Is the USPS really losing money on Amazon's package delivery?

Is the USPS really losing money on Amazon's package delivery? Here's what's up with the USPS 

Bottom Line: Time flies... It's been four years since the Amazon/USPS deal was announced which included Sunday delivery. A lot's changed. Back then Wal-Mart was still the largest retailer, Whole Foods wasn't part of Amazon.com and the Washington Post wasn't a Jeff Bezos publican. Another change, of course, is the President and we know that there's a thorny relationship between Amazon's Bezos and Trump. So, what's real?  

First, the President's assertions about the USPS losing money on Amazon's package delivery isn't unfounded. Just over a year ago a Citigroup analyst said that the USPS should be charging Amazon $1.46 more per delivered package to be on par with the average other retailer. Factor in that the USPS has been losing money (with only one profitable quarter in the past six years) and it begins to add up. 

First here's the overall bottom line from the most recent quarter. 

4th quarter 2017: 

  • Revenue: $19.2 billion (flat year over year) 
  • Operating expenses: $19.7 billion (+11%, to $2.2 billion year over year) 
  • Overall loss: $540 million  

Out of the gate you don't have to be a financial genius to know that an 11% increase in expenses on flat revenue is a huge problem. Where's the problem coming from? The biggest increase year over year was an increase in workers compensation expense from higher interest rates. In other words, the USPS has a bunch of obligations that are interest rate sensitive. That means that with rates rising they'll only continue to see loses escalate if other factors don't improve significantly to offset those cost increases. So back to the package delivery vs. mail thing. 

  • Package delivery revenue: +9.3% 
  • Mail delivery revenue: -4.4% 

Packages still only accounted for 30% of the USPS's revenue despite the growth. The long-standing challenge for the USPS is that they're mandated to make 144 million stops six days per week for traditional mail service. That creates fixed expense against a declining traditional mail service. In years gone by the USPS broke out expenses by business type. Whether for political reasons or not they've chosen not to under the current Post Master General. For that reason, it's unclear if Amazon's package delivery is a money loser. What we do know is they have a below market rate deal – given that Amazon's their largest package delivery customer that's appropriate at a certain level. What's potentially troubling is that they have a deal that's 73% below standard market rates (an average of $2 per Amazon package compared to $3.46) and they're losing huge money. That would speak to a poor business arrangement for the USPS if nothing else. What we do know is that the entire operation is in horrible financial health that's almost certain to only worsen due to the rising interest rate environment.  

 

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