USPS on horns of dilemma as it weighs parcel rate hikes

On Thursday afternoon, The Washington Post reported that the quasi-governmental agency has begun a review of its final-mile parcel delivery business with an eye toward implementing a significant rate increase. USPS has been raising its last-mile delivery rates for several years, and any dramatic escalation at this time could drive business to rivals FedEx Corp. (NYSE:FDX) and UPS Inc. (NYSE:UPS), and compel Inc., (NASDAQ:AMZN) USPS’ largest shipper, to shift more deliveries into its own network, experts have said.

Should the Postal Regulatory Commission, which by law signs off on USPS’ mail and parcel rate actions, agree to President Donald Trump’s demands that the agency quadruple its delivery prices, about three-quarters of Amazon’s business with USPS would likely disappear, according to Satish Jindel, head of consultancy ShipMatrix. 

A sudden ratcheting of parcel rates could be disastrous for the millions of online merchants that have relied on USPS for the low delivery prices. Many rely on USPS’ low rates to offer free shipping to their end customers. That value proposition could be severely undermined if USPS were forced to send prices sharply higher, analysts have said.

Trump has threatened to block any further coronavirus relief funding for USPS unless parcel rates are raised dramatically. The administration grudgingly agreed to grant a $10 billion loan to USPS in the $2.2 trillion CARES Act signed at the end of March. The terms of the loan are being strictly dictated by Treasury Secretary Stephen N. Mnuchin, himself a hard-liner when it comes to generous USPS relief. Mnuchin headed a White House task force on postal reform which, in its 2018 report, said USPS’ future rests with parcels, not with first-class or business mail.

The agency, whose mail volumes have been crushed during the coronavirus pandemic, has requested $75 billion in the next round of legislative relief. Without a substantial cash infusion, USPS executives warned that the agency will run out of cash by Sept. 30, the end of its fiscal year. House Democrats have proposed a $25 billion infusion, but Senate Republicans have looked askance even at that amount.

In theory, market forces might justify a large increase in parcel rates. Volumes and revenues are up well into the double digits since the pandemic began as more Americans order more goods online. The business is also profitable at this time, said a source close to the USPS package segment. Typically, though, USPS rate increases occur at predetermined time frames and only after judicious deliberations. According to the source, sudden spikes in demand would generally not play a major role in influencing parcel rate actions.

The source acknowledged, however, that parcel volumes have gone “through the roof,” and with the agency seemingly beginning to dance to the White House’s tune, “everything is on the table.”

USPS has made major strides in the parcel business by convincing big shippers to induct parcels deep into its infrastructure for last-mile deliveries. However, it is likely facing an uphill battle to sustain that strength. Amazon has been shifting high-density urban deliveries into its own network, leaving USPS, which by law must serve every U.S. address, with areas that typically have fewer customers. FedEx and UPS are using sophisticated technology to divert parcels normally tendered to USPS to their own drivers and vans. FedEx has said it will shift all of its USPS business onto its own vans by the end of this year.

What’s more, USPS’ Priority Mail service, which is geared toward small to midsize businesses, faces tough competition from FedEx and UPS, both of which have made the SMB market a priority. USPS handles Priority Mail deliveries from start to finish, and the business is typically higher-margin than the last-mile induction segment.

The battle over the fate of the 245-year-old USPS comes amid dramatic changes within the 11-person USPS Board of Governors, nine of whom are appointed by the president and confirmed by the Senate. Vice-Chairman David C. Williams resigned his post on April 30, USPS disclosed the following week. Then, Deputy Postmaster General Ronald Stroman, also a member of the board — though not selected by the president — said he would resign on June 1 after nine years at USPS and more than 40 years in public service.

The departures come as longtime business executive Louis DeJoy takes over as postmaster general on June 15, replacing the retiring Megan Brennan. Among his many business hats, DeJoy was chairman and CEO of logistics firm New Breed Logistics until the company was acquired by XPO Logistics Inc. (NYSE:XPO) in 2014.

Following Stroman’s departure, the USPS board will only have four members confirmed by the Senate, not enough to reach a quorum. However, it can delegate authority to a Temporary Emergency Committee, which allows the four remaining Senate-confirmed governors and the postmaster general to engage in all of the board’s normal decision-making.