Consultant Insight: USPS transportation suppliers may see cuts

[caption id="attachment_69752" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] The United States Postal Service (USPS) faces significant financial and political pressure that has led to questions of its survival as a quasi-government agency. Despite rising parcel volumes, the USPS continues to operate at a financial loss as its larger mail division experiences declines and pension prepayments mount. Louis DeJoy took over as postmaster general in July and made an immediate impact by cutting overtime for delivery drivers, removing mail processing equipment and blue collection boxes, closing processing facilities and more. However, due to public uproar and concern over whether the USPS would be able to deliver absentee ballots for the presidential election in a timely manner, DeJoy has apparently backed down. “I came to the Postal Service to make changes to secure the success of this organization and its long-term sustainability,” DeJoy said in a statement . “I believe significant reforms are essential to that objective, and work toward those reforms will commence after the election.” Indeed, significant reforms are needed, and they will be painful to not only postal workers but also to the numerous suppliers of USPS capacity. To what extent the pain will be felt is unknown, however, as DeJoy has not been as forthcoming as many would like. USPS operations and supplier agreements will be reviewed thoroughly, including air cargo contracts. According to the USPS’ recent annual report, operations are conducted primarily in the domestic market, with international revenue representing approximately 3% of operating revenue. While the USPS typically relies on a number of passenger airlines and air cargo providers for international flights, its domestic contracts heavily favor FedEx Express. In 2017, the USPS renewed its air cargo network contract with FedEx through Sept. 29, 2024. The contract, which began Oct. 1, 2013, provides domestic air transportation for Priority Mail and Priority Mail Express. At the time of the renewal, the contract was projected to generate about $1.5 billion annually in revenue for FedEx Express. According to an article in the Memphis news source Commercial Appeal, the USPS is FedEx Express’ largest customer. Indeed, Husch Blackwell LLP’s most recent top U.S. Postal Service suppliers list ranks FedEx Express as the top supplier earning just over $2 billion for the fiscal year that ended Sept. 30, 2019. The next transportation provider, Eagle Express Lines, is ranked third with $390.4 million. Postal Fleet Services and UPS are the fifth- and sixth-largest suppliers, with $248.9 million and $211.2 million, respectively, in earnings as USPS suppliers. Rounding out the top-10 USPS suppliers are United Airlines and Kalitta Air, with $177.3 million and $170.8 million, respectively. Seven of the top-10 suppliers are transportation providers. The USPS contract is a “major boost for FedEx’s finances and operations,” Dean Maciuba, director of consulting services for Logistics Trends & Insights, told the Commercial Appeal. “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.” From an operations perspective, the FedEx Express contract with the USPS is a complicated one that utilizes a number of intermediaries to consolidate mail and parcels. One such intermediary is Cargo Force, ranked 139th on Husch Blackwell’s list, with $14.6 million as a USPS supplier. USPS uses Cargo Force for its terminal handling service at six U.S. airports, according to the USPS website. As part of these services, USPS outbound mail is received, scanned and sorted by destination. The sorted mail is then transported by FedEx Express to destination cities. Once arrived, Cargo Force receives the mail from FedEx, unpacks the containers, scans the mail and sorts it by destination ZIP codes. Then, contracted truck carriers pick up the mail and transport to area post offices. Transportation companies with current USPS contracts will likely come under considerable review by DeJoy as USPS costs are scrutinized. DeJoy’s former roles as CEO at both New Breed Logistics and XPO Logistics in North America provide him with experience and expertise in negotiating transportation contracts. How that plays out for FedEx Express and other transportation companies remains to be seen.

Consultant Insight: USPS transportation suppliers may see cuts

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