The U.S. Postal Service (USPS) tapped the United Parcel Service (UPS) for its new air cargo contract. The contract was previously held by FedEx for more than 20 years, and the current deal will expire on Sept. 29, 2024.

The new contract will go into effect on Sept. 30 and last for at least five and half years, USPS said in a written statement. It covers First-Class Mail, Priority Mail Express and Priority Mail.

“Our requirements were reevaluated in light of the dramatic changes in the mailing and shipping marketplace that have occurred since our 10-year Delivering for America plan was initiated in March 2021,” the agency said.

Switching air cargo carriers is part of a larger USPS initiative to cut costs. The organization plans to cut at least $3 billion in costs in the next two years, including the $1 billion already saved in air transportation costs earlier this year by moving more packages through its ground transportation network.

485 retailers in the Top 1000 use FedEx for at least some of their fulfillment. The Top 1000 is Digital Commerce 360’s ranking of North America’s leading online retailers by web sales. 535 use UPS, and 480 use USPS. 

UPS enters contract with USPS

UPS did not disclose financial terms of the deal that will make it USPS’ primary air cargo carrier. 

“Together UPS and USPS have developed an innovative solution that is mutually beneficial and complements our unique, reliable and efficient integrated network,” said UPS CEO Carol B. Tomé in a written statement.

The new business could be a boon to UPS, which announced in January that it plans to cut 12,000 jobs this year to compensate for declining revenue and package volumes.

UPS consolidated revenue declined 7.8% to $24.9 billion in its fiscal fourth quarter ended Dec. 31. Consolidated operating profit declined 22.5% during the same time period to $2.5 billion. For the full fiscal 2023 year, consolidated revenue declined 9.3% to $91 billion and consolidated operating profit declined 28.7% to $9.1 billion.

“2023 was a unique and quite candidly a difficult and disappointing year,” Tome told investors in January. At the time, the carrier noted a “cautious” outlook for 2024. “We experienced declines in volume, revenue, and operating profit in all three of our business segments. Some of this performance was due to the macroenvironment and some of it was due to the disruption associated with our labor contract negotiations as well as higher costs associated with the new contract.”

FedEx ends relationship with USPS

FedEx and USPS have had a “long and productive relationship,” FedEx said in a statement. “We have long said we would extend the contract with the USPS if we could agree to commercial terms in the best interests of FedEx shareholders,” the carrier continued.

Just a week before the news, FedEx told investors in a Q3 earnings call that it was in the process of negotiating a contract renewal. The carrier had made “significant progress” as of late March, said Brie Carere, chief customer officer.

In the same call, FedEx executives noted that USPS volume had declined in the quarter, leading to fewer packages delivered through FedEx.

“Despite this volume and revenue draw down, our service obligations to the USPS remain fixed,” CEO Raj Subramaniam said. 

USPS was the largest customer of FedEx Express and brought in about $2 billion annually, Reuters reported.

FedEx said it will make structural changes when the contract expires to allow for new cost savings and greater flexibility. This initiative fits with its DRIVE savings plan to improve long-term profitability through cost reductions. So far, DRIVE has saved $550 million in Q3 and is on track to save FedEx $1.8 billion in fiscal 2024, and $2.2 billion in fiscal 2025.

The carrier reported that operating income grew 19% to $1.24 billion in its fiscal third quarter of 2024 ended Feb. 29. That’s despite total revenue decreasing to $21.7 billion from $22.2 billion in the year-ago period. Net income grew to $879 million from $771 million in the year-ago period.

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