At Post Office, Amazon Isn't the Only Big Shipper Getting Discounts
By Paul Ziobro and Laura Stevens
President Donald Trump's ordered review of the U.S. Postal
Service's finances will likely show that Amazon.com Inc. isn't the
only one getting a good deal on package deliveries.
Aside from Amazon, two of the largest users of the agency's
parcel-delivery business are FedEx Corp. and United Parcel Service
Inc. All three receive comparable rates on a service that lets them
drop truckloads of packages at a local post office for the last leg
Amazon, FedEx and UPS get about 5% to 10% off published rates
for the service, known as Parcel Select, according to a person
familiar with the matter. "There's no competitive advantage that
Amazon has over UPS or FedEx using the exact same service," this
Mr. Trump late Thursday ordered a task force to review the
quasigovernmental agency's operations, including how it competes on
While UPS and FedEx benefit from similar rates, the companies
have long argued that the Postal Service should charge more, in
part because it would drive more volume to their own networks. It
would also allow UPS and FedEx to raise their own rates, given that
the Postal Service's rates are considered a floor in the
parcel-delivery market. UPS declined to comment and FedEx had no
The Postal Service said Friday: "As we have repeatedly stressed,
these business model problems are serious, but solvable." The
agency has been lobbying Congress to overhaul its pension
obligations and has also called on its regulator to allow it more
freedom to raise prices.
The Postal Service's regulator audits all service contracts to
ensure they are profitable. Amazon is the biggest user of the Post
Office's so-called last-mile parcel service, putting a greater
strain on a system that was designed to carry envelopes, not boxes.
Amazon also gets volume-based discounts, analysts say.
The Postal Service delivers about half of Amazon's packages
every day, according to analyst estimates. Last year, Amazon
shipped an estimated 1.22 billion packages in the U.S., according
to MWPVL International, a supply-chain consultancy.
The executive order comes after weeks of tweets and other
broadsides from Mr. Trump attacking Amazon.com and its relationship
with the Postal Service, where he argued the online giant should be
paying more for deliveries and that the arrangement is costing the
agency billions of dollars. Mr. Trump's hostility toward Amazon,
one of the most valuable corporations in the world, stems largely
from his dislike of coverage of his administration by the
Washington Post, which Amazon Chief Executive Jeff Bezos owns
Claims that Amazon is hurting the Postal Service have been
refuted by reviews from the agency's regulator and others. Former
postmaster general Patrick Donahoe, who ran the agency from late
2010 until early 2015, told UBS analysts last week that the Amazon
contract was profitable for the agency.
Spokespeople for the Postal Service and Amazon declined to
comment on their relationship.
The Postal Service has relied on a growing parcel-delivery
business to offset the secular decline of first-class mail volume,
down more than 43% from its peak in 2001. But the agency is losing
money and weighed down by pension costs. It reported a $2.7 billion
net loss on revenue of $69.6 billion in the year ended Sept.
Amazon, meanwhile, has used the vast reach of the postal network
to help create one of the most valuable U.S. corporations. Last
year, the company's North American revenue jumped 33% to $106.1
billion, excluding its web-services business.
Amazon primarily uses Parcel Select, which requires a shipper to
sort its packages by ZIP Code and postal route, and drop off the
parcels at the closest post office for delivery. Letter carriers
bring the boxes to recipients' doors.
Parcel Select brought in $1.83 billion in revenue for the Postal
Service in the fourth quarter, or an average of $2.09 per package.
That compares with an average ground price per package of $8.19 at
UPS and $8.64 at FedEx, where the carriers typically take the
package the full distance.
At the heart of the question over the rates is how the Postal
Service allocates costs. Because a letter carrier is already
driving to every address on the route, it's unclear exactly how
much cost the agency should be attributing to each parcel, analysts
"Pricing is an art and a science," said Ivan Hofmann, an
industry consultant and former FedEx executive. "The science is the
numbers. The art is, you have to understand how it impacts your
network, and you have to make value judgments as far as how much
it's costing you."
The Postal Service's regulator requires that the contracts cover
direct expenses and an appropriate share of "institutional costs,"
or expenses that can't be linked to a specific product. Annual
tests have found Parcel Select more than meets that threshold. UPS
argues far more of the Postal Service's overall costs should be
borne by the parcel side of its business, a change that could force
Write to Paul Ziobro at Paul.Ziobro@wsj.com and Laura Stevens at
(END) Dow Jones Newswires
April 13, 2018 12:47 ET (16:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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