Who is the biggest winner when the US Postal Air Service switches from FedEx to UPS?

Posted by FBASZ
Category:

The US Postal Service has decided not to renew domestic air transportation contracts worth over $1.5 billion per year with FedEx and has awarded them to UPS. The minimum basic period for the new agreement is five and a half years, during which UPS will transport first-class mail, priority mail, and priority express mail.

This move is actually beneficial for all three parties. On the surface, this arrangement seems to be a blow to FedEx, as the company will lose one of its largest customers when the existing contract expires on September 29th. This also raises the question of how competitors UPS can make substantial profits by shipping mail if FedEx is struggling to make a profit.

Who is the biggest winner when the US Postal Air Service switches from FedEx to UPS?

But this change meets the needs of these three enterprises, all of which are undergoing significant transformation in the constantly changing packaging environment. For FedEx, losing its postal service means it can now freely and actively promote the reduction of its vast aviation network, while taking a huge measure to control corporate costs. “This is a win-win situation,” said Satish Jindel, President of ShipMatrix, a package transportation consulting company

Prior to this, the industry generally believed that the long-term relationship between FedEx and the United States Postal Service would change, with the only question being whether FedEx would abandon some or all of its air cargo business.

With the decreasing demand for next day delivery services, the US Postal Service has shifted its business volume from air transportation to ground transportation in recent years to improve truck utilization and reduce costs, making it difficult for express delivery companies to make a profit. This quasi government agency has implemented new delivery standards to assist in the transition. Now, the United States Postal Service promises to provide priority mail services within one to three days instead of two, and has expanded the delivery window for Ground Advantage packages. The latest goal is to reduce overall transportation costs by $3 billion within the next two years.

And a large part of FedEx’s air network is suitable for daytime flights of the United States Postal Service. As traditional postal infrastructure subsidies gradually disappear, FedEx has to bear more unit operating costs. According to David Hendel, a transportation lawyer at Culhane Meadows, which tracks major postal service providers, FedEx’s payments from postal services decreased from $1.9 billion to $1.6 billion in the fiscal year ending September 30, 2023. FedEx earned over $2.1 billion in revenue from postal services in the fiscal year 2021.

FedEx executives have repeatedly made it clear that they are willing to abandon postal services unless they include more favorable terms and a smaller route structure.

Satish Jindel, President of ShipMatrix, a package transportation consulting firm, said that losing the US Postal Service contract was an unexpected joy for FedEx, as the company is undergoing a historic integration of its FedEx, ground, and freight departments. This is a carefully considered cost saving plan that is expected to provide an annual efficiency benefit of $4 billion. For FedEx, it may make sense not to actively strive to retain this business now, but to focus on doing a good job of integration. When this opportunity arises again in the future, they may be in a more cost-effective bidding position.

FedEx plans to reduce structural costs by $4 billion by the end of fiscal year 2025, including accelerating the retirement of aging aircraft, parking underutilized aircraft until demand picks up, and relying more on truck feeder services. FedEx is also redesigning its aviation network to separate express delivery and delayed shipment of goods for night and day transportation, in order to improve efficiency.

Barclays Transportation Analyst Brandon Oglenski stated in a research report that FedEx may cut a significant amount of capacity from its aviation network next year, eliminating the need for infrastructure to support postal services, which will help improve the profitability of the express delivery sector

Will FedEx reduce its air freight network?

After losing the US Postal Service contract, freight experts have expressed that FedEx will be able to reduce daytime flights and integrate routes.

Dean Maciuba, Managing Partner of Crossroads Parcel Consulting and Senior Executive of FedEx, said, “As the U.S. Postal Service gradually exits the market and business volume decreases, FedEx may seek to integrate its aircraft business in nearby small and medium-sized markets to save costs. However, this type of operational change may also lead to earlier pickup times and delayed delivery times in the market. The risk here is that freight forwarders typically prefer to choose the latest pickup time and earliest delivery time, which may lead them to look for other carriers.”

In addition, due to the reduction in flights, another way for FedEx to reduce costs is to outsource ground support services for small airlines currently managed by more expensive employees, or to reduce team size by merging responsibilities

What will UPS Express receive?

Compared to FedEx, UPS has secured a base term contract of at least five and a half years, which will increase its revenue by approximately $15 billion and increase the density of mainline routes in a slowly growing market.

Some investment analysts are concerned that UPS will receive minimal returns from its postal services business and will not contribute to achieving its operational profit margin target of 13% by 2026

Satish Jindel, President of ShipMatrix, a package transportation consulting company, said that this will not be a problem. Because UPS places great emphasis on cost and will save money by using its ground network to support air freight contracts, which FedEx cannot do because its aviation and ground networks are independent of each other. UPS has been operating an integrated air and ground network for over 25 to 30 years, and I don’t think they need to add any additional aircraft. Therefore, this helps them offset fixed costs and allocate them to another package basis.

Barclays transportation analyst Brandon Oglenski also agrees, stating that UPS may provide cheaper long-distance transportation services for postal services by reducing its reliance on air cargo, especially between market locations that can be reached through one to two day truck transportation solutions. UPS may need to deploy some additional air assets in its daytime air network as its fleet is much smaller than FedEx, but any additional costs may be compensated through new contracts.

In addition, Derek Losing, a former logistics executive at Amazon, pointed out that the cargo volume of the US Postal Service helps to fill the air freight volume lost by UPS in recent years, as the retailer provides more two-day delivery services through its own logistics network. UPS stated that the average daily parcel volume in the fourth quarter of 2023 decreased by 7.4%, with delayed air freight products experiencing a faster decline rate (18.9%) than the next day’s air or land transportation