The U.S. Postal Service’s decision this week not to renew a contract with FedEx, worth more than $1.5 billion per year, for domestic air transport and award it to UPS after more than two decades actually benefits all three parties, according to industry analysts.
At face value, the arrangement seems a blow for FedEx (NYSE: FDX), which will lose one of its biggest customers when the existing contract expires on Sept. 29. And it raises questions about how UPS (NYSE: UPS) can make a decent profit flying mail if rival FedEx was struggling to do so.
But experts said the change meets the needs of the three organizations, each of which is undergoing substantial transformation in a shifting parcel environment. For FedEx Express, losing the postal business means it now has the freedom to aggressively move ahead with shrinking its large air network in conjunction with a huge corporate initiative to control costs.
The new agreement has a minimum base term of five and a half years, under which UPS will transport first-class mail, Priority Mail and Priority Express Mail.