Is Amazon really ripping off the US Postal Service?

A letter carrier holds Amazon.com packages while preparing a vehicle for deliveries at a United States Postal Service processing and distribution center in Washington, D.C.
Andrew Harrer | Bloomberg | Getty Images
A letter carrier holds Amazon.com packages while preparing a vehicle for deliveries at a United States Postal Service processing and distribution center in Washington, D.C.

Donald Trump went after the US Postal Service on Friday, claiming that the mail carrier is "losing many billions a year" charging low package rates, "making Amazon richer" and the Postal Service "dumber and poorer."

It is not clear, exactly, what prompted Trump's tirade Friday morning. It might be the general package-heavy Christmas season, or it might have to do with a Washington Post story detailing the White House's worries for 2018. Amazon's Jeff Bezos owns the Post, and its critical coverage of the president has inspired his ire before.

Amazon's stock took a slight dip after Trump's tweet, which also suggested the Postal Service should be charging "MUCH MORE."

But is Trump right that Amazon is ripping off the Postal Service? The question of whether it should or could charge more is complicated. The Postal Service does lose billions each year, and has for the past decade. And it's likely that Amazon gets a good deal, given that it ships millions of boxes a year.

But the Postal Service's problems are deeper than just delivering packages. Larger institutional problems in the age of email and two-hour delivery are really to blame — but also much, much harder to fix.

The Postal Service bleeding money — but its parcel services are doing okay

The US Postal Service's financial woes are, by now, well-documented: In November 2017, the Postal Service made a net loss of $2.7 billion. Magnified over decades, that figure represents a cumulative net loss of more than $63 billion since 2007. That is "many billions of dollars."

But break down the losses, and the situation is a bit more nuanced. Delivering packages, it turns out, is a growth business, and it actually makes the Postal Service money: The revenue from package increased $2.1 billion, and was up 11.8 percent for fiscal year 2017. The problem is the revenue from first-class mail — still the biggest source of the USPS's revenue — is declining.

The other issue that drags down the Postal Service's revenue: high labor costs plus the financial obligations to employees' health and retirement benefit programs, which cost billions.

So packages are the Postal Service's one positive note in an otherwise dismal financial report, and are at the very least not the only reason the organization is hemorrhaging money.

Could USPS charge Amazon more?

USPS really does make deals with Amazon. It all starts with how the postal system works: According to Kevin Kosar, vice president of policy for the R Street Institute, a free-market think tank, USPS is basically two separate entities: the monopoly side and the market side.

The monopoly side processes regular, first-class mail — wedding invitations, baby announcements, birthday cards, and bills. There isn't much competition for sending an ordinary letter.

The market services are parcel services, which competitors like UPS and FedEx also provide — and which means more competition.

An independent agency, the Postal Regulatory Commission, oversees and reviews the rates the US Postal Service sets for both the monopoly and competitive sides, basically reviewing and giving the okay for any changes — including a one cent stamp increase.

But USPS, Kosar explains, also cuts individual deals with companies that mail or ship in bulk — what are called "workshare discounts."

"The prices that the company pays is going to be haggled and based on how much [the companies] prepare whatever is being shipped before handing it over to the Postal Service," Kosar said.

That preparation includes making sure goods are packaged in the right size boxes, or parcels are outfitted with a bar code that works with the post office — basically anything that makes the USPS's job easier and cuts down on some logistical and processing costs.

And a massive company like Amazon, with the infrastructure and resources to do what the Postal Service needs, will probably get a more favorable deal. "Obviously bigger companies are better at doing this, that's how they eke out nice little margins, but driving those costs down," Kosar said.

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So in some ways, there's a mutual benefit. Amazon gets a good deal from USPS, which ships millions (but not all) of its packages, and, in return, the postal system gets help streamlining its operations.

Those discounts can be pretty generous. Kosar says that, in hindsight, the Postal Regulatory Commission has sometimes reconsidered its deals as maybe too good, and unions are often critical of these agreements.

So maybe Trump is somewhat right — the USPS is not the best at making deals. Beyond that, some have argued that USPS should be charging more for its packages across the board. A Wall Street Journal op-ed in July 2017 by Josh Sandbulte, a money manager who closely watches the shipping industry, also suggested the Postal Service is probably effectively subsidizing Amazon and other online retailers.

Sandbulte's claim is based on how the Postal Service sets its prices. USPS is not allowed to set prices so low that it loses money on delivering packages. (If it could, it could undercut competitors like FedEx or UPS.) But the formula for how it sets its prices was created by Congress in 2006, and doesn't account for the fact that packages are a much bigger share of the USPS's business than they used to be.

Sandbulte drew his conclusions based on a Citigroup analysis that suggested the average USPS parcel should cost about $1.46 more per package across the board than it does right now. (Sandbulte works for a firm that owns FedEx stock. Sandbulte could not be reached for comment.)

That discount, if it exists, exists for all USPS customers. It's just that Amazon sends a lot of packages.

And that's the bottom line here. Amazon is a giant and, as Kosar calls it, "is in a class of its own" when it comes to shipping. Amazon really, really doesn't need the United States Postal Service to do business. It can and does use a variety of delivery services — and probably can play those services off each other. In other words: Amazon doesn't need the USPS. The same isn't necessarily true for the USPS. (The Postal Regulatory Commission and Amazon did not return requests for comment.)

Which means maybe the USPS is a little bit "poorer" than it could be. As for "dumber" — well, in some ways, the USPS is following the playbook that made Amazon, well Amazon.

"Paper mail is a dying business; the margins are not going to increase," Kosar said. "They need to move into something that's more high margin."

Parcels might be the way to recoup some of those losses, especially if the USPS ups those prices a bit over time — essentially taking early hits for long-term gains.

"That would make perfect business sense in their eyes," Kosar said. "Amazon was willing to take losses year after year ... and it worked. It worked."

USPS's problems are much bigger than Bezos

Ultimately, the Postal Service's financial woes extend far beyond Amazon and its parcel services. And on this, Trump — who again, is president and oversees the executive branch — and the Republican-controlled Congress can actually have some say.

The Postal Regulatory Commission (which currently has a Republican majority) approved a jump in stamp prices 2 percent beyond the rate of inflation, as part of a larger review of postage rates. This could pave the way for increased shipping rates in the future.

This is a bit of a testy issue, as Kosar explains that some of the postal system's competitors believe USPS could use this increased revenue to help keep those parcel prices low — essentially using its monopoly (first-class mail) to underwrite its competitive business.

Either way, federal regulators are seriously putting postage prices under scrutiny. And Congress could also help ease some of the USPS's financial pressure by reexamining some of its retirement and health obligations. According to CBS News, a 2006 law requires the Postal Service to prefund 75 years' worth of retiree health benefits — which critics say contributes to its disastrous financial situation.

But even these potential remedies miss the larger points. "What do we want from the Postal Service in the 21st century?" Kosar asks. "And we haven't had that conversation."

The USPS is trying to save itself with its parcel services, but that's a temporary, not long-term solution to profitability — here or anywhere else. Finland, for example, launched a pilot program to mow lawns to make up some revenue. Sen. Elizabeth Warren (D-MA) and others have advocated the USPS get into banking. Those ventures might not work — but these are realities the Postal Service has to face.

After all, even Amazon can't save the post office forever: it's working on moving on to drones.