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  April 5th, 2024 | Written by

UPS to Replace FedEx as U.S. Postal Service’s Primary Air Cargo Provider

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In a significant development within the logistics industry, United Parcel Service (UPS) has announced its pivotal role as the primary air cargo provider for the United States Postal Service (USPS), effectively replacing its longstanding rival FedEx. The decision marks the culmination of FedEx’s more than two-decade partnership with USPS, signaling a strategic shift in the dynamics of air-based express deliveries.

USPS, a major customer for FedEx’s air-based Express segment, has undergone operational restructuring, transitioning from planes to more cost-effective truck-based transportation for letters and packages. While this move has led to a decline in payments to FedEx, UPS views this contract win as a substantial opportunity to bolster its market presence.

Faisal Hersi, an equity analyst at Edward Jones, notes that although FedEx’s revenue loss from the USPS contract is not immense, it will impact their business density. USPS constituted approximately 4% of FedEx Express’ annual revenue, highlighting the significance of this transition. However, Hersi suggests that this shift does not entirely disadvantage FedEx, as it allows for potential improvements in revenue consistency and operational focus.

UPS, on the other hand, anticipates significant benefits from the contract, particularly in terms of revenue and density enhancement. The financial terms of the agreement have not been disclosed by UPS, but the company has affirmed its significance.

Following the announcement, FedEx’s stock experienced a modest decline of nearly 2%, while UPS saw a 1% decrease. FedEx has also revealed plans to adapt its network to compensate for the loss of the lucrative USPS contract, which contributed nearly $2 billion annually to its business.

The inability of both parties to reach mutually beneficial terms for contract extension led to the cessation of their partnership. This decision could potentially impact around 300 pilots at FedEx, raising concerns among aviation unions about job security and corporate priorities.

Despite the contractual changes, USPS’s payments to FedEx have diminished in recent years, reflecting broader shifts in the agency’s operational strategies. As USPS undergoes reorganization to align with evolving market trends, including the rise of e-commerce giants like Amazon, there is a reduced reliance on air services for rapid deliveries.

In essence, UPS’s ascension as USPS’s primary air cargo provider signifies a significant realignment in the competitive landscape of express logistics, with implications for both companies and the broader industry.