UPS, FedEx, and USPS: What Delivery Company Is Faring Best This Holiday Season?

As the holidays draw closer, last-mile delivery is surely on the mind of every business that transports goods. So how are the largest companies in the space, particularly UPS and FedEx, faring after the challenges of 2020? Recent earnings calls from both companies provided some hints.

“The earnings calls for both UPS and FedEx were a tale of two direct competitors going in opposite directions,” says Dean Maciuba, a GLG Network Member and Managing Partner at Last Mile Experts.

To learn more how UPS, FedEx, USPS, and Amazon are faring, Alec Gustafson of GLG’s energy and industrials team spoke with Maciuba. Below are a few select excerpts from the teleconference.

What are some key takeaways from UPS’ recent Q3 earnings call?

UPS’ call was probably one of the most positive it’s had. CEO Carol Tomé really laid out how its strategy is improving margin. The number one thing on her list was growing SMB volume. The company is absolutely doing that, and as we know, those packages drive more revenue than packages for large, highly discounted customers. Second was to reduce cost, which UPS is doing favorably, helping it on the margin side. It’s also talking about better allocating capital, and a lot of that has to do with CapEx, which this year was a bit more than half of what FedEx’s is. Wall Street loves that.

Another startling thing that Tomé said is that for the first nine months of 2021, UPS has already generated more operating profit than any full year in history. That is simply amazing. She also said that the company met its goal to eliminate $500 million in nonoperating costs this year. UPS acquired Roadie, which will give it insight into how the on-demand last-mile pickup business works. Finally, its consolidated operating margin expanded to 12.8%. That is nearly double FedEx’s operating margin reported for its last quarter. It’s amazing that the margin spread can be so large between two direct competitors.

What about FedEx’s earnings call?

On the positive side, performance was highlighted by double-digit increases in yield across all its transportation modes. Its revenue per package is slightly up. There was a period of time in recent years where we saw a slide in revenue per package. What’s really trampling on that good news is FedEx’s operating costs and how it’s more than crushing the gains that it’s seeing in package yield. The impact of constricted labor markets remains the biggest issue facing FedEx. There are more than 600,000 packages being rerouted a day across the FedEx ground network, resulting in about $450 million in unplanned costs for its latest quarter. But there’s something else going on here. Based on third parties that publicly release carrier service for UPS and FedEx, one thing is clear: UPS is having better luck charging more to customers that are large, highly discounted e-commerce shippers. Obviously, those are bad packages, and FedEx needs to address that.

FedEx is in a difficult position, because it’s growing its volume but not charging customers enough to grow that volume. Now, FedEx does have a lower-cost labor model. It’s a contractor model, and it’s significantly lower cost than UPS’ model that is under the Teamsters. That’s something to watch. The only bright light for FedEx was FedEx Freight higher margins, its best ever. But the problem there is it’s just a tiny portion of the company’s overall revenue. Contrast that with UPS closing a deal to sell UPS Freight to TFI. Carol Tomé’s goal was to get rid of noncore businesses and focus on parcels. She’s got that organization focused on doing what it does best.

What has the Postal Service done to improve since its 2020 service issues?

It’s planning much better. Last year, Postmaster General Louis DeJoy was relatively new and there were all sorts of problems, both political and also organizational within the USPS. Middle management was preoccupied — possibly resisting the changes — and weren’t focusing on the customer as much as they should have been. That’s different this year. We’re reading about fewer internal issues at the USPS. DeJoy is more effective. Leadership has done the planning and met with its larger customers. It will try to limit intake to a certain extent, but something to keep in mind is, because it’s a quasi-governmental organization, it can’t fire bad customers, like UPS and FedEx can.

USPS has removed huge amounts of giant letter processing sort systems that weren’t even being used, because first-class mail has declined so much in the past 20 years. It’s bringing in machinery that will help it sort packages. One of the bottlenecks that it still has is at the local post office and its trucks. It was interesting to see that President Biden sort of snuck in $6 billion into one of his plans to buy new trucks for the USPS. That won’t help this year, but long term, with new trucks, it will be better positioned to deliver parcels and be more efficient.

What are Amazon’s challenges ahead of this holiday season?

Amazon is having some routes go unstaffed because it can’t find people to drive delivery trucks. Amazon was reported to be sending out letters to contractors saying, if you can’t start fielding staffed trucks and meeting your commitments, we’ll fire you. Another challenge is its drivers make more stops than UPS and FedEx. Amazon drivers are expected to do more than reasonable. In many cases, new routes are denser and drivers may be delivering 50 packages in one block, but they are not making as much as UPS drivers. We will probably see burnout at the driver level for Amazon. On a positive note, though, since last year, Amazon opened up hundreds of local delivery terminals, which means it is putting its delivery staff closer to the consumer. That has got to help, both from a standpoint of efficiency and service.

What will the relationship between UPS and Amazon look like?

UPS is not willing to pull the plug on Amazon overnight like FedEx did, because that volume is built into the mechanics and the design of its network. What we are seeing is UPS incrementally pulling back on Amazon, and there are a few ways to do that. One is pricing. If it’s getting more expensive, it makes more sense for Amazon not to give the packages to UPS as Amazon further develops its delivery service partner network. What I’m seeing is UPS incrementally pulling out of that relationship so it can adjust its operations over time, rather than walking away from that business all at once. UPS will likely always be with Amazon to some extent because Amazon will need a backup buddy.

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About Dean Maciuba

Dean Maciuba is currently the Managing Partner North America for Last Mile Experts. Before that, Dean also served UPS and FedEx for over 37 years across multiple professional positions in sales, marketing, and operations. His vast experience allows him to possess a unique and in-depth view into nearly all aspects of the trucking and parcel transportation industries. Dean has experienced much success consulting in the categories of Amazon’s transportation capabilities, e-commerce distribution, and the design/implementation of last-mile distribution solutions, including next-day and same-day delivery. He has direct experience designing both domestic and cross-border distribution solutions for the e-commerce shipper community. Additionally, Dean is expert in understanding the capabilities and pricing practices of UPS, FedEx, DHL, and supports carrier contract negotiations for medium-sized to large organizations.

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This last-mile article is adapted and translated from a GLG Teleconference. If you would like access to events like this or would like to speak with industry experts like Dean Maciuba or any of our approximately 1 million industry experts, contact us.

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Full List of Questions Addressed During Teleconference:

• Can you share your thoughts on some of the key takeaways from the recent Q3 earnings calls in the last mile?
• Is there any new carrier option this year to help reduce pressure and demand on the integrated carriers?
• Labor shortage just seems to be a problem in the industry and it’d be great to hear your overall thoughts on the hiring outlook for ahead of peak season and what impact that this could have to on-time performance.
• How will UPS look to grow the SMB segment?
• What has the Postal Service done to improve over 2020 service issues?
• What are the dynamics of the regional carrier market given the recent LaserShip and OnTrac merger?
• What are Amazon’s challenges right now ahead of this holiday season?
• What does the future hold for last-mile delivery for groceries?
• What do you forecast with UPS and Amazon’s relationship and when should we expect Amazon to intake all its own delivery?
• What should the expectations be with UPS’s acquisition of Roadie?