Post Office Hires FedEx to Fly Mail; Competitors Object to $6.3 Billion Deal

Post Office Hires FedEx to Fly Mail; Competitors Object to $6.3 Billion Deal
>From WASHINGTON POST, January 11th, 2001
Greg Schneider Washington Post Staff Writer The U.S. Postal Service said
yesterday that it has struck a seven-year, $6.3 billion alliance with FedEx
Corp. for air delivery of priority, express and first-class mail. FedEx also
will be allowed to put drop boxes in post offices around the country.
The extraordinary arrangement is an acknowledgment by the Postal Service
that
after 226 years, it must lean on a private company to stay relevant and
efficient in an era of changing technology and consumer habits.
With the Postal Service on track to lose more than $1 billion this year,
Postmaster General William J. Henderson said, tapping FedEx's fleet of more
than
600 planes will give consumers better service at lower cost. Postal
officials
estimated a $1 billion saving over the term of the contract.
Henderson said he expects the deal to keep postal rates down. "This is a
great
day for the American consumer," Henderson said in an interview.
"Anything that improves service and therefore improves marketability is
going to
have an effect on suppressing rate increases." But the arrangement has
alarmed
rival package carriers, which complain that the Postal Service awarded the
deal
to FedEx on a sole-source basis without allowing anyone else to compete for
it.
Emery Worldwide Airlines, which will have to forfeit a similar but smaller
postal contract to make way for FedEx, sued to block the deal.
A federal judge on Monday refused to grant a temporary restraining order to
halt
yesterday's announcement. A ruling in Emery's case could come in March.
Postal officials declined to comment specifically on the Emery case but said
they took the sole-source approach after a lengthy study by
PricewaterhouseCoopers showed that FedEx was the only company with the size
and
reach to provide a one-stop solution.
Once that determination was made, Deputy Postmaster General John Nolan said,
there was no point in dealing with other companies.
For the consumer, FedEx's role in mail delivery will be all but invisible,
postal officials said. The Postal Service will continue to offer the same
services it offers now — though, Henderson said he hoped, with greater
economy
and reliability.
Critics said yesterday that putting so much responsibility in the hands of a
single contractor would jeopardize the mail system in the event of labor
troubles at FedEx. Postal and company executives dismissed such concerns,
noting
that the Postal Service will continue to move mail on commercial airlines in
addition to the FedEx fleet. They added that the Postal Service can always
rely
on trucking in times of crisis.
The mail system currently relies on a combination of carriers for air
delivery,
with Emery as the primary contractor. Most of those duties will be
consolidated
into the arrangement with FedEx, which is to begin flying mail in August.
Henderson said FedEx could take on further postal duties in the future,
though
there are no plans to allow company employees to deliver postal parcels "the
final mile" to individual customers.
The most important aspect of the deal, he said, is that it lays the
groundwork
for public-private cooperation that benefits both sides.
"The Postal Service delivers Main Street, and FedEx provides an air fleet,"
he
said.
One expert on the Postal Service said the deal is a logical and necessary
step
in the agency's evolution — ordered by Congress — into a more businesslike
entity.
"This is a partnership with the private sector far beyond anything I'm aware
of
in the past," said Murray Comarow, who worked on a presidential postal
commission in the late 1960s that established many of the guidelines that
govern
the service.
Because Congress put restrictions on how the Postal Service handles both
costs
and rates, he said, "they don't have control over their organization the way
FedEx or UPS does." "So they've been thrashing around looking for things
they
can do [to be more efficient], and this is one of the things they've been
working on," Comarow added. "On the face of it, it looks like a natural
fit."
FedEx, based in Memphis, flies more planes than any passenger airline in the
country. As part of the deal, the company expects to put about 10,000 drop
boxes
at post offices around the country and to collect $900 million from those
sites.
It will pay up to $232 million in rent to the Postal Service.
FedEx also intends to hire 500 pilots and about 1,000 support personnel to
handle the contract, company officials said.
FedEx's chairman and founder, Frederick W. Smith, said in an interview that
he
had discussed a business relationship with several recent postmasters
general
but that Henderson was the first one who appreciated the potential.
While FedEx and the Postal Service might seem like competitors, Smith said,
they
really have complementary businesses: FedEx carries larger packages, while
the
Postal Service focuses on letters and lighter parcels.
Despite public debate in recent years about privatizing the mail service,
Smith
said he does not view the new alliance as a first step toward a FedEx
takeover
of the entire system.
"I think that is highly unlikely. This is a situation where two entities —
a
private company and a government entity — found that what they did was
highly
complementary," he said.
Nolan, the deputy postmaster, said the Postal Service had approached other
carriers, including United Parcel Service, over the years but saw little
interest in such a major affiliation.
UPS spokesman Tad Segal, however, said, "Discussions that occurred in the
past
were general and not particularly the same as what's being discussed here."
UPS's first concern is the Postal Service's agreement to let FedEx put drop
boxes at post offices. Henderson said he would consider letting other
companies
do the same. "I think we're pleased by that," Segal said.
Emery had no comment on the matter yesterday. According to several sources,
Emery mounted a vigorous attack Monday in court as it sought to have a
federal
judge temporarily block the deal.
Several people who attended the hearing said Emery's attorneys even
suggested
that FedEx had talked with Henderson about working at the company if he
leaves
the Postal Service at the end of his contract in May. In interviews, both
Smith
and Henderson denied having such a discussion.
Members of Congress have been concerned about the deal since Henderson made
it
known last September that it was in the works. Rep. John M. McHugh (R-N.Y.),
who
was chairman of the House Government Reform subcommittee on the postal
system
until stepping aside this year because of term limits, said yesterday that
he
expects the arrangement to provoke controversy.
"But I will say this: Under the current structure and given the crisis that
the
Postal Service is currently facing, I can fully understand why they entered
this
agreement," McHugh said.
Nolan said the deal was explained to the Justice Department, which seemed to
raise no major objections.
And Henderson insisted that the partnership would increase competition in
the
mail-delivery system. He said there are enough differences in products and
pricing to preserve separate customer bases.
FedEx has criticized the Postal Service in recent years for an aggressive
advertising campaign that pointed out the cost advantages of shipping
through
the U.S. mail. That rivalry will continue, Henderson said — within limits.
WASHINGTON POST, 11th January 2001