How Losing USPS Contract Could Boost FedEx’s Profitability

The dilemma of FedEx Express

FedEx Express, the largest division of FedEx Corporation (NYSE: FDX), is facing a dilemma. The division, which operates the world’s largest cargo airline, has a huge contract with the U.S. Postal Service (USPS) to transport mail and packages across the country. The contract, which expires in September 2023, is worth nearly $2 billion a year and accounts for about 10% of FedEx Express’ revenue.

However, the contract is also a burden for FedEx Express, as it forces the division to maintain a large and costly air network, which is underutilized and inefficient. FedEx Express has to fly hundreds of planes during the day to serve the USPS, while most of its own customers prefer overnight delivery. This means that FedEx Express has to fill its planes with low-margin freight to cover its fixed costs, which drags down its profitability and return on assets.

FedEx Express
FedEx Express

According to Brandon Oglenski, a senior analyst at Barclays Bank, FedEx Express could actually benefit from losing the USPS contract, or at least a part of it, as it would enable the division to downsize its air network and focus on its core express business.

The opportunity of FedEx Express

Oglenski, who covers FedEx Corporation for Barclays, said in a recent report that FedEx Express could save up to $1.5 billion a year by cutting 50% of its daytime network capacity if the USPS contract is not renewed. He said that FedEx Express could emulate the strategy of its rival UPS (NYSE: UPS), which operates a much smaller daytime air operation, and only flies planes where two-to-three day service commitments cannot be achieved by truck.

Oglenski said that by reducing its air capacity and cost, FedEx Express could improve its earnings and margins, as well as its asset utilization and return on invested capital. He said that FedEx Express could also increase its pricing power and customer loyalty, as it would offer a more differentiated and premium service than its competitors.

Oglenski said that losing the USPS contract could be a catalyst for FedEx Express to transform its business model and become more profitable and competitive.

The challenge of FedEx Express

However, losing the USPS contract is not a simple or easy decision for FedEx Express, as it involves several challenges and risks. For one, the contract is still a significant source of revenue and volume for the division, and losing it could hurt its top line and market share. Moreover, the contract is also a strategic partnership with the USPS, which is a major customer and supplier for FedEx Express, as well as a potential competitor.

Additionally, losing the USPS contract could also affect the other divisions of FedEx Corporation, such as FedEx Ground and FedEx Freight, which also have contracts and relationships with the USPS. Furthermore, losing the USPS contract could also have implications for the broader U.S. postal system and the public interest, as it could affect the service quality and affordability of mail and package delivery for millions of Americans.

Therefore, losing the USPS contract is not a straightforward or easy option for FedEx Express, as it involves several trade-offs and uncertainties.

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