Could USPS' Parcel Select rate hikes be aimed at discouraging its use?

A proposal by the U.S. Postal Service (USPS) to raise rates by 7 percent on parcels weighing one pound or less and moving under the quasi-governmental agency's "Parcel Select" service reflects two realities: That the product is popular, and that its popularity stems from the fact that it is priced cheaply.

Along with the rate proposal for lightweight parcels, USPS' board of governors filed a request with the Postal Regulatory Commission, the agency that oversees USPS pricing, for a 4.9-percent increase on all other transactions moving under Parcel Select. Customers using the product induct packages deep into the postal infrastructure for last-mile deliveries to every address, the vast majority of them residences.

By law, USPS must serve every U.S. address. It serves approximately 156 million addresses today. Parcel Select is priced inexpensively because USPS' costs are already sunk into the daily pickups and deliveries that must occur anyway. It is believed that Parcel Select represents the best cost-service value for packages weighing less than 10 pounds.

In addition, USPS proposed a 6-percent increase on its "Commercial Plus" product, in which business-to-business customers get volume discounts if they tender 5,000 first-class packages or 50,000 "Priority Mail" packages per year. Priority Mail is a two- to three-day delivery service. On average, rates on USPS' "shipping services" products, which include Priority Mail and Parcel Select, will rise 3.9 percent in 2018, USPS said Friday. All increases, which are subject to Regulatory Commission approval, would take effect Jan. 18.

In its fiscal 2017 third quarter, which ended June 30, revenue from parcel services rose 19.9 percent from the same period a year ago, USPS said in a quarterly filing with the Securities and Exchange Commission. Volumes increased 14.9 percent. For the nine months ending June 30, parcel revenue climbed 23.5 percent and volume rose 16.1 percent, USPS said. Much of the volume came from e-commerce fulfillment services, USPS said.

An industry source said the magnitude of the Parcel Select rate increases might be USPS' way of deliberately tamping down demand for the product. "The Parcel Select method has grown too much, while other methods have not grown enough," said the source, who requested anonymity.

USPS' shipping services are the fastest-growing segment of its operations. However, they generate relatively thin margins because the handling and processing of parcels is more time- and labor-intensive than that of first class letters, whose processing is heavily automated. Volumes for letters, which are by far USPS' most profitable line, are in secular decline due to the digitization of traditional postal services.