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Last MileNewsParcel

Quadrupling USPS’ parcel rates would cause economic catastrophe, report warns

Charles River study says Postal Service could be forced to exit parcel business

The U.S. Postal Service (USPS) could be forced to exit the parcel-delivery business and e-commerce customers could face up to an $865 billion increase in shipping costs over the next five years if USPS quadrupled its parcel rates as President Donald Trump has demanded, according to a study published Monday by a prominent consulting firm.

The 66-page report, written by Boston-based Charles River Associates and commissioned by the Package Coalition, a group of 25 large postal users that strongly opposes dramatic increases in USPS’ parcel rates, is believed to be the first attempt to quantify in detail the marketplace impact of Trump’s demands of the Postal Service. 

The co-authors, Charles River economists Debra Aron and Justin Lenzo, said that even “above-market increases at significant lower levels” than Trump wants would “divert most or all of the package delivery business from the Postal Service” to competitors like UPS Inc. (NYSE:UPS). UPS and others could then “substantially increase their own prices and still retain the entire market,” the report concluded. 

Based on different price-increase scenarios, consumers would pay between $7.86 and $16.95 more for each package, which would translate into total cost increases of $473 billion and $865 billion over five years, the report warned. This would trigger a vicious cycle in which consumers would drastically curtail their e-commerce ordering, thus hurting a wide range of industry players, the report said. USPS would need to shed about 154,000 jobs, nearly one-third of a workforce estimated by research firm Statista at 497,000 in 2019, if it exited or dramatically scaled back its presence in the parcel delivery market, according to the report.

Big retailers like Amazon.com Inc. (NASDAQ:AMZN) and Walmart Inc. (NYSE:WMT) would be impacted, but their pain would be mitigated by an ability to shift deliveries onto their own vehicles, said the authors. However, smaller retailers that lack those alternatives would be crushed, according to the report. Their shipping costs would rise by $11.35 to $26.51 for each package, the report estimated. Lost sales and profits would be measured in the many billions of dollars, the report said. Those losses don’t factor in the threat of businesses’ insolvency due to failures to cover their fixed costs, the report said.

Trump warned in April that he would not sign any coronavirus-relief legislation if it included direct aid to USPS, which has struggled mightily during the COVID-19 pandemic. Any future direct aid, Trump said at the time, would be conditioned upon USPS quadrupling its parcel rates. USPS eventually received a $10 billion loan from the last round of funding known as the CARES Act. The loan came with strings attached by the Treasury Department, however. 

Trump had USPS’ parcel rates on his radar screen long before the novel coronavirus hit U.S. shores. He has repeatedly charged that USPS loses money on every shipment tendered to it by Amazon, its largest parcel-delivery customer. However, USPS made $1.6 billion in profits from Amazon in its 2019 fiscal year, according to a trove of 10,000 pages of documents unearthed by nonprofit ethics watchdog American Oversight and reported in mid-September by The Washington Post. The Post is owned by Amazon Founder Jeff Bezos, who is believed to be the target of a Trump vendetta resulting from the many negative articles published about his presidency.

Satish Jindel, CEO of transport consultancy ShipMatrix, has said that Amazon often pays USPS more to move its parcels than it would cost to do the same work in house. Amazon today self-handles about two-thirds of its deliveries, a figure expected to rise to 85% to 90% in a couple of years as it continues to scale its shipping network. At the same time, Amazon’s percentage of deliveries handled by USPS has been cut in half since early 2017, according to a highly publicized report by Rakuten Intelligence. Amazon’s self-handling push is focused on heavily populated urban areas where package density and short trips help drive down its shipping costs.

For months, Jindel has warned the massive price increases contemplated by Trump would cost USPS about three-quarters of its parcel business as millions of merchants flee to competitors. USPS is a low-cost lifeline to many small to midsize businesses, especially those that ship lightweight parcels where USPS has a strong cost advantage over private-sector rivals.

The beneficiaries, according to the report, would be private-sector carriers like UPS, which with USPS out of the parcel picture could sharply raise delivery rates with little resistance from suddenly captive shippers. UPS has been embroiled in a long-running legal and regulatory battle to force USPS to raise its parcel prices, which the Atlanta-based company has long said is illegally subsidized by the agency’s monopoly on its core first-class mail product. 

One of the arguments has centered on how much USPS’ “competitive” products such as its parcel offerings have contributed to the total costs of running the agency. Critics like UPS have said that the required contribution from the competitive products segment hasn’t reflected its actual cost or its significant growth over the last decade. An increase in the segment’s overall contribution rate would raise its costs and, by extension, the floor on shipping prices. However, the Charles River authors cited data from the Postal Regulatory Commission (PRC), a separate agency that regulates USPS’ pricing programs, that competitive products contributed 23.4% to total USPS expenses in its 2019 fiscal year, well above the PRC’s minimum threshold of 8.8%.

UPS declined comment on the Charles River report. Ironically, UPS is a big user of USPS’ Parcel Select service, in which high-volume postal users induct bulk parcels deep into the postal infrastructure for last-mile deliveries to every U.S. residence. The inexpensively priced service benefits merchants as well as UPS, which doesn’t have to utilize its own assets to make the deliveries.

The report comes as USPS, which has been financially battered by declining mail volumes and higher costs associated with responding to the pandemic, looks for billions in aid from a hoped-for congressional relief bill. House Speaker Nancy Pelosi, D-Calif., and Treasury Secretary Stephen Mnuchin have been negotiating for several days. However, they are reportedly far apart on the size of the aid package. House Democrats have scaled back their proposal to $2.2 trillion. The White House has set a cap of $1.5 trillion.

The House has proposed $25 billion in direct aid to USPS. In July, Sens. Susan Collins, R-Maine, and Dianne Feinstein, D-Calif., introduced legislation that would also provide $25 billion in aid. 

Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.

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