DC Velocity - May 2013

Postal Service awards FedEx seven-year contract

The U.S. Postal Service (USPS) awarded FedEx Express, the air and international unit of FedEx Corp., a seven-year contract to fly USPS’s 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 next-day delivery was floated in March 2012, when 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.

$200 MILLION IN SAVINGS

The FedEx contract, valued at $10.5 billion over the seven-year period, extends a 12-year relationship between USPS and the Memphis, Tenn.-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, 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 would 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

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