USPS to put FedEx contract up for bid

In a 10-K filing with the Securities and Exchange Commission, FedEx said this week that it has learned that the United States Postal Service (USPS) plans to solicit proposals for domestic air services that are currently provided by FedEx.

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, and it expires in September 2013. According to industry estimates, this contract is valued at more than $1 billion.

“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. “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.”  

The USPS said it incurred a new loss of $3.2 billion during the fiscal second quarter, following a $3.3 billion fiscal first quarter loss and a $5.1 billion fiscal year 2012 loss. USPS officials said that despite ongoing management actions that have grown and improved efficiency, these sizable losses are expected to continue until key provisions of the USPS five-year business plan move forward. Previous losses in recent years include $8.5 billion for fiscal year 2010 and $3.8 billion for fiscal year 2009.

In terms of what FedEx competitor might be able to step in and win the USPS contract when it expires in 2013, one obvious candidate would be its top competitor UPS.

“UPS, I suspect, has been lobbying that the $1 billion in [annual USPS] business be competitively bid considering the financial woes the USPS has had,” said Jerry Hempstead, president of Hempstead Consulting. “But it is possible that a solution comes out of left field from ABX Air, ASTAR, or Atlas. I think it would be hard for the USPS to entertain seriously a bid from DHL, because they are German-owned. But DHL can be a subcontractor to Atlas or ASTAR or ABX (DHL owns minority voting of Atlas and ASTAR). By far the largest threat is from UPS if they want the business. UPS can take it on, and the USPS would not miss a beat.”

A Bloomberg report 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.”
But that sentiment does not appear to be a detriment to UPS in any way.

“UPS has informed the USPS that it definitely intends to bid on this work,” UPS spokesman Norman Black told LM. “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.  We believe 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, he explained.  And since 2006, UPS has provided airlift services for the transport of First Class and Priority Mail and remains focused on providing the best, most reliable service possible and growing our relationship for the future, said Black.

What’s more, Black said that UPS believes it is important to have a strong postal service. 

“The USPS provides a valuable service to the industry and our company by stimulating demand for goods, many of which show up as packages in our system as well as those of our competitors,” he said.

Robert W. Baird & Co. analyst Ben Hartford wrote in a research note that were FedEx to lose the USPS contract it would be a negative drag to domestic Express utilization and margins. But he pointed out that start-up costs for USPS were roughly $300 million in 2000-2001 when the agreement was originally struck. Hartford also wrote that the timing of the contract expiration, which comes a year after FedEx’ expected restructuring for its Express business, provides FedEx with visibility to plan for any potential loss of business and resulting impact to network utilization.