Shipping and Packages results shine for USPS but not bright enough to cure its financial woes

At this point, it fair to say that the strength of the United States Postal Service’s (USPS) Shipping and Package business, especially the parcel component, can be viewed as “the light in the forest” for USPS, amid its constant state of financial issues.

These financial issues are well documented, to be sure, and were highlighted this week in the USPS’s fiscal year 2018 results.

In short, the USPS incurred a $3.9 billion net loss in FY 2018, which was steeper than the FY 2017 $2.7 billion net loss, while not as severe as the $5.5 billion net loss in FY 2016.  FY 2018 operating revenue was up $1 billion to $70.6 billion, which USPS said was largely paced by growth in its Shipping and Packages group.

That growth really cannot be understated, especially when factoring in how the group’s revenue increased by $2 billion, or 10.1%, to $21.5 billion, and offset ongoing revenue declines in First Class and Marketing Mail, which USPS said each continue to see declining volumes. 

Just how much are those volumes declining? Well, First-Class Mail volumes dropped by around 2.1 billion pieces, or 3.6%, with these volumes expected to fall further in the future, due to what the USPS called the “migration to electronic communication and transactional alternatives resulting from technological changes.” In other words, things like e-mail, texting, and other electronic communications channels continue to hinder First-Class Mail.

But fortunately, for the USPS, Shipping Packages Growth remains strong, but it is not nearly enough to push the USPS’s financial needle into the black and out of the red.

The reason for this is the First Class and Marketing Mail collectively account for the majority of USPS operating income at 58.7% for FY 2018, with volume for those services at 91.5% of total USPS volume.

Those are staggering figures to say the least, and as well as USPS’s Shipping and Package group is doing, it still only accounted for around 30% of total FY 2018 revenues and 4% of total volume. What’s more, UPS explained that its Shipping and Packages processing and delivery costs are higher than First-Class costs on a per-piece basis.

When looking at the Shipping and Packages group’s service menu, there is a lot there that directly benefits shippers, including Priority Mail, Priority Mail Express, Parcel Select, Parcel Return, and First-Class Package Services for Retail and also Commercial.

“Our Shipping and Packages business has continued to show solid revenue and volume growth as a result of our successful efforts to compete in shipping services, including ‘last-mile’ e-commerce fulfillment markets and Sunday delivery, as well as end-to-end markets, although the rate of growth is slowing,” USPS said in its Form 10-K filing for FY 2018. “The reasons for the slowing growth rate are: 1) strong competition, 2) growing package density leading some large shippers to shift volume away from the Postal Service, and 3) a narrowing of the shipping cost differential between the Postal Service and its competitors due to several years of above-average price increases.”

USPS added that volume growth for this group has been paced by online shopping that led to a surge in record package volume for the 2016 and 2017 holiday seasons. And to meet consumers needs and accommodate the volume surge, as well as avoid service disruptions during peak holiday seasons, it rolled out Sunday delivery service for some U.S. customers in limited U.S markets in recent years.

Growth within this group is perhaps most apparent for USPS Parcel Services, with its annual FY 2018 growth for this segment, in terms of revenue and volume, being driven by competitive pricing for these services, as well as ongoing e-commerce growth. But this growth is quelled to a degree in that services for its Parcel Select service are pre-sorted by customers and bypass most of the USPS processing network and are some of its lowest-priced services, with a lower contribution margin and do not produce as much revenue per piece as other USPS package services.

“The bright and shining star, it would appear, for the USPS, is the parcel business”,” said Jerry Hempstead, president of Hempstead Consulting. “But when you look at the detail it comes with a downside, with USPS noting  ‘increased transportation expenses of $623 million primarily due to higher package volume, increases in fuel prices and higher highway contract rates.’ So the good news is that the USPS is just killing it with parcels but the contribution to profit is not running in parallel with revenue growth. The devil in the details is also the expanding financial losses. This business model just can't continue. The Postal Service reported a net loss for the year of $3.9 billion, an increase in net loss of $1.2 billion compared to 2017. The controllable loss for the year was $2.0 billion, an increase of $1.1 billion. The Postal Service was unable to make the $6.9 billion in payments that were due to the federal government at the end of fiscal year 2018 to pre-fund pension and health benefits for postal retirees. The debt for the health benefit continues to pile up. Congress needs to make the changes necessary to keep the USPS functioning properly.”

But it is anyone’s guess if, or when, those Congressional changes are actually going to come, if ever. In the meantime, the USPS Shipping and Packages group continues to shine, albeit not nearly bright enough to get it through these trying times.