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United Parcel Service (UPS) has been announced as the new primary air cargo provider for the United States Postal Service (USPS), replacing long-time partner FedEx.

According to Reuters, this move comes as FedEx terminates its over two-decade-long partnership with USPS, which was once its largest customer for air-based services.

FedEx's relationship with USPS has faltered in importance over the years, with USPS accounting for about 4 per cent of FedEx Express's annual revenue.

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The decline in revenue from USPS was due to the postal service's shift from using planes to more cost-effective trucks for transportation.

"It's not a huge loss for FedEx, but it will impact their density... You're losing consistency in terms of revenue from a pretty significant partner, but it wasn't the most profitable business for them ... it's not all negative,” Reuters quoted Faisal Hersi, an equity analyst at Edward Jones, as saying.

This transition is expected to follow an increase in revenue for UPS, which had previously forecasted full-year revenue below Wall Street's estimates.

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Hersi further noted the benefits for UPS.

"It provides an opportunity (for UPS) to have someone that's going to guarantee them some of that volume and helps them have that density improvement," he said.

The financial terms of the new contract between UPS and USPS were not disclosed, but UPS described it as "significant".

Following the announcement, shares of FedEx dropped nearly 2 per cent, while UPS's stock saw a 1 per cent decline.

FedEx is now faced with the task of adjusting its network to compensate for the loss of the contract, which contributed nearly $2 billion in annual business.

The company said in a filing on Monday that "the parties were unable to reach agreement on mutually beneficial terms to extend the contract."

As a result, as many as 300 pilots at FedEx could potentially be out of work.

In response, the Air Line Pilots Association International (ALPA), the union representing FedEx pilots, criticised FedEx's management.

"With each new announcement, FedEx management continues to threaten every FedEx employee's job security and quality of life,” the union said.

In the fiscal year 2023, USPS's payments to FedEx reduced to approximately $1.7 billion from $2.4 billion in the fiscal year ending September 2020.

FedEx, as the number one domestic air contractor for USPS, had been supporting the agency's Priority Mail and other quick services.

However, with USPS reorganising its operations to align with the strategy of moving distribution centres closer to consumers, the demand for fast air services has decreased.

(With inputs from Reuters)