US delivery giant FedEx wants a new US postal service deal
• Group hopes for more profitable contract and new labour deal with pilots
FedEx is waging financial battles on two fronts. The delivery giant wants a more profitable contract with the US Postal Service and is seeking an elusive labour deal with its pilots.
How both efforts shake out will be key to improving profit at its largest business, overnight-delivery provider FedEx Express.
If the domestic contract with USPS, Express’ largest customer, lapses later this year, it would erase nearly $2bn in annual business that funds hundreds of pilot jobs. A failure to reach an agreement with pilots could further delay retirements and buyouts that could reduce operating costs at Express. That lack of expense relief could increase the risk that FedEx will have to furlough pilots for the first time in its 52-year history.
The pilot talks have been continuing since May 2021 and there is no set deadline. In the midst of softening global demand, dwindling USPS revenue and some pilots postponing their retirements in hopes of more lucrative contract terms, FedEx executives have said the company’s 5,800 pilots are 700 too many.
Margins in the company’s Express business remain low and investors want CEO Raj Subramaniam to be bolder in slashing costs. “FedEx has too many planes and too many pilots,” said Trip Miller, founder of Memphis-based hedge fund Gullane Capital Partners, which has a small stake in the company. He wants FedEx to cut Express capacity 15% to 20%.
FedEx is the No 1 USPS domestic air contractor, supplying the speed for the agency’s Priority Mail and other quick services under a contract that will expire on September 29.
USPS payments to FedEx reached $2.4bn during the postal service’s fiscal year ended September 2020. That shrank to $1.7bn in financial 2023 after the postal service shifted letters and packages from planes to trucks.
The switch appears to be starving the daytime air operation that FedEx created for USPS of the volume it needs to keep planes about 70% full and generating profit.
“It’s a big contract and it was very profitable for a very long time. I’m not sure it is any more,” TD Cowen analyst Helane Becker, said.
USPS now provides about 4% of Express’s annual revenue, according to a Reuters calculation. FedEx has vowed to walk away from its 22-year relationship with the postal service if financial terms do not improve.
“We are focused on ensuring it continues to make good business sense for both parties,” FedEx said in a statement.
USPS, meanwhile, is reorganising its own operations to accommodate customers who are adopting Amazon.com’s strategy of moving distribution centres closer to people who buy their products. That proximity means that fast deliveries have less need for air services.
“There is no reason for the USPS to pay more” for domestic air transport, said Satish Jindel, who helped found a company purchased by FedEx. Jindel analysed for Reuters almost 1-billion packages shipped in the US and found a significant increase since 2008 in parcels travelling less than 483km — a distance easily handled by trucks.
USPS declined to comment. In its 10-year plan released in 2021, the agency said it sees opportunities in “diversifying the mix of air carriers and enhancing carrier contract management”. Its other air service providers include FedEx rival United Parcel Service, which had $308m in USPS business in fiscal 2023.
Up to 300 pilots at FedEx could be out of work if the company loses the USPS contract this year, news provider FreightWaves said in January, citing a recording of a meeting between a FedEx executive and pilot evaluators. FedEx also hopes to persuade 400 tenured pilots to take early retirement, the executive said.
That message landed as FedEx and the Air Line Pilots Association (ALPA) gathered for the first negotiations of 2024.
FedEx said the recorded comments were that executive’s “personal speculation” and that the company is committed to reaching a fair contract agreement. Asked if pilots were willing to make concessions to avoid furloughs, Captain Billy Wilson, chair of the FedEx ALPA master executive council, said its members “remain steadfast in their resolve”.
A group dominated by newer pilots rejected a tentative deal last July, which some analysts saw as a risky move as it delayed the departures of senior pilots last in line for cuts.
“The problem is that when you furlough, you furlough from the bottom. You can’t furlough from the top,” TD Cowen’s Becker said, referring to pilot seniority. “If I was a younger pilot at FedEx, I would be kicking myself that I rejected the contract.”
IF I WAS A YOUNGER PILOT AT FEDEX I WOULD BE KICKING MYSELF THAT I REJECTED THE CONTRACT