Emery calls it illegal, waits for day in court

By Timothy R. Gaffney
Dayton Daily News

DAYTON | FedEx Corp. and the U.S. Postal Service fulfilled Emery Worldwide Airlines' worst fears Wednesday by announcing a $7 billion deal to move mail.

Emery expects the Postal Service to cancel its contract with Emery to haul Express Mail — a contract scheduled to run for two more years. Emery claims losing it could cost about 1,000 jobs in Dayton and Indianapolis.

Most of the impact would be felt in Indianapolis, where Emery operates a fleet of 35 freighter jets dedicated to the Express Mail contract, spokeswoman Nancy Colvert said. But Emery, a unit of Palo Alto, Calif.-based CNF Inc., also moves mail on jets flying out of Dayton International Airport, where the airline is based and where Emery Worldwide has its main North American cargo hub.

Wednesday's announcement detailed an agreement involving two Postal Service contracts with FedEx subsidiary FedEx Express: a $6.3 billion deal for domestic transportation of Express Mail shipments, and an agreement for putting FedEx drop boxes in U.S. post offices, expected to boost FedEx drop-box revenues by $900 million.

The announcement didn't mention Emery, but Frederick W. Smith, chairman, president and chief executive of Memphis, Tenn.-based FedEx, said his company will be the agency's "single air transportation provider for most of its Express and Priority Mail which cannot travel solely by surface."

Emery sought to head off the deal last Friday by filing a lawsuit against the Postal Service in the U.S. Court of Federal Claims, but the court declined to grant Emery's request for a temporary restraining order.

Emery's lawsuit claims the Postal Service's exclusive negotiations with FedEx are illegal and and will "inevitably lead to the premature termination for convenience" of Emery's Express Mail contract.

Emery had little to say about the announcement Wednesday.

"Our lawsuit is still pending and we'll continue to vigorously protest the non-competitive bidding of the air transportation contract in the courts," Colvert said.

Emery previously sued the Postal Service in a pricing dispute about Emery's contract to handle Priority Mail. That contract has been terminated, but the Express Mail contract remains in effect.

Despite the news, trading on shares of Emery parent CNF (NYSE:CNF) on Wednesday closed up 25 cents at $33.25, while FedEx stock (NYSE:FDX) closed at $41.91, down 36 cents.

FedEx Chief Financial Officer Alan B. Graf Jr. said his company expects to invest between $350 million and $400 million to support the contracts, but that the $7 billion they generate will include "excellent operating margins."

While FedEx specializes in overnight business parcels, averaging eight pounds each, the post office’s Priority Mail is a two-to-three day service, which doesn’t compete directly with FedEx, and overnight Express Mail tends to be lighter packages of documents, averaging just over a pound, Smith said.

FedEx reports that it handles about 4.8 million packages each business day. The post office handles about 4 million pieces of Priority Mail and 188,000 pieces of Express Mail.

The drop-box agreement will start next month with an operational test. FedEx expects to place more than 10,000 drop boxes in post offices across the country within the next 18 months.

Despite the close working relationship, the Postal Service and FedEx insist they will continue to operate competitively by maintaining separate services. The Postal Service will not pick up or deliver any FedEx packages, and FedEx employees will not accept or deliver U.S. mail. They also say they have no plans to co-brand.

In an interview on CNBC, Smith said FedEx will begin serving the air transportation contract in August, and the agreement will have little effect on company earnings until then.