Postal Service 'Timing' Changes, The Allure of FedEx & UPS (FDX, UPS)

The U.S. Postal Service is proposing “sweeping changes” to how the mail system works in America.  Some is good, and some is not enough.  The aim is to save up to $3 billion a year in operating costs.  This means a reduction in the network of processing facilities “by over half” and it also means adjusting service standards.  More layoffs are looming.  This may be a huge opportunity for United Parcel Service, Inc. (NYSE: UPS) and FedEx Corporation (NYSE: FDX).

The Postal Service said that it is studying nearly 250 processing facilities for possible consolidation or closure.  This will reduce mail processing equipment by as much as 50% and is expected to lower the nationwide transportation network.  It also means more layoffs: as many as 35,000 positions.  24/7 Wall St. ran a list of cities with the most Post Office closures this summer.

What the public is going to complain about the most is this “revising service standards” in First Class mail.  Postmaster General Patrick Donahoe noted, “First-Class Mail supports the organization and drives network requirements. With the dramatic decline in mail volume and the resulting excess capacity, maintaining a vast national infrastructure is no longer realistic. Since 2006, we have closed 186 facilities, removed more than 1,500 pieces of mail processing equipment, decreased employee complement by more than 110,000 through attrition and reduced costs by $12 billion.”

We have reviewed the declining postal trends on numerous occasions, and it only continues to trend a certain way.  In fact, if you did not have bulk mail, bills, and bank or brokerage statements sent out in snail mail there might not be a Postal Service.  Here are some quick statistics over just the last five years:

• Mail volume has declined by more than 43 billion pieces in the past 5 years;
• First-Class Mail has dropped 25%;
• Single piece First-Class Mail (with stamps) fell by 36%.

Single piece First-Class Mail is down nearly 50% over the last 10 year period.

The mail processing network itself was constructed to process and deliver First-Class Mail within a 1 day to 3 day window by and large, but the new service standard would become 2 day to 3 day period.  This is where FedEx and UPS can rise.  When the Postal Service says 2 days, how many days is it really?

This is no easy change.  Even though the U.S. Postal Service is technically its own independent entity it is still effectively the government.  The news this morning notes that an Advance Notice of Rulemaking “pertaining to the proposed overnight service standard changes” was submitted to the Federal Register and it intends to file with the Postal Regulatory Commission this fall.

The Postal Service goes on to note that it “receives no tax dollars for operating expenses and relies on the sale of postage, products and services to fund its operations.”  OK, sure.  UPS and FedEx might have something to add there.

JON C. OGG