*USPS, CNF Conclude Priority Mail Contract

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The U.S. Postal Service and CNF Inc.'s Emery Worldwide Airlines unit last week announced that they have agreed to terminate Emery's contract to help move Priority Mail.

Gregory L. Quesnel, president/CEO of CNF, Palo Alto, CA, said the contract concludes effective Jan. 7, 2001. At that time, the USPS will assume responsibility for operating the Priority Mail network and its 10 Priority Mail processing centers that Emery began handling in 1997.

The centers are located in Nashua, NH; Springfield, MA; Rochester, NY; Bethpage, NY; Kearny, NJ; Philadelphia; Pittsburgh; Jacksonville, FL; Orlando, FL; and Miami.

While approximately 4,000 Emery employees will be affected by the move, the USPS said it plans "no major operational changes to the centers in the near future."

The decision prematurely ends a contract originally valued at $1.7 billion, the largest in USPS history. The original contract was scheduled to be concluded in early 2002.

"This was a pilot project from its inception in 1997," said Quesnel. "After substantial effort by all parties to make this a successful partnership, it is now agreed that it is best for the postal service to assume ongoing operating responsibility."

Jack Potter, chief operating officer at the USPS, agreed.

"It's in the best interest of the postal service, Emery and Priority Mail customers that the postal service assume network operating responsibility."

Indeed, the relationship was troubled from the start, with Emery claiming that the volume and mix of letters and parcels that it was handling differed significantly from initial USPS projections, making the arrangement unprofitable for Emery. Emery sued the USPS for breach of contract in April in the U.S. Court of Federal Claims in Washington, which hears legal disputes that involve the federal government.

While Emery lost its bid to stop working with the USPS, in August the court ordered the USPS to abide by changes they previously had negotiated in the contract's pricing formula. As a result, Emery received payments of approximately $102 million from the USPS.

Both Emery and the USPS said they are committed to making the transition of the centers seamless to the customer.

For example, as part of the agreement, Emery and the USPS will partner to retain those eligible employees who choose to continue working for the Priority Mail network. The USPS also is deploying a team of human resources specialists to each center to talk to employees about future employment opportunities.

"Priority Mail customers won't see any difference in the excellent quality of delivery service," said Potter.

CNF also said it would continue to provide air transportation for Priority Mail for up to nine months.

Insiders said the move clears the way for FedEx Corp., Memphis, or another air-cargo carrier to possibly start handling the job next year.

The USPS and FedEx have been negotiating a possible partnership to share certain deliveries -- with Priority Mail potentially in the mix -- but an agreement has not been reached.

In the meantime, the USPS will be under pressure to handle an expected flood of holiday-related Priority Mail shipments just as it is about to take over the Emery processing facilities.

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