USPS Saturday Decision to Have Minimal Impact on Fedex or UPS

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usps logoThe USPS Postmaster General and various press reports have indicated that Saturday mail deliveries may be eliminated in order to help USPS reduce costs. However, many investors do not believe the elimination of Saturday mail deliveries would have a meaningful impact on FDX or UPS. This is reflected in the performance of UPS and FDX share prices today. United Parcel Service, Inc.(NYSE:UPS) was up a meagre 0.14% today, while FedEx Corporation (NYSE:FDX) was up only 1%.

Customers electing to use either USPS parcel service or small package offerings from FDX/UPS that leverage the
USPS for final mile delivery (such as SmartPost or SurePost) have made their decisions based on price, not service or speed, and this announcement will likely not impact their decision. However, the proposed changes to mail delivery schedules could impact large mailers that use either SmartPost or SurePost to send items such as catalogues or flyers. However, some would argue that any negative impact would be minimal.

The USPS has previously stated that halting Saturday mail deliveries would result in ~$2B in annual cost savings. It is important to note that the USPS will continue Saturday package delivery as these operations are profitable. There is still some debate as to whether or not the USPS can legally stop providing services without congressional approval. However, the Senate has already passed a measure allowing the USPS to halt Saturday delivery and the House of Representatives put forward a measure last year that would halt Saturday deliveries in as little as a year.

The main opposition to change is based on the view that curtailing Saturday deliveries would jeopardize delivery of medicines and medical supplies to elderly customers, but some point out that the vast majority of medical shipments utilize the package network so this could be a moot point. At this point, many are inclined to believe that regular mail delivery on Saturdays will be a thing of the past before long.

The Postmaster General indicated that Saturday package deliveries would continue. Moreover, he indicated that the USPS package business was an important and profitable product. FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc.(NYSE:UPS) compete with the USPS for package business, but also cooperate with the USPS for certain residential package products.

In ”market dominant” services such as mail, the USPS faces rate restrictions (i.e., cannot raise stamp prices beyond a prescribed amount). Rate increases are limited by inflation measures that may have been more benign than actual USPS cost inflation. Analysts do not expect USPS to make material changes to the pricing of ”nonmarket dominant” products. In ”nonmarket dominant” services, analysts expect competitive factors to be the primary influence.

So what does it mean? Aside from modestly improving the USPS’s financial position, which reported a loss of $15.9B in FY/12, analysts see little impact to the broader parcel market since the USPS will continue regular delivery packages on Saturdays. The curtailment of Saturday mail delivery would not impact FedEx Corporation (NYSE:FDX)’s or United Parcel Service, Inc.(NYSE:UPS)’s postal injection product or the day sorting/line-haul services (currently provided by FDX). Some view it as unlikely that the USPS would try to eliminate the Saturday package deliveries as these operations are one of the more profitable parts of the organization. All in, many do not believe this decision would result in any major changes to the parcel landscape or to FDX’s/UPS’s earnings.

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