Postal Service awards FedEx seven-year flying pact for expedited mail; weighs change in Priority Mail deliveries

The U.S. Postal Service (USPS) said late yesterday it had awarded FedEx Express, the air and international unit of FedEx Corp., a seven-year contract to fly USPS' Express and Priority Mail shipments between U.S. airports.

At the same time, USPS is working on a plan to compress the delivery schedules of its Priority Mail service to one day from the existing two- to three-day windows. Although nothing has been finalized, an agency source told DC Velocity that the strategy "most likely" will be implemented and an announcement could come in late July.

The idea of moving to overnight delivery was already being floated in March of 2012. At that time, DC Velocity reported that Megan O. Brennan, USPS's executive vice president and chief operating officer, said her team was exploring the possibility of expediting Priority Mail's delivery schedules. "We want to stretch our capabilities to see how much of the second-day network we can advance into the overnight mail system," Brennan said at the time.

In the quarter ending Dec. 31, USPS handled about 233 million Priority Mail shipments, about flat with 2011 levels, according to a quarterly filing in February with the Securities and Exchange Commission. Revenue totaled $1.726 billion, up 0.3 percent from year-earlier levels, according to the filing.

The FedEx contract, valued at $10.5 billion over the seven-year period, extends a 12-year relationship between USPS and the Memphis-based giant, which has been the Post Office's largest supplier for a decade. The current pact, which was reached in 2006, expires in September. The new agreement starts the following month.

In a statement issued yesterday, USPS said it "conducted a competitive procurement" and incorporated "new service performance requirements and improved contract terms and conditions." It did not disclose details. Analysts estimated that the new contract will save USPS approximately $200 million annually.

Based on estimates of FedEx's annual revenue from the current contract, the new pact translates into a $100 million revenue decline per year. Analysts said, however, that FedEx should offset a chunk of that drop-off through network efficiencies expected to be put in place through the recently announced restructuring of its domestic air operation.

The initial contract, signed in 2001, 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 opposing the process. The renewed 2006 contract replaced the final two years of the initial compact.

In recent months, there was speculation the contract would be split up for political considerations. In the end, however, USPS seemed sufficiently satisfied with FedEx's service to determine that such a move would be too difficult to execute. It is unclear at this time what happens to the small amount of USPS' traffic now handled by UPS.

The agreement was initially struck to improve mail-delivery reliability by moving postal traffic on an all-cargo carrier instead of the traditional means of using passenger airlines. It also enabled the Post Office to reduce the line-haul costs associated with operating its own aircraft livery for the more-urgent, time-definite deliveries of Express and Priority Mail shipments. Express Mail provides overnight deliveries to most of the United States.

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.

FedEx also handles some of the USPS' first-class mail. However, the network is designed primarily to move Express and Priority Mail traffic.

USPS faces enormous financial pressures from people using digital communication such as e-mail for what used to be sent via first-class mail, the Postal Service's largest and most profitable product. It also must spend a billion dollars each year to pre-fund retiree health benefits. It recently proposed to end Saturday first-class mail deliveries sometime this spring. However, it postponed the move until Sept. 30 at the earliest, citing Congressional backlash. The elimination of Saturday delivery would save USPS an estimated $2 billion a year. It plans to maintain Saturday deliveries of packages.