A Light at the end of the Tunnel

There is now growing evidence that we have passed the bottom in two of the Postal Service's key businesses, delivering advertising and parcels.

Advertising

The evidence on advertising comes from recent forecasts on advertising spending and management comments of Postal Service Competitors. Here are some highlights. TNS Media Intelligence Reports released its measure of advertising spending for through the first six months of 2009. In that report it shows that all media spending was down by 14.3% not much better than the 15.9% decline in Standard Mail revenue. Mail appears to be doing substantially better than radio, local television, newspapers, magazines, and about even with outdoor advertising. The problem that mail and many its hardest hit competitors faced in the last year was that its best customers were those that cut advertising the most, automotive, financial, retailers, other than department, appliance and home furnishing stores, and builders, building materials, home furnishing stores, and real estate. Real estate advertising spending was down 50% or more than 3.5 times the rate of decline of advertising in general.

Now that GM and Chrysler are out of bankruptcy, there advertising is rebounding and the Postal Service may see additional business from these and other auto makers as they try to serve some of the pent-up demand. Real growth depends on improved business in the housing and financial markets that really depend on both improved credit markets and how fast customers can save. However, these industries are no longer seeing declines in business so their advertising by mail and other modes have most likely hit bottom as well. So it is reasonable to expect that postal revenue handling advertising will no longer decline at double-digit levels.

Real growth in advertising will really depend on the consumer and specifically the consumer's return to the housing market. Few expect that will occur until late next year.

Parcels

Two of three publicly traded parcel carriers, FedEx and Dynamex, reported quarterly earnings today. Both companies indicated that they believe that their business has seen the end of the recession driven decline in business. However, neither sees significant growth in the near term.

Both companies survived the decline in business by significant efforts to control costs. For example, Dynamex cut 1/3 of its regional management and eliminated one of its two administrative centers. These significant cuts allows both companies to minimize losses and are now starting show the impact with greater than expected profits and higher stock prices.

The FedEx conference call also provides some hope for the Postal Service's business of delivering parcels that FedEx collects from package shippers. FedEx ships drops at least 2.5 million parcels every Monday with the Postal Service and this business was FedEx's fastest growing domestic business.

FedEx targets the business to parcels under 7 pounds destined to households. Heavier parcels are handled by its own FedEx Home service. The growth has come from three sources, 1) DHL business that FedEx captured, 2) moving customer's light weight parcels into this service and away from FedEx Home, and 3) taking volume away from the Postal Service, with the biggest customer mentioned by FedEx as shifting their business from the Postal Service being Amazon.com.com.

FedEx's expected increase in rates of 3.9% in January (5.9% increase in rates and a 2% decline in fuel surcharge) also suggests that the Postal Service will be able to raise its parcel rates by more than inflation and still offer a strong value proposition. In order to keep its un-regulated rates competitive and profitable, mailers should expect that the Postal Service could raise its under 7 pound parcels by at least 4% and still keep rates in line with competitors. The price cap requirement that parcel rates remain nearly flat on average and FedEx price increases will likely result in higher rate increases on lighter weight parcels and lower rate increases on heavier parcels. This will likely put Postal rates more in line with a weight related curve that the private sector uses. The FedEx increases may also force the Postal Service to raise short-distance rates and lower long-distance rates to put its rate schedule more in line with the schedules used by its competitors,