The first chapter, with its airborne environment, was a hard act to follow. Part of me did get distracted by the conceit that a hot air balloon (which has no lateral propulsion) is being used to run a route and deliver mail, but this very much feels like it's taking place in a steampunk setting, so you forgive a little goofiness.
The aspect of delusion versus a horror reality is excellent. The surreal imagery, combined with an explicitly unreliable narrator, has this whimsical-terrible vibe to it. If you've ever read the lore for something like Turnip28, it has a similar dark mirth. In this case, I don't think that moves you out of the horror space or creates a problem with the injunctions of the contest.
Excellent take, glad to have read it.