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In February 2017, the U.S. Postal Service (USPS) sent a warning about the outlook for its one consistently successful product. The multi-year growth of its shipping and package operations, USPS said in a government filing, could be jeopardized if the three customers responsible for most of the business – UPS Inc., (NYSE:UPS), FedEx Corp. (NYSE:FDX) and Amazon.com, Inc. (NASDAQ:AMZN) – continued to expand their own shipping capabilities and divert business from USPS.

Thirty months later, the prophecy may be nearing self-fulfillment. In its fiscal third quarter results released late last week, USPS said quarterly package and shipping volumes fell year-over-year for the first time in nine years. The decline was caused by the in-sourcing of USPS’ last-mile delivery service known as “Parcel Select,” in which private-sector partners ship and induct parcels deep into the postal infrastructure for inexpensive last-mile deliveries, USPS said. Parcel and shipping revenue rose year-on-year due to gains in Priority Mail and Parcel Post volumes, which USPS moves end-to-end and which typically generate higher revenue.

The fiscal third-quarter declines could be the tip of the iceberg. FedEx, UPS and Amazon are picking up the pace of their infrastructure expansion, and they are going after the last-mile traffic they have traditionally outsourced to USPS. In June, FedEx said it would in-source its two million daily parcels it tenders to USPS by 2020; FedEx has already diverted 20 percent of the traffic that it formally outsourced. UPS, which has brought 35 percent of its former USPS business in-house, hasn’t announced any further plans. It would seem likely, though, that more of the outsourced business will be redirected to UPS within the next one to two years.

To support their moves, FedEx and UPS will launch seven day a week ground deliveries at the start of 2020. In addition, they have made enormous investments in hub operations and have expanded their networks of third-party locations, such as retail outlets, where their own drivers can pick up and deliver parcels.

Amazon, meanwhile, is beefing up its delivery network so it can deliver goods in high-density local markets that were previously handled by USPS. In turn, Amazon is pushing USPS out to the geographic margins, consigning it parcels bound for low-density, more rural addresses that USPS must, by law, serve but which Amazon would find less-profitable. It has been reported, though not confirmed, that USPS handles just 30 percent of Amazon’s final-mile business, down from 60 percent recently.

Amazon’s Prime Day online ordering extravaganza took place in mid-July, two weeks after USPS closed the books on its third quarter. However, it wouldn’t surprise anyone if Amazon used USPS less this year than it has done in the four prior Prime Day events. According to logistics technology firm Convey, in the week after last year’s Prime Day, USPS shipping volume across Convey’s retail customers dropped 92 percent. There could have been several reasons for this – perhaps retailers chose to avoid USPS that week, or maybe there simply wasn’t much volume after the Prime Day blowout. Still, for Amazon parcels that did go through the USPS system, average transit times spiked from 3.3 days to 4.4 days and negative customer feedback increased by 10 percent, Convey said.

The three giants have one goal – to build, or in the case of FedEx and UPS, re-engineer their networks to move parcels cheaper on a per-unit basis than USPS would charge for Parcel Select. For FedEx, which tenders two million parcels a day to USPS under its “SmartPost’ product, the unit cost has been on the order of 85 cents to $1.50, according to data from Shipware, LLC, a consultancy. 

The jury is still out on whether FedEx can build operating efficiencies of an order of magnitude that would lower its costs below what it pays USPS. Two million added parcels per day means additional road time, more vehicles, more drivers and possibly more time per stop. Just one additional minute per stop would translate into 33,333 new daily hours, according to Shipware CEO Rob Martinez.

Jerry Hempstead, a former top U.S. parcel executive who heads a consultancy that bears his name, said FedEx would have an enormously difficult time migrating parcels weighing one pound or less. USPS makes it work, Hempstead said, because it has the critical mass of first-class, marketing mail and periodical shipments to support it. Ironically, FedEx is taking a page from UPS’ playbook by planning to divert last-mile parcels to routes where a FedEx driver is already making deliveries, Hempstead said. UPS has engineered its network so precisely that one driver is able to pick up and deliver for multiple services each day.

What isn’t in dispute is the hole the diverted FedEx traffic blows in USPS’ volumes. Even with the potential of new business coming from companies entering the fulfillment and delivery category, there is no way to replace lost volumes of that size, Martinez said.

USPS, meanwhile, is caught between a rock and a hard place. It raised Parcel Select rates in January. Then in June it changed the pricing formula on items tendered that fall outside of certain dimensions, a move that will result in significant price increases for those shipments. USPS may be forced to push rates even higher to offset the impact of the lost business from FedEx and from Amazon. All of this could push away businesses that were initially drawn to Parcel Select because of its ultra-low prices.

On a broader scale, the potential loss of three such huge accounts raises questions about the long-term viability of a business line that, for years, has been the lone bright spot amid secular declines in first class and marketing mail volumes and revenues. 

Hempstead said the need for a top-to-bottom Congressional reform of USPS has gone beyond the urgent stage to that of a four-alarm fire. “There is no replacing what’s gone and what’s going,” he said. “Congress needs to let USPS right-size the business.”