If competition in the logistics industry were a war without gunpowder, United Parcel Service's (UPS) acquisition of the "major air transport contract" from the United States Postal Service (USPS) would constitute a brilliant strategic maneuver. This contract was previously held by its largest competitor, FedEx. What does this transfer of business between giants signify for industry transformation?
Contract Shift: UPS's Opportunity and Challenges
UPS officially stated that the contract took immediate effect and expands its existing partnership with USPS. After a transition period, UPS will become USPS's primary air service provider, handling most of its domestic air cargo. Meanwhile, FedEx disclosed in an SEC 8-K filing that its FedEx Express subsidiary's contract with USPS will expire on September 29, 2024. This contract primarily provided domestic transportation services for USPS.
Expert Analysis: USPS Strategic Adjustments and Market Dynamics
Satish Jindel, president of SJ Consulting, observes that USPS's air contracts and network have undergone significant changes over the past two decades, closely tied to adjustments in its Priority Mail service tier. Priority Mail was originally designed to compete with FedEx and UPS's deferred services through a two-day delivery network.
"As USPS extended First Class mail delivery times from next-day to 2-5 days, demand for overnight transportation decreased substantially," Jindel noted. "This directly reduced the scale of air contracts—precisely what Postmaster General Louis DeJoy designed in USPS's ten-year 'Delivering for America' plan released in March 2021."
He further suggested that if FedEx failed to adjust its network to accommodate declining USPS demand, the contract might no longer remain attractive to FedEx.
Jindel challenged FedEx Chief Customer Officer Brie Carrere's assertion about pricing dissatisfaction: "USPS sought cost reductions, and UPS was willing to accept USPS's pricing. Some believe UPS took on a losing proposition, but I disagree. With over 20 years of integrated network operations, USPS needs delivery time commitments—whether by plane, truck, or intermodal transport. UPS will handle this differently than FedEx, with positive outcomes."
The "Coopetition" Model: Pandemic-Era Strategic Shifts
Shipware's USPS expert Gordon Glazer noted the FedEx-to-UPS transition began during early pandemic "coopetition" between the carriers.
In early 2020, FedEx proceeded with SmartPost's transformation, eliminating USPS last-mile delivery. Simultaneously, Postmaster DeJoy implemented permanent measures for limited air transport: changing delivery standards; eliminating next-day local First Class mail; extending national delivery from 2-3 to 2-5 days; and shifting First Class mail/parcels from air to ground transport.
"UPS derives significant Amazon revenue, while FedEx shed smaller Amazon volumes when discontinuing air service in 2019," Glazer observed. "Now UPS must manage two major clients (Amazon and USPS) whose contracts could abruptly terminate. FedEx Ground Economy delivers nearly all economy parcels itself, focusing internally rather than aiding competitor USPS as a long-haul air provider. FedEx prioritizes B2C while UPS shifts toward B2B. UPS SurePost self-delivers half its parcels—retaining density-advantaged shipments while offloading lower-margin ones to USPS."
Glazer added that UPS Mail Innovations remains 100% USPS-delivered. He analyzed the announcement timing amid market overcapacity, with carriers aggressively pursuing volume: "During the pandemic, UPS ruthlessly jettisoned lower-margin clients to pursue profitable small shippers."
Contract Loss: FedEx's Challenges and Response
Shipware founder Rob Martinez contends that losing any major contract—especially one exceeding $1 billion—represents significant revenue loss, regardless of FedEx's explanations.
"Two weeks ago, FedEx executives reaffirmed negotiation progress," Martinez noted. "Clearly, FedEx needed structural contract adjustments for profitability. While not losing money, USPS relationship became break-even due to well-publicized transport changes. FedEx hoped to continue air and Priority mail transport without sacrificing volume guarantees."
Martinez compared this to FedEx's 2019 Amazon breakup: "FedEx required over a year—and a global pandemic—to refill its network. Before publicly 'firing' Amazon, Amazon had already excluded FedEx as a primary carrier, while UPS secured additional volume for at least five years."
"One company's trash becomes another's treasure," Martinez concluded. "This benefits UPS—securing four years of high-value air business while offsetting Amazon volume declines. Shipware frequently handles pricing for FedEx/UPS clients, making USPS's transition unsurprising. Shippers constantly evaluate carrier relationships. When one draws lines, competitors often redraw more favorable terms. However, deeper integration makes transitions harder. This will prove painful short-term for all parties."
Long-Term Partnership: FedEx's Loss and UPS's Gain
Hempstead Consulting president Jerry Hempstead suggested FedEx may have taken its 20-year USPS partnership for granted.
"This originated as an agreement between Postmaster Bill Henderson and Fred Smith when USPS replaced Emery's defunct Eagle Network," Hempstead recalled. "Postmaster DeJoy's logistics background drove network rationalization. Mail and e-commerce parcels often aren't urgent, so USPS expanded ground transport while meeting service requirements. To compensate for lost tonnage, FedEx likely sought higher rates but underestimated Carol Tomé's determination. This transition makes strategic sense given market realities."
Industry Impact and Future Outlook
HudsonWinters & Co. LLC founder Andre Winters offered five key perspectives:
- UPS's Expanded Capabilities: Acquiring USPS Priority/Frist-Class mail represents significant growth, aligning with UPS's cost-reduction and network expansion goals to better compete with FedEx and Amazon.
- Mutual Benefits: UPS gains broader clientele and revenue streams while alleviating financially strained USPS's operational modernization challenges.
- Consumer/Competitive Impact: Industry dynamics may shift as competitors reassess strategies, with potential rate reductions from UPS's co-loaded USPS shipments.
- FedEx's Revenue/Market Share Loss: Losing primary air provider status risks substantial revenue, compounded by UPS's access to greater USPS volume amid ongoing pilot union negotiations and network integration.
- Potential FedEx Adaptation: FedEx may pursue new partnerships or service improvements to retain clients, potentially accelerating workforce reductions as network streamlining continues.