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USPS Delays Parcel Price Increase, As Major Carriers Weigh Pass-Through...

Posted on Apr 7, 2015

By Mike O'Brien: Multi-Channel Merchant

The U.S. Postal Service announced it was putting on hold planned pricing increases in parcel services until all pricing requests across products were approved by the Postal Regulatory Commission (PRC). The parcel pricing was set to go into effect on April 26.

Meantime, the major carriers that rely on the USPS for last-mile parcel deliveries are weighing how to recoup the cost increase once it takes effect.

In a related development, UPS has filed a motion with the PRC seeking access to data the USPS uses to calculate its delivery costs. UPS argues that the USPS is gaining an unfair advantage by using the rates to partially subsidize its parcel business, which competes directly with the major carriers.

While the PRC has approved rate increases for first-class mail, special services and competitive products (which includes Parcel Select, the last-mile service used by major carriers and third-party providers like Newgistics), price changes for standard mail, periodicals and package services have twice been refused for various reasons, primarily due to the complexities of the price cap and the manner in which it is calculated, according to the USPS.

“Rather than subject our customers to a piecemeal implementation of our new prices, the Postal Service has decided that the best course of action would be to wait until our complete price proposal is approved by our regulator,” the USPS said in a release.

Due to the proposed USPS average rate increase on Parcel Select of 7.3%, FedEx – which uses Parcel Select for its SmartPost service – has told shippers it plans to raise SmartPost rates by an average of 8.3%. The difference in rates is explained by the fact that Parcel Select handles packages up to 70 lbs., while 95% of SmartPost parcels are 9 lbs. and under, so those weights would be subject to a larger increase.

“As a result of recent communication, we are aligning our 2015 rate action with the USPS, the date of which has yet to be announced,” said Christine Cook, director of marketing for DHL eCommerce, which uses Parcel Select for its last-mile deliveries.

UPS commissioned noted transportation expert Kevin Neels, principal of the Brattle Group consultancy, to do a study of USPS cost coverage models used in determining its pricing, as each category and class of mail must cover its own costs by law. In a filing with the PRC last month, UPS contended that the USPS is using first-class mail and other mail products to subsidize the cost of parcel delivery, putting them at an unfair advantage. Using Neels’ research, UPS contends that the USPS is using a pricing model it developed in 2002 that some felt was flawed at the time, and that since then mail delivery rates have dropped substantially.

UPS further called for the PRC to utilize Neels’ methodology for parcel cost attribution as an interim measure pending further analysis, instead of a revised model being proposed by the USPS. Calling that model “outdated,” UPS argues that Neels’ plan is a “more straightforward model that obtains results that are statistically rigorous, fit the data well, and are more consistent with reality.”

“Even assuming the current model was sound when it was adopted, these developments have rendered it obsolete,” UPS said in its filing, referring to the drop in mail volume. “Among other deficiencies, the current model treats parcel delivery as peripheral to the Postal Service’s business, resulting in unacceptably low levels of cost attribution associated with the Postal Service’s now booming parcel delivery business. Despite the fact that the Postal Service is keenly focused on its rapidly-growing parcel business, the current model attributed less than 5% of city carrier street time costs to competitive products in FY 2013.”

UPS is also seeking access to non-public data, including a database containing detailed information on carrier routes, activities and deliveries at the ZIP code level, claiming the USPS has “no legitimate interest” in protecting the data.

In a counter-filing seeking to quash that request, the USPS states access to the delivery database would give UPS access to competitive information.

“Anyone with access to this information would be able to examine carrier operation for each route in each ZIP Code (with city delivery) in the entire country,” the USPS said in its filing. “Details would be available for how operations are conducted (as reflected in the times spent on various activities), and how postal customers are using the delivery network (as reflected in the volumes delivered in various categories). The extreme commercial sensitivity of these data is self-evident. Any rational commercial enterprise would resist attempts to allow outside interests to gain access to such detailed and comprehensive data. Correspondingly, any claim that the Postal Service has ‘no legitimate interest’ in protecting such data borders on frivolous.”

“UPS recognizes that this (USPS route data) is commercially sensitive, which is why we have taken every necessary precaution to ensure that it is provided only to our outside counsel under protective order, and is not accessible by anyone at UPS,” said Kara Ross, Vice President of Global Strategic Communications at UPS.

Rob Martinez, president and CEO of parcel spend management firm Shipware, said the proposed 8.3% increase in FedEx SurePost was more than what was required for the carrier to recover its costs, should the PRC grant the increase for Parcel Select.

“If FedEx said, our costs are going up X cents, so we’re raising our rates by X cents, that’s acceptable,” Martinez said. “For instance, the USPS is looking to increase Parcel Select rates for 1 lb. packages in Zone 2 by 19 cents, an increase of 8.3%. But FedEx imposing an 8.3% increase on its current SurePost rate card would go above and beyond their recouping of costs, because it’s off a larger base.”

The current Parcel Select rate for a 1 lb. parcel in Zone 2 is $2.32, while the rate for SurePost is $6.61.

Martinez said it remains to be seen how FedEx will handle the Parcel Select increase when it goes into effect, either by raising the published SurePost prices higher than ground for the first time ever, or by offsetting the cost through adjusting shipper discounts to maintain current list rates.

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