FedEx Express could lose its biggest single contract next year as the US Postal Service mounts a bidding war for its air transportation services for First Class, Priority and Express Mail.
The integrator told investors yesterday that one of its key risks going forward was losing the USPS deal when the current agreement runs out in September 2013.
The Postal Service is FedEx Express’s largest single customer, using the Memphis-based company’s air network since 2001 for its overnight and express services.
Last year saw FedEx earning very nearly $1.5bn from the Postal Service.
By comparison UPS received $102m in payments from the Postal Service in the same year, largely for ground transportation.
In its annual report to the US Securities and Exchange Commission, FedEx said today that the current financial difficulties at USPS and resulting restructuring of the postal network could have an adverse effect on financial results.
But talking about the transportation deal, FedEx said that from September 2013 its lucrative contract could be “transitioned, in whole or in part, to another provider”.
Rival UPS is likely to bid for the work, but analysts have suggested that even if FedEx does win a fresh contract with USPS, with lower First Class Mail volumes and mail service standards reducing overnight First Class Mail to a local-only scope, the deal could be worth $400m a year less for FedEx.
“To the extent that any such services are retained by us, the terms and conditions of the new agreement may be less favourable than those currently in place,” FedEx warned in its filing.
A spokesperson for the US Postal Service confirmed that the FedEx air transportation deal was due to run out in September 2013, but could not say when the solicitation process for the next deal would take place.
“The existing contract with FedEx, scheduled to expire in September 2013, is the Postal Service’s single largest air transportation agreement,” said the spokesperson in a statement sent to Post&Parcel today.
“While no decision has been made to the existing contract, the Postal Service is evaluating all of its options as we move forward with our efforts to return to long-term financial stability, while maintaining excellent service for all our customers.”
Separately, a new report from the Postal Service’s Inspector General out last week suggests that the struggling USPS could save considerable sums of money by using the railways to transport more mail.
In 2011, USPS spent $3.3bn on road transport, but only $40m on freight rail contracts, although the research did not include USPS use of Amtrak passenger trains.
The Office of the Inspector General said that intermodal rail had become an “industry standard” for efficient long-distance freight transportation, and “could cut postal transportation costs dramatically”.
OIG suggested savings of $100m were feasible without any changes to the USPS network by using more rail, and that savings of up to 50% could be achieved on cargo shipments going by train rather than truck.
It said competitors including UPS and FedEx had become major users of freight rail over the last decade, with UPS the largest single user of intermodal rail in the US.
The rail industry is currently investing in expanding capacity and improving efficiency in the US, the report said, adding that rail companies are interested in speaking with the Postal Service about carrying the mail again.
But the Inspector General’s report said USPS was now so heavily dependent on road haulage that a change in culture was needed to shift significant volumes back to rail.