MEMPHIS – The U.S. Postal Service is unlikely to shut down due to COVID-19, but changes in its volumes or operations could ripple to FedEx, experts say.
Memphis-based FedEx remains closely tied with the ailing Postal Service as both a major customer and provider. Alterations to the USPS may translate to risk for FedEx, the company warned in 2019.
“Disruptions or modifications in service by the USPS as a result of financial difficulties or changes in its business, including any structural changes to its operations, network, service offerings or pricing, could adversely affect our operations, negatively impacting our revenue, results of operations and financial condition,” FedEx said in its annual report.
The Postal Service is FedEx Express’ largest customer, FedEx noted in its report — FedEx Express provides domestic air transportation for USPS first-class and priority mail. It also offers transportation and delivery for the USPS internationally.
In 2017, FedEx Express estimated its air transportation contract with the U.S. Postal Service would generate some $1.5 billion annually. They extended their contract at the time through September 2024.
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That extension was well before the COVID-19 pandemic had “a devastating effect on our business” and caused mail volumes to freefall, Postmaster General Megan Brennan said April 10. She called on Congress and President Donald Trump’s administration to act on shoring up the Postal Service’s finances.
The pandemic’s effects have been mixed on Postal Service mail that flies FedEx, said Michael Plunkett, president and CEO of the Association for Postal Commerce, an industry advocacy group that has FedEx and UPS as members.
Plunkett said the Postal Service “has seen an uptick in package volume in the last few weeks,” which could benefit FedEx in the short term with many of those packages traveling on its planes. But first-class mail, which FedEx also flies for the Postal Service, has been “down considerably,” he added.
Even if Postal Service volume falls, a lack of air cargo capacity could drive more Postal Service business to FedEx.
The Postal Service relies on FedEx and other airlines to deliver urgent mail on time. If passenger planes continue to be grounded due to the coronavirus, some Postal Service mail will need to shift from those passenger flights to dedicated FedEx and UPS cargo planes, said postal industry consultant Robert Fisher.
FedEx did not respond to a request for comment on the matter Thursday.
Pandemic accelerates USPS cash drain
While FedEx has faced its own struggles in the past several quarters, they don’t compare to what the Postal Service is experiencing. Revenues were already going downhill for the Postal Service before COVID-19 hastened a gloomy financial situation.
FedEx CEO Fred Smith told Southeastern Asset Management in 2019 that the company’s “best projections” on when the Postal Service will run out of money point to 2022. FedEx and Amazon keeping more of their own deliveries in-house has led to less business for the Postal Service, he said.
COVID-19 accelerated that timeline. Officials with the Postal Service warned that the pandemic’s effects “could shutter the Postal Service’s doors as early as June,” U.S. Reps. Carolyn B. Maloney and Gerry Connolly wrote in March.
“We now estimate that the COVID-19 pandemic will increase the Postal Service’s net operating loss by more than $22 billion dollars over the next eighteen months, and by over $54 billion dollars over the longer term, threatening our ability to operate,” Brennan said in the April 10 statement.
Congress recently approved $10 billion for the Postal Service to borrow. Postal Service officials estimate this will allow it to keep operating until April 2021, when further relief will be needed, Plunkett said. If no relief comes to the Postal Service by then, he said the agency could reach the point where it can’t pay its biggest expenses: employee salaries and benefits.
“There will be some pressure on all sides to not be perceived as the reason the Postal Service goes under,” Plunkett said. “It’s going to get messy, and perhaps ugly, in the next few weeks. We’re hopeful something gets done.”
FedEx uses Postal Service for some deliveries
On the ground, the Postal Service provides a cost-effective service with 100% delivery coverage for FedEx through FedEx SmartPost, in which a Postal Service courier makes the final-mile delivery.
If the Postal Service had to cut back on its operations, large customers like FedEx and UPS would take a financial hit, Plunkett said. The two companies often hand off inefficient deliveries destined for rural, faraway locations to the Postal Service.
“They go to every residence in the U.S., no matter what the population density is,” Plunkett said of the Postal Service. “If FedEx and UPS were in a situation where they had to make deliveries to those locations, their costs would go up.”
FedEx already began distancing itself from the Postal Service in 2019, when it announced it would insource into FedEx Ground nearly 2 million daily packages that were destined for SmartPost.
Kevin Sterling, managing director and analyst at The Benchmark Company, said the move made sense for FedEx, since it helps shield the company from future Postal Service shakeups, like reducing operating days or the number of addresses it serves.
“What I think FedEx is doing is smart, to bring what they can into their own network so if things do get cut (from the Postal Service), it won’t shock the system too bad,” Sterling said.
FedEx is “roughly halfway there” in moving that Postal Service volume in its own network, COO Raj Subramaniam said in a March earnings call. He summed up the move as “purely an economic decision,” providing FedEx Ground drivers with more packages per route and boosting delivery efficiency.
The current SmartPost product “will be rebranded in the future,” Chief Marketing Officer Brie Carere said on the call, with FedEx giving sub-pound volume to the post office when needed.
This article originally appeared on Memphis Commercial Appeal: FedEx: How do US Postal Service troubles affect delivery giant?