Whether the air shipping market in the United States can absorb such a dramatic shift in such a huge volume of traffic is entirely another matter, however. In fact, expedited carriers of all kinds are preparing for a changeover Aug. 27 that may have a far-reaching ripple effect on the domestic air cargo business throughout the country.

It will change the Postal Service management of its expedited business from a relatively fixed-cost base to a relatively variable-cost operation that piggybacks onto the nation's largest all-cargo system. That will take tons of traffic away from some private air operators - Emery Worldwide, operator of the outgoing Eagle network for Express Mail is the big loser here, along with secondary providers such as financially shaky Kitty Hawk Air Cargo.

But it is also likely to take mail away from the commercial airlines, cutting into a source of belly revenue that has already been eroded by the increasing use of electronic alternatives to mail and by stingier contract rates the USPS pays the airlines.

Big Winners

In a glad-handing press conference announcing the deal, FedEx Chairman Frederick W. Smith said, "Whenever the public and private sectors work together, the real beneficiary is the American public."

But the American public probably isn't as big a winner as FedEx in this deal.

The single-source contract is one of the largest transportation contracts ever, sending about $7 billion in air transport revenue to FedEx over seven years for the carriage of Priority Mail and Express Mail. At the same time, FedEx will be allowed to put its drop boxes at 10,000 post offices around the country.

How good a deal is it for FedEx?

The company said it will have to spend up to $450 million over the life of the contract aligning its operations and will have to hire about 500 pilots for the service. But FedEx will not have to add new aircraft. Instead, the carrier will put some aircraft that now sit idle during the day into extra service and will be able to load its own traffic alongside the postal material.

Moreover, an analysis by Pittsburgh-based SJ Consulting suggests FedEx will carry the postal traffic for 85 cents a pound, based on the revenue and traffic estimates released by the USPS and FedEx. That compares to an average rate of around 30 cents a pound the airlines get for carrying First Class mail.

Emery's compensation under the "A-Net" contract has been 85 cents a piece for pieces that weigh an average of two pounds, or about 44 cents a pound. Emery says it gets about $200 million annually from the operation, won in a protracted battle six years ago, but will not disclose specific profit numbers. In its still-unresolved dispute with the Postal Service over Priority Mail handling and transport, Emery was asking for the equivalent of 67 cents a pound.

Handling Priority

And it looks like FedEx won't have to do as much for its postal revenue. Under the contract, the Postal Service is supposed to deliver its material containerized and ready to fly with a minimum of fuss from FedEx ground handlers.

In other words, said SJ Consulting President Satish Jindel, "This is a phenomenal deal for FedEx."

It's no wonder, then, that Emery went to court seeking to block the USPS-FedEx deal even before it was announced. Emery lost its request for an injunction, however, and experts say the labyrinthine rules of postal procurement really leave little room to challenge a decision that the Postal Board of Governors has approved.

In fact, it appeared inevitable that Emery would lose its long standing postal ties after their falling out over the Postal Service's Priority Mail contract over the last two years. Under a partial settlement, the USPS took over 10 Emery-run Priority Mail Handling Centers on Jan. 7, but Emery is still demanding compensation for that trouble-ridden business.

The Justice Department's antitrust division has said it will review any alliance between the Postal Service and FedEx. But Emery's experience may provide greater solace for FedEx's competitors.

Like the commercial airlines and Emery, FedEx may find that the only thing worse than competing with the U.S. Postal Service is being on the same side.

Rising Rates

Don't tell U.S. parcel shippers that inflation is in control. The nation's top three express carriers announced aggressive rate hikes for 2001 and a close look suggests the prices will go far higher when special fees and shipping distances are included.

For instance, United Parcel Service boosted air rates 3.7 percent but special handling charges for oversized shipments jumped an average of 25 percent. That is "bad news for shippers of non-conforming freight," says Dwight Sigworth of the consulting firm AFMS.

FedEx raised its domestic rates 4.9 percent and tacked 2.9 percent onto export prices. Analysts say the increase was surprisingly steep given the weakening shipping demand in the softer U.S. economy. The moves by the two giants cleared the way for lower-priced Airborne Express, which lost market share during a dismal 2000, to announce it will phase in unspecified rate increases this year.

But analysts say the biggest surprises will come in the fine print, where shippers will find new charges such as UPS's "delivery area surcharge" for lightly-populated areas and sharper increases for longer distances. Industrial shippers will see surcharges for hazardous materials jump 25 percent and rates for odd shapes or oversized boxes will also grow and get more expensive over distance and, especially, as they get heavier.

"In the last two years, they have created a pricing structure that rewards shippers with the right kind of packages and penalizes those that UPS doesn't want," said Satish Jindel, a principal of SJ Consulting.

For shippers, that means more work if they want to keep shipping costs down. "Prudent shippers will pay attention to these ever-increasing and proliferating fees and continue to look at other alternatives," said Sigworth.

Eagle Landing

Eagle Global Logistics appears to be leveling off from its high-flying growth path. The Houston-based forwarder laid off 300 people in a round of cutbacks EGL attributed to economic and unexpected troubles in its aggressive worldwide expansion.

The surprising thing about EGL's expansion problems is that they were not really rom the integration of mega-forwarder Circle International. EGL said it faced greater-than-expected costs from a shaky start to a dedicated trans-Pacific flight operation, a piece of EGL's strategy of using committed capacity controls around the world.

The Circle merger is carrying heavy costs, however, and the overall burden prompted EGL to warn that its earnings would fall short of previous expectations. EGL says it is cutting costs in line with the larger economic slowdown. That is not an unusual step in the general corporate retrenching around the United States in the first quarter, but it marks the first real step backwards for a company that has been growing at a pace more familiar to technology companies than the air freight world.

EGL expected fourth quarter revenue to come in 23 percent to 26 percent higher than the year-earlier period. However, after-tax charges for "unusual expenses and merger-related costs associated with (EGL's) merger with Circle International" would hit $57 million.

In its attempt to reduce drag, EGL has accelerated the consolidation of duplicate field offices and reduced its number of short-term leased aircraft to 10, while renegotiating leases on the rest.

Dedicated transport has been central to EGL's domestic growth and EGL Chairman James Crane insists he will press a similar strategy internationally despite the troublesome startup costs of an Asia operation with a Gemini Air Cargo freighter.

"This is consistent with our approach of providing higher levels of service to our clients," said Crane. "This resulted in a short-term impact on our margins, but provides opportunities for revenue and margin expansion, as has been demonstrated in the past. By the end of the (fourth) quarter, we had recognized increased levels of activity on this route through our new commitments from various major customers. This increased level of business activity is expected to significantly improve 2001 operating results for this US-Asia trade lane."

... Briefly

Northwest Airlines incorporated its cargo division as a wholly-owned subsidiary, Northwest Airlines Cargo Inc. Northwest Chief Financial Officer Mickey Foret is chairman and CEO of NWA cargo and cargo chief Jim Friedel will be president. ... Research firm PC Data said personal computer sales in the United States fell 24 percent in December compared to the same month the year before, the fifth straight monthly decline. ... Bell & Howell named Airborne Express its exclusive worldwide provider of express delivery services. ... Hartsfield Atlanta International Airport became the first airport in the southern United States to gain a special permit allowing the import of certain fruits that may be hosts to the Mediterranean fruit fly. ... FedEx-owned broker and forwarder Tower Group International opened a Denver office. ... Seattle-based forwarder Lynden Air Freight opened offices in Denver and Charlotte, N.C., Louisville, Ky., and Las Vegas. ... Privately-held Pilot Air Freight says it recorded $59.8 million in revenue in the third quarter, 12 percent better than last year. ... UPS e-Logistics will build a 400,000-square-foot distribution center in Elizabethtown, Ky., to focus on e-commerce companies. ... A government report issued in January said flight delays within the United States grew 58 percent between 1995 and 1999. ... Aviation Facilities Co. started construction of a 50,000-square-foot cargo facility at Pittsburgh International Airport, the first of a four-part project that will total 290,000 square feet. ... Alaska-based Reeve Aleutian Airways, which has served the Russian Far East, suspended operations and filed for bankruptcy protection. ... Passenger startup Legend Airlines, led by ex-FedEx official and Federal Aviation Administrator T. Allan McArtor, filed for bankruptcy protection eight months after its launch. ... China Southern Airlines started offering cargo service out of Atlanta with a drop-off station for traffic that will be trucked to the airline's freighter departures from Chicago. ... ShipLogix, a Web-based freight management systems company, extended its business into Canada. ... Los Angeles-based startup cargo airline International Cargo Air began five-days weekly 747-200 flights between Honolulu and Los Angeles. ... United Airlines Cargo set up a "key partner" agreement with TradingProduce.com, a Web-based business-to-business perishables operations. ... Alliance Shippers won ISO 9002 quality certification for its logistics and brokerage businesses. ... Forwarder Bill Hay International, which specializes in traffic to Mexico, opened an office in Laredo, Texas. ... FedEx Custom Critical, formerly Roberts Express, opened a center in Reno, Nev. ... Freight wholesaler Consolidators International expanded operations to 24 hours, seven days a week. ... Cargo traffic at Tampa International Airport was down 6 percent in October and nearly 4 percent through the first 10 months of 2000. ... Expedited trucker Towne Air Freight took over the operations of Dart Air Freight from Chicago to the East Coast under an agreement that will have the two companies coordinate connections to Dart's remaining routes in the south.