Will Amazon's Sunday Shipping Save the Postal Service?

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Amazon Post Office Sunday Delivery
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On Monday, investors learned that Amazon.com (AMZN) is beefing up its shipment schedules in key markets by offering Sunday deliveries to its Amazon Prime customers. The Postal Service was a surprising choice given that FedEx (FDX) and UPS (UPS) were also in the running for Amazon's extended parcel delivery service business.

While the new plan nice for customers, the biggest beneficiary may be the United States Postal Service. So now let's get into what this could mean for the struggling Postal Service.

Dead Letters

It wasn't that long ago that the U.S. Postal Service system was doing so badly that it was entertaining massive layoffs and ending Saturday deliveries. Things are starting to get better for it as the economic recovery shows signs of strengthening, but the Post Office is still losing a lot of money.

The Postal Service generated $16.2 billion in revenue in its quarter ending in June, but that was more than offset by $16.9 billion in expenses. The $740 million loss is actually a dramatic improvement, and it would have been an actual profit if it wasn't for Congress-mandated health fund payments. (And who knows what its P&L statement might look like if Congress allowed the Post Office to charge enough for postage to cover its costs?)

It may surprise some to see that revenue actually increased by nearly 4 percent during the period, but the growth isn't coming from traditional first-class mail. That business continues to slide as folks use e-mail, smartphones, and faxes to communicate without having to deal with postage stamped communiques.

However, if the lines at the Post Office don't seem to be getting any shorter, it's because e-commerce is keeping postal workers busy.

Less Mail in Our Boxes, More Mailed Boxes

Revenue from package deliveries climbed nearly 9 percent during the June quarter, and at $2.9 billion now accounts for 18 percent of the Postal Service's total revenue.

%VIRTUAL-article-sponsoredlinks%Amazon's move to start to sending Sunday deliveries through the Postal Service will generate it some serious revenue. It will also likely improve the agency's employment picture, as the Postal Service had only limited Sunday operations in the past.

Amazon's a leader, and it wouldn't be a surprise if smaller Web-based retailers have little choice but to also team up with the Postal Service to keep up.

Sunday is the New Monday

Amazon and the Postal Service aren't disclosing the costs or the length of the contract. They also are not disclosing volume projections. Los Angeles and New York City will begin offering deliveries as soon as this Sunday. Other cities expected to be added soon include Dallas, New Orleans, Houston and Phoenix, according to The Wall Street Journal.

Amazon will simply have to make sure that its packages are delivered to the Postal Service locations by Sunday morning, and the USPS will handle the rest of the fulfillment process.

Amazon will not charge extra for the service if it's available. In fact, Amazon surely wants the Sunday business to take off because it could be a strong catalyst for Friday orders.

Putting Friday Shopping In Play

There are an estimated 10 million customers paying $79 a year for Amazon Prime, which offers free two-day deliveries of Amazon-warehoused goods. Placing an order on Friday used to mean waiting until Monday, and that may have been enough to dissuade some shoppers from just buying what they needed locally over the weekend. Sunday deliveries would alter that dynamic.

Another important factor here is that it will set Amazon apart from the competition this holiday shopping season -- the most important time of the year for retailers. Analysts already foresaw Amazon ringing up more than $26 billion in sales during the quarter, and that number could inch higher with Sunday deliveries making Amazon even more popular than it already is with Web-savvy consumers.

However, the U.S. Postal Service will be the big winner here. As long as it doesn't let Amazon down, it will enhance its reputation as a speedy parcel-delivery option for folks who often lean on FedEx or UPS first for package shipments.

There's money to be made. There's an image to be spruced up. Something as simple as this could turn a money-losing service into a profitable winner. And that is first-class potential.

Will Amazon's Sunday Shipping Save the Postal Service?

It's hemorrhaging money at the rate of about $25 million a day. The U.S. Postal Service, the nation's second-biggest employer after Walmart, lost almost $16 billion in the last fiscal year. By next fall, it is projected to have less than three days' worth of operating expenses on hand. (As an independent agency operating with federal oversight, the USPS can borrow money from the government to cover its losses but doesn't get any direct funding.) To ward off reckoning day, Postmaster General Patrick Donahoe last month announced that Saturday delivery of regular mail would end in August, in order to save $2 billion a year. That plan is meeting stiff resistance in Congress, which has notified Donahoe that he lacks "the constitutional and statutory authority" to eliminate Saturday delivery. Dozens of House and Senate members are vowing to go to court, if necessary, to block any change in delivery frequency. Donahoe isn't budging. "We plan to do what we said we were going to do," he said.

First-class mail volume has dropped by more than 25 percent since 2006, as Americans embraced email and started paying bills and communicating with each other online. But more than two thirds of last year's colossal losses were caused by pension obligations. In 2006, Congress and the Bush administration passed a law requiring the then-profitable Postal Service to prepay, over the course of just 10 years, 75 years' worth of anticipated retiree health benefits. Fearing a future financial collapse and a taxpayer bailout, Republicans insisted on the provision to guarantee that the post office would meet its future obligations. No other government agency or private company, however, is required to fund future costs in this backbreaking way. The Postal Service has since made $49 billion in such payments, and Sen. Bernie Sanders (I-Vt.) has claimed that if the Postal Service were allowed to manage its own obligations, it "would be back in the black and posting profits."

No. A more conventional pension-funding system might eliminate current losses, but with mail volume dropping dramatically every year in a digital world, the Postal Service would still be on the road to insolvency. That's why, Donahoe says, the post office needs to cut costs across the board and alter its business model. Besides ending Saturday delivery, he wants to set up a new health-insurance system for employees, shut down 252 of the country's 487 mail-processing centers, slow delivery times, reduce business hours at 13,000 post offices, and eliminate 220,000 of 522,000 postal jobs.

Not according to members of Congress from rural districts, union representatives, and lobbyists for magazine publishers, bulk mailers, and greeting card companies. They contend that the Postal Service needs volume to make money, and that curtailing service will only encourage mailers to take their business elsewhere and accelerate the USPS's decline. "Eliminating Saturday mail delivery is not a solution," said Sen. Jerry Moran (R-Kan.). "Smart reforms are needed to make sure the Postal Service can compete in a digital world, increase revenue, and not become a taxpayer liability." Among the steps the post office could take, he and other critics say, is capitalizing on the data and patents it holds. An internal report in 2011 found that the Postal Service was leaving $500 million a year on the table because it "does not manage its portfolio of patents to maximize commercial significance." The USPS also gets virtually no revenue for its valuable ZIP codes for the nation, which it sells to businesses for $60. Some advocate letting the nation's 32,000 post offices serve as branches of a massive postal savings bank, generating revenue and serving the needs of millions of "unbanked" Americans.

They've diversified their postal services to engage in other, more lucrative activities, and in many cases refashioned them as private companies. Unlike the USPS, almost all foreign postal systems make most of their money from "non-mail services." State-owned Japan Post Holdings, for example, operates a bank and is the world's largest holder of personal savings. New Zealand Post, which was corporatized in 1987, turned $49 million in profit in the last half of 2012, thanks largely to its KiwiBank and a national courier service. But it barely broke even on conventional mail delivery, and last month petitioned the government to cut deliveries to three times a week.

It's possible that Congress may delay the end of Saturday delivery for another year or two. But the Postal Service's financial woes will grow worse, says Rick Geddes of the American Enterprise Institute, unless Congress frees it up "to become a more commercial entity." The postmaster general is virtually begging Congress for permission to create "a new business model,'' and in a new report, the Government Accountability Office said the need for action is urgent. "If Congress does not act soon,'' the GAO said, "USPS could be forced to take more drastic actions that could have disruptive, negative effects on its employees, customers, and the availability of postal services."

The USPS may be losing money, but it's still a great deal for its users. Congress mandates that the Postal Service deliver mail for the same price to any address in the country, from downtown Manhattan to remote villages in Alaska. Because Congress limits any postage increase to the inflation rate, a first-class stamp costs only 46 cents - far less than the cost of mailing a letter in any European country, including tiny Malta. And the U.S. Postal Service did better than any other in a recent international test to see how many letters sent to false addresses were correctly returned to sender. "Wonder why the lines at the post office are so long?" said Richard R. John, author of a history of the post office. "It's because it still provides a service at a cost no rival can match."

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Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, FedEx, and United Parcel Service. The Motley Fool owns shares of Amazon.com. Try any of our newsletter services free for 30 days.
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