Parcel experts examine the UPS-United States Postal Service air cargo relationship amid parcel landscape

Following yesterday’s news that UPS has been awarded what it labeled a “significant air cargo contract” by the United States Postal Service (USPS), which used to be handled by its biggest competitor, FedEx, there has been no shortage of feedback and opinions on the development.

As previously reported, UPS officials said that this contract takes effect immediately while also expanding the existing relationship between UPS and USPS. And the company added that after a transition period, UPS will be the primary air cargo provider for USPS, moving the majority of USPS’s United States air cargo. And in an 8-K statement filed with the United States Securities and Exchange Commission yesterday FedEx said that the contract between its FedEx Express subsidiary and the USPS—in which it provides domestic transportation services for the USPS, “will expire by its terms” on September 29, 2024.

Satish Jindel, president of SJ Consulting, explained that the USPS air cargo contract and network has evolved dramatically in the last 20 years, coupled with the changes USPS is making to its service levels for Priority Mail, which was designed to be a two-day network to be positioned against the deferred services of FedEx and UPS.

“It has changed dramatically over time,” he said. “You had First Class packages and mail letters that used to have a next-day commitment for certain lanes. First Class is no longer one-to-five days, it is two-to-five days. Those changes reduce the need for how much needs to be moved on an overnight basis. The air contract has shrunk dramatically and that’s of the design by Postmaster General Louis DeJoy in the USPS's ten-year “Delivering for America” plan that was issued in March 2021.”

What’s more, he said that if FedEx had not modified its network to reflect the lower use of it, then it probably was not as desirable for the company.

“What [FedEx Executive Vice President, Chief Customer Officer] Brie Carrere said about FedEx not liking the pricing FedEx had and needed to get an increase can be challenged,” said Jindel. “USPS was looking to cut costs and found UPS willing to handle the [air cargo contract] business at a price that works for the USPS. I am surprised that some people are saying UPS is taking on a business that they will lose. I cannot see that happening. UPS has had an integrated network for more than 20 years, and what the USPS is looking for is a commit time to get packages moved…whether you move it on a plane or in a truck or a truck and air combination does not matter. My view is that UPS will handle it in a different way than FedEx may have planned to handle it. And as a result, it will be incrementally positive for UPS, not negative.”

Gordon Glazer, Senior Consultant, USPS Specialist, for San Diego-based Shipware, noted that this transition, from FedEx handling the USPS air cargo contract to UPS, commenced in the early days of the pandemic, in the form of “co-opetition,” or collaboration among competitors between FedEx and USPS.

He explained that in early 2020, FedEx charged ahead with its plans to transition SmartPost, its highly successful economy service, from handing off to the USPS for final-mile delivery. And Postmaster General DeJoy instituted a permanent change to the temporary problem of limited airline traffic at that time indifferent ways, including: changing delivery standards; removing overnight delivery of local First Class mail; changing national delivery from 2-3 days to 2-5 days; and transitioning First Class Mail and Package Services from air to ground transportation.

“It makes sense, UPS already has a huge chunk of its revenue tied to Amazon, while FedEx divested a much smaller percentage of Amazon revenue in 2019 when they stopped providing Air services,” said Glazer. “With this change UPS will have to manage two whales (large clients) that could adversely impact them should either contract end abruptly. FedEx Ground Economy now delivers virtually all of this economy volume themselves.  It frees up FedEx to focus on its internal business rather than helping its main competitor as their long-haul Air Cargo provider. FedEx is clearly focusing on B2C, while UPS’s focus has shifted more towards B2B. UPS SurePost delivers about half of their volume themselves, cherry picking packages that can contribute delivery density, handing off less profitable packages to the USPS for final mile delivery. “

The Shipware executive also noted that UPS Mail Innovations has always been 100% delivered by the USPS and also examined the timing of this announcement, saying that with the current oversupply of fulfilment and delivery capacity in the marketplace today, carriers are fiercely competing for volume. 

“During the Pandemic UPS was all about being selective in how it used its limited resources, rudely divorcing many of their largest less profitable clients,” said Glazer. “By removing that volume from their networks, It allowed them to go after more profitable smaller shippers.

Glazer’s colleague, Shipware Founder Rob Martinez said that losing a major contract is never positive, regardless of FedEx's spin—especially those worth more than a billion dollars, a sizeable representation of revenue. 

“As recently as only two weeks ago, FedEx executives reiterated the desire to wrap up negotiations, and said ‘significant progress had been made,’” he said. “It was clear that FedEx needed to make structural changes to its contract with the USPS to make it profitable (I don't think FedEx was losing money, but the USPS relationship had migrated to a break even given the latter's well publicized transportation changes in accordance with the Postal Transformation Plan).  Still, FedEx was hopeful to continue to carry the airfreight and Priority traffic, but to shed some of the high-cost operational accommodations without the offset postal concession of guaranteed volume.”

Martinez compared this situation to 2019, when FedEx and Amazon ceased their business relationship, noting that it took more than a year—and a global pandemic—before FedEx would again fill its network. And he added with FedEx having publicly “fired” Amazon as a customer, it was after Amazon had already excluded FedEx from future consideration as a primary carrier, coupled with UPS ready to swoop up the additional volumes and solidify its standing with UPS for another half decade and more.

“One man's trash is another man's treasure,” he said. “This is a great deal for UPS.  It's no secret that UPS has been struggling to find volume to fill its networks, and the USPS contract secures another four years of significant airfreight with a high-value customer.  It also helps buoy UPS from continued steep volume declines as Amazon's business ‘glides down.’ Shipware contends with pricing and contract issues for many of FedEx and UPS's largest customers, so the USPS's transition to UPS comes as no surprise (in fact, I publicly called this in a call with Wall Street analysts a few weeks ago).  Shippers constantly evaluate carrier relationships, performance, cost, and value.  Invariably, when lines are drawn in the sand by one carrier, it's usually the non-incumbent that's willing to draw new lines more favorable to the customer in order to win new business.  However, the larger the integration, the harder it is for shippers—or USPS in this case—to unwind from an incumbent carrier and hitch its wagon to another provider.  Make no mistake—this will be painful for all participants, FedEx, USPS, and UPS, at least in the short-term.”  

With Fedex having enjoyed the USPS business for 20 years, Jerry Hempstead, president of Orlando-based Hempstead Consulting, said he suspects FedEx felt a sense of entitlement about the business.

“If I recall, this was a deal struck between Postmaster Bill Henderson and Fred Smith,” he said. “The USPS had to replace the Eagle Network that was operated by Emery and Emery had lost its FAA certificate to operate. When Postmaster DeJoy took the helm, he came with a logistics background. He decided the network should be rationalized. Mail and e-commerce packages, for the most part, are not normally ‘urgent.’ As a result, the USPS determined that it could expand the distance by which surface could be substituted for air and still achieve the service requirements. To replace the lost tonnage from the USPS I suspect the Purple Package folks wanted higher prices for that which they were handling. Most likely, they underestimated the drive of Carol Tomé. This shift is a big deal in light of the declining demand in the marketplace.”

Andre Winters, Founder & Principal of St. Paul, Minn.-based HudsonWinters & Co. LLC,  laid out a five-part list of this development, including the following below:

• UPS Expanding Its Footprint: UPS's strategic move to acquire the U.S. Postal Service's Priority Mail and First-Class Mail businesses represents a significant expansion of its uplift capabilities. This partnership aligns with UPS's goal of reducing costs, gaining scale and tonnage into the network, potentially enhancing its competitiveness against rivals like FedEx and Amazon;
• Synergistic Benefits for Both Parties: By taking over these postal services, UPS stands to possibly gain access to a wider customer base (TBD) and additional revenue streams. Simultaneously, the deal could offer relief to the financially burdened U.S. Postal Service, allowing it to focus on improving its core operations and addressing longstanding challenges such as infrastructure modernization and service reliability;
• Impact on Consumers and Competition:  This move could influence competition dynamics within the shipping industry, potentially prompting other players to reassess their strategies to remain competitive in the evolving market landscape. Rates may come down as UPS is co-loading USPS cargo on its aircraft and possible their ground network by spreading the costs;
• Loss of Revenue and Market Share: Losing its position as USPS's primary air cargo provider could lead to a substantial loss of revenue for FedEx. Moreover, the shift may result in FedEx losing market share in the shipping industry, as it faces increased competition from UPS, which now has access to a larger portion of USPS's shipping volume. Another challenge is the current collective bargaining negotiations with its pilots union and the ongoing integration of the ground and air network; and
• Potential Response and Adaptation: In response to this development, FedEx may need to reassess its strategies and potentially seek new partnerships or avenues for growth to mitigate the impact of losing USPS's business. Additionally, FedEx may focus on enhancing its service quality and efficiency to retain existing customers and attract new ones in the face of heightened competition from UPS. FedEx may speed up their workforce reductions as part of their effort to streamline dense networks. The rumored Amazon reunion might be getting closer to being inked.