USPS Transportation Costs Climb: Adjusting Capacity Structure to Fulfill UPS Air Cargo Contract
The United States Postal Service (USPS) reported in its third-quarter fiscal year 2026 financial results that transportation costs rose year-over-year, with air transportation expenses increasing 4.7% to $509 million and highway transportation expenses rising 4.1% to nearly $1.6 billion. The cost increase was mainly driven by high fuel prices and the shift of some mail from highway back to air transportation to fulfill the UPS air cargo contract. Despite a temporary 8% price increase boosting package revenue by 7.7%, the quarter still recorded a net loss of $2.5 billion.
Key Takeaways
- The U.S. Postal Service's (USPS) transportation costs rose in the quarter ending June 30, driven by higher fuel expenses and volume adjustments to meet air cargo contract requirements with UPS. The agency disclosed this in itsthird-quarter earnings report.
- Inter-facility air transportation costs rose 4.7% year-over-year to $509 million. The Postal Service primarily attributed this increase to "shifting some package volume from surface to air transportation to meet service standards and contractual requirements," as well as a significant rise in jet fuel costs.
- Surface transportation costs increased 4.1% year-over-year to nearly $1.6 billion, driven mainly by higher average diesel prices, but partially offset by the shift of volume to air.
Deep Dive
In the previous fiscal year, the Postal Service made progress in reducing transportation costs, particularly in air cargo, by shifting some volume from air to surface transportation to achieve cost savings.
However, this year, to fulfill its air cargo contract with UPS, the Postal Service has been moving more First-Class Mail and Marketing Mail via air rather than the more economical ground transportation. The agency's Office of Inspector General (OIG) noted in areportlast month that under the contract, USPS committed to a minimum daily air volume, buta significant decline in Priority Mail demandhas made meeting that minimum difficult.
"If package volumes continue their downward trend, the Postal Service will likely shift more First-Class Mail and Marketing Mail into the air network to avoid higher costs—even though this contradicts the long-term goal of reducing reliance on costly air transportation," the OIG report said.
Transportation costs also face another pressure: the Postal Serviceand other carriersare dealing with rising fuel costs due to the Iran war and disruptions related to the Strait of Hormuz.
To offset these costs, the Postal Service implemented atemporary 8% price increasein April on package delivery services such as USPS Ground Advantage and Priority Mail. The increase, which remains in effect until January 17, 2027, helped the Postal Service achieve a 7.7% year-over-year increase in package delivery service revenue in the third quarter, despite a 3.4% decline in volume for that category.
"On pricing, this quarter's results show that pricing has a powerful leverage on results, and pricing is one of the levers we must use now to increase revenue," Postmaster General and CEO David Steiner said inremarksto the agency's Board of Governors on Friday.
Despite revenue growth, the Postal Service still recorded anet loss of $2.5 billionfor the quarter and continues to face an "urgent financial crisis," Steiner said. The postmaster general stated thatcongressional action is neededto lay the foundation for the agency's long-term financial stability.