UPDATE: Court Refuses to Block FedEx-USPS Contract

A federal appeals court yesterday denied a bid by Emery Worldwide Airlines to block the U.S. Postal Service and FedEx from entering into a delivery contract that could bring FedEx at least $5 billion in revenue over the next several years.

Emery, a unit of CNF Inc. of Palo Alto, CA, carries Express Mail for the USPS under a separate, 10-year pact that ends in 2004.

Emery asked the U.S. Court of Federal Claims in Washington on Friday to stop the post office from awarding an air transportation contract to FedEx. In its court filing, Emery claimed the contract “contemplated with FedEx will likely result in the termination for convenience of [Emery's contract] three years before it is set to expire.”

Emery also claimed that the USPS unfairly excluded it and other airlines from competing against FedEx for the contract and that termination of its Express Mail contract could result in the elimination of more than 1,000 jobs at Emery and its subcontractors.

Nancy Colvert, a spokeswoman for Emery, said, “We can continue to pursue and will pursue appropriate legal action. Even if they implement the contract, we still could file suit down the road.”

The USPS said in a statement that discussions are continuing between the agency and FedEx regarding a possible business alliance and that there is no agreement at this time. The USPS' Board of Governors was briefed on the proposed arrangement at a closed session Monday. The board would have to act on any contract.

While many details of the plan still are unclear, FedEx would use its far-reaching air network to haul all postal Express Mail shipments, which are supposed to arrive no later than 3 p.m. the next day, as well as slower-moving Priority Mail shipments, according to people familiar with the situation.

The arrangement could go as far as having the Memphis, TN, company handle most air transportation needs for the postal service, a job that probably would require FedEx to expand the size of its aircraft fleet.

Hauling mail would make FedEx a key element of the postal system despite the relatively narrow scope of the proposed contract. The two sides are said to have dropped at least for now a number of wider-ranging ideas, including cooperating on certain ground deliveries currently made by FedEx. Still, the contract would be the largest in postal service history.

The arrangement with FedEx offers the USPS a way to boost the efficiency and reliability of its delivery operations at a time when it is struggling to deal with the transformation of the world's other major postal carriers. For FedEx, any deal would boost its aircraft use because the company could use Express Mail and Priority Mail shipments to fill empty space on its freighters. At least some flights would take place in the daytime, when few FedEx overnight deliveries are moving through the carrier's air network.

Meanwhile, the contract between the USPS and Emery to help move Priority Mail was terminated on Sunday.

The USPS now assumes responsibility for operating the Priority Mail network and the 10 Priority Mail processing centers that Emery began handling in 1997.

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

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, 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 it previously had negotiated in the contract's pricing formula. As a result, Emery received payments of about $102 million from the USPS.

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