Cargo Carriers Monetize Mail

As FedEx and UPS enhance their revenue streams, passenger airlines are the losers.
Author:
Publish date:

Decades after it underwrote the creation of U.S. commercial aviation, the Postal Service continues to reduce its reliance on the nation's passenger airlines -- and the switch is costing the domestic carriers hundreds of millions of dollars.

Between 2000 and 2005, passenger carriers' share of total postal shipments fell by 65% to 789 million pounds, Postal Service figures show. During the same period, revenue from the 10 largest mail contracts held by passenger airlines fell 52% to $456 million, according to the federal Bureau of Transportation Statistics.

AirTran Airways

(AAI)

,

Delta Air Lines

(DALRQ)

and

Southwest Airlines

(LUV) - Get Report

have made moves to end their domestic mail contracts, saying it no longer fits their operating models, in some cases because tougher requirements make the work cost-prohibitive.

"By putting freight in the cargo space that was traditionally reserved for mail, we see much better revenue opportunities," said Delta spokeswoman Gina Laughlin. Delta had mail revenue of $58 million last year, BTS data indicate.

Meanwhile,

United Airlines

(UAUA)

stopped carrying domestic mail on June 30, saying it failed to qualify for a five-year contract renewal because of shortcomings with its on-time delivery performance, but it will continue to transport international mail. United's 2005 mail revenue totaled $150 million, according to the BTS.

Friendly Confines

These recent changes have followed a groundbreaking arrangement that was reached in 2001, when

FedEx

(FDX) - Get Report

signed a no-bid, seven-year $6.3 billion contract to carry mail. Four weeks ago, FedEx said it had extended that contract until 2013.

In June, rival

United Parcel Service

(UPS) - Get Report

agreed to a three-year deal to fly domestic mail to 98 cities, expanding a relationship that had involved 16 cities. The contract, involving mail previously carried by passenger airlines, is worth an estimated $100 million annually. The Postal Service "had service issues and was looking for alternatives," said UPS spokesman Ken Sternad.

The shift reflects not only the evolution in the scope and efficiency of the overnight carriers, but also the vagaries of the passenger industry. Occupancy levels have been climbing steadily since 1980, increasing the likelihood that passenger baggage will crowd mail out of cargo holds. Additionally, tighter scheduling and the increased use of smaller planes reduce the amount of time and capacity available to load and carry mail.

"We obviously have shown a preference during the last decade to go with carriers whose principal mission is to carry freight and hard copy," said Postal Service spokesman Gerry McKiernan. "There have been times, occasionally and understandably, that on a passenger airline the people would come first.

"We understand the mission of passenger airlines and we're appreciative of the service they've given, but we just felt that it was important to move in the other direction, so that our materials would get priority consideration," McKiernan said. "And UPS and FedEx understand that."

Privilege to Pay

FedEx's new contract takes effect in October, and incorporates the final two years of the 2001 deal. The pact is expected to generate $8 billion in revenue. The company said it will continue to carry more than 4 million pounds of mail each business day. The agreement was reached two years before the existing contract expired.

The UPS deal is also notable because it signals an end to the historically chilly relations the company has had with the Postal Service. "Mike Eskew made it clear when he became chairman

of UPS in 2002 that we wanted to establish a much more positive relationship with the USPS," Sternad said. "You are seeing the result."

The Air Mail Act of 1925 authorized the Postal Service to contract for domestic airmail service with carriers, effectively creating the commercial aviation industry. Early bidders included Henry Ford's Ford Air Transport, what was then the Boeing Airplane Co., and Varney Airlines, a United forerunner.

Carriers like Pan American World Airways and

US Airways

(LCC)

originated as mail carriers. The relationship between the Postal Service and the industry was so cozy that Capital Airlines once had a contract requiring it to pay the post office when it became profitable. Washington-based Capital, once the fifth-largest domestic carrier, merged into United in 1961.

"There was a time when Capital Airlines paid the post office for the privilege of carrying the mail," recalled retired industry veteran Mort Beyer, a former junior executive at the company. "For years they had paid us, and they were responsible for the survival of the airline. Then we turned the company around in the early 1950s, and we started to pay them. That's what the contract specified. That's the way it worked in those days."