defunct Eagle Network. When DeJoy assumed leadership, his logistics background informed network rationalization decisions. Recognizing that mail and e-commerce parcels aren't typically urgent, USPS expanded ground transport alternatives while meeting service requirements. To offset reduced USPS volume, FedEx likely sought higher pricing but underestimated UPS CEO Carol Tomé's resolve. Given declining demand, this shift carries significance.
HudsonWinters & Co. LLC founder Andre Winters distilled five key implications:
- UPS expands capabilities: Acquiring USPS's Priority and First-Class Mail business represents major growth, aligning with UPS's goals to reduce costs, increase scale, and enhance network capacity against competitors like FedEx and Amazon.
- Mutual benefits: UPS gains broader client access and additional revenue while financially strained USPS can focus on core operations and infrastructure modernization.
- Consumer and competitive impact: This may reshape industry dynamics, prompting strategic reevaluations. UPS's shared-loading of USPS cargo with its air and ground networks could lower rates.
- FedEx revenue and market share loss: Losing primary USPS air cargo status may significantly hurt FedEx's finances and competitive position amid ongoing pilot union negotiations and network integration challenges.
- FedEx adaptation: FedEx may need new partnerships or growth strategies to offset this loss while improving service quality to retain customers. Accelerated workforce reductions and potential Amazon reconciliation rumors emerge as possibilities.