USPS Air Transport Costs Climb as UPS Contract Minimums Bite

The U.S. Postal Service spent more moving freight in its third quarter, and the reason is only partly fuel. The agency is putting letters and advertising mail on aircraft to satisfy minimum volume commitments in a UPS air cargo contract that its parcel business can no longer meet on its own.

Air transportation between facilities cost $509 million in the quarter ended June 30, up 4.7% year over year. Highway transportation ran just under $1.6 billion, up 4.1%. The Postal Service attributed the air increase to moving certain package volume off highway and back into the air network to meet service standards and contract requirements, alongside jet fuel costs.

That is an unusual sentence for an organization whose stated strategy for five years has been the opposite.

The contract that reverses the strategy

Under Delivering for America, the Postal Service extended First-Class Mail delivery standards in October 2021 specifically so more volume could travel by truck, targeting roughly $701 million in annual air transportation savings and $1.1 billion from surface. In 2024 it replaced FedEx with UPS as its primary domestic air provider under a contract worth more than $10 billion, effective from Sept. 30, 2024, and running through March 2030.

The contract guarantees UPS a minimum average daily volume, with rate penalties when actual volume falls outside a negotiated band. The band's exact width is redacted in the public audit.

The problem is what happened to the volume that was supposed to fill it. Priority Mail volume had already fallen roughly 54% before the contract was announced in April 2024, and dropped a further 31% after. Postal management, according to the Office of Inspector General, forecast a 2% increase in average daily volume when setting the minimums.

The gap has to be filled with something, and the only thing available is mail. The share of First-Class Mail in the three-to-five-day delivery band moving by air rose from 2% in fiscal 2025 to 50% by the middle of fiscal 2026. The OIG calculated that without supplementing with First-Class and Marketing Mail, the Postal Service would have paid more than $127 million for air capacity it did not use.

The audit's conclusion is blunt: the contract's volume requirements are not aligned with actual volume or operational reality, and the agency is flying mail simply to avoid larger penalties. The OIG recommended a fresh cost-benefit analysis, explicitly including whether to exit the contract. It also credited the deal with lower rates, better flexibility and tougher service terms — roughly $1.7 billion in annual savings when combined with other measures.

Pricing is carrying the quarter

Total operating revenue reached $19.94 billion, up 6.1%, the agency reported on Aug. 7. Net loss was $2.51 billion, an improvement on $3.08 billion a year earlier; controllable loss narrowed to $1.04 billion from $1.62 billion.

Shipping and Packages revenue rose 7.7% to $8.25 billion on a volume decline of 3.4%. That works out to roughly $5.31 per piece against $4.76 a year ago — an 11.5% increase in yield, achieved on fewer parcels. A transportation-related temporary price increase implemented April 26 did most of that work. It is scheduled to run until Jan. 17, 2027.

Postmaster General David Steiner told the board of governors on Aug. 7 that pricing is the lever available now to grow revenue. The agency also deferred approximately $1.4 billion in FERS contributions during the quarter and cut 4 million work hours — measures it describes as temporary and insufficient without legislative action.

The line nobody quoted

Buried in the revenue table is the steepest decline in the report. International revenue fell to $229 million from $295 million, down 22.4%, on volume down 23.2% to 43 million pieces.

Every domestic category held up better. First-Class volume fell 3.5%, Shipping and Packages 3.4%, and Marketing Mail actually grew 4.3%. International is falling roughly seven times faster than the domestic average — and it is the only category where both revenue and volume dropped by more than a fifth in a single year.

That is the cross-border small-parcel channel contracting, visible in postal data before it shows up anywhere else.

What it means for forwarders

Three things follow for anyone buying US domestic air capacity or handling cross-border e-commerce.

UPS has a volume floor through March 2030. Whatever happens to postal parcel volume, UPS is contractually owed minimum daily lift, and USPS is filling the shortfall with mail rather than paying penalties. That is a structural support under UPS's domestic air network that has nothing to do with market demand — and it constrains how much of that network gets offered to the open market.

The temporary surcharge has an expiry date. Jan. 17, 2027. If you are pricing USPS Ground Advantage or Priority into 2027 final-mile quotes, that date matters, and there is no guarantee the increase lapses rather than being folded into the base rate.

The OIG has put termination on the table. It is a recommendation, not a decision, and the contract runs to 2030. But a renegotiation or exit would put a large block of domestic air volume back in play, and that is worth watching rather than assuming.

The Postal Service's own framing is that management action alone will not fix this. CFO Luke Grossmann said as much on Aug. 7, pointing to a business model he described as unresponsive to change. The air contract is a fair illustration: a deal signed to cut costs is now adding them, because the volume assumptions underneath it were wrong by a wide margin.