United Parcel Service Inc (UPS.N) and FedEx Corp (FDX.N), which have long been undercut by the U.S. Postal Service's low prices for package delivery, could have much to gain as the agency faces a painful restructuring.
Lawmakers are weighing a suite of options for the struggling Postal Service, including ending Saturday delivery, shuttering about 3,600 post offices and hundreds of processing facilities, and scrapping overnight delivery of letters and postcards.
Analysts said market leader UPS, given its size, stands to win the lion's share of the packages the Postal Service could lose, although any downsizing is widely seen bolstering the fortunes of FedEx as well.
Research firm Sterne Agee estimates the Postal Service does about $20 billion of business in parcel-related markets.
"I don't think the whole $20 billion is up for grabs, but it doesn't take but a small part of that to make a meaningful difference in terms of volume or profitability," said Jeffrey Kauffman, managing director at Sterne Agee in New York.
Pressure is mounting on the Postal Service to cut costs and restructure, as mail volumes decline with the growth of email and online bill paying. The agency is expected to announce next month a multi-billion dollar loss for the last fiscal year.
Analysts are watching out for deeper cuts than already mentioned by Postal Service officials.
"If the USPS were also to drop a mid-week delivery day -- say Wednesdays -- this might be a bit of a tipping point," wrote Jefferies & Co equities analyst Peter Nesvold. "If the USPS were to start closing distribution centers and thus extend delivery times by another one to two days, market share gains by UPS would probably be more dramatic."
Others say the Postal Service is treading on thin ice if it cuts into the basic needs of consumers and could spur more people to switch to private shipping companies.
"There is a certain segment that's always going to want the cheapest delivery method, but there's also another segment of the population that just wants to get it there in a certain number of days," S&P Capital IQ analyst Jim Corridore said.
"It's the kind of thing that could feed on itself. The Postal Service cuts delivery days so they get less volume and they get less revenues and then they may have to cut more ... it could be a self-fulfilling prophecy in some way and, eventually, they'd effectively end up privatizing the mail."
UPS is the No. 1 multi-day deferred parcel delivery player, followed by the Postal Service and then FedEx.
Globally, UPS delivers 15.6 million total packages and documents each day, on average. FedEx handles about 8 million shipments daily.
CAN'T AFFORD SPEED
Ending Saturday delivery alone would have limited impact on the market, analysts said, as customers who use postal delivery tend to be less time-sensitive and more cost conscious.
The Postal Service charges an average parcel rate of $3.26, roughly half that of private competitors.
For that reason, David Vernon, an analyst with Sanford C. Bernstein, is less convinced that UPS and FedEx have a major opportunity to cut into the Postal Service's one-fifth share of the package delivery market in the United States.
"Most likely that stuff that's already in the postal service network is there because they can't afford to go faster," he said. "If you just lower the transit time, that doesn't automatically make that shipment now worth spending double on upgrading to a UPS or FedEx ground shipment."
UPS, however, has pointed to an "upside opportunity" in pricing if the Postal Service's current turmoil leads to an increase in the fees it charges.
"When you've got a competitor that's losing that much money something has to change," UPS Chief Financial Officer Kurt Kuehn told investors and analysts last month at a meeting in Louisville, Kentucky.
Some postal package and first-class products are underpriced and if the Postal Service lifts prices, "we see that as raising the floor in the market," he said.
Investors will look for additional details when UPS reports quarterly results on October 25.
FedEx spokesperson Maury Donahue said the company has long advocated changes at the Postal Service that would enable it to run more like a business.
"We believe that a healthy Postal Service, the largest postal operator in the world, is important to America," she said.
PARTNER STATUS COULD LIMIT GAINS
Although most commonly viewed as competitors, the private delivery companies, most notably FedEx, works with the Postal Service on key pieces of business.
FedEx was the largest postal service supplier last year at $1.37 billion, based on USPS payments received in fiscal 2010, and UPS was 12th on the list with $95 million, according to David Hendel, chairman of Husch Blackwell LLP's postal service contracting practice group.
The Postal Service makes final-mile deliveries for FedEx's SmartPost and UPS's SurePost offerings.
But FedEx may not entirely be out in the cold. SmartPost, through which FedEx ships goods to the Postal Service for final delivery to residential customers, does not guarantee Saturday delivery, Dahlman Rose analysts led by Jason Seidl wrote. "If Saturday deliveries were eliminated, business levels at FedEx Home delivery could actually see a boost, as this division does guarantee Saturday delivery," they added.
(Editing by Andre Grenon)