UPS secures contract as USPS' primary air cargo provider as FedEx steps away

United Parcel Service (UPS) has been selected as the primary air cargo provider for the United States Postal Service (USPS), following FedEx's decision to discontinue its contract negotiations with the US agency.

UPS announced on Monday that it will assume the role of USPS' primary air cargo provider, leading to a 1.4 per cent increase in UPS shares before the market opening, while FedEx's stock fell by 1.6 per cent. The financial terms of the contract were not disclosed, but UPS described the postal service's award as "significant."

FedEx, which has been USPS's largest customer for its air-based Express segment, opted not to extend its 22-year relationship with the agency. The decision came after FedEx expressed its willingness to walk away from the existing contract, set to expire on September 29, if the terms did not improve.

"The parties were unable to reach agreement on mutually beneficial terms to extend the contract," FedEx stated in a securities filing.

As the primary domestic air contractor for USPS, FedEx has provided support for the agency's Priority Mail and other expedited services. However, the loss of the contract will result in a significant reduction in FedEx's annual business revenue, amounting to nearly $2 billion, which funds hundreds of pilot jobs at the company.

Despite the immediate financial impact, some analysts believe that FedEx's reduction in air capacity, resulting from the loss of the USPS contract, could benefit the company in the medium term. Meanwhile, FedEx is still in negotiations for a new contract agreement with its pilots.

USPS' payments to FedEx have declined in recent years, dropping to about $1.73 billion in fiscal 2023 from $2.4 billion in fiscal 2020.

(With Reuters inputs)