The Truth About the Postal Service's 'Fiscal Cliff'
And why the private sector needs the USPS to survive.
Indeed, FedEx's latest 10-K stated, "[T]he USPS has informed us that it intends to solicit proposals for the provision of air transportation services currently provided by FedEx Express upon the expiration of the current agreement in September 2013."
Accordingly, upon the expiration of the current agreement, the transportation services we provide to the USPS could be transitioned, in whole or in part, to another provider. This would have a negative impact on our asset utilization and profitability. Moreover, to the extent that any such services are retained by us, the terms and conditions of the new arrangement may be less favorable than those currently in place.Dr. Gene Del Polito, President of the Association for Postal Commerce in Washington, DC, told me that UPS will be bidding on the contract, as the revenue is obviously substantial. However, while the Postal Service relies on FedEx and UPS to achieve efficiencies in its operations, FedEx and UPS also rely on the Postal Service for similar benefits of their own.
"For FedEx and UPS, the costs are lower to deliver in urban areas, and higher in rural ones," Del Polito said. "For the Postal Service, that cost structure is the exact opposite. So FedEx and UPS use the Postal Service for 'last-mile' delivery in many areas where it would cost them too much to deliver that mail -- they prepare it for re-entry via the Postal Service which then walks it out for final delivery." (To put a number on this, Alan Robinson determined in 2011 that "30.4% of FedEx Ground shipments are delivered by the United States Postal Service.")
Del Polito explained that "there was a time when you would hear concerns from FedEx and UPS that the Postal Service was unfairly competing against them, but now you will hear they are 'partners' because they have figured out how to get good value out of a set-up that makes sense for them."
The arrangement does make sense for FedEx and UPS, from an operational and economic standpoint. Interestingly, a purely competitive structure wouldn't work, as FedEx and UPS don't want the responsibilities that they would be saddled with if the playing field were perfectly level.
Here's Lauren T. Andrews, writing in the William & Mary Business Law Review:
For example, the USPS is charged by governmental decree with providing universal service to all parts of the country, even in areas that may not be profitable. Private companies, on the other hand, can essentially ignore and avoid areas that may not be profitable, areas where they may otherwise be forced to serve if the postal monopolies were lifted and regulations put in place. Furthermore, companies such as UPS and FedEx would likely have no interest in the delivery of "letters," primarily because it is not as profitable as larger parcel and package delivery. In fact, a UPS Spokesman, Norman Black, stated, "We believe that the government plays a role in terms of ensuring that every mailbox is reached every day …. That is not a responsibility that UPS would want."And, not only would they not want it, David Hendel maintains they couldn't do it.
"Neither FedEx or UPS are even in the same league as the Postal Service, which goes to 100 million addresses every day," he told me. "What they do, they do well. But they don't do what the Postal Service does."
Follow Justin Rohrlich on Twitter: @chickenalaking
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter