Package deal

A $7 billion deal saves millions for the U.S. Postal Service, makes big money for FedEx Express, and could push Emery out of the picture altogether.

Staff -- Logistics Management, 2/1/2001

Ever since reports surfaced last summer that the U.S. Postal Service (USPS) and FedEx Express were discussing an alliance, industry observers have been waiting to see what came of those talks. Last month they found out, and not everyone is happy.

The USPS and FedEx Express have signed two contracts worth about $7 billion over seven years. Under the first deal, worth $6.3 billion, FedEx will provide airport-to-airport transportation for 250,000 pounds of Express Mail packages nightly and about three million pounds of Priority Mail each day. That volume will not strain FedEx's system, said Frederick W. Smith, chairman, president, and CEO of FedEx Express's parent company, FedEx Corp., in a press conference announcing the agreement. The Express Mail portion represents just 1.5 percent of the company's total nightly capacity, and the Priority Mail shipments will move on aircraft that largely sit idle during the day, he said. Presorted, unitized mail will be handled at existing FedEx facilities.

Under the second contract, FedEx will be allowed to place about 10,000 drop boxes outside post offices, paying the USPS a fee for each box. The non-exclusive agreement allows FedEx to test the concept for 90 days. After that, the USPS can extend similar opportunities to other express carriers. FedEx projects that the new drop boxes will earn an additional $900 million in business. That number is based on the expectation that greater exposure and convenience will encourage small businesses and individuals to use FedEx Express services. That figure also includes savings achieved by reducing the need for expensive pickups.

Some have questioned whether the partners are treading on dangerous ground i.e., if FedEx improves on-time reliability for Express Mail and Priority Mail, won't customers switch to the cheaper USPS service and drop FedEx? Not at all, said FedEx executives at the press conference. For one thing, FedEx's average overnight package weighs eight pounds, while the average Express Mail shipment weighs about one pound. For another, said Alan B. Graf Jr., FedEx Express' executive vice president and chief financial officer, "We are really not a big participant in deferred lightweight documents that the Postal Service handles with Express Mail& We're in a different market with time-specific deliveries."

Postmaster General William Henderson says his organization expects to save more than $1 billion over the life of the contract. For its part, FedEx sees the deal as a financial home run. "The two agreements& are consistent with our goals of improving margins, cash flows, and returns," says Graf.

There may be more news to come from FedEx and the USPS. When asked whether they might work together on other aspects of mail delivery, Henderson said, "A lot of things will be talked about over time that are not necessarily finalized today. There will be ongoing discussions."

Taking exception

FedEx's competitors are not exactly pleased about the deal. United Parcel Service, which last summer had voiced strong opposition to Henderson's suggestions that the Postal Service and FedEx might share pickup and delivery responsibilities, is more circumspect about the current arrangement. "We know the Postal Service has described [the drop-box deal] as a non-exclusive agreement," says UPS spokesman Norman Black. "& If it is non-exclusive, then we have every intent of examining that as a business opportunity for us." Any agreement that unfairly favors FedEx against similarly situated companies, he adds, would be cause for dispute.

Another competitor, Emery Worldwide Airlines (EWA), the airline subsidiary of CNF Inc., is questioning the way the contract was awarded. Last month, Emery asked the U.S. Court of Federal Claims to issue a temporary restraining order barring the Postal Service from signing the FedEx contract. Emery's suit alleged that the contract, which was not subject to competitive bidding, violated the Postal Service's own procurement rules. That request was denied. "We are extremely disappointed that a restraining order was not granted. We consider the Postal Service's pursuit of an exclusive agreement with FedEx to be irresponsible and not in the best interests of consumers," says Kent T. Scott, Emery's president and chief operating officer. Emery plans to continue its fight, he adds. "When Emery expressed interest in bidding for these services, we were ignored. We think that's unfair and illegal. We will continue to pursue appropriate action to stop this contract from being implemented."

EWA may not have to fight alone: The U.S. Department of Justice reportedly will investigate whether the contract awards violated any laws.

The Postal Service denies any impropriety. John Nolan, assistant postmaster general, told reporters that the pre-bid screening found that FedEx was the only carrier that could fill all of the post office's requirements a statement that one FedEx competitor termed "ridiculous."

Emery was not on the best of terms with the Postal Service before the FedEx news broke. The airline filed suit last year in federal claims court alleging that the Postal Service underpaid it for its services under a 10-year contract to handle Priority and Express Mail. Emery won increased payments, but the court declined to declare a breach of contract. An Emery representative said that the company had not received notice that its 10-year contract to handle Express and Priority Mail would be terminated, but it was likely that the new FedEx deal would result in termination prior to that contract's expiration in 2004.

FedEx executives said their contract would avoid the troubles that have plagued Emery's agreement. "We studied the CNF-Emery contract extensively. ... The Postal Service had to contract for entire aircraft and a fixed-cost network," said Smith. "Now the Postal Service has taken a fixed-cost network and turned it into a variable-cost network, so it can grow unconstrained by the necessity to put into place new infrastructure. I can't emphasize enough how different this contract is from the Emery-CNF arrangement."