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home / articles / UPS - Postal Service's Air Cargo Shift to UPS Makes Everyone a Winner | Benzinga

UPS - Postal Service's Air Cargo Shift to UPS Makes Everyone a Winner | Benzinga

United Parcel Service Inc.
The U.S. Postal Service's decision this week not to renew a contract with FedEx (NYSE: FDX), worth more than $1.5 billion per year, for domestic air transport and award it to UPS after more than two decades actually benefits all three parties, according to industry analysts. 

At face value, the arrangement seems a blow for FedEx, which will lose one its biggest customers when the existing contract expires on Sept. 29. And it raises questions about how UPS (NYSE: UPS) can make a decent profit flying mail if rival FedEx was struggling to do so. 

But experts said the change meets the needs of the three organizations, each of which is undergoing substantial transformation in a shifting parcel environment. For FedEx Express, losing the postal business means it now has the freedom to aggressively move ahead with shrinking its large air network in conjunction with a huge corporate initiative to control costs.

The new agreement has a minimum base term of five and a half years, under which UPS will transport first-class mail, Priority Mail and Priority Express Mail.

"It's a win-win-win" said Satish Jindel, president of parcel shipping consultancy ShipMatrix, told Freightwaves.

The long-standing relationship between FedEx and the U.S. Postal Service was widely expected to change. The only question was whether FedEx would relinquish some, or all, of the air cargo business.

It was difficult for the express carrier to eke out a profit as the Postal Service in recent years shifted volume from air to ground transportation to improve truck utilization and reduce expenses as demand for next-day service decreased. The quasigovernmental agency implemented new delivery standards to help with that transition. It now promises Priority Mail service in one to three days instead of two days and has extended delivery windows for Ground Advantage packages. The latest goal is to cut overall transportation costs by $3 billion over the next two years. 

A large portion of FedEx Express' air network is geared to daytime flying for the Postal Service. The company had to absorb more per-unit operating costs as the traditional postal subsidy for its fixed infrastructure slowly evaporated. FedEx's payments from the Postal Service dropped to $1.6 billion in the fiscal year that ended Sept. 30, 2023, from $1.9 billion, said David Hendel, a transportation attorney at Culhane Meadows who tracks the Postal Services' top suppliers. His report last year showed FedEx's revenue from the Postal Service was more than $2.1 billion in fiscal year 2021.