Dive Brief:
- Fewer packages from the U.S. Postal Service remained "a significant headwind" for FedEx's struggling Express unit in its second quarter, EVP and Chief Customer Officer Brie Carere said in an earnings call last month.
- Global average daily freight pounds at FedEx Express fell 18% year-over-year for the quarter ending Nov. 30, which Carere said reduced Postal Service volume and "weakness in industrial production" played a part in. The unit's revenue declined 6%.
- The Postal Service has reduced its air volumes by more than 90% under Postmaster General and CEO Louis DeJoy's 10-year transformation plan, which aims to improve the agency's financial health.
Dive Insight:
FedEx Express and the Postal Service's operational strategies have changed significantly since they extended their current air transportation agreement in 2017, which was expected to generate around $1.5 billion in revenue annually for FedEx.
The Postal Service, Express' top customer as of July, is shifting more packages to ground transportation to reduce operating costs. The agency's air transportation spending fell 16.3% YoY for the fiscal year ended Sept. 30, while highway transportation expenses increased 7.1%.
Meanwhile, FedEx is redesigning its Express air network as part of its wide-ranging "DRIVE" cost-savings program as it looks to better match capacity with demand and increase flexibility. FedEx's contract with the Postal Service is complicating its efforts to improve financial performance at Express, however.
"Our ability to drive margin improvement in the near term has been constrained by transitory factors including the year-over-year decline in the U.S. Postal Service volume, combined with minimum required service obligations associated with our current USPS contract," President and CEO Raj Subramaniam said on the call.
The delivery providers' strategic shifts complicate efforts to renew the deal before its expiration in September. Under the contract, FedEx Express provides domestic air transportation for the USPS' First Class Mail, Priority Mail and Priority Mail Express services, plus international delivery.
"We are having very collaborative negotiations with the Post Office, but I think we've also been very clear that it will take quite a significant change in contractual terms and agreement to renew that contract," Carere said.
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