Dive Brief:
- UPS' network flexibility gave it an edge over FedEx in landing a deal with the U.S. Postal Service to become the agency's primary air cargo provider, CEO Carol Tomé said on an earnings call Tuesday.
- UPS can service the Postal Service’s volume outside of a traditional hub-and-spoke model revolving around its main air hub in Louisville, Kentucky, Tomé said. While the company will still use that hub as needed, it will also tap into regional gateways so Postal Service volumes can travel point-to-point without compromising service.
- "This is an integrated solution that's very different than I think the former provider offers," Tome said. Analysts say FedEx's handling of Postal Service volume — under a contract expiring Sept. 29 — centers around its Memphis, Tennessee, hub.
Dive Insight:
UPS is gearing up to move the majority of the Postal Service's domestic air cargo volume under the new contract, which will be officially implemented the day after the FedEx deal expires.
The majority of the volume will fit within UPS' existing U.S. daytime flight operations, EVP and CFO Brian Newman said. This means the company won't need to purchase additional aircraft, but will bring additional pilots on board to handle the volume boost, according to Tomé.
Although FedEx lost out on landing the new Postal Service contract, its business with the agency has been a headwind in recent quarters as the Postal Service shifts air cargo volume to its less-expensive ground network instead.
UPS EVP and Chief Commercial and Strategy Officer Matt Guffey said the new contract includes "volume protection" with established minimums to ensure enough Postal Service parcels keep flowing into its network. Guffey added that the company is meeting with the agency weekly to ensure a smooth transition before the peak holiday shipping season.
UPS executives expressed confidence that the contract will help boost its bottom line as it looks to shake off a recent stretch of weak quarterly results that continued in Q1.
U.S. revenue fell 5% year over year, fueled by a 3.2% decline in average daily volume. Next day air and deferred services saw a more pronounced volume drop than ground services, as customers prioritize cost savings over shipping speeds, Newman said.
But the company saw positive signs around demand near the end of the quarter, with the final few weeks at "basically break-even from a volume perspective," according to Newman. UPS expects to see slightly positive volume trends in Q2 as its sales team pushes to bring more packages into the network.
"We are winning new [customers], we are gaining additional penetration of existing customers, we are meeting customers where they want us to be," Tomé said.
