Executive Summary

• Global parcels expanded rapidly pre-COVID (36 billion in 2013 to 103 billion in 2019, 19% CAGR increase in volumes), accelerated in 2020 to 131 billion (+27% y/y) and continued their rise since then.

• In the U.S., 2024 volume growth (Pitney Bowes 22.4 billion, +3.4% y/y; ShipMatrix 23.8 billion) outpaced revenue (+2.7% to $203 billion), reinforcing a lower-cost mix and modest unit revenue gains despite intensifying competition.

• The picture is not complete without a look at China, a market that does 6.8 times the annual volume of parcel deliveries as the U.S. does, despite having only 4 times the population. Since 2019, ZTO (the largest player in China) has reduced transportation cost per parcel from roughly 8.7 U.S. cents to about 6 U.S. cents, and sorting cost from around 5 U.S. cents to about 4 U.S. cents, giving us an idea of how low costs can go through scale, efficiency, and a lower cost structure.

• The low cost of delivery in China, measured in mere cents, compares to average revenue per piece at UPS/FDX of about $13-$16. The USPS average revenue per piece is less than $5 across all services.

• The 2025 de minimis reset sharply reduced inbound air small-package flows, pressuring lane balance and yields for FedEx, UPS, and others. For carriers like FedEx, the China to U.S. trade lane was the most profitable trade lane they operated on, which has now been significantly impacted.

• Amazon is expected to be the largest parcel carrier in the U.S. going forward, overtaking USPS by 2028 according to various forecasts. That will necessitate carriers such as FedEx and UPS to invest in diversified & high-value add revenue streams (such as healthcare) and force them to “up their game” in last-mile delivery part of the logistics chain.

• Following our review of the global industry, we expect continued long term pressure on rates. This pressure should result in the U.S. players continually focused on cost efficiency. This will require continued investment in automation, as well as rethinking how to structure networks in order to lower delivery cost. Given this dynamic, we continue to favor railroads relative to the parcels in the industry. We maintain a Market perform on UPS (A2/A/NR) with a Underperform on FDX (Baa2/BBB/NR) based on relative value. We see a basis of just 15 bp between the two credits in the middle of the curve, despite the three notch ratings difference between the two.