UPS to replace FedEx as U.S. Postal Service’s primary air cargo provider

United Parcel Service (UPS.N) announced on Monday that it will become the primary air cargo provider for the United States Postal Service (USPS), following rival FedEx’s (FDX.N) decision to end their more than 20-year partnership with the postal service provider.
USPS, which was FedEx’s largest customer for its air-based Express segment, saw a decline in payments as it shifted letters and packages from planes to more economical trucks as part of its operational revamp. Faisal Hersi, an equity analyst at Edward Jones, commented, “It’s not a huge loss for FedEx, but it will impact their density… You’re losing consistency in terms of revenue from a pretty significant partner, but it wasn’t the most profitable business for them… it’s not all negative.”
According to a Reuters calculation, USPS represented approximately 4% of Express’ annual revenue. The contract win is viewed as a boost to UPS, especially after the parcel delivery company forecasted full-year revenue below Wall Street’s estimate in January. Hersi added, “It provides an opportunity (for UPS) to have someone that’s going to guarantee them some of that volume and helps them have that density improvement.”
Although the financial terms of the contract were not disclosed, UPS stated that it was “significant.” Following the announcement, shares of FedEx fell nearly 2%, while UPS’ stock was 1% lower. FedEx plans to make adjustments to its network to compensate for the loss of the contract, which brought in nearly $2 billion in annual business. The company stated, “The parties were unable to reach agreement on mutually beneficial terms to extend the contract.”
According to trade publication FreightWaves, as many as 300 pilots at FedEx could potentially lose their jobs if the contract ends. The Air Line Pilots Association International (ALPA), the union representing FedEx pilots, criticized FedEx management for jeopardizing job security and quality of life for employees. ALPA added, “FedEx continues to spend billions in stock buybacks while simultaneously announcing layoffs of employees who have helped build it into the brand it is today.”