For FedEx and UPS, a Cheaper Route: the Post Office

FedEx Corp. and  United Parcel Service Inc increasingly are moving their own packages through the U.S. Postal Service, putting pressure on the quasigovernmental agency and raising questions about whether the USPS is charging enough for the service.

For FedEx alone, the post office delivers an average of 2.2 million packages a day, or about 30% of the express-mail company’s total U.S. ground segment.

UPS won’t specify how much of its shipments go through the post office, but a regulatory filing indicates those type of lightweight shipments accounted for 40%—or about 37 million packages—of its total increase in ground shipments in 2012.

The post office is lapping up the extra package-delivery business from its private-sector rivals because it badly needs growth. In the past decade, it has lost more than 30% of its most profitable product—first-class mail—to the Internet.

“We’ve been focusing a lot of efforts on package growth, because that’s the biggest opportunity for us,” said Postmaster General Patrick R. Donahoe.

But the flood of these packages has begun to tax the system, and it has raised questions about whether the USPS is charging enough for its service. Even as UPS makes use of the USPS, a UPS executive on the company’s earnings conference call last month questioned whether the Postal Service is unfairly cross-subsidizing certain products to offer lower prices.

The volume of so-called Parcel Select packages—a USPS service aimed at businesses including FedEx, UPS, and Inc.- surged nearly 500% to about 1.29 billion packages in 2013 from about 223 million in 2009. The USPS projects that service it will grow 12% next year. Parcel Select accounts for 35% of the USPS’s annual package-delivery business.

Both UPS and FedEx rely on the postal office for the back-end of their cheaper two- to seven-day delivery options, Smartpost for FedEx and Surepost for UPS. Amazon also uses the USPS and enlisted it for Sunday deliveries. The post office’s Parcel Select service, launched in its current format in 2008, allows the companies to transport the packages the long distance themselves, then sort by ZIP Code and deliver to the local post office. The letter carrier takes it for the most expensive last leg of the delivery.

Some critics question whether the Postal Service is charging the delivery services enough. Revenue per Parcel Select package averaged about $1.71 in the second quarter, according to a quarterly filing. FedEx averages $1.78 in revenue per package on its Smartpost business. UPS doesn’t disclose its Surepost revenue.

Analysts estimate Amazon pays about $2 to mail a package via the Postal Service versus $7 or $8 for UPS or FedEx ground. Late last year Amazon cut out the middleman—FedEx—and started taking most of its packages to the Postal Service, analysts say. FedEx Smartpost volume dropped 8% in the quarter ended in May, FedEx reported.

Neither the Postal Service nor these big customers will reveal contract terms. “There should be more transparency” to make sure the agency is properly compensated, says Mark Jamison, a retired Postmaster from North Carolina, a frequent critic.

Mr. Donahoe says the criticism is unwarranted. “We make money on it. We wouldn’t do it if we didn’t make money on it,” Mr. Donahoe said.

Postal carriers are already delivering to every mailbox, so transporting the presorted packages doesn’t add significantly to costs, he said.

Rates have increased 27% from an average of $1.35 in revenue per package in 2012, according to postal filings.

First-class mail still accounts for nearly half of the USPS’s revenue, while standard mail, such as advertising and circulars, account for about 25%. Packages—including those from FedEx and UPS—account for about 20% of the post office’s revenue but are the fastest-growing, averaging 7% annual revenue growth the past four years.

The Postal Service is aiming to more than double its package-delivery business within a few years, Mr. Donahoe said.

The post office, established in 1775 to enable secure communications during the Revolutionary War, was designed for letters, not packages, and it is aging. About 140,000 of its 200,000 mail vehicles are more than 20 years old. The service also isn’t nearly as automated as FedEx and UPS.

At FedEx and UPS, packages typically are automatically scanned on belts that deposit them directly to designated delivery vans. At local post offices, by contrast, mail carriers often sort packages manually and carry them to their trucks. Shelves to stack packages have been squeezed into tiny delivery trucks. The number of career postal employees has declined nearly 30% over the past seven years, and some mail carriers tend their routes twice a day, once with letters and once with packages.

To accommodate the growth, Mr. Donahoe plans to invest $10 billion over the next four years for improvements, including buying new vehicles, retrofitting old ones and upgrading package-sorting equipment.

It is unclear how the post office will finance growth, as it is chronically short on funds. Because the Postal Service has enough cash on hand for only about two weeks of operations, Mr. Donahoe is counting on Congress to pass a proposed bill that would give the Postal Service more financial flexibility, with options like cutting Saturday letter delivery. The Postal Service reached its $15 billion credit limit with the Treasury Department in 2012.

Under law, the USPS must pay its own way. It generated $67.3 billion in revenue in 2013, $7.5 billion of which came from selling stamps. It doesn’t receive an annual taxpayer subsidy, but is reimbursed by Congress for some services such as delivering mail to the blind and overseas voters.

The USPS has generated about $1 billion in operating profit so far this year, but that is before its approximate $5.5 billion required annual contribution for retiree benefits.

There is little margin for error. If it misjudges its capacity or financial strength, it could end up with too many packages to deliver, compromising mail service. “Without significant structural changes, we will…continue on a path that will lead to insolvency and a government bailout,” the postal service warned this summer.

via For FedEx and UPS, a Cheaper Route: the Post Office – WSJ.

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