Postal Service bets on higher stamp prices to fix woes
Buffeted by threats from Amazon drones to deliveries by golf cart, the beleaguered U.S. Postal Service is counting on a different strategy to stay competitive: more freedom to raise prices on mailing letters.
After a 10-year review, the Postal Regulatory Commission appears likely to move to grant the Postal Service power to increase stamp costs beyond the rate of inflation, marking the biggest change in its pricing system in nearly a half-century. A decision is expected next month.
The commission, which oversees postal rates, might limit how high stamp prices could go. But the price of a first-class stamp, now 49 cents, could jump, though it’s not known how much.
The plan has received praise from financial analysts but raised the ire of the mail-order industry, which could pay millions more for sending items like prescription drugs and magazines and be forced to pass the costs onto consumers.
The Postal Service is trying to stay financially afloat as it seeks to invest billions in new delivery trucks to get packages more nimbly to American homes.
An independent agency of government, the Postal Service has lost money for 10 consecutive years. While online shopping has led to years of double-digit growth in its package-delivery business, it hasn’t offset declines in lucrative first-class mail. Overall mail volume, which makes up more than two-thirds of postal revenue, dropped 27 percent over the last decade as people rely more on email and online bill payments.
Congress’ failure to address its underlying financial woes, such as onerous requirements to pre-fund retiree health benefits, has left the commission more likely to embrace the Postal Service’s request for complete freedom to set prices. The Postal Service has already ruled out closing post offices and ending Saturday delivery to reduce costs.
“We are calling for action from Congress, but we’ll do what we have to, based on the reality of what is,” Robert Taub, the Republican chairman of the regulatory commission, said in a telephone interview.
He declined to comment on the upcoming decision, but noted the Postal Service doesn’t make enough money to cover its mandated expenses and invest for the future. Taub stressed a need to fix the balance sheet at the 242-year-old Postal Service, which generates $71 billion in annual revenue.
The decision comes as internet sales continue to flourish, led by Amazon, spurring consumer demand for ever-faster and cheaper delivery. Forty percent of the e-commerce giant’s packages are delivered by the Postal Service, compared to 20 to 25 percent by United Parcel Service and 15 to 20 percent for FedEx, thanks to lower package delivery rates it can offer by tapping into a network that already delivers to every U.S. household six days a week.
Still, growing competition is challenging postal dominance in the “last mile” portion of delivery, the final and usually most expensive stretch of a package’s journey from a retailer’s warehouse to a customer’s door. In a bid to control more of its deliveries, Amazon has been testing the use of drones and launched Amazon Flex, a network of contract drivers similar to courier services offered by Uber. UPS has been trying deliveries via golf carts.
The post office also takes hits for perceived bad service, including Reddit threads devoted to consumer complaints about lackluster home delivery attempts. One thread on Amazon’s site has 1,000 posts under the title, “Amazon, Quit shipping via USPS and btw, you suck.”
“Price increases are long overdue,” said David G. Ross, a shipping analyst at Stifel Financial Corp., noting that first-class stamp prices in countries like Germany cost the equivalent of 80 cents or more. He said the Postal Service needs “to make the investment and deliver the packages so that Amazon doesn’t have to do it themselves.”
Shipping rival UPS takes a different view, branding loosened stamp rates as anticompetitive, by having stamps essentially subsidize package deliveries.
If the post office could freely raise stamp prices, UPS wrote the commission in March, mailers would “end up paying for investments and expenses they do not benefit from, while the Postal Service leverages those investments to undercut efficient private-sector rivals in competitive markets.”
The periodicals industry argues the Postal Service needs more pricing oversight, since it holds a monopoly in delivering letter-sized mail.
A big driver of the Postal Service’s losses has been a requirement under a 2006 law that it prefund 75 years’ worth of retiree health benefits. Neither the government nor private companies are required to do that.
The Postal Service, which reached its debt limit of $15 billion and runs perilously low in cash every October, has avoided bankruptcy by defaulting on billions of dollars in the health prepayments. It also has postponed much-needed upgrades to information technology systems.
Still, the Postal Service hopes to replace its vehicles, many 30 years old and wearing down. A purchase order worth up to $6 billion would cover up to 140,000 trucks. The tall right-hand drive vehicles would seek to accommodate slim letters and oversized packages alike, more akin to fuel-efficient UPS trucks.
Postmaster General Megan Brennan hasn’t made final commitments, citing in part financial uncertainties.
Bipartisan legislation passed by a House oversight committee would ease much of the Postal Service’s problems caused by the 2006 health benefits law, requiring retirees to enroll in Medicare. But it faces uncertain prospects.
Ravi Shanker, an equity analyst at Morgan Stanley, said even if regulators lift the cap on stamp prices, legislation is still needed to address health payments. “Given the size of the balance sheet hole, the Postal Service would have to raise prices astronomically to fix it,” he said.
Ross, the shipping analyst, said the Postal Service would have to show restraint in raising rates or risk losing price-sensitive customers.
He said lawmakers “may feel if you don’t give the Postal Service limits, they can just raise prices to $3 a stamp and people will go nuts.”
But overly high rates, Ross said, would only “accelerate the demise of first-class mail.”
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