"Our financial condition and our network consolidation activities have been highly publicized," the US Postal Service says in its most recent annual report. "Reports in the press...may result in confusion or misunderstanding by our customers regarding the future viability of the Postal Service."
Without a doubt, the perception of many is that the outmoded USPS is nothing more than an inefficient drag on the economy -- though the reality is far more complex. In fact, a broad swath of the private sector -- including supposed competitors such as FedEx (NYSE:FDX) and UPS (NYSE:UPS) -- is reliant, in many ways, on the Postal Service.
According to data obtained and released today by attorney David P. Hendel, a partner at the law firm of Husch Blackwell, where he is a member of the Postal Service Contracting practice, FedEx was the Postal Service's number-one supplier in fiscal 2012 -- transporting Express Mail, Priority Mail, and First Class Mail, and earning a total of $1,618,197,536.71. UPS, the Postal Service's tenth largest supplier last year, earned a lesser-but-still-quite-substantial $126,357,591 for services rendered.
Moreover, the relationship allows FedEx and UPS to maximize the efficiency of their operations.
"While the money from the USPS is good work for them, they have a lot of downtime on their planes," Hendel tells me. "When they first started, most of the FedEx and UPS planes sat empty during the daytime; now they can get some use out of them. And they didn't have to buy a single new plane." (Further, while FedEx and UPS may fly large quantities of US Mail, they rely on the Postal Service for "last-mile" delivery in many areas it would cost too much to service. In fact, as UPS spokesman Norman Black said in 2009, "We believe that the government plays a role in terms of ensuring that every mailbox is reached every day.... That is not a responsibility that UPS would want."
Beleaguered commercial carriers also benefit from contract work for the Postal Service.
"The Postal Service is probably the airlines' biggest customer," Hendel tells me. "I can't think of any single customer they have that pays them more than $100 million a year."
Indeed, United Airlines (NYSE:UAL) earned $153,411,749 from USPS contracts in 2012. Delta (NYSE:DAL) was paid $85,570,535.92 for services rendered, and American Airlines (PINK:AAMRQ) billed $55,191,715.07.
But, but...with the advent of email and Twitter, where's the business coming from?
"While volume has declined, there's still more volume than we had 20 years ago," Hendel tells me. "Way more volume."
Naturally, someone needs to maintain the trucks (Northrop Grumman (NYSE:NOC), $184,363,645; Wheeler Brothers, Inc. (NASDAQ:VSEC), $129,735,270.65) and keep the system running smoothly (Siemens (NYSE:SI), $167,811,740.07; Hewlett-Packard (NYSE:HPQ), $143,553,827; Accenture (NYSE:ACN), $135,883,812.57; IBM (NYSE:IBM), $125,260,869.17).
Hendel says, "In terms of reaching an individual in their home as an advertiser, [the mail] is still the best way to do it. If you have an interesting message, it's going to get opened." And Hendel points out that "package delivery has increased over a billion dollars in revenue over the past year."
Yet, as the USPS works on bringing its costs more in line with those in the private sector (Hendel tells me he expects savings to come primarily from workforce and facility reductions, in addition to the development of new revenue streams), it is our vaunted politicians who continually hamstring the agency in these efforts.
"Unfortunately, at the direction of Congress, the Postal Service has been forced to set aside more than $45 billion to pre-fund the health care costs of its future retirees and is required to unnecessarily set aside billions more -- although no other business or government agency in this country is required to pre-fund these benefits, and although the amount already accumulated will provide for retirees for decades to come," National Association of Letter Carriers president Fredric Rolando said last fall. "By mandating these payments and refusing to allow the Postal Service to access its own pension fund surplus, Congress has turned a manageable business challenge into a nightmare of artificial deadlines and unnecessary financial burdens."
Absent the pre-funding fiasco, Hendel views the 2012 USPS contractor data as evidence of a Postal Service that is, in many ways, a model of competence.
"The USPS spends about 10% of its budget on transportation, about six billion dollars a year," he says. "If you think about it, that's mostly what they do. That's pretty good, in terms of efficiency. There's only so much more efficiency they can achieve on that."
This article by Justin Rohrlich published on Minyanville.
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Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.