FedEx Seen Losing $400 Million in Next Postal Contract: Freight

FedEx Profit Beats Estimates
Packages are sorted at the FedEx Express hub at Memphis International Airport in Memphis, Tennessee. Photographer: Daniel Acker/Bloomberg

FedEx Corp., the delivery company that is both a partner and rival to the U.S. Postal Service, may see a federal mail-flying contract drop by more than 27 percent in 2013 as the agency restructures.

Revenue from carrying Postal Service express, priority and first-class mail in FedEx cargo jets may shrink to less than $1 billion annually once the current agreement expires and a new accord is negotiated, according to Satish Jindel, president of SJ Consulting Group Inc. in Sewickley, Pennsylvania.

A Postal Service goal of saving $2.1 billion a year isn’t reachable “without making some changes in the way they move things,” Jindel said in a telephone interview. That is “likely to result in a reduction of the number of packages that they will need transported by air.”

The risk to mail flying spotlights the ties binding the U.S. agency to its largest supplier -- the company founded in 1971 by Chief Executive Officer Fred Smith to speed air-freight shipments. U.S. government sales make up about 3.7 percent of FedEx’s annual total, data compiled by Bloomberg indicate.

Postal Service Chief Financial Officer Joseph Corbett has said the agency will cut mail sent by air by boosting ground shipments, without giving details. Regulators discussed the agency’s financial crisis yesterday at a meeting in Washington.

Some savings would come “from changes and cost elimination for people who handle the mail,” Jindel said. Some “is going to come from reducing transportation expenditures that they incur. That transportation total amount is almost $6 billion; of that, $1.4 billion is being spent on FedEx.”

FedEx Freighters

Freighters from Memphis, Tennessee-based FedEx help fly U.S. mail that needs to arrive within a few days. The Postal Service’s agreements with companies such as FedEx and United Parcel Service Inc. mean the agency doesn’t have to maintain a large air-cargo fleet.

“The most likely outcome is that FedEx keeps the priority-mail contract,” David Ross, a Stifel Nicolaus & Co. analyst in Baltimore, said in an interview. “But maybe it’s at a lower rate or a lower guaranteed minimum” value because of the Postal Service’s dwindling mail deliveries.

The agency is struggling with a 2012 loss projected at $14.1 billion. First-class volumes tumbled 29 percent from 2000 through 2011, according to Bloomberg Industries data. CFO Corbett said in November, “We’re not looking to grow what’s in the air.”

UPS Estimate

UPS’s mail-flying contract is valued at about $95 million, according to David Hendel, a partner at Washington law firm Husch Blackwell LLP who specializes in postal contracting. FedEx’s $1.4 billion contract for fiscal 2010 made it the Postal Service’s biggest supplier, according to Hendel, who compiles an annual list of top contractors using documents obtained through the Freedom of Information Act.

FedEx isn’t speculating on the terms of any future contract, a spokeswoman, Maury Donahue, said in an e-mail. The company and the Postal Service have “a longstanding and strong relationship,” she said yesterday. The current agreement was signed in 2006 and amended several since then, filings show.

Jindel said UPS’s contract to fly mail probably won’t be cut because the sum is relatively small. Susan Rosenberg, a UPS spokeswoman in Atlanta, said, “We believe there needs to be a successful Postal Service, and we ourselves are a beneficiary of that, too.”

Trailing UPS

FedEx has lagged behind UPS for the past one- and two-year periods, after surging ahead of its rival immediately following the bear-market low in March 2009. FedEx slid 10 percent in the 12 months ended yesterday, while UPS was up 0.3 percent and the broader Standard & Poor’s 500 Index gained 0.4 percent.

FedEx doesn’t disclose sales from individual customers, such as the Postal Service. Revenue for the fiscal year that ended in May was $39.3 billion. The Postal Service and FedEx operate on different fiscal years.

Over time, the company may benefit from the Postal Service’s continued shrinkage, said Art Hatfield, a Morgan Keegan & Co. analyst based in Memphis, who like Stifel Nicolaus’s Ross recommends buying UPS and FedEx shares.

“Any time any competitor, theoretical or direct or indirect, lowers their level of service, it’s going to benefit everybody else,” Hatfield said in an interview.

Saturday Gain

Consultant Jindel projected that Postal Service’s proposal to end six-day-a-week deliveries may produce a net $15 million revenue gain for FedEx. The company now has a product known as SmartPost, in which FedEx moves goods from a shipper such as a catalog retailer to a postal center for the final delivery leg.

Current SmartPost customers who want to keep Saturday service could switch to FedEx Home Delivery, which generates an average of $4.60 more in revenue per package than SmartPost shipments, Jindel said.

It’s too soon to say what transport companies may pick up the Postal Service mail shipments being shifted to trucks as the agency seeks savings, Jindel said. FedEx Ground is one possibility, he said. What is clear is that Postal Service cuts and falling volumes mean fewer pieces of mail will make part of their journey on FedEx planes, he said.

“Air is the most expensive form of transportation,” he said. “If they’re going to do it right, they must be looking to bring more of that air to the ground.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE