Imagine millions of packages flowing like an endless river through cities, connecting businesses with customers, carrying expectations and hopes. The lifeline supporting this logistics network is a vast and complex air transportation system. When a logistics giant quietly secures another postal service's air cargo contract, it's not merely a business transfer—it's the prelude to an industry transformation.
Recently, UPS announced it had won a "significant air cargo contract" from the United States Postal Service (USPS), a business previously held by its largest competitor, FedEx. The move has drawn widespread industry attention. UPS stated that the contract takes effect immediately and expands their existing partnership. After a transition period, UPS will become USPS's primary air cargo provider, handling most of its domestic air operations. 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 Air Network: A Microcosm of Change
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 levels. Originally designed to compete with FedEx and UPS's deferred services by offering two-day delivery, Priority Mail's air cargo needs have evolved with USPS's strategic shifts.
"The changes have been dramatic over the years," Jindel explained. "First Class mail and packages once had next-day delivery commitments on certain routes. Now, First Class delivery times have extended to 2-5 days. These changes reduced the need for overnight transportation. The scale of air cargo contracts has shrunk significantly, as designed by Postmaster General Louis DeJoy in USPS's ten-year 'Delivering for America' plan."
Jindel believes that if FedEx hadn't adjusted its network to accommodate declining USPS demand, the contract might have become less attractive. "UPS has operated an integrated network for over 20 years. USPS needs committed timeframes to transport packages—whether by plane, truck, or a combination doesn't matter. I believe UPS will handle this business differently than FedEx did, with positive effects for UPS."
"Coopetition": The New Normal in Pandemic Logistics
Gordon Glazer, a USPS expert and senior consultant at Shipware, argues that the transition from FedEx to UPS actually began during the early pandemic as a form of "coopetition." He explained that in early 2020, FedEx aggressively transformed its SmartPost business, eliminating USPS's last-mile delivery role. Simultaneously, Postmaster DeJoy implemented permanent changes to limited air transport capacity, including revised delivery standards, elimination of local First Class mail overnight delivery, extended national delivery times from 2-3 days to 2-5 days, and shifting First Class mail and packages from air to ground transportation.
"This makes sense," Glazer said. "UPS already derives much of its revenue from Amazon, while FedEx shed a smaller proportion of Amazon revenue when it discontinued air service in 2019. With this change, UPS will manage two massive clients—Amazon and USPS—where sudden termination of either contract could adversely affect UPS."
FedEx's Losses and Gains
Rob Martinez, founder of Shipware, contends that losing a major contract—especially one worth over $1 billion—is never positive, regardless of how FedEx spins it. "Just two weeks ago, FedEx executives reiterated their desire to reach an agreement and claimed 'significant progress' had been made," Martinez noted. "Clearly, FedEx needed structural adjustments to make its USPS contract profitable. Still, FedEx hoped to continue handling air and Priority mail but wanted to eliminate some high-cost operational arrangements without USPS-guaranteed volume."
Martinez compared the situation to FedEx's 2019 termination of its Amazon business relationship, noting it took over a year—and a global pandemic—for FedEx to refill its network. He added that after FedEx publicly "fired" Amazon as a client, Amazon excluded FedEx from future consideration as a primary carrier, while UPS positioned itself to capture additional volume and solidify its standing for the next five years or more.
A New Postmaster's New Approach
Jerry Hempstead, president of Hempstead Consulting, suggests FedEx may have taken its 20-year USPS relationship for granted. "When Postmaster DeJoy took office, he brought a logistics background," Hempstead said. "He believed the network needed rationalization. Mail and e-commerce packages often aren't 'urgent,' so USPS concluded it could expand ground transportation alternatives to air while still meeting service requirements. To compensate for lost tonnage, FedEx likely sought higher prices—but underestimated UPS CEO Carol Tomé's resolve."
Five Impacts Reshaping the Industry
Andre Winters, founder of HudsonWinters & Co., summarized five key implications:
1. UPS Expands Its Footprint: Acquiring USPS's Priority and First-Class mail business represents a major capacity expansion, aligning with UPS's cost-reduction and network-tonnage goals.
2. Mutual Benefits: The agreement could grant UPS a broader customer base while allowing cash-strapped USPS to focus on core operations and infrastructure modernization.
3. Consumer and Competitive Effects: The shift may prompt industry players to reassess strategies as UPS co-loads USPS cargo, potentially lowering rates through cost-sharing.
4. Revenue and Market Share Losses: FedEx faces significant revenue decline and intensified competition from UPS, compounded by ongoing pilot union negotiations and network integration challenges.
5. Potential Responses: FedEx may seek new partnerships or growth avenues to offset the loss, while improving service quality to retain customers. Workforce reductions and a potential Amazon reunion remain possibilities.
The transfer of USPS's air cargo contract isn't merely a business shift—it's a strategic gambit among logistics giants. UPS's bold move, FedEx's recalibration, and USPS's reform agenda will profoundly influence the industry's future landscape. Who ultimately gains the upper hand remains to be seen.