Why FedEx and UPS Want the Postal Service to Survive

Minyanville Follow | Monday, 06 August 2012 06:00 (EST)

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 11^th 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:

Accordingly, upon the expiration of the current agreement, the transportation services we provide to the USPS could be transitioned, in whole or in part, to another provider. This would have a negative impact on our asset utilization and profitability. Moreover, to the extent that any such services are retained by us, the terms and conditions of the new arrangement may be less favorable than those currently in place.

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.”

The arrangement does make sense for FedEx and UPS, from an operational and economic standpoint. Interestingly, a purely competitive structure wouldn’t work, as FedEx and UPS don’t want the responsibilities that they would be saddled with if the playing field were perfectly level.

Here’s Lauren T. Andrews, writing in the William & Mary Business Law Review:

For example, the USPS is charged by governmental decree with providing universal service to all parts of the country, even in areas that may not be profitable. Private companies, on the other hand, can essentially ignore and avoid areas that may not be profitable, areas where they may otherwise be forced to serve if the postal monopolies were lifted and regulations put in place. Furthermore, companies such as UPS and FedEx would likely have no interest in the delivery of “letters,” primarily because it is not as profitable as larger parcel and package delivery. In fact, a UPS Spokesman, Norman Black, stated, “We believe that the government plays a role in terms of ensuring that every mailbox is reached every day …. That is not a responsibility that UPS would want.”

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

More From Minyanville:

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

	Symbol	Name	Price	Change	%	Volume
Follow	UAL	United Continental Holdings	64.70	-2.22	-3.32	3,905,638	Trade
Follow	IBM	International Business Machines Corp	140.70	-1.80	-1.26	4,422,087	Trade
Follow	NOC	Northrop Grumman Corporation	268.13	-1.86	-0.69	581,745	Trade
Follow	FDX	FedEx Corporation	205.37	-4.26	-2.03	1,028,645	Trade

News

News