USPS to rebid FedEx air contract upon next-year's renewal

The U.S. Postal Service has informed FedEx Corp. that it intends to rebid a large air services contract when it comes up for renewal in September 2013.

The contract, first awarded in the fall of 2001, calls for FedEx to provide domestic airport-to-airport delivery of first-class mail, Express and Priority Mail. The agreement has been in place for 11 years.

The contract generates about $1 billion in annual revenue for Memphis-based FedEx, equal to about 2.5 percent of the company's $43 billion in total annual revenue. It is also USPS' biggest air transport contract.

In its annual 10-K filing made yesterday with the Securities and Exchange Commission, FedEx said it has been told the Post Office "intends to solicit proposals for the provision of these services upon the expiration of the current agreement."

In a statement, USPS said that while no decision has been made regarding the current contract, the agency is "evaluating all of its options" to maintain long-term financial stability and still meet customer commitments.

The initial contract stirred controversy because it was awarded with no competitive bidding. FedEx rivals UPS Inc. and Airborne Express, which two years later was acquired by DHL, were vocal at the time in their opposition to the process.

The agreement was struck to improve mail delivery reliability by moving shipments on an all-cargo carrier instead of depending on passenger airlines, which were long the primary air providers for first-class mail. It also enabled the Post Office to reduce the line-haul costs associated with operating its own aircraft livery.

At the same time, the agreement helped fill FedEx's planes and improved utilization for its sorting operations in Indianapolis, which generally processes shipments not bound for overnight deliveries.