FedEx and UPS shares are more at stake with USPS than with Amazon
Photograph by Justin Sullivan / Getty Images
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Which 70 billion logistics behemoth has hit a rough patch due to a changing shipping landscape?
Is it
United Parcel Service
(ticker: UPS)? Or maybe
FedEx
(FDX)? Both retail packages provide about $ 70 billion in sales.
No, the answer is United Posted Postal Service. And the fight does.
First, the USPS loses $ 400 million every month, but the losses are not the biggest problem. That would be the size of the pension obligations. It is not easy to fix the financial status of the postal service, but it can be a great advantage for collective package suppliers, an advantage that would dwarf current concerns, such as new competition from
Amazon.com
(AMZN).
Post office expenses consistently exceed revenue.
USPS pension liabilities dwarf by FedEx and UPS.
It is somewhat intuitively sensible that USPS's pension obligations are large. It's an old organization. In fact, the post office has been longer than the country. Benjamin Franklin was the first postmaster appointed by the Continental Congress in 1775, a year before America declared its independence from Britain. Today, USPS uses more than 630,000 full-time and part-time workers and handles around 146 billion pieces of mail each year.
USPS pension liabilities total $ 322 billion, more than 4 times the overall pension obligations of FedEx and UPS. And the USPS plans are under-funded at around $ 43.5 billion. For all perspectives, all US officials have retirement benefits, including USPS, totaling more than $ 1.8 trillion, and the government has set aside only $ 900 billion to cover future payments. It's a big problem, but one for US taxpayers in the end. The Office of Personnel Management, which oversees officials, was not available for comment.
Even though the post office loses money, it generates cash flow. This is because, while pension costs are incurred in accordance with common accounting principles, payments will not be made until well into the future. Finally, coverage of cash expenses can mean higher pricing. It would be an advantage for FedEx and UPS. Both compete with the Post Office for Volume and the postal service traditionally has a negative impact on pricing in the market.
"A rising tide can lift all boats," says Glenn Gooding, president of iDrive Logistics. "UPS and FedEx are looking at USPS for baseline pricing." IDrive helps business prices and secure logistics services for small packages.
With initial e-mail volumes decreasing, USPS is becoming increasingly dependent on what it calls "competitive services", such as package delivery. The post office seems to recognize this reality and has increased prices in recent years. "We made price increases for some competitive services, which averaged 4.1% in January 2018, 3.9% in January 2017 and 9.5% in January 2016," the Post Office said in the annual report.
Investors we're talking with concern that Amazon will be a third logistics competitor to UPS and FedEx, but it's better to call Amazon a fourth competitor. The post office already has around $ 23 billion in parcel delivery sales. In addition, Amazon has a long way to go to build the networks of UPS, FedEx or the Post Office. Goldman Sachs analyst Jordan Alliger estimates it would take over $ 120 billion in new investment from Amazon.
That means that Amazon is not a real threat to UPS and FedEx in the way investors think. Amazon is putting pressure on pricing because it dominates the e-commerce landscape.
Profitability pricing in the so-called competitive service offerings will be a plus for US taxpayers, potentially shrinking losses and helping to cover large retirement benefits. And it will also help FedEx and UPS shareholders.
Investors usually do not consider the post office as a delivery service competition, and maybe they should. USPS prices have to rise to cover losses, which will benefit FedX and UPS. What more Amazon.com gets low on e-commerce services from the post office. It must be changed, which in turn would benefit the rivals.
Barron's recently wrote positive about UPS and recommended the shares.
Write to Al Root at allen.root@dowjones.com
