New Contract System Is Opened For Bidding

The U.S. Postal Service has laid out its new program for moving the mail to and from rural areas. It has developed a "matrix" of routes that will enable regional carriers to know which routes and under what conditions the mail will be offered for air transport.

The Postal Service will also operate under a different contract philosophy than the one currently in use with the U.S. regional carriers. Although still allowing regionals to carry the mail, the new system will be "a significant departure from the current process of negotiated set rate contracting," according to the Postal Service. It will also include provisions for recognition of code share partners and subcontracting.

The terms of the new contract proposal and how it will impact the regional cargo carriers that fly the mail was the subject of a pre-bidding conference held in Washington, D.C., on Jan. 13. The new contract will replace the Air Systems-Regional (ASYS-R) contract that will expire on May 30.

To be eligible to participate in the contract, a regional carrier will be required to be a certified air carrier; have or certify that it will obtain the capability to scan Postal Service bar-coded mail pieces and transmit and receive such data to the Postal Service in accordance with the specifications in the solicitation; be in good standing in other areas of government purchasing; and not be barred from doing business with the U.S. government.

At the conference, it was noted that it is "of significant importance" that the carriers accept the reality that the amount of mail being transported on commercial aircraft has decreased since the fall of 2001. "The market has changed pretty dramatically since 9/11, so this is an opportune time to restructure our business relationship with the carriers," said Paul Vogel, Postal Service vice president of network operations management.

Currently, under the Air System (ASYS) and ASYA-R contract system, the carriers are paid a uniform rate, with an equal tender provision, so that if two carriers are flying the same route at the same time, the mail will be divided equally between them. With the recent changes, contracts will be issued under a competitive bidding process, with a single carrier getting the contract for a specific route.

"We've identified a matrix of over 200 airports that we need to connect, as well as the volumes between those pairs, and we have put that entire matrix into this solicitation so that any carrier can bid their network to serve those needs. Price will be a deciding factor," he said.

Vogel also told C/R News that the airlines will be required to do tag scanning. "Every sack of mail or tray of mail will have a unique identifier on it, and we will be able to monitor the service performance (of the carrier). So after the process is in place for a month or two, we will be able to make judgment on not only who gets the mail contract based on price, but also on who gets the mail volume because of the service they provide. We'll have a computer algorithm that will balance the cost of service with the price."

Essentially, the new bidding system developed by the Postal Service requires a regional carrier to bid for a route network, with a flat bid based on a terminal handling charge plus a rate per mile charge. Those bids must then be submitted by Jan. 31. The service will consider all the bids, then either select a carrier to receive a contract for that network, or throw it up for auction next month.

An extension of the Jan. 31 deadline is being considered because of the size of the project. Vogel noted that 55 airlines indicated that they would bid, "and this is a huge matrix, consisting of some 230 odd pairs squared, that's how many relationships we have, so there will be multiple networks."

While all 55 carriers may have acceptable bids, it is more likely that it will be considerably less that that, he said. "Those who are successful in passing the initial screening will be invited to the auction where they will be encouraged to participate by giving their best and final offers," he added.

Once the "best and final offers" are in, "we will overlay the matrix again and come up with the final carriers that are going to be carrying the U.S. mail," Vogel said.

"They will post all the bids for the routes, but they won't post who bid those amounts," said Gene Mallette, CEO of Alpine Air, a Provo, Utah-based regional cargo carrier. "An operator can look at the bids and see what levels he wants to go to. The Post Office is looking for the most competition. They're saying they want to go with the people who are responsible and who offer the lowest bid."

Mallette said that there are two problems with the proposed bidding system. The Postal Service is not offering a minimum amount of mail and it is not offering fuel escalator adjustments every quarter. What it does offer is a three-year contract with two one-year options, "so the airlines have to gaze into the future and figure out the price of fuel, determine if we are going to have a war that will impact on the price oil and determine if Venezuela will come back to its senses soon," Mallette said. He told C/R News that while the three-year contract does offer some stability, "they are asking us to bear all of the risks in the future with no additional guarantees of weight, no minimums and at the same time bid a uniform rate for the whole system."

Vogel responded to the criticism by noting that even under today's ASYS-R contracts, there are no guaranteed minimums and carriers simply take whatever mail is available.

Although most of the routes will be awarded based on the auction system, some routes that have only a few bids may be awarded prior to the auction. "We might possibly be offering some contracts prior to the auction, but it is a bit premature to make that judgment, although there are some O&D [origin and destination] lanes where there may not be an extensive amount of competition," Vogel said.

Another problem arises if somebody else bids lower on one or two routes within a network than someone else has bid, Mallette said. "Then the Post Office has to ask itself which way they want to go, either accept the bid or go with the auction. They might get lower rates in the auction, but then they will have to figure out if they could get lower rates on specific routes, he said.

Vogel emphasized that the new form of bidding, using a network matrix combining city pairs, is not a departure from the Postal Service's plan to truck mail within a 700-mile radius of the pick-up point if that is the more economical way to go. "We are still holding to the original position that when it is more economical to send by truck, we will do so ... We have taken a very responsible approach to where trucks would work and where aircraft would be better."

(Contact: Alpine Air, Gene Mallette, 801-373-1508; Postal Service Mgr. of Logistics, 202-268-4948)