While the U.S. Postal Service gets tossed around like a political football and threatens insolvency without more federal aid, the agency continues to report poor results as already lower mail rates have fallen through the floor in the midst of the coronavirus pandemic.
Meantime, Louis DeJoy, a Republican donor, fundraiser and ally of President Donald Trump, has been approved as the new Postmaster General, and will take over the role from retiring Megan Brennan on June 15. Trump has repeatedly lambasted the USPS, saying it undercharges Amazon in a sweetheart deal, calling for privatization and vowing to deny bailout funding unless the agency raises parcel rates by a whopping 400%.
“Trump is spot on with his demand that the USPS first manage its book of business before they get a bailout,” said parcel shipping consultant Jerry Hempstead. “But Congress has to change the rules that the USPS is under to fix the problem.”
A $10 billion loan to the USPS was approved as part of the federal CARES Act in April, but Trump has said he would veto it without the rate increase. The USPS is seeking another $75 billion which officials there say is required to remain solvent. The agency is negotiating with the U.S. Treasury Department over reform conditions that would release the loan.
USPS Q2 Bad, Q3 Expected to be Worse
Even though the USPS reported a loss of $4.5 billion for the second quarter ended March 31, the agency expects the damage to be worse in the third quarter as it will be more severely impacted by COVID-19.
Shipping and packages revenue for the USPS increased 7.1% in Q2, on volume of 12 million pieces, an 0.8% rise. This is expected to increase as lingering quarantines and shifting consumer behavior drive more ecommerce spending. In the recent past, the USPS enjoyed regular double-digit gains in parcel volume.
First-class mail revenue was up $89 million or 1.4%, despite a volume decline of 0.2%, due to one-time U.S. Census mailings. Marketing mail revenue was down $94 million or 2.5%, on a volume decline of 3.4%.
“Although the pandemic did not have significant impact on our financial condition in our second quarter, we anticipate that our business will suffer potentially dire consequences for the remainder of the year, and we are already feeling those impacts during the last half of March,” Brennan said. “At a time when America needs the Postal Service more than ever, the pandemic is starting to have a significant effect on our business with mail volumes plummeting.”
The Anti-Rate Hike Position of Shippers
Supporters of the USPS say a substantial hike in rates would drive away business and further cripple its prospects. The Package Coalition, a USPS lobbying group that includes Amazon as well as many major ecommerce shippers, is spending $2 million on an ad campaign begun last week to try to influence Republican lawmakers favorable to Trump’s plan.
“Simply put, reliable and affordable postal package delivery is fuel for the American economy,” said John McHugh, chairman of The Package Coalition in a release. “Imposing an arbitrary package tax would threaten the significant engine of commerce that the U.S. Postal Service provides to Americans, especially right now when it is one of our best defenses against this economic downturn.”
Fixes, Solutions Are Complex
Charles Moore, vice president of parcel solutions for logistics services provider Transportation Insight, said the agency’s issues are complex and will require an “all of the above” approach to fix.
“The COVID-19 pandemic and the lack of revenue is just accelerating the need to fix systemic problems that have been delayed for political reasons,” Moore said. “A comprehensive approach needs to be taken to adjust costs to match revenue, just as private industry makes adjustments to remain viable and relevant.”
Moore cited a 2018 federal task force report on the USPS which found its employees are paid better than their private sector counterparts. U.S. Treasury staff analysis found that in 2017, the per-employee cost for USPS was $85,800, compared to $76,200 for UPS and $53,900 for FedEx.
“Understanding that universal service (to every U.S. ZIP code) is a requirement, it may need to look different as we emerge post pandemic,” he said.
Hempstead said Congress, which has legislated caps on USPS pricing, isn’t helping matters, and huge lobbies of mailers don’t want rates going up. “So, you can’t get anyone on the Hill to devote any time to fixing the USPS,” he said.
As for USPS’s Parcel Select last mile service, used by UPS and FedEx as well as Pitney Bowes and DHL eCommerce, “there’s plenty of room to bring the price up because there is no real competitor for most ZIP codes,” Hempstead said. “The USPS goes to every residence six days a week. Nobody else can say that.”
Delivery Boy?
Business Insider cited a 2017 Citi analysis which calculated the USPS was undercharging Amazon by $1.46 per package, which a Morningstar analyst said still holds true today. The article went on to say Amazon strategically bulks up its own parcel volume in easier-to-serve, dense ZIP codes that are more profitable, leaving the expensive, low-margin rural areas to the USPS.
It also cited Rakuten analysis which found that since January 2019, Amazon has been delivering more of its own volume than any carrier partner.
Another fix, Hempstead said, would be cutting residential mail delivery from six day to two days a week and cutting the work force by two thirds, an idea that has even less chance than removing price caps. “If you look at the P&L of the USPS, about 75% of the cost is labor, medical, retirement and workman’s comp,” he said. “That’s the real problem with the definition of universal service.”