USPS says it plans to stick with FedEx for domestic air services

Earlier this week, the United States Postal Service (USPS) said that it is keeping its domestic air services in the hands of FedEx, its current provider, with a seven-year contract for Priority and Express Mail services.

The current contract between the USPS and FedEx expires in September, with the new one commencing in October.

USPS officials said that the organization conducted a competitive procurement for the transportation of domestic mail products by air, incorporating new service performance requirements and improved contract terms and conditions. And on the heels of what it said was a rigorous evaluation of technical aspects, pricing and other factors, the USPS “determined that the FedEx proposal represented the best value,” adding that “The new contract benefits postal customers by providing service improvements, capacity flexibility, and other planned operational improvements.”

The USPS added that based on estimated volumes the new agreement is valued at approximately $10.5 billion over the seven-year term and also allows the USPS to continue a successful business relationship with FedEx.

The possibility of USPS and FedEx continuing this relationship was not a given, considering that in July 2012 the USPS said it planned to solicit proposals for domestic air services currently provided by FedEx. That information was made available through a FedEx 10-K filing with the Securities and Exchange Commission last July. 

These services are for various USPS offerings, including First-Class, Priority, and Express Mail. The current agreement between the USPS and FedEx dates back to 2001.

“The US Postal Service continues to strive for the best value in the fulfillment of its service obligations, including those associated with air and ground transportation procurements,” said USPS officials in July. “The existing contract with FedEx, scheduled to expire in September 2013, is the Postal Service’s single largest air transportation agreement.  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, while maintaining excellent service for all our customers.” 

A Bloomberg report issued last summer noted that the USPS contract represents more than 3 percent of FedEx’ sales and generated about $1.4 billion for FedEx in its fiscal year through May 2012.

And it quoted FedEx spokesman Jess Bunn as saying during the 11-year period of the relationship between FedEx and USPS, FedEx has “raised the service levels and reliability of the Postal Service product,” adding that “[t]hat record of success will be an important consideration.”
Had the USPS elected to go in a different direction, one obvious option would have been FedEx’ biggest competitor UPS.

When the FedEx 10-K was issued last summer, a UPS spokesman told LM that it definitely intended to bid on this work and that UPS absolutely believes it can support the Postal Service’s commitment to its mail customers by enhancing the efficiency of the mail system while creating new growth opportunities for
UPS and that the UPS air network and the company’s proven logistics capabilities place UPS in a position to best satisfy the demands of the nation’s mail system.”

UPS today acts as a customer, vendor and supplier to the USPS as well as a competitor.  And since 2006, UPS has provided airlift services for the transport of First Class and Priority Mail.

“FedEx has had the business for over a decade, and the USPS did not want to switch,” said Jerry Hempstead, president of parcel consultancy Hempstead Consulting. “FedEx could not afford to loose the business as it would be a Herculean effort to replace that much revenue in their daylight system. Ergo they had to offer a much lower price than they had been charging in order to keep the contract.  They had previously announced to the investment community that if they kept the business it would have lower yields than they had been enjoying. The hit to earnings if there is one will not manifest itself until FedEx announces its next fiscal first quarter, which usually occurs in January. So FedEx has some time to bring down operating costs to coincide with whatever revenue decline they expect. It kept the business, but it is going to be less profitable for them than it had been.”