Imagine millions of letters and packages flowing like blood through the arteries of a city, operating around the clock. Sustaining this "logistics lifeline" is the fierce competition among major delivery giants. Recently, UPS announced it had secured a "significant air cargo contract" with the U.S. Postal Service (USPS) from FedEx, sending ripples through the otherwise calm delivery industry. What underlying industry shifts does this deal reveal?
UPS Expands Partnership With USPS, Aiming for Air Cargo Dominance
According to UPS, the contract took immediate effect, marking a deepening of its existing relationship with USPS. After a transition period, UPS will become USPS's primary air cargo provider, handling most of its domestic air freight operations. This move will significantly boost UPS's share of the U.S. air cargo market, solidifying its industry position.
Meanwhile, FedEx has filed an 8-K report with the Securities and Exchange Commission (SEC), confirming that its FedEx Express subsidiary's contract with USPS will expire on September 29, 2024. The agreement primarily involves domestic transportation services for USPS, and its termination means FedEx will lose a critical revenue stream.
Expert Analysis: USPS Strategic Shift and Intensified Competition
Satish Jindel, president of SJ Consulting, noted that USPS's air cargo contracts and network have undergone significant changes over the past two decades, closely tied to adjustments in its Priority Mail service. Initially designed as a two-day delivery network to compete with FedEx and UPS's deferred services, Priority Mail has evolved.
"As USPS extended delivery times for First-Class mail and packages from next-day to 2-5 days, demand for overnight air cargo decreased substantially," Jindel explained. "This directly led to a reduction in the scale of USPS's air cargo contracts—a deliberate strategy under Postmaster General Louis DeJoy's 10-year 'Delivering for America' plan."
Jindel added that if FedEx failed to adjust its network to accommodate USPS's declining demand, the contract might no longer be attractive. "FedEx Chief Customer Officer Brie Carrere's claim that FedEx dislikes current pricing and needs to raise rates is debatable," he said. "USPS seeks cost reductions, and UPS is willing to handle the business at USPS's acceptable price. I'm surprised some suggest UPS will incur losses. UPS has operated an integrated network for over 20 years, and what USPS truly needs is a commitment to delivery times—whether by plane, truck, or a combination. UPS will approach this differently than FedEx, and the outcome will likely be positive."
Gordon Glazer, a senior USPS consultant at Shipware, pointed out that the transition from FedEx to UPS began during the pandemic as a form of "coopetition"—collaboration between competitors. He explained that in early 2020, FedEx aggressively shifted its SmartPost service, ending last-mile deliveries through USPS. Simultaneously, Postmaster General DeJoy implemented permanent changes to air transport, including revised delivery standards, eliminating overnight First-Class mail, extending national delivery times from 2-3 days to 2-5 days, and shifting First-Class mail and packages from air to ground transport.
"Much of UPS's revenue is tied to Amazon, while FedEx shed a smaller portion of Amazon-related revenue when it discontinued air services in 2019, making UPS more motivated to pursue USPS's contract," Glazer said. "With this change, UPS must manage two major clients—Amazon and USPS—and sudden contract terminations by either could be detrimental. FedEx Ground Economy now handles nearly all its economy parcels independently, allowing FedEx to focus on internal operations rather than supporting a key competitor as its long-haul air cargo provider. FedEx is clearly prioritizing B2C, while UPS has shifted toward B2B. UPS SurePost delivers about half its parcels in-house, selecting those that improve delivery density, while lower-margin parcels go to USPS for last-mile delivery."
Glazer also noted that UPS Mail Innovations has always relied entirely on USPS for delivery. He analyzed the timing of the announcement, observing that the current market suffers from an oversupply of fulfillment and delivery capacity, intensifying competition among carriers. "During the pandemic, UPS focused heavily on leveraging limited resources and abruptly dropped many lower-margin clients," Glazer said. "By removing this volume, UPS could pursue more profitable small shippers."
Shipware founder Rob Martinez argued that, regardless of FedEx's explanations, losing a major contract—especially one worth over $1 billion—is undeniably unfavorable, representing substantial lost revenue. "Just two weeks ago, FedEx executives reiterated their desire to reach an agreement, claiming 'significant progress.' Clearly, FedEx needed structural adjustments to make its USPS contract profitable—likely breaking even due to USPS's publicly announced transport changes under its transformation plan. Still, FedEx hoped to continue handling air and Priority Mail but wanted to shed high-cost operational arrangements, which USPS wouldn't compensate for with guaranteed volume."
Martinez compared the situation to FedEx and Amazon's 2019 split, noting it took FedEx over a year—and a global pandemic—to refill its network. He added that FedEx's public "firing" of Amazon as a client occurred after Amazon had already excluded FedEx from future primary carrier consideration. Meanwhile, UPS stands ready to absorb additional volume and solidify its USPS relationship for at least five years. "One company's trash is another's treasure," he said. "This is a great deal for UPS, which has struggled to fill its network. The USPS contract ensures four years of high-value air cargo volume. It also helps offset Amazon-related declines. Shipware frequently handles pricing and contracts for FedEx and UPS's largest clients, so this transition isn't surprising—I predicted it weeks ago in a Wall Street analyst call. Shippers constantly evaluate carrier relationships, performance, cost, and value. When one carrier draws a line, a competitor often steps in with better terms. However, the deeper the integration, the harder it is for a shipper—or USPS—to switch. This will be painful for all parties in the short term."
Jerry Hempstead, president of Hempstead Consulting, suggested FedEx may have taken its USPS business for granted after 20 years. "If I recall correctly, this was a deal struck between Postmaster General Bill Henderson and Fred Smith," he said. "USPS had to replace the Emery-operated Eagle Network after Emery lost its FAA operating certificate. When DeJoy took office, he brought a logistics background and sought to rationalize the network. Mail and e-commerce parcels often aren't 'urgent,' so USPS expanded ground transport as an alternative to air while still meeting service requirements. To offset lost USPS volume, FedEx likely sought higher prices but underestimated Carol Tomé's resolve. Given reduced market demand, this shift makes sense."
Andre Winters, founder of HudsonWinters & Co., outlined five implications of this development:
- UPS Expands Its Footprint: Acquiring USPS's Priority and First-Class mail business represents a major capacity expansion, aligning with UPS's goals to cut costs, scale up, and boost network volume, enhancing competitiveness against FedEx and Amazon.
- Mutual Benefits: UPS gains potential access to a broader customer base and additional revenue, while USPS—strapped for funds—can focus on modernizing infrastructure and improving service reliability.
- Consumer and Competitive Impact: The move may reshape industry dynamics, prompting rivals to reassess strategies. Co-loading USPS cargo on UPS planes and ground networks could lower rates.
- Revenue and Market Share Loss: FedEx faces significant revenue erosion and heightened competition from UPS, compounded by ongoing pilot union negotiations and network integration challenges.
- Potential FedEx Adjustments: FedEx may seek new partnerships or growth avenues to mitigate losses, improve service efficiency, and accelerate workforce reductions. Rumors of an Amazon reunion persist.