At a hearing on a challenge to the FedEx-U.S. Postal Service business alliance, a lawyer for Emery Worldwide Airlines suggested that Postmaster General William J. Henderson was considering a position at the auditing firm PriceWaterhouseCoopers. A Jan. 11 article in The Washington Post incorrectly identified FedEx as the company that might be talking to Henderson about employment. (Published 1/26/01)

The U.S. Postal Service said yesterday that it has struck a seven-year, $6.3 billion alliance with FedEx Corp. for air delivery of priority, express and first-class mail. FedEx also will be allowed to put drop boxes in post offices around the country.

The extraordinary arrangement is an acknowledgment by the Postal Service that after 226 years, it must lean on a private company to stay relevant and efficient in an era of changing technology and consumer habits.

With the Postal Service on track to lose more than $1 billion this year, Postmaster General William J. Henderson said, tapping FedEx's fleet of more than 600 planes will give consumers better service at lower cost. Postal officials estimated a $1 billion saving over the term of the contract.

Henderson said he expects the deal to keep postal rates down. "This is a great day for the American consumer," Henderson said in an interview. "Anything that improves service and therefore improves marketability is going to have an effect on suppressing rate increases."

But the arrangement has alarmed rival package carriers, which complain that the Postal Service awarded the deal to FedEx on a sole-source basis without allowing anyone else to compete for it. Emery Worldwide Airlines, which will have to forfeit a similar but smaller postal contract to make way for FedEx, sued to block the deal.

A federal judge on Monday refused to grant a temporary restraining order to halt yesterday's announcement. A ruling in Emery's case could come in March.

Postal officials declined to comment specifically on the Emery case but said they took the sole-source approach after a lengthy study by PricewaterhouseCoopers showed that FedEx was the only company with the size and reach to provide a one-stop solution.

Once that determination was made, Deputy Postmaster General John Nolan said, there was no point in dealing with other companies.

For the consumer, FedEx's role in mail delivery will be all but invisible, postal officials said. The Postal Service will continue to offer the same services it offers now -- though, Henderson said he hoped, with greater economy and reliability.

Critics said yesterday that putting so much responsibility in the hands of a single contractor would jeopardize the mail system in the event of labor troubles at FedEx. Postal and company executives dismissed such concerns, noting that the Postal Service will continue to move mail on commercial airlines in addition to the FedEx fleet. They added that the Postal Service can always rely on trucking in times of crisis.

The mail system currently relies on a combination of carriers for air delivery, with Emery as the primary contractor. Most of those duties will be consolidated into the arrangement with FedEx, which is to begin flying mail in August.

Henderson said FedEx could take on further postal duties in the future, though there are no plans to allow company employees to deliver postal parcels "the final mile" to individual customers.

The most important aspect of the deal, he said, is that it lays the groundwork for public-private cooperation that benefits both sides.

"The Postal Service delivers Main Street, and FedEx provides an air fleet," he said.

One expert on the Postal Service said the deal is a logical and necessary step in the agency's evolution -- ordered by Congress -- into a more businesslike entity.

"This is a partnership with the private sector far beyond anything I'm aware of in the past," said Murray Comarow, who worked on a presidential postal commission in the late 1960s that established many of the guidelines that govern the service.

Because Congress put restrictions on how the Postal Service handles both costs and rates, he said, "they don't have control over their organization the way FedEx or UPS does."

"So they've been thrashing around looking for things they can do [to be more efficient], and this is one of the things they've been working on," Comarow added. "On the face of it, it looks like a natural fit."

FedEx, based in Memphis, flies more planes than any passenger airline in the country. As part of the deal, the company expects to put about 10,000 drop boxes at post offices around the country and to collect $900 million from those sites. It will pay up to $232 million in rent to the Postal Service.

FedEx also intends to hire 500 pilots and about 1,000 support personnel to handle the contract, company officials said.

FedEx's chairman and founder, Frederick W. Smith, said in an interview that he had discussed a business relationship with several recent postmasters general but that Henderson was the first one who appreciated the potential. While FedEx and the Postal Service might seem like competitors, Smith said, they really have complementary businesses: FedEx carries larger packages, while the Postal Service focuses on letters and lighter parcels.

Despite public debate in recent years about privatizing the mail service, Smith said he does not view the new alliance as a first step toward a FedEx takeover of the entire system.

"I think that is highly unlikely. This is a situation where two entities -- a private company and a government entity -- found that what they did was highly complementary," he said.

Nolan, the deputy postmaster, said the Postal Service had approached other carriers, including United Parcel Service, over the years but saw little interest in such a major affiliation.

UPS spokesman Tad Segal, however, said, "Discussions that occurred in the past were general and not particularly the same as what's being discussed here."

UPS's first concern is the Postal Service's agreement to let FedEx put drop boxes at post offices. Henderson said he would consider letting other companies do the same. "I think we're pleased by that," Segal said.

Emery had no comment on the matter yesterday. According to several sources, Emery mounted a vigorous attack Monday in court as it sought to have a federal judge temporarily block the deal.

Several people who attended the hearing said Emery's attorneys even suggested that FedEx had talked with Henderson about working at the company if he leaves the Postal Service at the end of his contract in May. In interviews, both Smith and Henderson denied having such a discussion.

Members of Congress have been concerned about the deal since Henderson made it known last September that it was in the works. Rep. John M. McHugh (R-N.Y.), who was chairman of the House Government Reform subcommittee on the postal system until stepping aside this year because of term limits, said yesterday that he expects the arrangement to provoke controversy.

"But I will say this: Under the current structure and given the crisis that the Postal Service is currently facing, I can fully understand why they entered this agreement," McHugh said.

Nolan said the deal was explained to the Justice Department, which seemed to raise no major objections.

And Henderson insisted that the partnership would increase competition in the mail-delivery system. He said there are enough differences in products and pricing to preserve separate customer bases.

FedEx has criticized the Postal Service in recent years for an aggressive advertising campaign that pointed out the cost advantages of shipping through the U.S. mail. That rivalry will continue, Henderson said -- within limits.

FedEx Chairman Frederick W. Smith, left, and Deputy Postmaster General John Nolan announce a deal under which FedEx will transport U.S. mail.