Why The Post Office Might Choose To Continue Delivering Amazon Packages While It Loses Money On The Contract

If you support the United States Postal Service, you must have experienced mixed feelings about last week’s fiscal announcement. On the one hand, package volume increased significantly over last year’s comparative levels. But on the other hand, financial losses worsened significantly.

Huh? How can an organization serve more customers and yet suffer more losses? There are usually two possible reasons why such a mixed outcome is possible. The first is that the entity may be losing money on each customer served, and thus more volume generates worse financial results. And the second is that the entity may be facing a problem that is unrelated to customer volume, and that is suddenly generating losses.

Evidently, President Trump has not taken a position on this question, having simply tweeted that “Only fools, or worse, are saying that our money losing Post Office makes money with Amazon. THEY LOSE A FORTUNE, and this will be changed.

But the President has not considered the possibility that the Post Office might choose to continue its relationship with Amazon while it continues to incur losses on the contract. Why? Imagine, for the sake of argument, that you decide to pay freelance drivers to deliver packages in competition with the Postal Service.

Let’s assume that your only significant operating payments are $100 per day to rent a small office, and $10 per delivery for each service rendered. You charge and collect $15 per delivery, and thus earn a gross profit of $5 per delivery before paying the rent. You would thus need to deliver 20 packages per day to pay the rent and break even.

That arithmetic is not difficult to follow, is it? But now let’s assume that Amazon offers to guarantee you $600 per day to deliver 50 packages. You might estimate that you’re charging your customer $12 per package. On a per-delivery basis, that’s a loss of $3 in comparison to your normal $15 price!

But now look at the situation in total. You’ll earn $600 from Amazon alone. You’ll pay $100 in rent and $500 (i.e. 50 packages @ $10) for deliveries, yielding total payments of $600. You’ll actually enjoy a guarantee of breaking even on the Amazon contract alone! And you’ll start to earn a profit on the very first package that you deliver for any other party.

So when you read that the Postal Service is losing money on its Amazon deliveries, it may indeed be true. And yet, perhaps paradoxically, the government agency might choose to continue serving Amazon while it loses money on the contract.

Why? Because, as we can see from our example, it might be reasonable to do so.

Retired Postal Workers vs. Homer J. Simpson

Four weeks ago, the current and future retirees of the United States Postal Service received troubling news. For the first time in its history, the Service did not possess the financial resources to make a required $5.5 billion payment into its retiree health care benefits fund. Given the billions of dollars of losses that are incurred by the Service each year, many commentators asserted that Post Office employees and retirees have reason to be concerned about the security of their future benefits.

But why is the Post Office incurring such significant losses? According to its spokespersons, its dismal financial condition is attributable to a variety of Congressional mandates. Unlike Fedex, UPS, and its other private sector competitors, the Post Office is required by law to deliver first class mail to every address in the United States six days a week. It is also required to maintain a consumer branch presence in every mail district in the nation.

Last week, though, the public learned of another reason for the losses that are being reported by the Service. Some of those losses, apparently, are directly attributable to the character of Homer J. Simpson and his animated family!

A Commemorative Flop

The Simpsons connection can be attributed to the Post Office’s 2009 decision to memorialize the television show with a commemorative series of five stamps. In order to recognize the show’s twentieth anniversary on the Fox television network, each of the show’s five major characters — Homer, Marge, Bart, Lisa, and baby Maggie — was featured on a 44 cent stamp.

The Service decided to print a billion stamps to meet the estimated demand of Simpsons fans around the world. But fewer than one third of the printed stamps were purchased by the public, and when the price of a first class letter increased by a single penny to 45 cents, the stamps became obsolete for letter-mailing purposes as well.

Ironically, two years earlier in 2007, the Post Office began distributing “Forever Stamps” that never become obsolete; under their terms of purchase, they can be utilized to mail any first class letter, regardless of the price that is in place at the time of mailing. But because the Simpsons stamps were sold with a fixed financial value of 44 cents, the Service must now write off its $1.2 million cost of printing the unwanted and unsold merchandise.

A Speculative Strategy

In comparison to the $5.5 billion missed health care retiree payment, a write-off of $1.2 million might appear to be a relative drop in the bucket. Nevertheless, the Simpsons stamp “episode” raises troubling questions about the speculative nature of the use of commemorative stamp printings by the Post Office to generate operating revenue.

For instance, do Post Office professionals possess the requisite consumer marketing expertise to predict public demand for such pop culture icons in an accurate manner? And if not, should the Service authorize such huge printing orders when demand for commemorative stamps is so uncertain in nature?

To what extent should the Post Office base its revenue generation strategy on such esoteric products as commemorative Simpsons stamps? Should it, perhaps, focus instead on developing new products and services that can be sold more broadly across the entire spectrum of the American public?

In addition, postage stamps have always been perceived around the world as tiny billboards of images that promote national societies and cultures. Is it wise for the U.S. Postal Service to rely on the images of Homer Simpson and his family members to promote the national image of the United States of America?

A Matter Of Perspective

Interestingly, the issue of the $5.5 billion missed retiree health care funding payment raises important questions about the operational policies of the Service as well. Ironically, at the present time, the retiree benefit programs of the Post Office are significantly more fully funded than the programs of most other organizations.

The pension plan of the Post Office, for instance, is more than 100% funded at a time when the mammoth California Public Employees’ Retirement System (CalPERS) and other entities are struggling to attain 80% levels of funding. And most organizations do not fund retiree health care programs at all, preferring to adopt “pay as you go” strategies that expose retirees to the possibility of benefit reductions in the future.

American firms were first required to accrue health care retirement benefit liabilities with the issuance of the Statement of Financial Accounting Standards # 106 in 1990. However, there have never been any legal requirements that firms establish funding mechanisms for health care programs in the same manner as they are required to do for pension programs.

Despite the recent missed $5.5 billion payment, the Post Office maintains a fund balance of over $40 billion to finance future retiree health care expenses. So should current and future Service retirees be worried about the security of their future benefits? The answer to this question, apparently, is a matter of perspective.

Which Agency Survives: Amtrak or the Postal Service?

One traces its lineage to a golden spike, driven into a rail in 1869, that linked the eastern and western coastlines of the United States. The other was formed in 1775 and was explicitly institutionalized by the United States Constitution.

To which organizations are we referring? To the Amtrak railroad service and the United States Postal Service, government agencies that have existed for decades and even centuries. Each is deeply ingrained in the American way of life, and each now faces a similar existential threat.

A more detailed analysis, though, reveals a significant difference between the competitive positions of the two entities. And because of this difference, it is indeed possible that one of the organizations may long outlive the other.

Antique Technologies

Amtrak is America’s public railroad transportation service, operating from northern New England to southern California. Although the service was officially formed during the Nixon Administration in the early 1970s, the network considers itself the heir to the nation’s earliest transcontinental railroad service, an entity that was born with the driving of a ceremonial golden spike in Utah that linked the Central and Union Pacific rail lines together.

A century earlier, the Postal Service was formed shortly before the thirteen colonies declared their independence from Great Britain in 1776. Its first Postmaster General, in fact, was Benjamin Franklin, who had previously halved service delivery times between Philadelphia and Boston by modernizing and standardizing mail shipment procedures.

Each of these services, though, was eventually threatened by more efficient emerging technologies. The rail system lost large numbers of passengers to automobiles, buses, trucks, and airplanes after the Second World War. And the postal system continues to lose significant business volume to internet-based email, merchandise purchasing, bill payment, and coupon distribution services.

In other words, industrial advances have forced each service into a position of technological obsolescence. But does this mean that each service is equally likely to fade away after generations of public service?

Competitive Positions

Although the services are each facing similar threats, they differ markedly in terms of their strategic market positions. Specifically, each service confronts a different mix of competitors, with differing abilities to attract customers with more efficient levels of service.

Amtrak, for instance, benefits from the competitive reality that the nation’s highway grid and air space are saturated with traffic. Such congestion has helped make Amtrak’s northeastern Acela service competitive (in terms of both time and cost) with air and land vehicle alternatives.

On the other hand, as the Post Office’s first class mail business continues to gravitate to the internet, and as its package delivery business continues to migrate to for-profit firms like Federal Express and UPS, the federal agency has been forced to face the prospect that its entire line of business may be vulnerable to poaching by rivals. Of course, no other firm would be interested in poaching its grossly unprofitable rural delivery system, which it plans to streamline in the near future.

Thus, based on its competitive strengths, Amtrak appears to be much better positioned to survive than its sister agency the Postal Service. But do their respective financial positions support this assertion as well?

Government Subsidies

Regrettably for Amtrak, the financial positions of the two government agencies are mirror opposites of their strategic positions. In other words, although Amtrak is the stronger entity from a competitive perspective, the Post Office is the stronger one from a financial perspective.

How can that be true when the Post Office has relentlessly increased the price of a first class stamp from 37 cents as recently as January 2006 to 45 cents in January 2012? In essence, its ability to raise its prices has actually helped bring it the necessary revenue to phase out government subsidiaries. And because Congress is now proposing to allow it to implement various cost efficiencies, the Post Office has been able to manage (and subsidize) its costs effectively.

On the other hand, United States Congressmen who fear watching their home districts lose access to the national rail transportation system are loathe to permit Amtrak to reduce, eliminate, or spin off rail lines. As a result, Amtrak is unable to engage in the types of restructuring activities that can improve its financial position, and thus it has needed over $40 billion in public subsidies in order to remain solvent. Since it initiated service under the Amtrak moniker, the agency has never broken even or earned an annual profit.

Nevertheless, the growing public need for a national rail service recently led Amtrak to announce an all-time record 30 million tickets sold last year, at the same time as the Postal Service declared that it is hiring a former Obama Administration automobile “czar” to study its restructuring options. As long as the railroad is strategically positioned to serve a growing public need, it may thus survive long after Ben Franklin’s postal system closes down, despite its financial shortcomings.