The logistics industry is undergoing a quiet transformation as UPS secures a significant air cargo contract with the United States Postal Service (USPS), previously held by its rival FedEx. This strategic shift has sparked intense industry scrutiny and analysis. This report examines the motivations behind the change, its implications, and future developments in the sector.
UPS Expands USPS Partnership, Targets Air Cargo Dominance
According to official information, the contract takes immediate effect, marking a deepening of UPS's existing relationship with USPS. Following a transition period, UPS will become USPS's primary air cargo provider, handling most of its domestic air shipments. Meanwhile, FedEx disclosed 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 Declining Air Cargo Demand: Key Factors in FedEx's Loss
Satish Jindel, president of SJ Consulting, notes significant changes in USPS's air cargo contracts and network over the past two decades. USPS 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.
"Previously, First Class mail and packages promised next-day delivery on certain routes," Jindel explains. "Now, First Class delivery times have extended to 2-5 days. These changes reduced overnight delivery demand, leading to a substantial contraction in air cargo contracts—exactly as Postmaster General Louis DeJoy planned in USPS's 10-year 'Delivering for America' strategy released in March 2021."
Jindel suggests that if FedEx hadn't adapted its network to declining air cargo demand, the contract might have become less attractive. "FedEx Executive Vice President Brie Carrere stated they disliked current pricing and needed increases. But USPS sought cost reductions and found UPS willing to handle this air cargo at acceptable rates," he adds. "I doubt UPS would operate this at a loss. Their integrated network, operational for over 20 years, aligns perfectly with USPS's delivery time commitments—whether by plane, truck, or combined methods. This represents incremental positive growth for UPS."
"Coopetition" and Strategic Shifts: The UPS-FedEx-USPS Power Play
Gordon Glazer, senior consultant at Shipware, observes that the transition from FedEx to UPS actually began during the pandemic's early stages, manifesting as "coopetition" between FedEx and USPS.
He explains that in early 2020, FedEx aggressively transformed its SmartPost business, which previously relied on USPS for final-mile delivery. Simultaneously, Postmaster DeJoy implemented permanent operational changes in response to temporary airline capacity constraints during the pandemic, including revised delivery standards, eliminated overnight service for local First Class mail, extended national delivery windows from 2-3 to 2-5 days, and shifted First Class mail from air to ground transport.
"UPS derives significant revenue from Amazon, while FedEx shed a smaller portion of Amazon revenue when ending air services in 2019," Glazer notes. "This makes UPS's USPS acquisition more logical. However, managing two 'whales' (major clients) creates vulnerability if either terminates contracts suddenly. FedEx Ground Economy now handles nearly all economy parcel deliveries internally, allowing focus on core operations rather than supporting a competitor's long-haul air network."
Profit Versus Strategy: FedEx's Retreat and UPS's Advance
Shipware founder Rob Martinez contends that losing a major contract—particularly one worth over $1 billion—always represents significant revenue loss, regardless of corporate spin.
"Just weeks ago, FedEx executives expressed optimism about reaching agreement," Martinez recalls. "Clearly, FedEx needed structural contract adjustments to achieve profitability. While not necessarily losing money, the postal transformation plan changed their relationship to breakeven status. FedEx hoped to continue handling air and Priority mail without volume guarantees or high-cost operational arrangements."
Martinez compares this situation to FedEx's 2019 Amazon breakup, noting it took over a year—and a global pandemic—to refill their network. "One company's trash becomes another's treasure. This is a smart UPS acquisition. They've struggled to fill network capacity since Amazon business declined. The USPS contract ensures substantial air volume for four years with a premium client."
Strategic Reassessment: FedEx's Complacency and UPS's Opportunity
Jerry Hempstead of Hempstead Consulting suggests FedEx may have taken the 20-year USPS relationship for granted. "This originated with Postmaster Bill Henderson and FedEx founder Fred Smith when USPS needed to replace the failing Emery network. DeJoy, with logistics expertise, rationally reconfigured the network recognizing most mail isn't urgent. To offset reduced USPS volume, FedEx likely sought price increases but underestimated UPS CEO Carol Tomé's resolve."
Andre Winters of HudsonWinters offers a five-point analysis:
1. UPS's Strategic Expansion: Acquiring USPS Priority and First-Class mail operations represents major capability growth, aligning with UPS's cost-reduction and network optimization goals.
2. Mutual Benefits: UPS gains broader customer access while USPS focuses on modernizing infrastructure and improving core services.
3. Consumer and Competitive Impact: Industry dynamics may shift as UPS combines USPS shipments with its own network, potentially lowering rates through cost-sharing.
4. FedEx Challenges: Revenue and market share losses compound existing pressures from pilot union negotiations and network integration efforts.
5. FedEx Adaptation: The company may accelerate workforce reductions, explore new partnerships, or potentially revisit Amazon relationships.
Conclusion
UPS's USPS contract victory signals a major logistics industry realignment. While reflecting USPS's cost-control priorities and UPS's competitive aggression, it presents FedEx with strategic reassessment challenges. As market competition intensifies, adaptability and innovation will determine which carriers thrive in this evolving landscape.