At Post Office, Amazon Isn’t the Only Big Shipper Getting Discounts

Mony
24
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A Postal Service worker delivering packages in Minneapolis last December.

President

Donald Trump’s

ordered review of the U.S. Postal Service’s finances will likely show that

Amazon.com
Inc.


AMZN -1.22%

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 of delivery.

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 person said.

Mr. Trump late Thursday ordered a task force to review the quasigovernmental agency’s operations, including how it competes on package deliveries.

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 immediate comment.

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, the president’s advisers and people close to the White House say, stems largely from his dislike of coverage of his administration by the Washington Post, which Amazon Chief Executive

Jeff Bezos

owns separately.

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. 30.

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 say.

“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 higher rates.

Write to Paul Ziobro at Paul.Ziobro@wsj.com and Laura Stevens at laura.stevens@wsj.com

Appeared in the April 14, 2018, print edition as ‘Post Office Delivers Discounts Widely.’

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