How UPS & FedEx Latest Moves May Impact Your Future Logistics Strategies

Over the last few quarters, it has become apparent that both UPS and Fedex have substantial overcapacity in their fleets of aircraft. This is not just a matter of their pilot utilization reports but also a concern for air cargo operators and brokers.

They are getting very antsy about the prospect of UPS and FedEx dedicating a portion of their planes to 3PL usage, especially usage that would not be subjected to last-minute offload situations.

Offload is when cargo is removed at the last minute at the carrier's discretion due to events like increased passenger load, change of aircraft, change in itinerary, etc. If this scenario plays out, the impact on air cargo carriers could be substantial, as all of their business models are very sensitive to capacity utilization.

This potential impact should not be underestimated.

Fleet Overcapacity Impact on Air Cargo Operators

Air cargo flights are usually maxed out due to the razor-thin profit margins that they operate on. Between 2010 and 2020, the average margin was only 2.1%. With that in mind, underutilization of these aircraft is not well tolerated as free capacity quickly turns into a flight where they could be losing money.

Combine that with the possibility of domestic parcel carriers siphoning off business via their [presumably] lower-priced cargo offerings due to their existing parcel network requirements, and the potential fallout becomes clear.

 

Strategic Moves by UPS and FedEx Amidst Declining Volumes

UPS and FedEx have not [yet] come out and announced such plans just, but there are moves in this space that indicate just such a move will take place.

For starters, FedEx lost a large portion of its USPS business which amounted to 6% of the Express unit’s revenue. In addition, on average, volumes have been down 10% for the last four quarters.

Internal communications show that something needs to change in order to plug that ever-expanding hole in its revenue, and they see an opportunity to aggressively pursue heavyweight air cargo business.

On the UPS side, revenues have been on the same trajectory, though not with as much drama as losing a large contract with a USPS-sized client.

Air freight volumes are down for UPS yet, despite this news, they are pushing ahead with the purchase of two 747-8 freighters from Qatar Airways. UPS already operates 28 747-8’s and is the largest freight operator of this model.

This particular purchase is said to be needed in order to support certain international routes. Still, even those int’l volumes are down 8.3% YoY and some aircraft have been parked for periods during this current shipping downturn.

Opportunities & Challenges for Large Shippers

What can we make of this and how could it affect JBF clients and large shippers?

For now, UPS and FedEx are keeping quiet on their plans, but recent moves indicate that they are trying to adapt to materially lower parcel volumes and opening up space on their fleets could be low-hanging fruit.

Clients that frequently utilize traditional air cargo brokers or even air cargo operators will need to explore the possibility of utilizing dedicated space on UPS/FedEx routes.

Current events such as the Red Sea ocean freighter attacks may take up some of the slack in air cargo as freight is rerouted via air, but that effect has not yet materialized.

With air cargo rates near 5-year lows and post-covid margins back to low single digits with some even losing money, there are certainly opportunities for cost savings. These savings are, however, likely to be more concentrated on trans-Atlantic routes as those are currently the most competitive. Asia-Europe and trans-Pacific routes will likely follow close behind in terms of savings.

 

Conclusion

As UPS and FedEx address fleet overcapacity and declining volumes, the air freight industry faces both challenges and opportunities. Adapting to these shifts is crucial for leveraging cost savings and maintaining efficient logistics operations. If optimizing your transportation management strategy to adapt to industry changes is a priority, engaging with JBF Consulting could be the right step forward.

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