Nonprofit Mailers Applaud USPS Success in Package Market and Reasonable Regulatory Hurdle

February 6, 2019

While we are major mailers of letters, flats and periodicals, nonprofits still benefit from U.S. Postal Service success in the package business.  Packages provide a large and growing amount of revenue that helps to fund USPS infrastructure and operations.  The table below shows 162 percent ten-year growth of USPS revenue from packages, from $7.9 billion to $20.7 billion.

USPS market share has more than doubled over the same ten years, to almost one-fifth of the package delivery market.

The Postal Regulatory Commission recently made an adjustment to how it regulates the USPS package segment.  The two main requirements in law remain the same: all packages must cover their own cost, and packages as a whole must contribute a certain minimum percentage of USPS overhead, called the “appropriate share.”  After passage of the 2006 postal law, the PRC set the minimum contribution at a fixed 5.5 percent of USPS overhead.

The massive growth in USPS package delivery revenue has meant that it easily surpasses the appropriate share, hitting 24.7 percent in FY 2018.  Postal competitor UPS has argued that the minimum appropriate share should be set much higher by the PRC, maybe even above the level it is achieving now.  It wants to force much higher USPS package pricing.  The Alliance of Nonprofit Mailers joined other associations in arguing that the appropriate share concept has outlived its usefulness as a regulatory tool and is no longer needed.

One of the ways USPS has realized such heady revenue growth in packages has been price increases well above inflation.  There is no price cap on postal packages as it has several direct competitors, unlike the mailing side where it enjoys a government-granted monopoly.  The Postal Service is doing what competitors do by leveraging its competitive advantages and seeking to maximize revenues.  It does not need an artificial push by the PRC.

The PRC recently made its ruling on the appropriate share.  It created a formula that will adjust the required minimum USPS package appropriate share of overhead annually based on factors it deems relevant: competitive contribution margin and growth differential.  As we can see below, the formula escalates the minimum above the previous 5.5 percent, but nowhere near the current level of 24.7 percent, to 8.8 percent.

As there is plenty of room between the regulatory minimum and the actual level, the new rule should not affect USPS pricing of packages.  This is very close to the outcome we worked for, and we believe it will be positive for continuing growth of USPS package revenue and profit.  UPS is trying to interest the Supreme Court in this case, based on the argument that the appeals court gave too much deference to the regulator.  It is highly unlikely that the highest court in the land will take up the case.