Is there a Problem with RPW Parcel Select Volumes?

In a recent post illustrating the importance of the Postal Service, I noted that FedEx Ground had 28% of its volume delivered by the Postal Service in FedEx's most recent quarter.  The same phenomenon was examined by Robert W Baird investment analyst Jon Langenfeld in his most recent report on FedEx reported the same figures.  He noted that FedEx's increased use of Postal Service delivery corresponded with improvements in the Postal Service delivery quality.

The problem with this analysis is that the volumes that FedEx reports for its SmartPost product exceed the total Parcel Select volume reported in RPW.  Here is the data for the Postal Service's most recent fiscal year and the closest period for FedEx.

• USPS October 2008 – September 2009:  222.9 million Parcel Select Parcels
• FedEx September 2008 – August 2009:  267.2 million Smart Post Parcels

The same results exist for the equivalent of the Postal Service's First quarter 2010.

• USPS October 2009 – December 2009:  79.7 million Parcel Select Parcels
• FedEx September 2009 – November 2009:  67.2 million Smart Post Parcels

Given that United Parcel Service and numerous regional parcel carriers are known to use the Postal Service then the total volume that these carriers provide the Postal Service would far exceed the volumes of parcel select.  The difference most likely reflects one of the following two scenarios:

1.  The Postal Service handles a significant number of parcels for FedEx Ground, UPS and other consolidators that are priced at Standard Class parcel rates.   The rates for up to one pound Standard parcels are below rates for Parcel Select for items dropped at a destination NDC and the difference is greater if the parcels can be dropped closer to destination.
   
   
2. The RPW measures of parcel select volumes are wrong.    

The second scenario is highly unlikely given that revenue and volume that FedEx Ground, UPS, and other consolidators provide the Postal Service are tendered with documents or electronic files with actual piece counts that when summed generate numbers in the RPW report.

The first scenario is troubling for a number of reasons:

1.  There is reason to believe that Standard Parcel rates may be below costs based on the 2009 Annual Compliance Report.  If that is true, than the Postal Service is providing a delivery service for FedEx and UPS because it offers the service not only at a price less than UPS and FedEx Ground's costs  but also its costs as well.  It does not make sense for other mailers to subsidize private sector parcel delivery companies if this is true.
   
2. Under the current regulatory scheme that has some regulated and some unregulated parcel products, the Postal Service can not follow the price increases of its private sector competitors for parcels under 2 pounds.    Over time, this means that the differential between Postal rate and the costs of FedEx Ground and United Parcel service using their own resources to deliver these parcels will grow over time as this anomaly continues to exist.  

The Postal Service also generates losses for single piece parcels and presorted First Class parcels.  As long as these rates cannot adjust when the private sector changes parcel delivery rates, the Postal Service will be faced with the prospect of delivering more and more parcels at a loss or at unacceptably low margins.

The solution is clear, all parcel products need to be considered competitive products.   If they were competitive products, the Postal Service would not be prevented from charging rates closer to market rates that other carriers set for parcels under 3 pounds or in the case of parcels that they deliver for other carriers, the costs of these carriers for handling the delivery of these parcels themselves.