If you thought it was a little strange that President Donald Trump insinuated himself in the affairs of the United States Postal Service, that’s because it was virtually unprecedented. Congress has passed legislation from time to time regulating postal finances, but we haven’t seen a president take a direct interest in postal operations anytime in recent decades.
All that changed when the president ordered a task force to evaluate the operations and finances of USPS, and include recommendations for reform. “The USPS is on an unsustainable financial path,” the president’s order read, noting that the Postal Service incurred losses of $65 billion since the last recession.
At the top of Trump’s list of priorities for the task force is a study of package delivery pricing, even though studies have found that USPS’s package delivery operations are profitable and not the cause of the Postal Service’s problems. It’s worth noting at the outset that the USPS isn’t taxpayer-funded, so it’s not clear why this issue should command presidential attention. However, some critics have said that the Post Office’s financial situation is so dire that the postal system will have to be bailed out by the taxpayers.
The press has been replete with discussions of possible political and personal reasons for the president’s executive order. Also of interest is that fact that currently no one is serving in the nine seats of the USPS board of governors appointed by the president (two other seats are filled by the postmaster and deputy postmaster, chosen by the board), so it’s not clear how reforms suggested by the task force might be implemented. But we’ll save that for another discussion: What we’re interested in right now are the implications of the president’s task force, what the outcomes might be, and what all this means for shippers.
Behind the president’s concerns is the allegation, as he tweeted, that the post office is “charging Amazon and others so little to deliver their packages.” The president also cited, and some in the press have repeated, data from a Citi Research report, which purportedly shows that the USPS loses $1.46 on each package it delivers.
In fact, that’s not what Citi Research said. What they did say was that the USPS could pull itself out of its financial hole if it could raise its package delivery service rates by $1.46.
It’s true that the USPS is in bad shape financially, but it’s not package deliveries that got it into that mess. Instead, it’s been money-losing rural mail routes, the fall-off in first class and marketing mail volumes, and a 2008 law that requires the Postal Service to pre-fund health insurance benefits for mail carrier retirees.
Back in the heyday of first-class mail, those operations subsidized USPS’s package business. Now, it’s just the opposite. The USPS turns a profit on package deliveries, while losing on rural mail deliveries. First-class mail deliveries to far-flung locations is a public service that the post office has been committed to since 1792. Package deliveries constitute a profit-making enterprise that is up against some pretty sophisticated competition. In fact, according to its fiscal year 2017 report, revenues from USPS shipping and package services increased by $2.1 billion, or 11.8 percent on the year.
The president’s criticisms were not directed at Amazon alone, but the company was mentioned by name – and its situation could impact other shippers’ relationships with the USPS. Amazon has noted that the company’s relationship with USPS is reviewed annually by the Postal Regulatory Commission and that the commission “has consistently found that Amazon’s contracts with the USPS are profitable.” In fact, the law requires that all such arrangements turn a profit for USPS.
The rates Amazon has negotiated with USPS are not public, but we can assume that the Postal Service grants the retailer significant volume discounts. Amazon has also invested hundreds of millions of dollars in a network of package sortation facilities, meaning that in many cases, Amazon doesn’t rely on the USPS distribution network, but only for last-mile deliveries.
FedEx and UPS also offer Amazon reduced rates, and the reason is simple: they are able to move Amazon’s massive volumes through their systems at a profit. There’s no reason to believe the United States Postal Service doesn’t.
Let’s assume that the task force follows the president’s lead and recommends a price hike for package deliveries. The immediate effect would be to increase costs for shippers that rely on the postal service for deliveries, perhaps motivating them to abandon USPS in favor of other carriers.
That includes Amazon—analysts estimate a price increase would cost the company over $1 billion—but with this additional wrinkle: The online giant is busy building out its own last-mile delivery network, and a USPS price hike could motivate the company to accelerate those efforts and/or rely more on other carriers.
Some analysts have concluded that a price hike by USPS could motivate UPS and FedEx to follow suit, raising costs for all shippers. Another outcome might be that USPS’s competitors could press their advantage with lower prices, poaching business from the Postal Service. Some of these scenarios could cripple USPS, which, along with cost increases, spells bad news for shippers, who would have one less carrier in their stable to rely on for deliveries.
But there is another alternative that might be better. Some analysts say that USPS’s current model is unsustainable, that its money-losing mail delivery operations should be separated from package deliveries, and that the latter should be privatized. That would preserve shippers an additional choice for deliveries and create a carrier that would operate on market conditions and without having to shoulder the costs of USPS’s legacy operations.
Of course, that’s easier said than done. It would take congressional action, and it’s hard to imagine that reforming the postal service will make it to the top of the legislative agenda anytime soon. On the other hand, it’s an idea worth considering. As President Trump might say, “We’ll see what happens.”
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