USPS changes may hit Fedex
Advocacy group says postal service issues could delay contracted deliveries
Changes are coming to the ailing U.S. Postal Service, with shockwaves potentially hitting Fedex, its largest supplier and air cargo carrier.
The postal service saw a $4.5 billion net loss in its most recently reported quarter, with “significant impacts” from the COVID-19 pandemic anticipated the remainder of the year, it announced in May. Internal postal service memos obtained by the Washington Post and other news outlets say the agency will prohibit overtime and look to cut transportation costs such as late and extra delivery trips.
In a statement, new Postmaster General Louis Dejoy said the agency’s unsustainable financial position stems “from substantial declines in mail volume, and a broken business model.” He also noted the billions the agency has spent on overtime costs without “material improvement in our service performance scores.”
Fedex declined to comment on the reported changes but has made it clear in regulatory filings its reliance on the postal service. Risks to Fedex’s business due to COVID-19 include “changes to the business and financial soundness of the U.S. Postal service,” according to its annual financial report.
“The COVID-19 pandemic has negatively impacted mail volumes and mix resulting in a further decrease in revenues and negative financial impact for the USPS,” Fedex said. “Additionally, the USPS continues to experience budgetary uncertainty as well as increased political debate regarding potential privatization or restructuring of its operations.”
Changes are needed to stem the postal service’s mounting financial losses as Dejoy looks to manage it like Fedex and UPS, said Dean Maciuba of consulting service Logistics Trends & Insights. He expects the postal service will evaluate every piece of its operation to reduce costs, including its significant air cargo business with Fedex.
Fedex, USPS have close ties
The postal service is Fedex Express’ largest customer, Fedex has disclosed.
The Memphis-based air cargo giant provides domestic airport-to-airport transportation services for the agency under a contract expiring in 2024. It also provides international transportation and delivery for the postal service.
Fedex received more than $2 billion in payments from the postal service in fiscal year 2019, according to research from David Hendel of Husch Blackwell LLP’S Postal Service Contracting practice. That was about four times as much in payment as the second-place supplier.
The air lift contract is a major expense for the postal service and a major boost for Fedex’s finances and operations. The company’s airport-to-airport network would be forced to undergo big changes if the postal service lands an air lift contract with a competitor like UPS, Maciuba said, as the contract likely “subsidizes” that current operational model.
“I believe it is very important to (Fedex) in that it allows them to offset the costs of running their hub-and-spoke system,” Maciuba said. “Losing that, I think, would be a crushing blow for them.”
Fedex keeping more in-house
The postal service, Fedex and other
shippers are grappling with a flood of packages during the COVID-19 pandemic. More people are ordering online and requesting home deliveries as they stay put at home.
“Service levels are being challenged,” said John Haber, CEO of transportation spend consultancy Spend Management Experts. “The post office is running way behind, we're seeing Amazon's time in transit running behind, UPS and Fedex are behind, everybody is running behind. There are no service guarantees on anything these days.”
If implemented, the reported postal service changes could delay Fedex deliveries and any others involving the agency, said Art Sackler, manager of the Coalition for a 21st Century Postal Service, an advocacy group with members such as Amazon and International Paper.
The postal service said in a statement Thursday that “temporary service impacts can occur,” after which the agency will determine what the causes are and what needs to be corrected.
Fedex, UPS and other carriers hand off some of their deliveries to the postal service for the final mile of delivery. Fedex's future involves fewer of those handoffs. In 2019, it announced it would insource nearly 2 million packages daily that it was giving to the postal service through its Smartpost service.
The move, expected to be finished this fiscal year, was “purely an economic decision” to increase Fedex's delivery efficiency, COO Raj Subramaniam said in March. But it's a big blow for the postal service, Haber said, as the Smartpost service relied on the agency more than similar services offered by UPS and DHL.
UPS continuing to use the postal service for its Surepost deliveries might give the Fedex rival an edge when trying to land that valuable airlift contract once the current deal expires, Maciuba said. Still, the postal service's current arrangements with Fedex provide significant business for both parties, Sackler noted.
“I don't think any of them want to back off from the arrangements they have in any kind of hurried manner,” he said.
More price hikes on the horizon?
President Donald Trump has called on the agency to hike its package rates higher. Further rate increases for packages are more likely than rate increases for mail, which the agency's Board of Governors has historically been hesitant to do, Maciuba said.
The postal service could raise its rates and still come out ahead pricewise versus its competition, but many shippers won't be keen on paying those new rates, Sackler said.
Declining service could be enough of a motivator to move to another shipper. Amid COVID-19 backlogs, clients of Haber's have moved to pricier delivery services like Fedex Home Delivery to get shipments fulfilled sooner.
“As they raise prices, they bring the cost of things closer to more premium products by UPS, Fedex and DHL, especially on the international side,” Haber said, adding that he's heard internal concerns at the postal service that more of its volume could shift to those companies because of that.
In his statement, Dejoy acknowledged “alternatives” to postal service products and stressed the need for better operational efficiency “to provide prompt, reliable, and affordable” services.
Max Garland covers Fedex, logistics and health care for The Commercial Appeal. Reach him at max.garland@commercialappeal.com or 901-529-2651 and on Twitter @Maxgarlandtypes.