Economics of U.S. Postage Stamp Price Hikes (FDX, UPS)

Both FedEx Corporation (NYSE: FDX) and United Parcel Service, Inc. (NYSE: UPS) are likely watching government competition for next week.  Starting on Monday, the price of most traditional mail will rise.  This will have no impact on the larger packages and on freight/delivery for now at UPS and FedEx, but when the cost of one good rise it generally trickles up.  The USPS cost of a 1-ounce first class normal letter will rise to $0.44 from $0.42.

It seems that whether we have inflation or have the risk of deflation that the cost of mail will only rise year after year.  The wonderful USPS notes on its site, “Prices for mailing services will continue to adjust each May. Prices for most shipping services, including Express Mail and Priority Mail, were adjusted in January and will not change in May.”

Here is the new pricing system for the rates:
First-Class Mail  (Price)

• Letters – first ounce $0.44
• Large envelopes – first ounce $0.88
• Parcels – first ounce $1.22
• Additional ounces $0.17
• Postcard $0.28
• Stamped Card $0.31
• Stamped Envelope $0.54

This $0.02 increase doesn’t sound like much on the surface.  For those who use the Internet for all written correspondence, the impact is immaterial.  Again, it is likely to have zero impact on FedEx and UPS until the next round of postal price hikes.  For the army of those who have resorted to using online bill-payments, this will have no impact.

How many of you have ever used two $0.34 stamps when one $0.37 stamp was all that was needed?  Yours truly was guilty of that.  Fortunately, most citizens do not go out and buy thousands of stamps at a time.  Thankfully, the new Forever stamps will keep this from having much impact compared to the stated value stamps.

But upon pondering the impact of a society, this is going to have a significant cost impact of the “three-comma” sort.  This also comes at a time when there had been reports in recent months that the Postmaster General had been seeking to cut the delivery of Saturday mail.

Operating revenues for 2008 were $74.932 billion in 2008, for 2007 were $74.778 billion, and for 2006 were $72.65 billion.  And the last year the USPS posted a profit was a $900 million profit in 2006.  In 2008 its net loss was in at -$2.806 billion and for 2007 its net loss was -$5.142 billion.

UPS generated $51.48 billion in 2008 revenue, while it posted a figure of $3 billion as net income.  FedEx posted $37.95 billion in revenue in 2008, while generating net income of $1.125 billion.

The post office, as of the 2008 annual report, had 663,238 people listed as “career employees” and that was down from 684,762 in 2007 and 696,138 in 2006.

Also from the 2008 annual report, its mail volume was 202.703 billion pieces of mail.  The number of mail pieces delivered has fallen from 212.234 billion pieces in 2007 and from 213.138 billion in 2006.  The volume per day as also shrunk to 667 million/day in 2008 from 705 million/day in 2007 and 703 million/day in 2006.

In 2008, First Class mail represented 45% of all mail revenues, with 49% being standard mail, and a combined 6% for shipping services and ‘other’ mailing services. Of all of the mail pieces, 91.697 billion of the 2008 pieces were listed as First Class pieces.

As far as what the USPS gave for a 2009 outlook, it projected revenue to increase between 1.0% and 2.0% in 2009 on a volume decrease of 3.0% to 4.0% and it projected total expenses for 2009  to increase between 1.0% and 2.0%.  First-Class Mail volume is expected to decline about 2.0% during 2009, which would come to a 89.863 billion pieces count.

As far as what this will cost my own household, that number after we burn through our current Forever Stamps will probably increase a whopping $4.00 per year based upon an estimated count of bills not paid by electronic payment, thank you letters, and various mailed greeting cards and invites.  If you could take some simple math and apply this to “all” 89.863 billion pieces , which you can’t do based upon weight differences but did for argument sake, this would generate almost an extra $1.8 billion.  That number is probably close to accurate if you include the prior price hikes that were put in place on other weight letters.

Again, it is hard to compare these in apples-to-apples numbers without going in and picking these apart class by class and bit by bit.  But it does give you an idea of what it translates to per year.

For comparison, if each person including the children in the United States, could find one Abe Lincoln, or 1 penny, per day and based on roughly 304 million people (citizens at any rate) as of 2008 data, that number comes to $1.1096 billion found per year in total.

It might not pay for you to go looking for two cents here and there, but it looks like that isn’t the case for the USPS.  Unfortunately, it looks like the USPS will still lose money for the year on the surface.

And speaking of executive compensation bashing, multiple reports put the US Postmaster General John Potter’s total package for fiscal 2008 (including higher value of his pensions) totaled more than $800,000.00.

Jon C. Ogg
May 8, 2009