Another Stumbling Block to Self-Sufficiency

In addition to declining volumes, the Postal Service now faxes another stumbling block to self sufficiency, rising fuel prices.   Increases in fuel prices used by the trucks, airplanes, cars, boats, and railroads that transport and deliver the mail have a nearly immediate impact on Postal Service operating costs.  Gasoline costs are up almost 28% since the beginning of fiscal year 2011 and diesel prices are up 29%. 

The impact affects the largest non-personnel line items, transportation costs. The Postal Service will spend around $6 billion in purchased transportation services and fuel for delivery vehicles this year.   Through December, Postal Service transportation costs are $106 million above plan during a period that diesel fuel prices were 4.8% above levels that existed at the time the financial plan was finalized and 23% below current levels.  If oil prices stay at current levels, the spike in oil prices could add between $475 and $720 million in transportation costs to these contained in the original budget.

The only option the Postal Service has to deal with rising fuel costs is to expedite cuts in its transportationprocessing and retail networks as well as the number of employees.  Streamlining the processing network will help efforts to reduce excess transportation capacity as a smaller network increases the probability that trucks betwwn plants run full.  The cutbacks in networks and management and union positions will have to be tougher if Postmaster General Pat Donahoe is to meet his goal of operating break-even this year,

The Postal Service is unique in its vulnerability to rising fuel prices among transportation companies as it alone has a rate structure that does not include a provision for a fuel surcharge.  Fuel surchases allow transportation companies to reduce the risk of fuel price volatility and allows them to provide more consistent service.  They also protect shareholders from some of the stock value fluctuations due to changing fuel prices.

By not having a fuel surcharge, especially on contracts used for last-mile delivery of parcels, the Postal Service creates the risk that its customers will opportunistically replace delivery by its own or contract transportation that must pass through higher fuel costs to customers with Postal Service delivery and a supplier willing to take lower margins or losses when fuel prices rise.   This is even more problematic in rural deliveries that are often significant distances from where carriers like UPS or FedEx drop parcels for Postal Service delivery and fuel costs have the largest impact. 

Good management would begin the process of eliminating this vulnerability as it applies to competitive products and examine how regulated products could be adjusted more frequently to reflect changes in fuel costs.  Congress as the shareholder of the Postal Service and the Postal Service's largest usecured creditors (the Office of Personnel Management and the Department of Labor) needs to look into this issue to see how not having fuel surcharges affects the risks to their investments,    Mailers will complain about more frequent changes in rates but the Postal Service can no longer bear all the risk of fluctuating fuel prices.

Update 3/9/2011 11:45 a.m.:  Since this post was first published, the Postal Regulatory Commission has posted the Postal Service's financial resulats for January 2011.   The results show that transportation cost were $44 million below plan in January.   This is good news and suggests aggressive reductions in the amount of transportation being purchased.   However, the reduction below plan would have been even larger if fuel prices were not higher in January than they were in October.  The even higher fuel prices today make holding transportation costs below plan more difficult today then it was in January.