Lost in the scrum of competing opinions over the future of the United States Postal Service is one very important fact:
FedEx (FDX) and UPS (UPS) both want the post office to survive.
Why?
For starters, FedEx earned $1.495 billion from the Postal Service last year as the agency’s number one supplier. UPS, the Postal Service’s 11th largest supplier, earned $102 million from the Postal Service, a $7 million increase from the year before.
“FedEx, UPS, and the US Postal Service are more business partners today than they are competitors,” David Hendel, an attorney in the Postal Service Contracting practice at the law firm of Husch Blackwell, who compiles an annual list of the Postal Service’s top contractors, tells me. (FedEx and UPS are far from the only companies that enjoy lucrative partnerships with the Postal Service. A quick scan of the Husch Blackwell list shows Northrop Grumman (NOC) taking in $410 million from Postal Service contracts last year. IBM (IBM) made $108 million from Postal Service contracts. And United Airlines (UAL) brought in $102 million.)
FedEx has flown Express Mail, Priority Mail and First Class Mail for the Postal Service since 2000. According to Alan Robinson, Executive Director of the Center for the Study of the Postal Market and the publisher of the Courier Express and Postal Observer, the income generated by this “represents around 60% of FedEx Express’s US domestic air freight revenue.”
Per Robinson, “Most of this revenue comes from flying mail and parcels during the day when FedEx airplanes would be otherwise parked.” Thus, if FedEx were to lose this contract, it “would reduce the utilization of its aircraft possibly putting pressure on FedEx’s margins on its other air freight and Express business.”
Indeed, FedEx’s latest 10-K states that “the USPS has informed us that it intends to solicit proposals for the provision of air transportation services currently provided by FedEx Express upon the expiration of the current agreement in September 2013.”
It continues:
Dr. Gene Del Polito, President of the Association for Postal Commerce in Washington, DC, tells me that UPS will be bidding on the contract, as the revenue is obviously substantial. However, while the Postal Service relies on FedEx and UPS to achieve efficiencies in its operations, FedEx and UPS also rely on the Postal Service for similar benefits of their own.
“For FedEx and UPS, the costs are lower to deliver in urban areas, and higher in rural ones,” Del Polito says. “For the Postal Service, that cost structure is the exact opposite. So FedEx and UPS use the Postal Service for ‘last-mile’ delivery in many areas where it would cost them too much to deliver that mail — they prepare it for re-entry via the Postal Service which then walks it out for final delivery.” (To put a number on this, Alan Robinson determined in 2011 that “30.4% of FedEx Ground shipments are delivered by the United States Postal Service.”)
Del Polito explains that “there was a time when you would hear concerns from FedEx and UPS that the Postal Service was unfairly competing against them, but now you will hear they are ‘partners’ because they have figured out how to get good value out of a set-up that makes sense for them.”
Here’s Lauren T. Andrews, writing in the William & Mary Business Law Review:
And, not only would they not want it, David Hendel says they couldn’t do it.
“Neither FedEx or UPS are even in the same league as the Postal Service, which goes to 100 million addresses every day,” he tells me. “What they do, they do well. But they don’t do what the Postal Service does.”
By Justin Rohrlich
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