UPS to become USPS’s primary air cargo provider, replacing FedEx

United Parcel Service will become the United States Postal Service’s (USPS) primary air cargo provider, the company said on Monday, as rival FedEx announced an end to its more than 20-year partnership with the postal service provider.

The contract’s financial terms were not disclosed, but UPS said the award was “significant.”

USPS was the largest customer for FedEx’s air-based Express segment, even as payments declined after the postal service shifted letters and packages from planes to more economical trucks.

FedEx had said it was prepared to walk away from the relationship if the terms of the existing contract, set to expire on Sept. 29, did not improve.

The company has launched a drive to rein in costs to combat weaker freight demand and improve margins at Express following pressure from shareholders.

UPS’ shares rose 1.8% before the bell while FedEx’s stock fell 1.6%.

“It’s a change of fortunes and obviously it will be good for UPS to be able to have that business,” said Thomas Martin, senior portfolio manager at GLOBALT Investments in Atlanta.

FedEx said on Monday it would make adjustments to its network to make up for the loss of the contract that brought in nearly $2 billion in annual business.

The company also said its profitability will improve in fiscal 2025 and beyond, echoing analysts’ views made amid the contract negotiations with USPS.

As many as 300 pilots at FedEx could be out of work if the contract ended, trade publication FreightWaves said in January, citing a recording of a meeting between a FedEx executive and pilot evaluators.

The Air Line Pilots Association, which is yet to reach a new labor deal with FedEx, was not immediately available for comment on Monday.

As the No. 1 USPS domestic air contractor, FedEx had supported the agency’s Priority Mail and other quick services.

“The parties were unable to reach agreement on mutually beneficial terms to extend the contract,” FedEx said in a securities filing on Monday.

USPS’ payments to FedEx shrank to about $1.7 billion in fiscal 2023, from $2.4 billion during the fiscal year ended September 2020.

The agency is also reorganizing its operations to accommodate customers who are adopting Amazon.com’s strategy of moving distribution centers closer to people who buy their products. That proximity meant that fast deliveries have less need for air services.