Race for $1.4 Billion Postal Service Contract to Pit Incumbent FedEx vs. Challenger UPS

This story appears in the July 23 print edition of Transport Topics.

When the U.S. Postal Service’s biggest airfreight contract, worth $1.4 billion, expires in September 2013, current pact holder FedEx Corp. will have to battle archrival UPS Inc. to keep it.

After FedEx last week disclosed the Postal Service’s intentions to solicit proposals when its largest airfreight contract expires, UPS officials told Transport Topics they would bid for the pact FedEx has held for the past six years. “We intend to bid,” UPS spokeswoman Susan Rosenberg said.

“While no decision has been made to the existing contract, the Postal Service is evaluating all of its options as we move forward with our efforts to return to long-term financial stability,” Postal Service spokesman David Parthenheimer said.

He declined to be specific.

Hoping to save cash by altering service and choosing less expensive vendors, the Postal Service has hinted for months that it would put the FedEx contract up for tender when it expires.

The Postal Service is projecting a $14 billion loss in its 2012 fiscal year, which ends Sept 30.

It lost $5.06 billion in fiscal 2011.

“The USPS has informed us that it intends to solicit proposals for the provision of these services upon the expiration of the current agreement,” FedEx said July 16 in a U.S. Securities and Exchange Commission filing.

FedEx intends to vie for the contract again when bidding opens, FedEx spokesman Jess Bunn said.

FedEx Express generates about $1.4 billion from the airfreight contract, Dahlman Rose & Co. analyst Helane Becker wrote in a July 17 research note. While this is a small portion of FedEx’s $42.7 billion annual revenue, “losing the USPS contract would negatively impact FedEx and cause a bump in the road as the company restructures its Express business,” Becker wrote.

In its filing, FedEx said its Express unit also provides airlift for the Postal Service’s international delivery program called Global Express Guaranteed under a separate contract. The company would not divulge details of that agreement.

FedEx also is a customer of the Postal Service as its FedEx SmartPost, a unit of FedEx Ground, sorts, consolidates and delivers small business-to-consumer packages to postal processing centers. SmartPost uses the Postal Service for final delivery to residences.

UPS won a contract to provide airlift for first-class postal and priority mail in 2006, Rosenberg said. The value of the contract was not available. Like FedEx, UPS is a customer and competitor of the Postal Service for package delivery, she said.

“We have a multifaceted relationship with the Postal Service,” Rosenberg said. “We’re a customer, a vendor and a supplier to the Postal Service, and we also compete.”

Because the FedEx contract expiration is still 16 months away, the Postal Service has not offered any specific information on how a new pact would be structured.

Meanwhile, a July 16 report from the U.S. Postal Service Office of Inspector General recommended that the Postal Service consider shifting some truck freight to intermodal. In 2011, the agency spent $3.3 billion on truck transport but only $40 million on rail shipments, according to the report.

The agency could save money by reducing some empty backhaul trips caused by truck lane imbalances, according to the report, “Strategic Advantages of Moving Mail by Rail.”

Because rail transportation is billed one-way, about 18,000 truck backhauls a year, totaling more than 35 million miles, could be eliminated by using rail transport. That change would save more than $65 million a year, the report said.

The Postal Service added that it could save about $100 million a year with a shift to intermodal. But calculating exact savings depends on trip length, availability of rail lanes, among other factors, the agency said.

It is unknown how much truck freight could be shifted, because intermodal depends on mail volume direction and location of rail lines, the report said.

UPS and FedEx have increased their use of intermodal over the past decade, the report said, while the Postal Service has moved away from it.