In a story published today, Reuters stated that “United Parcel Service Inc (UPS.N) and FedEx Corp (FDX.N), which have long been undercut by the U.S. Postal Service’s low prices for package delivery, could have much to gain as the agency faces a painful restructuring.” Unfortunately, the article bases its conclusion by assuming that all or a significant share of the Postal Service’s parcel revenue would shift to these companies. In fact, the problems facing the Postal Service creates added risks to both companies business strategies given UPS’s and FedEx’s relationship with the Postal Service as both a customer and supplier.
Reuters Overestimates the size of the Postal Service’s Parcel Revenue.
The Postal Service’s total revenue from both regulated and competitive parcel services in fiscal year 2011 will be less than $14 billion. Reuters’ $20 billion estimate of Postal Service revenue is over 40% more than its actual revenue. So this puts the maximum revenue gain for UPS and FedEx at $14 billion.
Except for light-weight, Parcels FedEx and UPS Charge less than the Postal Service to Commercial Shippers.
The Postal Service has a pricing advantage only for a limited portion of the market for parcels. The Postal Service has a clear advantage on the delivery of parcels weighing less than 1 pound. The advantage diminishes as the weight of the parcel increases and is non-existent for most parcels over 10 pounds shipped by commercial customers.
The Postal Service’s price disadvantage is even greater for B-2-B shipments that do not incur residential delivery surcharges.
The myth that the Postal Service has significant pricing advantages was debunked in two presentations for the Postal Regulatory Commission.
- Postal Service Influence on the Price of Parcel Services
- The Postal Service and Services to Small and Large Businesses
UPS and FedEx Air Contracts Move Postal Service Parcels.
A significant part of this revenue goes to cover air transportation that UPS and FedEx operate for the Postal Service move the Postal Service’s Priority Mail and Express Mail parcels. FedEx generated $1.4 billion and UPS 94 million in 2010. So any gains they get in parcel revenue would be reduced by the loss in air cargo revenue, even if one assumes that Postal Service customers would still be shipping if their shipping costs rose to pay the minimum charges that would be incurred by using FedEx or UPS,
The impact on FedEx would be significant. Postal Service revenue represents around 60% of FedEx Express’s U.S. domestic air freight revenue. Most of this revenue comes from flying mail and parcels during the day when FedEx airplanes would be otherwise parked. This would reduce the utilization of its aircraft possibly putting pressure on FedEx’s margins on its other air freight and Express business.
The impact of losing Postal Service revenue would have a minimal impact on UPS.
The Postal Service is a Significant Supplier to Both FedEx and United Parcel Service.
Both FedEx and United Parcel Service use the Postal Service to deliver parcels. FedEx offers this service through FedEx SmartPost and UPS offers the service through UPS Mail Innovations and UPS SurePost. FedEx reports information on its volume of parcels delivered by the Postal Service every quarter. UPS does not. Therefore only the impact on FedEx would be known. There are other companies that also use the Postal Service for last mile delivery, or for returns, collection. In total, these companies tender less than 1 billion parcels annually to the Postal Service.
In its 2011 fiscal year, FedEx handled 367 million shipments that the Postal Service delivered. In its fiscal year, FedEx will handle between 400 and 450 million parcels that the Postal Service will deliver.
If the Postal Service was no longer delivering parcels, the companies that use the joint FedEx Ground-USPS service would be forced to use FedEx Ground, UPS or a regional carrier for delivery. This would likely increase the last mile delivery charge by between $1 and $4 per shipment over what the Postal Service and FedEx combined charge the shipper. (The increase in cost would depend on existing discounts and the weight of the shipment.)
Higher shipping prices could have a significant impact on the shipping costs charged for many items that weigh less than 5 pounds and could eliminate free shipping or force e-commerce companies to raise prices to cover the increased shipping charges. The biggest impact on the delivered price of an on-line purchase would be for those items that are not only light weight but have a relatively low purchase price.
If one assumes that FedEx could hold on to all of its current shipping volume that use the joint line service to its FedEx Ground and FedEx Home networks, FedEx would at best generate $1 billion in revenue or an increase in total revenue of under 5% and a minimum increase in profits as the increase in price would be only marginally above the cost of delivery.
FedEx would also have a significant logistical problem that could have some short term cost implications. Currently The Postal Service delivers over 28% of all parcels that FedEx Ground picks up from shippers. Having to deliver these parcels, would more than likely require FedEx to manage an increase of nearly 28% in delivery points daily. As FedEx Ground and FedEx Home use contractors to deliver the parcels to the delivery address, FedEx would have to get it contractors to hire a sufficient number of employees to handle a rapid increase in volume. This is unlikely to be easy and could cause some difficulties in meeting service commitments until the workforce could be adjusted.
United Parcel Service is thought of as the second or third largest customer of the Postal Service for its last-mile delivery service. As such, it most likely tenders to the Postal Service between 100 million and 300 million parcels annually. So the additional revenue that United Parcel Service could expect from its joint-line customers is likely well less than $1 billion, and the additional profits would be a small fraction of that amount.
UPS would also have the challenge of dealing with an increase in parcels to be delivered and delivery stops. As UPS uses mostly full-time Teamster drivers to deliver these parcels and most of these parcels are delivered to households, UPS will likely have a higher cost per delivered parcels than FedEx for handling the former joint-line parcels that could make pricing these parcels profitably difficult.
Conclusion and Economic Impact
When reading articles about who will lose and who will profit because of the Postal Service’s problems, this quick post illustrates one more time that the business press, and for that matter many investment analysts do not have a suffucient understanding of the postal and parcel delivery markets to accurately estimate what is likely to happen. Clearly firms that are generally thought of as competitors in the parcel market would likely see a small increase in revenue (i.e. not more than 5%) and an even smaller increase in profits.
These firms would have particular problems because they would then be handle hundreds of millions of parcels that they have priced their competitive offerings well above what the Postal Servie offers to all individual customers and nearly all commercial parcel delivery volume. Handling this volume in their networks would require them to handle hundreds of millions of parcels that are both expensive to deliver and unlikely to generate more than the minimum revenue that they charge a customer.
The biggest losses of losing the Postal Service as a the primary firm providing last mile delivery of light weight parcels would be web-based, and other direct-to-consumer retailers and the consumers that have to pay higher shipping charges to receive their goods.
Economists call the loss to retailers and consumers a dead-weight loss. The impact on consumers would be the equivalent of a sales tax and would reduce both demand for the retailer’s goods (and sales of its suppliers) and the available income of consumers to spend on goods and services. It would seem that putting a sales tax on hundreds of millions of items sold annually