The U.S. Postal Service on Tuesday unveiled its long-awaited 10-year reorganization plan that includes an expansion of parcel delivery services that have become the tail that wags the postal dog.
The parcel expansion, which has been branded USPS Connect, is projected to generate $24 billion in new net revenue by 2030, postal officials said. The agency will broaden its weekend parcel-delivery services, especially on Sundays. Currently, its Sunday offerings are limited to deliveries for Amazon.com Inc. (NASDAQ:AMZN) and the Postal Service’s Priority Mail Express product, which was once known as Express Mail and is its fastest and highest-priced delivery offering.
Under the reorganization, the Postal Service will offer same-day, next-day and two- to three-day deliveries covering its four package-delivery services: Priority Mail Express, Priority Mail, First-Class Package Services for deliveries weighing less than 1 pound and Parcel Select, in which the Postal Service collects packages dropped off at post offices by high-volume shippers for final-mile deliveries to residences. By law, the Postal Service must serve every address in the U.S.
Delivering merchandise the same day it is ordered will pose an interesting challenge, but one the Postal Service believes it can execute because most parcel deliveries transit just 150 miles or even shorter distances.
The Postal Service vowed in its plan to meet or exceed 95% on-time delivery reliability for all parcels and mail. As part of that pledge, the agency said Tuesday it will propose to the Postal Regulatory Commission (PRC), a separate agency that regulates the Postal Service’s so-called market dominant products, to divert First-Class Package Services shipments to ground transportation from air deliveries, which Postmaster General Louis DeJoy has repeatedly criticized as unreliable. First-Class Package is classified as a market-dominant product and subject to PRC scrutiny. Currently, deliveries are performed by commercial airlines and FedEx Corp. (NYSE:FDX), the agency’s primary air transportation vendor.
The Postal Service will also roll out an IT platform, Informed Delivery, that will allow users to change parcel delivery times and locations and instruct mail carriers where to leave or pick up parcels. UPS Inc. (NYSE:UPS) and FedEx, both of which compete with the Postal Service, and in UPS’ case is a major postal customer for its final-mile service, have similar platforms designed to give consignees more control of their deliveries.
In addition, CFO Joe Corbett said USPS has earmarked $12 billion out of $40 billion in expected capital expenditures to acquire delivery vehicles powered either by batteries and internal combustion. The vehicles will be configured to more efficiently load and unload bulkier parcel shipments. A month ago, USPS awarded a 10-year contract to Oshkosh, Wisconsin-based Oshkosh Defense to build as many as 165,000 vehicles to replace thousands of the familiar boxy trucks that have been around, in many cases, for 30 years.
The Postal Service doesn’t require PRC approval to modify the operations of its “competitive” products, which include Priority Mail, Parcel Select and Priority Mail Express. However, the PRC must sign off on any pricing changes for those products. The Postal Service said it will detail specifics of its plan in various filings with the PRC in the coming weeks.
Much of the proposed operational modifications relate to the parcel business, which has become the Postal Service’s top revenue performer. The shipping and package segment generated more than $9 billion in revenue during the Postal Service’s fiscal 2021 first quarter, a period that included the holiday shipping season that saw unprecedented package volumes and that overwhelmed the Postal Service’s delivery capabilities. Shipping and package revenue in the quarter nearly exceeded the combined revenue of first-class mail and marketing mail, long the Postal Service’s biggest profit centers.
In fiscal 2020, shipping and package revenue surpassed first-class mail revenue for the first time ever, as the COVID-19 pandemic drove massive spikes in e-commerce orders and parcel deliveries. However, parcel processing and deliveries are far more labor intensive and less automated than sorting and delivering letters and marketing material. Ironically, the avalanche of parcel business has had the effect of slowing the delivery of mail and other non-parcel volumes.
The changes in the parcel portfolio are one component of an ambitious plan to transform the Postal Service from a consistent money loser to a break-even position by 2023 and to modest profits through the rest of the decade, DeJoy said Tuesday. Without the changes outlined in the plan, the Postal Service stands to lose $160 billion over the next 10 years and will likely need a federal bailout, DeJoy said. The agency lost $9.2 billion in fiscal 2020 and more than $87 billion over the past 14 years.
About one-third of the projected $160 billion deficit can be wiped out if Congress changes how postal retiree health benefits are managed, the Postal Service said. Integrating retiree health benefits with Medicare, and basing their expense on vested benefits would reduce the agency’s cash-flow expenses by about $44 billion, it said. The Postal Service has also agitated for years to end the requirement that it prefund retiree health benefits, a burden faced by no other agency. The Postal Service is considered a quasi-government entity because it accepts no taxpayer dollars to run the business but it enjoys a number of perquisites of federal government classification, including a monopoly on first-class mail.
Eight months in the making, the plan was released as DeJoy continues to face political backlash for his performance during 2020, his first year in the job. DeJoy, a loyal supporter of former President Donald Trump, was nominated by the Postal Service’s Board of Governors in early 2020 to replace Megan J. Brennan, who was retiring. Almost immediately, DeJoy caught intense fire for trying to reform the Postal Service’s operations in ways critics said would degrade service levels and justify Trump’s claims that the Postal Service couldn’t handle the surge in mail-in election battles during the pandemic. By all accounts, the Postal Service managed the ballot-delivery process almost flawlessly. Still, there were numerous calls for DeJoy’s firing.
Last Thursday, a group of 50 Democratic lawmakers sent a letter to President Joe Biden asking him to remove all six current board members appointed by Trump and replace them with Biden’s appointees. In the letter, the lawmakers said the current board has failed in its mission to oversee an effective Postal Service, citing mail delays and internal conflicts of interest. Only the board can hire and fire a postmaster general.
Late last month, Biden nominated three individuals to fill positions on the board. If confirmed, the appointees would give Democrats a majority and might intensify calls for DeJoy’s firing.
Gordon Glazer, a Postal Service expert for consultancy Shipware LLC, said in an email that he was concerned the plan will be “halted in its tracks and put on hold” until Biden’s board nominations are confirmed, and if the reconstituted board decides to elect a new postmaster general. “Once this process plays itself out, the new leadership can review the 10-year plan and selectively decide which aspects are cut, which are maintained and what gets added,” Glazer said.