FedEx, UPS Seen Gaining Delivery Business From Planned U.S. Postal Service Cutbacks
This story appears in the Jan. 23 print edition of Transport Topics.
FedEx Corp. and UPS Inc. could see more business if the U.S. Postal Service closes more than half of its 478 processing centers, eliminates Saturday deliveries and slows first-class delivery to two to three days from one to two days, said sources who closely monitor postal cargo operations.
David Hendel, a lawyer at Husch Blackwell LLP, Washington, who specializes in Postal Service contracts, said these changes and the proposed closings of about 250 mail-processing centers and hundreds of post offices would increase the Postal Service’s reliance on air cargo.
“To keep [postal] service commitments, there will be a need for additional air,” Hendel said. “This new volume may go by commercial air or by FedEx.”
Hendel is counsel to the National Star Route Mail Contractors Association, which represents thousands of postal truck contractors.
FedEx and UPS would be the logical choices for postal shippers that need a Saturday parcel delivery, said Christian Wetherbee, senior transportation analyst at Citi Investment Research.
USPS Shipping Services, the postal service’s parcel division, delivers about 1.47 billion packages annually and moves an estimated 2.4 million pieces each Saturday, Wetherbee said.
Using the Postal Service rate of $6 per parcel, Wetherbee’s firm estimated the Saturday market at about $737 million in annual revenue. If just half of that volume moves to FedEx or UPS, the companies could add $534 million and $476 million in annual revenue, respectively. The estimates assume a price up to $8.73 per piece for FedEx and $7.79 per piece for UPS, Wetherbee noted.
FedEx already provides air transportation for most Express Mail, Priority Mail and first-class mail from the Postal Service that cannot move by ground.
FedEx generated about $1.49 billion in revenue from the Postal Service last year, Hendel said, and is the largest Postal Service contractor by revenue. UPS did an estimated $59 million in 2011 postal business, Hendel said.
“FedEx has a very strong relationship with the U.S. Postal Service, both as a customer and a supplier.
Through our partnership, the reliability of the USPS’ priority mail service has improved to more than 95% from 70%,” said FedEx spokeswoman Maury Donahue.
The Postal Service now has until 6 p.m. on the day before delivery to ensure that three-day service, first-class mail arrives at a destination mail-processing facility, said Cheryl Martin, manager of the Postal Service’s surface transportation operations group. Under the operational revamp, the same mail must arrive at a destination processing facility by 8 a.m. on the day before delivery, she said.
“Because the surface transportation window for this particular mail class will be decreased by several hours, the Postal Service will need to divert a portion of this mail volume from surface to air transportation to ensure timely delivery,” Martin said in testimony before the Postal Regulatory Commission last month.
She estimated the volume of mail shifting from ground to air would increase by about 124 million pounds a year.
Meanwhile, Hendel noted the Postal Service may look for cheaper air cargo rates when its seven-year contract with FedEx expires in September 2013.
Postal Service spokesman David Partenheimer declined to comment on the possible future of the FedEx pact.
“Our Priority Mail business, which is largely shipped by air, has been growing and, at the same time, our first-class mail has been declining,” Partenheimer said. “We will continue to use transportation that best ensures on-time and efficient service.”
“FedEx has long advocated changes that would permit [the Postal Service] to operate more like a business,” Donahue said. “There have been a number of different proposals offered in legislation, and we’re monitoring that situation closely.”
UPS also said it has no position on any postal proposals. “Anytime a competitor pulls back on service and access, it creates opportunities in the marketplace,” UPS spokeswoman Susan Rosenberg said. “Whenever a postal bid is presented, we will evaluate it.”
