FedEx is bracing for a significant cut in its air express unit’s collaboration with the US Postal Service, potentially losing half of its business as their existing air contract nears expiration. This anticipated reduction poses challenges for FedEx, impacting pilots and necessitating strategic adjustments.

Shifting Dynamics: Postal Service Transformation and Impact on FedEx

Postal Volume Shift to Ground Transportation

Three years ago, the USPS initiated a strategic shift, diverting a substantial amount of its volume from air to ground transportation. The aim was to mitigate financial losses and enhance competitiveness. This transformation has adversely affected FedEx Express, with declining postal volumes becoming a noteworthy drag on the unit’s recent performance.

Warning Signals: Jeopardized Postal Delivery

Pat DiMento, FedEx’s Vice President of Flight Operations and Training, has issued warnings regarding the potential elimination of postal delivery in 29 daytime cities where FedEx operates domestically. An unauthorized recording revealed his concern that the company may lose 50% of its daytime flying, affecting the overall operational landscape.

Ramifications for FedEx: Excess Pilots and Revenue Decline

Excess Pilots and Strategic Measures

The anticipated loss of a substantial portion of USPS work implies that FedEx (NYSE: FDX) could have 200 to 300 more excess pilots by October. In response, the cargo airline plans to adjust guaranteed flight hours for pilots and introduce early retirement packages. These measures are crucial as the shipping market experiences a prolonged downturn.

Revenue Decline and Express Unit Struggles

The USPS changes, particularly the reduction of First-Class mail and packages through air carriers, has led to a 90% decrease in volume over the past two and a half years. Postmaster General Louis DeJoy highlighted the positive impact on air transportation expenses, decreasing by $600 million year over year.

Collaborative History and Future Negotiations

Long-Standing Partnership and Revenue Decline

FedEx’s collaboration with the USPS dates to 2001, providing domestic and international air transportation for various postal products. However, the revenue from their USPS contract witnessed a decline from $2 billion to $1.9 billion in the fiscal year ending September 30, 2022. This downward trend is expected to continue, posing challenges for the existing contract’s renewal.

Challenges in Contract Renewal

The existing contract, while barely profitable, necessitates FedEx to provide expensive plane capacity for relatively low-yielding parcel volume. Management is actively working with the USPS to renew the contract, but challenges arise due to the contractual commitment and changing dynamics in mail volume priorities.

Operational Inefficiencies and Strategic Revisions

DiMento highlighted operational inefficiencies resulting from the long-term postal contract, where FedEx struggled to align with increases in mail volumes. Strategic adjustments are imperative to address the disparity between the current line-haul network designed for historically high USPS volume and the evolving landscape.

Future Outlook and Predictions

Uncertain Future: Contract Revisions and Margins

As the USPS plans to diversify its mix of air carriers, FedEx faces uncertainty regarding the future of its collaboration. Analysts, including TD Cowen equity analyst Helane Becker, predict that FedEx might walk away from the postal business if the contract is not renewed at better margins.

In conclusion, FedEx’s evolving relationship with the USPS underscores the challenges and strategic decisions necessary for both entities to navigate the changing landscape of mail transportation. As negotiations unfold, the future of this collaboration remains uncertain, prompting FedEx to reconsider its involvement in the postal business if better terms cannot be secured during contract renewal.