FedEx Corp. (FDX:US) will have to fend off competition from United Parcel Service Inc. (UPS:US) to keep a contract valued at more than $1 billion with its largest customer, the money-losing U.S. Postal Service.
The agreement generates more than 3 percent (FDX:US) of FedEx’s sales, according to data compiled by Bloomberg, and covers shipping of first class, priority and express mail. UPS “definitely wants to bid” for that work when the Postal Service seeks proposals after the contract’s expiration in September 2013, said Norman Black, a company spokesman.
UPS, which already has a $100 million contract with the Postal Service, is the “most logical competitor,” said Ben Hartford, a Robert W. Baird & Co. analyst in Milwaukee. The agency is seeking new bids as it closes mail-processing plants and cuts its work force to save cash after a $3.2 billion loss in the quarter through March 31.
Just being the incumbent, FedEx is “the most likely to get the business going forward, but it would likely be under different terms,” Hartford said in a telephone interview.
During an 11-year relationship, FedEx has “raised the service levels and reliability of the Postal Service product,” Jess Bunn, a FedEx spokesman, said in a telephone interview. “That record of success will be an important consideration.”
FedEx warned in a regulatory filing this week that it may lose the contract or be able to negotiate less favorable terms for renewing it. Postal Service work generated about $1.4 billion for the Memphis, Tennessee-based company in its fiscal year through May 2012, Helane Becker, a Dahlman Rose & Co. analyst in New York, said in a note to clients.
The loss would “negatively impact FedEx and would cause a bump in the road as the company restructures its Express business,” she said.
FedEx fell 0.7 percent to $91.25 at the close in New York. The shares have gained 9.3 percent this year. UPS today rose 0.2 percent to $79.33.
FedEx last month predicted profit (FDX:US) of $6.90 to $7.40 a share in the fiscal year through May, compared an average estimate of $7.33 from analysts and $6.41 last year.
The FedEx Express unit also has around 5,000 drop boxes at Postal Service locations that will be removed under an agreement that expired in June, the company said in the filing.
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