Consultant’s Insight: USPS reports another loss as UPS takes over USPS air contract

The U.S. Postal Service's financial losses deepened for the fiscal year that ended Sept. 30 as it continued reducing costs and optimizing its network after announcing a new domestic air cargo partner in April. Total operating revenue was up 1.7% to $79.5 billion, but a net loss of $9.5 billion was up from a net loss of $6.5 billion in the previous fiscal year. Total volume of 44.3 million pieces was down 3.2%, attributed to the ongoing decline of mail volumes. On the other hand, the U.S. Postal Service's (USPS) shipping and packages division reported an increase of 2.7% in volume. [caption id="attachment_57146692" align="alignright" width="298"] Cathy Roberson, Cargo Facts columnist.[/caption] Expenses continue to plague USPS as it carries out a transformation announced in 2021. Transportation expenses were identified early on as an area to reduce costs. For the fiscal year ending Sept. 30, USPS reduced transportation expenses 12.8%. The agency attributed the decline to network optimization, reduction of facilities and “the logical alignment of operating functions resulting in the elimination of underutilized transportation trips, significantly increasing truck fill rates and reducing costs," according to its annual report. Truck fill rates also benefited from the shift from air to truck. In the past fiscal year, air expenses declined 20.8%. “Our changes in service standards have further facilitated the shift of package volume from air to highway transport when more economical and enabling improved reliability and service performance,” according to the USPS annual report. UPS deal FedEx handled most of USPS’ domestic air cargo for twenty years. However, under FedEx’s network transformation and cost reductions, the USPS contract proved too costly and resulted in financial losses for FedEx. So, after twenty years with FedEx, the U.S. domestic contract was awarded to UPS in April. [caption id="attachment_412640" align="aligncenter" width="1475"] UPS began onboarding USPS volumes before the contract started Oct. 1. (Courtesy/UPS)[/caption] “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. Although we were unable to reach mutually agreeable terms, we remain committed to delivering outstanding service through the completion of our contract in September,” according to a FedEx statement in April. While details of the USPS- UPS deal were not made public, the UPS10-Q filed with the Securities and Exchange Commission provides insights. During Q3, revenue attributable to volume gains from USPS increased $111 million. Year to date through Sept. 30, revenue attributable to USPS increased $38 million, due primarily to air cargo volume growth in Q2 and Q3, which "more than offset lower volumes in the first quarter." “We expect revenue growth will continue in the fourth quarter, as the air cargo volume under our agreement is now fully onboarded,” according to the 10-Q filing. UPS’ contract officially began Oct. 1, but it had already begun onboarding USPS volume before then as FedEx shut down USPS facilities and routes. What lies ahead FedEx removed a number of flights in its network and plans to remove more variable expenses tied to the USPS contract, FedEx Chief Financial Officer John Dietrich said at the Baird Global Industrial Conference early in November. “We'll continue to look for opportunities for the capacity that's been released to us, particularly in the daytime network that largely serves the Postal Service business to adapt that network to our liking and not necessarily the customer's liking,” Dietrich said. The big question is how profitable will the USPS contract be for UPS. As noted in its Q3 10-Q, UPS achieved revenue and volume gains, but there was no mention of profitability. Will UPS struggle with the USPS contract as FedEx did once profitable volumes such as from manufacturing begin to increase? Stay tuned. Register now for Cargo Facts' essential regional events for industry stakeholders: Cargo Facts LATAM 2025 on Feb. 10-11 at the Pullman Sao Paulo Guarulhos Airport in Brazil; Cargo Facts Asia 2025 on March 24-26 at the W Shanghai in China; and Cargo Facts EMEA 2025 on May 6-8 at the Shangri-La Bosphorus in Turkey.

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