Today's Paper Latest stories Obits Traffic Wally Hall Newsletters Weather Puzzles + games
ADVERTISEMENT
ADVERTISEMENT
story.lead_photo.caption Arkansas Democrat-Gazette Earth Illustration - Photo by John Deering

It seems like a straightforward question: Is the U.S. Postal Service making or losing money on its package delivery contract with Amazon--you know, the one President Donald Trump can't stop tweeting about? To answer it, all you need to do is start with the Postal Service's revenues from Amazon, subtract all the expenses associated with delivery the Amazon packages and voila! You either get a positive number (a profit) or a negative one (a loss). Accounting 101.

As with most interesting questions, however, this one turns out to be more complicated than that.

For starters, other than Amazon and the Postal Service, almost nobody, including Trump, knows for sure what the revenue from the contract actually is. Analysts have estimated that Amazon uses the Postal Service for 40 percent of its shipping and that the per-package cost works out to roughly $2, or about half of the standard rate charged by other big shippers.

One reason the Postal Service is willing to give Amazon such a big discount is the huge volume of deliveries that the contract guarantees, a key factor in business with high fixed costs. Another is that Amazon performs a fair amount of the shipping work itself, arranging the packages by ZIP code and carrier route and dropping them off on pallets at one of 20 Postal Service distribution centers across the country. (Amazon founder and CEO Jeff Bezos owns the Washington Post.)

The trickier challenge, however, is figuring out what it actually costs the Postal Service to deliver those pre-sorted packages from the distribution centers

to millions of households and businesses.

If the Postal Service had to set up a new dedicated fleet of trucks and delivery personnel to work exclusively on the Amazon account, that would be a fairly easy number to come up with. And if that were the case, it's a good bet that a contract charging $2 per package would be a money loser.

But that's not what happened. When it sat down to negotiate its deal with Amazon, the Postal Service, in its role as the government-designated postal monopoly, was already required to stop by every home, business and rural post box six days a week, and already had the workforce and infrastructure to do that.

In that context, the additional--or "incremental"--cost of delivering the additional Amazon packages would be much more modest. It might involve a few more trucks here and there, or the cost of buying slightly larger trucks than would otherwise have been needed. Perhaps some additional delivery personnel would be necessary to accommodate the higher volumes Monday through Saturday. And there's the extra overtime for providing the service on Sundays, which Amazon required.

Looked at from the standpoint of incremental revenue (huge) minus these incremental expenses (modest), the Postal Service could very easily have come to the conclusion that, even at $2 a package, the Amazon contract was likely to be highly profitable.

So who is right? Is Amazon getting a sweetheart deal, as President Trump protests, one that it could never have gotten from UPS or FedEx? Or, as the Postal Service contends, does the Amazon contract allow it to reduce its annual operating deficit and put itself on a more solid financial footing?

The answer, it turns out, is that both are right. In a very real sense, the arrangement is a win-win proposition, a great deal for both Amazon and the Postal Service.

We still haven't exactly answered the larger accounting question regarding whether the Postal Service is making or losing money on the Amazon contract. Using short-term incremental accounting--incremental revenue minus incremental costs--the Amazon contract certainly looks profitable. But any enterprise that only uses short-term incremental accounting to price its products would, over the long run, probably find itself out of business. That's because incremental cost accounting ignores the common costs (or what the Postal Service calls "institutional" costs) that can't easily be attributed to any one customer or any one line of business. Regular first-class letter mail, for example, or second-class newspapers and magazines, or third-class catalogs.

Under federal law, the Postal Service must not only calculate the incremental costs and revenues associated with any special contract or any of its lines of business when calculating costs. In setting rates, it must determine the full cost of providing the service by assigning an appropriate share of the common, or institutional, costs.

You could reason, for example, that since the postman was coming by my house to deliver a birthday card from Aunt Millie, it doesn't add much cost for the postman to drop off a catalog from Orvis and a paperback book from Amazon while he is here. But does that mean you should charge Aunt Millie the full cost of sending a postman to my house while charging Orvis and Amazon only the incremental cost of adding their material to Aunt Millie's delivery? Federal law says no, that in setting rates for Orvis and Amazon, the Postal Service should assign to them an appropriate share of the cost of the postman's visit.

In the case of the Postal Service, these common or institutional costs are calculated to be quite high: 45 percent of all costs, according to a primer on postal costing issues put out by the agency's Office of Inspector General. They include everything from pensions to TV advertising to the salary of the Postmaster General, but also a considerable amount of delivery costs; any expenses that do not change as the volume of mail rises or falls.

So how should these common costs be fairly shared and assigned to different contracts or lines of business? Should it be on the basis of the number of items delivered? Or by weight? By size? By the amount of revenue generated? Whatever method is chosen, inevitably it will be arbitrary, involving guesswork, averages, rules of thumb, and plenty of subjective judgment.

With so much money at stake, you won't be surprised to learn that there is a cottage industry of economists, accountants, lawyers and lobbyists in Washington who spend their days fighting over all this, along with the the staffs of the Postal Service and the separate and independent Postal Regulatory Commission.

Big companies that send out a lot of bills and catalogs, for example, are always arguing that their class of mail is assigned a too-high share of common costs, resulting in third-class postal rates that are too high. Then there are Federal Express and UPS, which make elaborate arguments about why too little of the common costs are assigned to package delivery, resulting in rates that are too low, allowing the Postal Service to steal business from them.

Currently the way the Postal Service calculates its package delivery costs is to start with the incremental costs directly attributable with package delivery, then add another 5.5 percent to cover common or institutional costs. Using that method, the Postal Regulatory Commission recently found that special contracts such as Amazon's generated $7 billion in profit for the Postal Service last year.

But a number of analysts, including more than a few hired by UPS and FedEx, have argued that the 5.5 percent common charge is ridiculously low, particularly now that package delivery has grown into a $20 billion a year business for the Postal Service, accounting for 28 percent of its total revenue. These critics argue that the common-cost surcharge on package delivery should be somewhere between 24 and 28 percent. Roughly speaking, that would add $1.50, on average, to the calculated cost for the Postal Service to deliver a package.

So what would happen if President Trump got his way and the Postal Service was required to charge that much for a package? It's a pretty good guess that the Postal Service would lose many of its biggest package delivery customers, including Amazon. And without that revenue, the Postal Service would lose a lot more money than it is already losing. That would force it to dramatically raise rates on Aunt Millie and Orvis, who would respond by mailing fewer birthday cards and catalogs. And in the end, what you would get would be a death spiral that eventually would force Congress to shut down the Postal Service and sell it off to the highest bidder.

For years critics of the Postal Service argued that it should act more like a profit-making business. Now that it is, those same critics are arguing that it should be prevented from using pricing strategies routinely used by profit-making businesses and act more like a government agency.

The reality is that the modern Postal Service has been set up to be a hybrid: part government agency with a mission of universal service, part private enterprise with a mission not to lose money, overseen by an independent regulator whose job is to make sure that the two missions are held in proper balance.

Unfortunately, that is a reality that is way too complicated for our president to understand.

Editorial on 04/15/2018

Print Headline: Amazon delivers via USPS

Sponsor Content

Comments

You must be signed in to post comments
  • 23cal
    April 15, 2018 at 7:09 a.m.

    Very fair and informative article.
    I particularly note: "And in the end, what you would get would be a death spiral that eventually would force Congress to shut down the Postal Service and sell it off to the highest bidder."
    This has been a Republican goal for a very long time. Add to that Trump's desire for vengeance against the Washington Post via attacking Jeff Bezos, and we have a very real threat to mail delivery for the common man.

  • Delta2
    April 15, 2018 at 7:26 a.m.

    Any die-hard Republican Amazon shoppers who might be out there, care to comment?

  • WGT
    April 15, 2018 at 8 a.m.

    Vote.
    .
    The dealings with the Post Office and Amazon, Bezos and his companies dealings with the Press, and Trump,seeing a perceived slight, is a perfect opportunity for The Mendacious Loser to toss out another distraction. Vote.

  • Jfish
    April 15, 2018 at 8:19 a.m.

    I am surprised there is nobody coming on here to argue that the USPS is not a government agency, they will probably be along later. Anyway, the USPS has its problems, but it does need to survive for the good of the public and to keep the private carriers honest. For small stuff and convenience, you cannot beat the USPS, and that is very important for the elderly and poor. For fast delivery with tracking, UPS and FedEx are better in many instances.

  • TimberTopper
    April 15, 2018 at 10:53 a.m.

    I have only one question. Being in business as I am, I still don't really see the need for regular Saturday delivery. Many banks are closed by noon, and even though a person might rush to make a deposit, usually it doesn't post until Monday night. And of regular business mail, if you get a letter that needs a response, or something done, what good is it, as most companies are closed for the weekend. So nothing can be accomplished. So why couldn't that be changed and in doing so would cut down on the expense of the Post Office.

  • Foghorn
    April 15, 2018 at 10:55 a.m.

    If USPS cannot CLEARLY illustrate whether or not the Amazon contract is revenue positive or negative, there is a huge issue. They need to be audited or hire PWC, Deloitte or someone to audit them. If they were a publicly traded company and this were the case, their stock would tank until the CEO & CFO and most of their board were replaced. Maybe the answer is that taxpayers would be better off if Bezos DID take over the USPS.

  • NoUserName
    April 15, 2018 at 12:08 p.m.

    "So why couldn't that be changed and in doing so would cut down on the expense of the Post Office."
    .
    Congress says no. As for Saturday delivery, we've sent packages for Saturday delivery before. Depends on the business.
    .
    "If USPS cannot CLEARLY illustrate whether or not the Amazon contract is revenue positive or negative, there is a huge issue"
    .
    By law, they can't lose money. In addition, they ARE regulated by the Postal Regulatory Commission, an independent agency, and the commission signed off on the deal. This whole Amazon thing is all a red herring.

  • Foghorn
    April 15, 2018 at 1:01 p.m.

    NUN - USPS has posted annual losses for over 10yrs; as high as $16B at one point. They also have pension liabilities in the hundreds of billions. How are they anything but a giant taxpayer suck? Amtrak is another example of an agency that should be privatized.

  • JakeTidmore
    April 15, 2018 at 2:07 p.m.

    doubleblind is truly blind. Some research shows the facts he ignores (like Trump ignored before opening his big fat mouth):
    **
    In fact, Amazon may be saving the post office from financial ruin.

    On April 3, Trump said, "the post office is losing billions of dollars," at U.S. taxpayers' expense.

    It's true that the post office is losing money. It reported a $2.7 billion net loss in 2017.

    But the post office is not funded by U.S. tax dollars.

    And when you look at the revenue breakdown, you can see that shipping and packages is actually one of the few categories that brought in more money than the previous year. While overall revenue fell $1.8 billion, shipping and packages saw a $2.1 billion increase in revenue. Meanwhile, first-class mail revenue was down around $1.8 billion.
    And the post office was in the red long before Amazon became such an online giant. The USPS began to lose money in the early 2000s with the internet's rise. But one of the post office's biggest revenue drainers has nothing to do with shipments, or the Internet.

    It's all about employee benefits.

    Back in 2006, Congress enacted a law that required the USPS to prefund its employee health benefits for the next 75 years. And that has cost the post office billions. In a note to clients, Baird Equity Research said that any large customer, including Amazon, would actually help the post office subsidize its pension costs.
    In October 2013, Amazon struck a five-year deal with the post office. The specific terms of the contract aren't available to the public because the post office's deals with private shippers are considered proprietary. That means there's a decent amount of information we don't know. But one thing we do know is that the post office is making a profit.

    In 2006, Congress ruled that the USPS couldn't set its prices lower than its costs, otherwise it would be able to unfairly charge less than its competitors like UPS and FedEx.
    Every year, an independent agency called the Postal Regulatory Commission makes sure the USPS' deals make economic sense. And year after year, the commission has approved the deal with Amazon. In its 2017 annual report, the USPS even said its shipping and packages business helped the "financial picture of the Postal Service."

    Trump is right that Amazon does technically receive a discount. Amazon ships a lot of packages, so chances are it's utilizing a bulk discount. But that's not specific to Amazon; it's available to other businesses, too.
    **
    Source: Jason Urbi, CNBC Financial Analyst & Reporter
    ***
    Bottom line: Trump is going after WaPO & its owner. This is a politically driven attack that is unworthy of ANY president, much less Donnie the Chump. His sycophants simply are regurgitating what Donnie vomits on them.

  • RBBrittain
    April 16, 2018 at 8:16 a.m.

    Amazon actually does more than this article gives it credit for: Instead of delivering to "one of 20 Postal Service distribution centers across the country" (probably Memphis for us), in many places where USPS does last-mile delivery for Amazon (including Arkansas) the pallets are delivered directly to your local post office Monday thru Saturday just before your carrier goes out for delivery. (Sunday deliveries are done more centrally, but in this area still from a USPS facility in Little Rock. Amazon also uses non-USPS last-mile couriers where available, including presumably in DC.) But even that isn't exclusive to Amazon; UPS, FedEx & DHL all have special subsidiaries (known as "zone-skipping consolidators" because they bypass the USPS "zone" system for packages) which pick up packages from shippers nationwide and deliver them to your post office for last-mile delivery. The only difference between them & Amazon is that Amazon is big enough to arrange for it all itself, so they can offer 2-day and even 1-day delivery this way.

ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT