USPS says higher labor, freight expenses cut into parcel margins in fiscal second quarter

The U.S. Postal Service (USPS) is discovering one of the downsides of the multi-year growth in its parcel business.

USPS reported today that shipping and package volume in its fiscal second quarter, which ended March 31, rose 5 percent to 1.4 billion pieces. Operating revenue climbed 9 percent to $5.15 billion, equal to about 30 percent of the post office's total quarterly operating revenue of $17.5 billion. At the same time, however, USPS incurred a $364 million increase in compensation expenses, due in part to additional man-hours needed to support the package business, which is more labor-intensive than its core business of first-class mail processing.

USPS also reported a $155 million increase in transportation costs in the quarter as it, like other truck users, felt the pinch of rising freight costs and higher diesel fuel prices. The first calendar quarter of 2018 saw one of the sharpest escalations in freight rates in years.

First-class mail is USPS' most profitable service line because of the quasi-governmental agency's efficiencies in letter processing and deliveries. However, mail revenue and volumes continue to decline because of a secular conversion to digital formats. First-class mail volume fell by 2.1 billion pieces over the same period in fiscal 2017. USPS' parcel business, despite its rapid growth, will never achieve margins comparable to first-class or marketing mail because of the higher costs associated with parcel shipping and handling.

All told, USPS reported a quarterly net loss of $1.3 billion, compared to a net loss of $562 million in the year-earlier quarter. The so-called controllable loss, or the deficit not out of USPS' control, was $656 million, compared to "controllable" income of $12 million for the same quarter last year. USPS is required by law to pre-fund the cost of all future retiree health benefits, which is a multi-billion-dollar annual obligation.

In response to a question on how it can get ahead of rising parcel costs as the segment continues to grow, Postmaster General and CEO Megan J. Brennan said USPS will look at dynamic routing options for parcel traffic, creating more "high-density" delivery routes, and gaining more flexibility in staffing to support the parcel business. Brennan sidestepped a query on whether USPS has the latitude to raise parcel rates to offset increased costs, saying it relies on input from a range of voices inside and outside USPS to determine the rates that the marketplace will tolerate.

An industry executive who has worked with USPS said the agency wouldn't have much room to raise parcel prices unless it "improves the value" of its offerings. The executive, who asked not to be identified, did not get into detail. In April 2017, Christian Wetherbee, an analyst for the bank Citigroup Inc., said USPS would need to hike parcel rates by 50 percent to break even on the rising cost of its offerings.

Last month, President Trump created a task force headed by Treasury Secretary Steven T. Mnuchin to examine all aspects of USPS' operations. The president's executive order came amid a number of Twitter posts by the president charging that USPS has significantly undercharged Seattle-based e-tailer Amazon.com Inc., its largest parcel user, to the point where USPS loses $1.50 on each parcel it ships for Amazon. That claim is widely believed to be untrue. Bezos, who personally owns The Washington Post, has been in Trump's crosshairs over The Post's coverage of the administration.

USPS has long chafed at the pricing restrictions imposed on its so-called market-dominant products by the Postal Regulatory Commission, which by law must approve all rate changes for products such as first-class mail. Brennan said today that she would like to see all price caps eliminated, arguing that USPS faces competitive alternatives to "every product we offer." The Regulatory Commission is in the midst of its first review of the ratemaking process since it was mandated by Congress in 2006 when passed postal-reform legislation.

Brennan said she would not support eliminating the USPS' monopoly on first-class mail, known as the "Private Express Statutes," in exchange for legislative relief on price caps. The monopoly on first-class letters provides USPS with the revenue needed to meet its statutory obligation to serve every U.S. address, she said.