Imagine millions of packages crisscrossing the skies daily—not just as cargo, but as vital connections between individuals and businesses. The intricate web of air freight is sustained through both competition and collaboration among logistics giants. Now, a single contract change is quietly reshaping the competitive landscape of U.S. air cargo.
UPS recently announced it has secured a "significant air cargo contract" with the U.S. Postal Service (USPS), wresting control of business long dominated by its chief rival FedEx. The news sent shockwaves through the industry, sparking widespread analysis and speculation. UPS stated the contract took immediate effect and would establish it as USPS's primary air cargo provider following a transition period. Meanwhile, FedEx disclosed in an SEC 8-K filing that its FedEx Express subsidiary's contract with USPS will expire on September 29, 2024.
The Evolution of USPS Air Cargo Needs: Efficiency Takes Priority
Satish Jindel, president of SJ Consulting, observes that USPS's air cargo contracts and network have undergone dramatic changes over two decades, closely tied to the postal service's own service-level adjustments—particularly for Priority Mail. Originally designed to compete with FedEx and UPS deferred services through a two-day delivery network, Priority Mail's operational requirements have significantly evolved.
"The transformation has been remarkable," Jindel explains. "Where First Class mail and packages once promised next-day delivery on certain routes, First Class now operates on a 2-5 day delivery standard. These changes directly reduced the need for overnight air transport."
He emphasizes this shift reflects strategic planning under Postmaster General Louis DeJoy's "Delivering for America" ten-year plan (released March 2021), which aims to optimize transportation modes, reduce operational costs, and enhance overall efficiency.
FedEx's Strategic Calculus: Balancing Profit and Growth
Jindel suggests that if FedEx hadn't adapted its network to accommodate USPS's declining air cargo needs, the contract might have lost its appeal.
"FedEx EVP and Chief Customer Officer Brie Carrere previously expressed dissatisfaction with contract pricing, suggesting rate increases were necessary. But this perspective warrants scrutiny," Jindel notes. "USPS sought cost reductions, while UPS proved willing to accept terms USPS found acceptable. Some speculate UPS may face losses on this business, but I disagree. With over twenty years of integrated network experience, UPS understands USPS fundamentally requires delivery time commitments—whether achieved through air, ground, or intermodal transport. I expect UPS will approach this business differently than FedEx did, ultimately generating incremental gains rather than negative impact."
The End of "Coopetition": Reshaping Market Dynamics
Gordon Glazer, senior consultant and USPS expert at Shipware in San Diego, observes that the transition from FedEx to UPS for USPS air cargo actually began during the pandemic's early stages, when a "coopetition" model emerged between the rivals.
He explains that by early 2020, FedEx aggressively transformed its SmartPost business by assuming final-mile delivery rather than relying on USPS. Simultaneously, Postmaster DeJoy implemented permanent solutions for temporary airline capacity constraints, including revised delivery standards, elimination of local First Class overnight service, extension of national delivery windows from 2-3 days to 2-5 days, and shifting First Class mail and packages from air to surface transportation.
"This realignment makes strategic sense," Glazer says. "While UPS derives substantial revenue from Amazon, FedEx shed its relatively modest Amazon air business in 2019. Now UPS must manage two 'whale' clients—Amazon and USPS—where sudden contract termination with either could prove disruptive. Meanwhile, FedEx Ground Economy handles nearly all economy parcel deliveries internally. This allows FedEx to focus on internal growth rather than serving as a long-haul air provider for a key competitor. FedEx clearly prioritizes B2C, while UPS increasingly emphasizes B2B. UPS SurePost delivers approximately half its parcels internally, selectively retaining high-density routes while assigning lower-margin deliveries to USPS for final mile."
Glazer notes UPS Mail Innovations always utilizes USPS for 100% of final delivery. He also analyzes the contract announcement's timing, suggesting carriers are aggressively pursuing volume in today's capacity-surplus market.
"During the pandemic, UPS focused intensely on optimizing constrained resources, sometimes abruptly severing relationships with lower-margin clients," Glazer observes. "By removing this volume, UPS could pursue more profitable small shippers."
FedEx's Response: Navigating Challenges and Opportunities
Shipware founder Rob Martinez contends that losing any major contract—particularly one exceeding $1 billion in annual revenue—represents a significant blow, regardless of corporate messaging.
"Just two weeks ago, FedEx executives reiterated their desire to conclude negotiations, claiming 'substantial progress.' Clearly FedEx needed structural contract adjustments to restore profitability—I don't believe they were losing money, but the relationship had become break-even given USPS's publicly announced transportation shifts under its transformation plan. Still, FedEx hoped to continue handling air and Priority Mail without sacrificing USPS's volume guarantees or absorbing high-cost operational adjustments."
Martinez compares the situation to FedEx and Amazon's 2019 breakup, noting FedEx required over a year—and a global pandemic—to refill its network. He adds that after FedEx publicly "fired" Amazon as a client, Amazon excluded FedEx from future consideration as a primary carrier, while UPS positioned itself to absorb additional volume and cement what became a multiyear partnership.
"One company's trash becomes another's treasure," Martinez remarks. "This represents a shrewd deal for UPS, which has struggled to fill its network. The USPS contract guarantees substantial air volume with a premium client for four years, helping offset Amazon-related declines. Shipware routinely handles pricing and contracts for many FedEx and UPS enterprise clients, making USPS's transition unsurprising—in fact, I publicly predicted this outcome weeks ago during Wall Street analyst calls. Shippers constantly evaluate carrier relationships based on performance, cost and value. Typically when one carrier draws lines, a competitor redraws them more favorably to win business. However, greater integration makes it harder for shippers—or USPS here—to disentangle from existing providers. Undoubtedly this transition will prove painful for all parties, at least short-term."
The End of an Era: Strategic Realignments and Market Competition
Hempstead Consulting president Jerry Hempstead notes FedEx's twenty-year USPS partnership may have bred complacency.
"If memory serves, this originated as an agreement between Postmaster Bill Henderson and Fred Smith when USPS needed to replace the FAA-grounded Eagle Network operated by Emery," he recalls. "Postmaster DeJoy brought logistics expertise upon taking office. He recognized network rationalization was needed—most mail and e-commerce parcels aren't truly 'urgent.' Thus USPS concluded it could expand surface transportation's role while still meeting service requirements. To offset lost volume, I suspect FedEx sought rate increases on remaining business, likely underestimating Carol Tomé's determination. Given market softness, this shift carries significant implications."
Andre Winters, founder and principal of HudsonWinters & Co., outlines five key implications:
UPS expands capabilities: Securing USPS Priority and First-Class mail represents a major capacity expansion aligned with UPS's cost-reduction and volume-growth objectives, potentially strengthening its position against FedEx and Amazon.
Mutual benefits: UPS gains access to broader customer segments and supplemental revenue streams, while cash-strapped USPS can refocus on core operational improvements and infrastructure modernization.
Consumer and competitive impact: The move may reshape industry competition, potentially driving down prices as UPS co-loads USPS freight with its existing air and ground networks.
Revenue and market share losses: FedEx faces substantial revenue erosion and potential market share declines amid intensifying UPS competition, compounded by ongoing pilot union negotiations and network integration challenges.
Strategic adaptation: FedEx may accelerate workforce reductions as part of network optimization efforts, while potentially pursuing new partnerships—including rumored renewed talks with Amazon—to offset lost business.