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* FedEx contract with USPS ends September 2013
* US Postal Service told FedEx it will solicit bids
* UPS says "definitely intends to bid"
* FedEx now postal service's biggest contractor
By Lynn Adler
July 17 (Reuters) - Package-delivery company FedEx Corp risks losing its business with the U.S. Postal Service, worth more than $1 billion a year, when the beleaguered postal service puts the contract up for bid next year.
The postal service alerted FedEx that it will seek bids for the contract after it expires in September 2013, FedEx said in a regulatory filing late on Monday.
That clears the way for larger competitor United Parcel Service to grab the business - domestic air transportation for first-class, priority and express mail - that FedEx has had since 2000.
FedEx, the No. 2 package delivery company, signed its first contract in 2000 and started providing postal service in April 2001. In 2006, it signed an extension through September 2013.
"By flying some of the fastest growing and most successful postal products, FedEx Express continues to provide the Postal Service and postal customers important services," FedEx spokesman Jess Bunn said on Tuesday. "We look forward to continuing our excellent relationship."
FedEx is the postal service's top contractor, earning an estimated $1.5 billion in revenue in fiscal 2011 from this business, according to Husch Blackwell LLP's postal service contracting practice group.
UPS, the world's largest package delivery company, earned about $100 million in revenue during that period.
"UPS has informed the U.S. Postal Service that it definitely intends to bid on this work," said UPS spokesman Norman Black.
Dahlman Rose analyst Helane Becker said the contract loss would be small compared FedEx's $42.7 billion in revenue, but disruptive.
"We believe the probability of FedEx losing the USPS contract is relatively small, but until we hear confirmation otherwise, the contract renewal will cast an overhang on the stock," she wrote in a note.
"UPS's current contract is dwarfed by FedEx's and would give the company a solid boost to earnings," she said.
Shares of Memphis, Tennessee-based FedEx were down 0.9 percent in midafternoon trading at $91.04 on the New York Stock Exchange and up 9 percent so far this year.
FedEx is focused on cost-cutting to boost profit margins with sluggish economic growth curbing shipping volumes and leading customers to demand lower-priced delivery options. .
Chief Executive Fred Smith in June said the company would provide greater detail of its planned Express division restructuring at its October analyst meetings.
"The timing of contract expiration -- a year following FedEx's expected restructuring announcement -- provides FedEx visibility to plan for any potential loss of business and resulting impact to network utilization," Robert W. Baird analysts led by Benjamin Hartford wrote in a note.
FedEx also said it is preparing to remove about 5,000 drop boxes at U.S. Postal Service locations in about 340 metropolitan areas, in line with a separate agreement that expired in June.