To hear President Donald Trump tell it, there’s nothing wrong with the finances of the U.S. Postal Service (USPS) that a parcel rate hike, notably on Amazon.com Inc. (NASDAQ:AMZN), its largest shipping customer, wouldn’t cure. Trump commented on Wednesday, April 8, that the USPS “ought to do that, and we are looking into it. We’ve been pushing them [USPS] now for over a year.”
However, USPS has for years been raising its prices on shipping and package delivery services as demand has increased along with the growth of e-commerce. The 2020 increases ranged from a little more than 2% for USPS Parcel Select service, in which big shippers place bulk consignments deep into the postal network for last-mile deliveries, to a little more than 4% for Priority Mail, which USPS handles on an end-to-end basis and which, unlike Parcel Select, has tight on-time guarantees. In 2019, USPS hiked rates on those same products by high single-digit to low double-digit levels.
Ironically, USPS eased off on the pace of rate hikes in 2020 partly because of concerns it might be pricing itself out of the market vis-a-vis its competitors, which are the same companies that use it for Parcel Select.
In addition, USPS’ 2019 data analyzed by consultancy ShipMatrix concluded that Amazon actually paid more to ship with USPS than it did through its own network of delivery service providers (DSPs). USPS generated $2.34 in revenue for each parcel it handled for Amazon, as well as its two other large Parcel Select customers, UPS Inc. (NYSE:UPS) and FedEx Corp. (NYSE: FDX), the consultancy said.
By contrast, it cost Amazon $1.75, on average, to move a parcel through its own network of fulfillment and delivery partners, ShipMatrix said. Despite the price hikes, Parcel Select has remained the lowest-cost option for the 1- to 5-pound parcels that still dominate e-commerce business-to-consumer deliveries.
In a letter sent Friday, April 10, to Treasury Secretary Stephen T. Mnuchin, the Parcel Shippers Association said the administration labors under the “mistaken impression” that USPS underprices its package delivery services. “This claim has been widely debunked by independent commissions, experts and virtually everyone” who has studied the issue, said Jim Cochrane, CEO of the parcel group and a former USPS executive. Cochrane said the perception has been promoted by a USPS competitor, which he did not name in the letter. Cochrane did not respond to an email request for comment on Tuesday.
Deaf ears at 1600 Pennsylvania Ave.
The various data points have so far fallen on deaf ears at the White House, if they’ve been heard at all. In a stunning move, the Trump administration refused to go along with any direct funding for the agency in the $2.2 trillion emergency coronavirus relief bill signed into law March 27. The White House would only agree to a $10 billion loan, with terms dictated by the Treasury Department. The Washington Post reported over the weekend that Trump threatened not to sign the legislation if it included funding for USPS.
The original Senate version had called for $13 billion in direct aid, while the House version would have injected $20 billion to $25 billion to reimburse USPS for lost revenue, provided $11 billion in debt relief, reset USPS’ borrowing limit with the Treasury at $15 billion, and eliminated an annual $3 billion borrowing ceiling.
Initially, it was thought that with $8 billion in cash and $4 billion in existing borrowing capacity, USPS could make it through 2020 once it had access to the $10 billion loan authority. If it ever was the case, it isn’t now, according to USPS officials. Last week, the presidentially appointed USPS Board of Governors told Congress that, at the current rate of losses and spending, the agency will run out of cash before September 30 (the end of the federal fiscal year). The Board of Governors requested $75 billion in the next round of coronavirus relief. Of that, $25 billion would be used to offset pandemic-related losses, $25 billion would take the form of a grant to fund modernization projects, and the remainder would give USPS unrestricted access to borrowing authority from the Treasury.
On April 9, Postmaster General Megan J. Brennan told the House Oversight and Government Reform Committee that a sharp drop in mail volume during the coronavirus pandemic will result in a $13 billion revenue loss tied “directly to COVID-19” in the current fiscal year. Over the next 18 months, that loss would approach $22 billion and would exceed $54 billion within the next decade, Brennan warned.
The 245-year existence of the USPS may hinge on what emerges from the next round of funding legislation. Mnuchin considers any language calling for a direct capital injection to be tantamount to a “poison pill“ that could thwart progress on additional federal funding, according to the Washington Post article.
USPS, which continues to process mail and parcels every day during the pandemic, was on shaky financial ground before the virus hit U.S. shores. Volumes and revenues in its core first-class and marketing mail products have been in multi-year declines due to digitalization. At the same time, UPS and FedEx have increased their use of dynamic routing technology capable of redirecting the flow of packages into their own networks. The software can identify last-mile deliveries typically handled by USPS and divert them onto their own vans and trucks.
FedEx and UPS have been aggressively courting small to midsize shippers that are heavy users of the USPS Priority Mail service, which generates about four times the revenue per piece as Parcel Select, according to Satish Jindel, founder of ShipMatrix. Jindel has estimated that USPS may lose about 10% of that volume due to diversion to rivals.
UPS is also under pressure from the International Brotherhood of Teamsters union, which represents company drivers, to shift as much business as possible away from USPS and onto its members’ routes.
Amazon, meanwhile, is handling more of its high-density urban deliveries through its own network, leaving USPS with the less dense suburban and rural routes that, by law, it must serve. The USPS share of Amazon’s deliveries has fallen over the past three years. FedEx has said that it will end its last-mile relationship with USPS by the end of 2020.
The three companies make up the bulk of USPS’ shipping and package revenue, and analysts said it would be impossible for new business to fill the void should they all part ways with the agency. Analysts believe that the price hikes on the Parcel Select service had little influence on the companies’ decisions to take their delivery business in-house, though there is no way to know for certain.
As a way to reduce costs and focus on profitable revenue, Jindel said USPS should refuse any parcel consignment that cannot fit inside mailboxes, where it still has a monopoly. The agency is allowed to turn away such business, according to the consultant.