Dive Brief:
- Losing the U.S. Postal Service air cargo contract will allow FedEx to aggressively pursue changes in its network once the deal expires in September, FedEx EVP and CFO John Dietrich said at a Bank of America conference earlier this week.
- Experts have viewed FedEx Express daytime flight capacity as a likely target for cuts due to the contract loss. While the delivery giant will continue to serve shippers with daytime operations, it "will not be as wedded to" that area in the future, Dietrich said.
- "We are going to continue to have a daytime operation, and we've some great customers on that," the CFO said. "And will we do as much as we are doing with the U.S. Postal Service? Probably not. But we are going to continue to rationalize the network, and there's a lot of great work going on in that area."
Dive Insight:
The Postal Service contract has presented a headwind in recent quarters for FedEx, which lost the deal to rival UPS. The agency has been shifting volume destined for FedEx aircraft to its less-expensive, in-house ground network, which complicated the companies’ relationship.
"We approached this negotiation in a way that said, 'It needs to be mutually beneficial for both parties,'" Dietrich said. "And as we saw from the U.S. Postal Service's drawdown of the business, that was not mutually beneficial."
The Postal Service continues to wind down its reliance on FedEx's air network as part of its long-term "Delivering for America" plan to improve its finances. Air transportation spending by the Postal Service fell nearly 26% year over year for the quarter that ended March 31, according to the agency's quarterly report.
The agency said the drop from $773 million to $574 million was mainly due to lower jet fuel prices and shifting volume to its ground network. It leans on ground transit instead of air "when more economical and allowing for improved reliability and service performance," per the quarterly report.
The Postal Service's reduced reliance on air transport limits the upside UPS could see from its new air cargo contract with the agency.
However, the company has implemented language in the contract to prevent too much volume from leaving its air cargo network over the deal's lifetime. UPS EVP and Chief Commercial and Strategy Officer Matt Guffey said in April that the contract features established volume minimums, limiting how many packages can flee to the Postal Service's ground network.
"We're meeting with them every week in [Washington] D.C. to continue to onboard that volume to make sure it's a smooth transition," Guffey said in an earnings call.
