Why Parcels Can’t Save the Postal Service
It’s mid-November—the air has gotten colder and the leaves are dropping faster with each blustery day. The holiday shopping season has begun, moving from Veteran’s Day specials to Black Friday blowouts. For most households, much of this shopping will take place online, with products ferried to our doors by a combination of private shippers and the United States Postal Service (USPS). The USPS is banking on it. The arm’s-length government corporation is required by law to keep its books balanced as profits from traditional mail decrease each year. It’s carried parcels for a century, so expanding that business as it booms seems like a natural reaction. But expanding in the highly competitive parcel market is different from reaping the profits of a postal monopoly. New profits are no sure thing, and the USPS faces real, intentionally erected barriers to an expanded share of e-commerce deliveries.
There are three main barriers preventing the USPS from replacing declining mail revenue with increased parcel revenue. First, the USPS faces competition in the parcel space that it does not face in the letter mail market. Second, should the USPS hope to scale up in the parcel market, it will need to invest in improved facilities and equipment—but it does not have profits to invest, and changing facilities is politically toxic. Third, changing parcel market share causes more USPS costs to be attributed to parcels, limiting growth of the USPS’ e-commerce market share.
Postal products are divided into two broad categories: monopoly products (primarily letter mail) and competitive products (packages, express mail, mailing supplies, etc.). To prevent the USPS from misusing the profits from its monopoly products to subsidize products offered by private firms, postal law requires all products be profitable on an individual basis. While parcels are usually profitable, it’s far from certain that a postal service carrying, say, twice as many packages could do so without running into constraints that would erode its competitive edge. Much of the argument for this expansion rests on the idea that with workforce size held equal and letter carriers moving less mail, excess capacity could productively be put to use moving packages with little new overhead or degradation of service. Recent signs imply this is not the case. Indeed, in a recent quarter, the USPS saw package volumes decline for the first time since the ascendance of e-commerce parcels nine years ago.
The same parcel profits that cause postal policymakers to salivate over an easy USPS finance fix draw new competition and investment from private parcel carriers that specialize in the e-commerce market. To the USPS, parcels can only ever be a secondary market behind letter mail. Scale is important. This December, the USPS expects to deliver about 800 million packages. It earns about $3.50 in revenue per package, for a total holiday parcel revenue of about $2.8 billion at zero marginal cost. In the 2018 fiscal year, the USPS lost nearly $4 billion, with larger losses expected this year. This fiscal year, the USPS’ net loss was $5.9 billion, a figure that includes the 2018 holiday peak. Making up the difference would require substantial growth, both of the market as a whole and of the USPS’ ability to handle the increase in parcels
Updating existing post offices and mail sorting centers to handle packages as efficiently as letters is by no means cheap, simple or politically popular. The agency recently signed a contract—for an undisclosed sum—for a new artificial intelligence system to improve package sorting. To aid in parcel tracking, it just ordered 300,000 new handheld scanners at a cost of $570 million, or $1,900 each.
These investments are just the tip of the iceberg when it comes to the cost of improving package delivery. The agency still needs to decide on the design of its next fleet of mail trucks, which must be larger and better adapted to a mail stream comprised of less mail and more packages. This once-in-a-generation investment will cost more than $6 billion before any delay or overrun costs. This time last year, the USPS had about $24 billion in assets, including $10 billion in cash and $14 billion in real estate, vehicles and other equipment. Unless its financial picture improves, it’s unlikely that the USPS will be able to afford any new investments in its parcel handling ability—not to mention the changes necessary at postal facilities, such as moving small post offices to larger buildings that can handle larger packages.
Even if the USPS finds the money to make investments in new vehicles and facilities, it would still not be able to realize substantial profits from parcel service. As part of the USPS’ mandate that each individual product cover its costs, the Postal Regulatory Commission must set rules to determine how shared overhead costs are allocated to different product lines.
These rules are contentious. If too small a percentage is assigned to a competitive product like packages, the government shipper would be making an accounting profit on a product that’s losing money, harming those who offer the service in the private market with cross-subsidies from the monopoly postal business. If too large a percentage is assigned, the USPS could be forced to discontinue products that are paying their fair share of overhead and generating value for the institution. The negotiations over the USPS parcel overhead rule took nearly a decade, with the eventual compromise linking the amount of overhead assigned to USPS parcel business to its share of the overall U.S. parcel business. This mechanism is a sort of automatic stabilizer for USPS parcel pricing, with any increase in market share causing the share of USPS overhead attributed to parcels to increase and vice versa. In some ways, this particular mechanism suits the USPS. Should overhead associated with the parcel business grow faster than other overhead costs, the price increase would only show up in parcels’ profitability metrics if the higher costs make for more market share. But the downside of this for the government mail carrier is that if it successfully wins more of the parcel market from private shippers, parcels would be assigned more of the agency’s overhead costs. This would undercut any temporary cost advantage the USPS achieves in due time, such that the agency’s reliance on parcels to pay for joint costs cannot rise to cross-subsidize other postal services unchecked.
Expanding into competitive markets means jostling with private shippers that specialize in packages and don’t require massive cross-subsidies from monopoly products. Even if they could win a head-to-head matchup, the USPS lacks the resources to sustain its advantage. And even if it had the money to facilitate it, regulations prevent the USPS from using its government-granted advantage in monopoly products to cover parcel service overhead. Thus, parcels aren’t a sustainable funding mechanism to prop-up a money-losing government mail carrier under existing postal law. Policymakers looking for a quick fix to postal finances will need to look for other options.
