UPS to become primary air cargo provider for USPS

United Parcel Service (UPS) has agreed to a contract with the United States Postal Service (USPS) to become its primary air cargo provider. FedEx (FDX) is the current provider but claimed in a regulatory filing that it could not reach mutually beneficial terms to extend its contract.

Yahoo Finance Anchors Brad Smith and Jared Blikre break down why FedEx stepping away from the agreement could be a potential positive for the company.

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Editor's note: This article was written by Nicholas Jacobino

Video transcript

BRAD SMITH: In today's stock to watch as well here, we're tracking UPS officially taking the place of FedEx as the United States Postal Service's primary air cargo provider. Now, FedEx said in a regulatory filing it was not able to reach mutually beneficial terms to extend the contract, which is set to expire on September 29th here. You're taking a look at the share price reactions here, I believe, pre-market. And FedEx moving lower. However, there were some analysts that had actually come out in recent months and said that this is going to be a potential positive here for FedEx, and here's why.

JARED BLIKRE: Really?

BRAD SMITH: Because it actually removes them from having this burden of needing to operate with USPS be the cargo carrier there and--

JARED BLIKRE: It implies some efficiency in the United States Postal Service that I can't understand.

BRAD SMITH: We cannot fathom it at all. I mean, you've got the Grinch probably back there in the back offices giving everybody jury duty. Anyway, all jokes aside, it's this new tricolor initiative. And they say, the analyst does over at Barclays, I believe, that it muddies the water, making it less clear how much air capacity and cost the company can reduce. So this perhaps one of those instances that they can start to reduce costs here. And we'll see what type of benefit UPS gets as a result of this on the other side.

JARED BLIKRE: Yeah. Well, just sticking on FedEx for a second, I have a reaction by Bloomberg Intelligence saying they stand-- FedEx stands to lose close to $2 billion in revenue following the expiration of this contract we're talking about. It's their largest customer. And the company will need to restructure its network to better align assets to the lost volume to minimize the margin impact. So the loss of the business could also free up capacity for higher yielding freight, like small air shippers. So I think freeing up the capacity and rejiggering the business is probably the longer term thinking there. Shedding a little bit of deadweight there.

BRAD SMITH: Yeah, absolutely. And how much deadweight? Well, perhaps $1.5 worth of deadweight according to Barclays here ahead of that news being announced here.