ail was an oasis of stability for U.S. airlines for decades, as constant in volume as it was in price. But the U.S. Postal Service's change last year to a new system for allocating traffic has turned mail into a shifty lover that is always ready to abandon one carrier for another if performance or price fails to please.

Airlines are still adjusting to the new set-up on the domestic front, and there are signs that international letters will move toward a similar course adjustment.

The old U.S. mail regime gave airlines a soothing break from the normal cutthroat cargo price wars. The USPS dished out the business to carriers based on the routes they flew and airlines' cutoff times. The postal authority paid one set rate, and if three carriers flew on a route, the load was divided equally among them.

But that process has been radically altered. For starters, volumes are now allocated on the basis of competitive bids. And measuring performance has entered the picture whereas before there had been no performance metrics in place.

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One of the key USPS performance measures forcing airlines to adjust is electronic scanning of mail. To get paid for their service, airlines now have to perform at least three scans: when they receive the mail, when they load it onto a flight and when they hand it over at the other end. And if mail is transferred between planes, it also has to be scanned when loaded onto the connecting flight.

The actual handling of mail didn't change, but the scanning requirement provided airlines with a number of challenges. Continental Airlines could draw on its experiences scanning baggage, according to Jack Boisen, vice president of cargo. For Delta Air Lines, on the other hand, it was a step into new territory.

"For us, it was new. We hadn't scanned baggage or freight before. Getting the software and training our people took some time," said Frank Sorci, Delta's manager of postal marketing.

Continental worked together with AT&T to choose technology and pick the best locations for antennas. Nevertheless, scanning has been difficult, Boisen said. "An airport environment creates a lot of interference with the scanning process, particularly on the ramp side," he said. In some cities technical problems forced the carrier to adopt a wired system.

To allow for teething problems, the USPS originally gave airlines until late September to get their scanning up and running. Even then, it didn't immediately begin to shift mail from under-performing airlines to more efficient rivals or curtail payments. The postal service gave the carriers until January 27 to have their scanning fully in place; after that date it began to withhold payments if scans were not performed, and in early February it started shifting volumes from carriers that fell short of their targets, Boisen said.

While central to the new process, scanning isn't the only performance measurement, said John Bonafilia, manager of commercial air operations at the USPS. Carriers also have to meet mail delivery times given on routing tags. That has led to some shifts in traffic because carriers missed those delivery times.

"There have been significant shifts from some carriers to others," said Bonafilia. He didn't identify individual carriers, but confirmed that some airlines had more problems meeting the USPS's new requirements than others.

According to Boisen, Continental emerged as a net winner from the reassignment of traffic, its market share doubling from six to 12 percent. Sorci said that Delta was consistently above the 90 percent mark in all scanning categories and that its market share has remained "pretty consistent."

Delta and United Airlines emerged as the winners of last year's bidding process for a three-year contract with the USPS. Some reports put the two carriers's combined share of the total U.S. domestic mail volume in the neighborhood of 70 percent. As Delta claims no change in market share, United would appear to be on the losing side, having suffered massive problems at its hubs last fall after it outsourced its handling operations, which resulted in a drop in freight-ton miles of almost 40 percent last October.

This past May, United's mail traffic in terms of freight-ton kilometers was down 4.3 percent from the same month in 2003, which was before the current contract had been awarded. Still, that figure gives no clear picture of traffic that the carrier may have lost.

For one thing, it includes international mail, which makes up a large chunk of United's mail traffic. More importantly, though, the airlines' collective mail business has continued to go down.

"Domestic mail given to ATA carriers in April was 19 percent down, and international dropped over 9 percent," said Boisen. "Post Office volumes are dropping. E-commerce is impacting them."

U.S. combination airlines have also been losing business to FedEx, which now has two contracts with the USPS. The latest one, where FedEx replaces DHL as the carrier for the Postal Service's Global Express Guaranteed packages product, is using a joint brand. Since August 2001, when the USPS signed up FedEx to carry its Priority Mail, mail traffic available to commercial airlines has dropped precipitously. Last year it was down more than 50 percent from 2001.

The USPS is happy with the new mail allocation regime. Bonafilia said that it has not only given the organization clear performance indicators for the first time, it has also produced improvements in the airlines' service levels. "In the past, tender was on an equitable basis. There was no incentive to perform," he said.

At the same time, costs have been reduced, he claimed, but did not disclose any figures.

The enthusiasm is less audible on the airline side. Scanning has led to a 10-15 percent reduction in productivity, Boisen reported. However, he insisted that has not hurt Continental's yields.

"We factored that into our rate, so we did not end up reducing our price," he said. "Our yields have been fairly good."

Delta's mail yields have also been fairly consistent, according to Sorci, "probably more consistent than in years past." Reid Davies, a spokesman for Delta, added that the carrier's gain in market share made up for its investment in scanning technology. He did not disclose how much the airline spent on that front.

Jim Friedel, president of cargo at Northwest, said that his outfit had to fork out about $2 million on technology, plus another $1 million for staffing and training. Boisen said that Continental spent less than that amount, adding that he viewed this as an investment not only in mail, but also in freight and express cargo scanning.

For Northwest, the figures did not add up once it became clear that the new bidding mechanism would leave it with a significantly reduced chunk of the business. "Even in the old regime, margins were lower than for freight, but the number of kilos we were carrying then could justify staying in the business. Under the new regime, the margins were squeezed slightly and volumes were down. It didn't cover our fixed cost," said Friedel.

As it backed off from domestic mail, Northwest laid off the 275 employees who had been handling that traffic, but Friedel stressed that this is not a permanent withdrawal. "We're not categorically out," he said. "This is not a principle decision but a tactical one. We've made it clear to the Postmaster General that in the next round Northwest will be a bidder."

Meanwhile, the airline continues to carry U.S. mail on international routes, which accounted for over 50 percent of its former mail volume. This business is still handled in the traditional way, without scans or competitive bidding, but change may be on the horizon. Boisen said that he has seen "very strong signals from the post office to take this into the international arena."

A contract that Continental signed recently for carrying mail to Pacific islands requires scanning, and new mail contracts for intra-Haiwaiian and intra-Alaskan mail have the same requirement. Boisen predicted that any new mail contract will include scanning, in order to give the USPS a way to measure performance.

Bonafilia said that the current regime for domestic mail business allocation will likely remain intact. He only foresees minor changes. On the international front he is less sanguine.

"Right now, international products wouldn't be a good fit (for a domestic-style pricing and performance measurement regime) because rates are set by the Department of Transportation," he said.

The USPS is trying to change that. Legislation that would give the Postal Service greater freedom to set its own prices appears to be on a roll. It was backed in early June by the Senate Governmental Affairs Committee, where Democrats and Republicans unanimously approved the bill, and also enjoys support in the House of Representatives.