Postal Service-FedEx Deal Would Increase Costs, Lawsuit Says

A $6.3 billion no-bid contract
awarded to FedEx Corp. by the U.S. Postal Service will increase the cost of
transporting mail by between $443 million and $1.17 billion over the life of
the agreement, according to documents filed in a lawsuit by a FedEx
competitor. That would translate into higher prices for Postal Service
customers and poorer service, the suit alleges.
When it announced the deal in January, the Postal Service justified the
absence of competitive bidding by saying the arrangement would save $1
billion over the seven years of the contract and would improve efficiency in
the air delivery of priority, express and first-class mail. The Postal
Service and FedEx declined to release details concerning pricing and
schedules, citing proprietary business concerns.
The mail delivery deal, unprecedented in its magnitude for the Postal
Service, will be challenged by Emery Worldwide, a subsidiary of CNF Inc., in
the U.S. Court of Federal Claims on Tuesday. Emery, which transports the
bulk of Postal Service priority and express mail and would be cut out by
FedEx, contends that the no-bid award violates the 1970 law that established
the agency.
Emery also contends that postal officials violated their own procurement
regulations, using flawed data in comparing the cost of current air
transport service with the projected cost of the new contract and concluding
that only one company could meet its needs.
The Justice Department began an antitrust review of the FedEx deal in
January to determine whether the alliance would reduce competition in the
air freight industry, and some members of Congress have asked the General
Accounting Office to analyze the implications of the sole-source contract.
"Unfortunately, the parties have kept the details of this no-bid contract
secret, so it's impossible to fully evaluate whether it is in the public
interest," Rep. Tony P. Hall (D-Ohio) said. "However, there is credible
evidence that it won't provide the cost savings and service improvements
that the Postal Service says it will." The Postal Service declined to
comment on the allegations but continued to defend its decision not to bid
the contract competitively.
"No other existing entity than FedEx could offer the comprehensive network
that the Postal Service needed," agency spokeswoman Monica Hand said.
To increase service reliability and reduce costs, the Postal Service
believed that it needed a single, national air transportation network to
supplement the commercial air carriers the agency uses, she said.
The Postal Service is facing increasing financial uncertainty, projecting
losses of up to $3 billion this year. It served notice last week that it
will seek a rate increase of 10 to 15 percent next year and froze new
construction and leases for 800 projects nationwide.
As part of the effort to cut costs and improve service, Postmaster General
William J. Henderson, who is retiring in May, began discussions with the
chief executive of FedEx last summer about a possible alliance. The project
was so secret within the Postal Service that it even had a code name:
PSALMS.
FedEx is one of the world's largest cargo carriers, with 660 aircraft
serving 212 countries. It has a well-developed tracking capacity, as well as
planes not being used during the day that it could devote to Postal Service
mail, company spokesman Jess Bunn said.
At issue in court is whether the 1970 law allows a single-source contract
for nationwide air delivery of mail and, if so, whether it must be
competitively bid. Emery argues that for this type of service, the law
requires "fair and equitable distribution" among carriers, and that even if
a single source is permitted, fair distribution requires competition.
Bunn said he expects that the Postal Service and FedEx will prevail, and he
noted that a federal judge in January declined to grant a temporary
restraining order blocking the deal.
Emery contends that in justifying the deal, the Postal Service grossly
inflated the costs that the current contractors, Emery and Kitty Hawk Inc.,
would incur on aircraft, crew, maintenance and fuel, and that it greatly
underestimated how much it would cost to move its air mail, currently more
than 4 million pounds a day.
The additional costs, said Emery consultant Morris R. Garfinkle of PA
Consulting Group, range from $443 million to $1.17 billion, depending on the
volume of mail moved. He said he could not release certain figures on Postal
Service and FedEx costs because they are under court seal at the request of
FedEx and the Postal Service.
In addition, Emery alleges the deal would shortchange customers, who,
because the Postal Service would have to get mail to FedEx sooner, would be
forced to drop off mail earlier in the day than they do now.
"Rather than the carrier meeting the Postal Service's requirements and
needs, the postal system is fitting into FedEx's system," Garfinkle said.
"If the Postal Service doesn't meet the schedule, FedEx can leave the
package on the tarmac." The contract also grants FedEx several concessions
that would add to costs without ensuring performance, Emery contends. For
example, the Postal Service has agreed to pay FedEx a $100 million "network
development payment" to cover the cost of expansion, including hiring more
pilots and support personnel.
In a written justification for the sole-source contract, the Postal Service
found something wrong with every other national air cargo carrier: The
networks of DHL Worldwide Express and BAX Global Inc. do not approach the
geographic scale required. Emery's fleet is too old and too small. Airborne
Inc. is under financial strain and has too few aircraft.
United Parcel Service Inc. was regarded as too hostile, with Postal Service
officials calling it "a hardened and effective competitor" that has
"consistently opposed" the Postal Service's effort to enhance its
competitiveness.
"The Postal Service considered what they should have ignored and they
ignored what they should have considered," Emery attorney David P. Hendel
said. "They went out of their way to avoid obtaining any information that
conflicted with their goal of establishing a business relationship with
FedEx." The deal is scheduled to take effect in August, and the first $50
million of the network payment is due March 31.
WASHINGTON POST, 11th March 2001