Amazon Deal Won’t Save U.S. Postal Service

by Jonathan Berr | November 12, 2013 10:45 am

Let’s get one thing straight: Amazon’s (AMZN[1]) plan to offer Sunday delivery through the U.S. Postal Service isn’t going to “save” the cash-strapped agency.

That said, it will certainly help address some serious financial problems.

The USPS lost a whopping $12 billion last year, mainly because it has to pre-fund 75 years of retirement benefits for its workers. The USPS has defaulted in more than $16 bilion in retire health benefits payments to the U.S. Treasury.

Critics such as the conservative Heritage Foundation[2] have argued that the USPS is using the pension issue as a smoke screen to cover up the huge decline in its core operations. Mail volumes, for instance, slumped 25% between fiscal year 2006 and fiscal year 2012 because people are mailing fewer things.

The think tank noted, “… even without the pre-funding payments, the USPS still would have lost over $15 billion since FY 2009, a sizable sum by any measure.”

If partnering with Seattle-based Amazon was going to put a major dent in this red ink, the USPS PR machine would have certainly said so. But the quasi-government agency has declined to release any details regarding the partnership with Amazon, including how long the deal will last or any financial details.

I emailed USPS spokeswoman Sue Brennan, and the only thing she would tell me was that, “We expect it to help the bottom line. I cannot be specific — you can ask Amazon.” Amazon, whose founder Jeffery Bezos recently acquired the Washington Post, declined to comment beyond the press release.

Though many people think that the Internet is hurting the USPS, the truth is more nuanced. While people are mailing fewer bills and greeting cards, ecommerce companies such as Amazon have helped USPS package volumes jump from 3.3 billion in 2008 to 3.5 billion in 2012[3]. No wonder Postmaster General Patrick Donohoe called the Amazon partnership ” a win/win for both organizations.”

Unions representing postal workers were unsurprisingly elated that the USPS will deliver packages in select markets such as New York and Los Angeles and will expand the service further in 2014. The partnership also comes as Amazon gears up for the holiday rush.

“We certainly think it’s a good idea,” says Sally Davidow, spokeswoman for the American Postal Workers Union, in an interview. “It will certainly help the Postal Service’s financial picture. … [However], the Postal Service’s financial crisis is a manufactured crisis.”

Were it not for the pre-funding of health care costs, the Postal Service “would be doing well”, she said.

The big-city deal with the USPS certainly won’t be cheap. An Amazon spokeswoman said that partnering with the USPS made sense for the company, which believes that customers will “love the service.”

Of course, Amazon been a longtime believer in the adage, “You have to spend money to make money.”

During the most recent quarter, Amazon’s spending increased 35% to $2.03 billion as it added a network of new warehouses and continued to ramp up new services such as grocery delivery. Revenue increased by 24% to $17.89 billion[4]. Ordinarily, when a company’s expenses rise at a faster rate than revenue, that’s a huge red flag for investors, especially since Amazon also reported a net loss of $41 million. But, as has often been said, Amazon is not a typical company.

Sadly, the USPS needs more than just the Amazon deal. It should follow the lead of European agencies and offer banking services to the unbanked. The USPS is also bloated and in dire need of cost cutting. A few years ago, the Postal Service’s Inspector General[5] estimated that about 25 percent of its work space was excess and that it could generate more than $3.4 billion in savings over 10 years if it sold that excess space. Conservatives have also called for the USPS to be privatized for years, an idea that postal unions have rejected.

When it comes to the USPS, politics often trumps economics. Earlier this year, the service backed away from plans to stop Saturday delivery and was forced to keep little-used post offices open because cost savings plans upset members of Congress.

The Amazon deal is a private sector solution to a very public mess at the USPS. Even under the most optimistic of scenarios, the deal will only make a minor dent in the service’s fiscal problems. But when you’re struggling as much as USPS is, every little bit helps.

As of this writing, Jonathan Berr did not own any of the aforementioned securities. Follow him on Berr’s World.[6]

Source URL: https://investorplace.com/2013/11/amazon-deal-isnt-going-save-us-postal-service/

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