USPS's air contract brought FedEx $1.6 billion in fiscal 2012, internal documents show

FedEx Corp. generated more than $1.6 billion in revenue from the U.S. Postal Service (USPS) in the post office's 2012 fiscal year ending last September, making FedEx by far the postal service's largest supplier, according to internal USPS data obtained by a Washington, D.C.-based law firm.

This marks the 10th consecutive year that Memphis, Tenn.-based FedEx, which competes with USPS on various delivery services, was also the quasi-governmental agency's largest supplier, according to Husch Blackwell LLP, which obtained the information through a Freedom of Information Act request.

Second on the list was Kalitta Air LLC, which flies military mail for the post office. Kalitta, based in Ypsilanti Township, Mich., generated $396.6 million from postal business. UPS Inc., FedEx's chief rival, was 10th with $126.3 million in revenue from USPS.

FedEx Express, FedEx's air and international unit, provides domestic airport-to-airport deliveries of Priority Mail, USPS's two-day delivery product; Express Mail, its overnight delivery product; and regular first-class mail. FedEx was first awarded a seven-year flying contract by USPS in 2001. The contract was renewed in 2006 for another seven years. The 2006 pact replaced the final two years of the original contract.

In a statement disclosing the 2006 contract, USPS said FedEx Express would fly about 4 million pounds of mail every business day. At the time, USPS said the contract would be worth about $1 billion a year to FedEx.

The data's release comes as USPS prepares to rebid the contract by the time it is up for renewal in August. An industry source said FedEx believes it has a good shot at keeping the business, though it acknowledges the pact could be split up due to political considerations. The contract is very profitable to FedEx, according to the source.

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 service 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 process shipments not designated for overnight delivery.

USPS, which recently announced plans to end Saturday mail deliveries in the fall, has been under pressure to cut costs across its vast enterprise. However, it is recognized that the relationship with FedEx has improved the quality of USPS's airmail service while saving it money over operating its own fleet.