Wednesday, July 18, 2012

USPS to put FedEx’s air contract to bid in September

The beleaguered US Postal Service (USPS) continues to look for ways to streamline operations as it struggles to remain afloat.  It appears the postal service is reviewing its transportation spend and plans to make some changes that may have a major impact on some providers.

According to a report by its inspector general, the USPS could save roughly $100m annually by shifting more mail shipments from trucking to intermodal. In 2011, the USPS spent only $40m on freight rail contracts compared to more than $3.3bn in trucking contracts.  “Intermodal rail service has improved to the point it can now provide service standards competitive with highway. Today, it is widely accepted as industry standard that rail is far more economical than highway for long-distance surface transportation,” according to a report by the USPS Office of Inspector General Risk Analysis Research Center.  A shift towards intermodal will benefit the Class I railroads such as CSX and Norfolk Southern however, trucking companies that base much of their business plan on USPS contracts such as Pat Salmon and Sons Inc. will likely be negatively affected. According to USPS records, Pat Salmon and Sons Inc. is among its largest truck providers with an estimated contract value of over $136m.

Another area in which the USPS intends to cut cost is that of its domestic express delivery. The initial contract was controversial because it was awarded to FedEx with no competitive bidding despite opposition from UPS and Airborne Express.  As a result of the “win”, FedEx has transported Express Mail, Priority Mail and First Class Mail on behalf of the USPS since 2001 and has become the post office’s largest contractor generating over $1bn in revenue for the company.  However, in September the USPS plans to put this contract to bid.

Not only would a loss of contract severely affect FedEx’s revenue, the potential loss could also have a serious effect on FedEx’s domestic restructuring plans. For example, additional service center closures may be implemented as well as the removal or “retirement” of additional planes. Also major changes could be in store for its sorting operations at its second largest hub in Indianapolis, which processes shipments not bound for overnight deliveries. On a positive note,  however, FedEx's SmartPost arrangement with USPS will remain unchanged.

It would be surprising if FedEx loses the entire contract however it would not be that much of a surprise if the contract is split among several providers instead. Many providers will likely bid on the upcoming contract. For example, UPS has already expressed interest in bidding on the work. Currently, UPS has a $100m contract with the USPS providing mainly ground transportation.  Other potential providers could be passenger airlines such as Delta and Southwest Airlines. Kalitta Air which is the second largest USPS contractor generating revenues of almost $550m may bid on the contract as well.