FedEx Corp. expects its air express unit will lose half of its business with the U.S. Postal Service when an existing contract expires, making more pilots expendable, FreightWaves has learned.

The Postal Service three years ago began shifting a large amount of volume from air to ground transportation to reduce red ink and become more competitive. Declining postal volumes have been a significant drag on FedEx Express’ recent performance, company officials publicly acknowledge.

Postal delivery at 29 daytime cities where FedEx flies domestically is in jeopardy of being eliminated at the end of the government’s fiscal year, Pat DiMento, FedEx’s vice president of flight operations and training, warned in a recent meeting with a group of supervisory pilots.

“If I were to bet, I think we lose 50% of our daytime flying,” he said in an unauthorized recording reviewed by FreightWaves.

The loss of a substantial portion of Postal Service work means FedEx (NYSE: FDX) will have 200 to 300 more excess pilots by October, said the flight operations chief. The cargo airline plans to lower guaranteed flight hours for pilots and offer early retirement packages because it already has hundreds of surplus pilots with the shipping market in a prolonged downturn.

The Postal Service transformation has reduced the volume of First-Class mail and packages moved through air carriers by 90% in the past 2½ years, Postmaster General Louis DeJoy told the board of governors last summer. Air transportation expenses decreased $600 million year over year, or 16.3%, in the fiscal period ending Sept. 30 due to lower package volumes and diversion to motor carriers.

The Postal Service has also revealed plans to diversify its mix of air carriers.

The drop in postal traffic contributed to a 6% decline in revenue for the Express unit, which is struggling with lower profits. Express volumes were down more than 10% for three consecutive quarters through last February and then shrank at single-digit levels for the remainder of 2023.

The U.S. Postal Service is diverting most regional and long-haul mail transport to its own trucks or contract motor carriers. (Photo: Jim Allen/FreightWaves)

FedEx’s relationship with the Postal Service dates back to 2001. Since 2013, it has provided domestic and international air transportation for numerous postal products, including Priority Mail. FedEx has been the largest provider of air transportation capacity to the Postal Service for 20 consecutive years, according to data compiled by David Hendel, a transportation attorney at Culhane Meadows.

FedEx’s revenue from its Postal Service contract in the fiscal year ending Sept. 30, 2022, fell $236 million to $1.9 billion and is expected to decrease again in Hendel’s next list. The contract previously generated annual revenue of at least $2 billion. The $236 million revenue loss is equivalent to how much the 10th-largest transportation supplier to the Postal Service makes.

Management is working with the Postal Service to renew the existing contract, which is barely profitable, DiMento said. Minimum service requirements under the contract leave FedEx contractually committed to providing expensive plane capacity to relatively low-yielding parcel volume.

DiMento said the long-term postal contract led to network inefficiencies as FedEx tried to accommodate increases in mail volumes while priority flying at night stayed the same. A route from Raleigh, North Carolina, to the Memphis, Tennessee, global hub, for example, might only require a small jet, but FedEx would upsize to a larger freighter because that met the daytime mail requirement.

“Now we’re flying an Airbus on both routes, and unfortunately that Airbus is now half empty going to Memphis every night. And it got us completely out of whack. They expected the priority stuff to keep up with the postal and it just didn’t happen. And all of our gauge was being driven by the dayside instead of the nightside,” DiMento told the airline employees.

DiMento said he thought FedEx would lose the Postal Service business in 2022 and now hopes to retain half of it. The more routes FedEx operates under the contract, the better profit it can generate. 

“The problem is that the current FedEx Express line-haul network is designed to support historically high USPS volume that is going away, and that USPS revenue subsidizes the operational cost of overall FedEx lift operations here in the U.S.,” said Dean Maciuba, a managing partner at Crossroads Parcel Consulting, on LinkedIn.

FedEx, through a spokesperson, declined to comment. But the company has previously said the contract will need to be revised for it to consider renewal.

TD Cowen equity analyst Helane Becker predicted in a client note that FedEx will walk away from the postal business when the contract expires if it can’t renew at better margins. 

 Click here for more FreightWaves/American Shipper articles by Eric Kulisch.

Contact reporter: 


FedEx pilots face pay cuts, buyouts as contract talks resume

FedEx says air network restructuring to save $700M annually

The post FedEx braces for 50% cut in Postal Service air contract appeared first on FreightWaves.

Similar Posts

Leave a Reply