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The US Postal Service will raise prices this weekend. A price increase makes financial sense for the USPS, even if it causes some hackles among loyal USPS customers.
On Sunday, the price of Forever stamps jumps from 60 cents to 63 cents. USPS he announced a price increase in October. Its oversight body, the Postal Regulatory Commission, approved the plan in November.
The price increase comes after a symbolic year for USPS. The agency reported a record $56 billion in net income for its fiscal year 2022, which ended September. Compare that to the combined net income of the three USPS competitors.
Amazon.co.jp
(Ticker: AMZN),
United Parcel Service
(UPS), and
fedex
(FDX — from last 12 months: about $27 billion.
So why raise stamp prices when profits are high? Congress, cash flow, and net income all play a role.
In 2006, Congress ordered the Post Office to prepay medical bills by creating the equivalent of a pension fund to pay future medical benefits. No other private company has similar requirements. Private companies cover the costs associated with their employees’ medical care, but in most cases they only pay when an employee walks in.
This requirement cost the USPS years of losses and drained the cash flow of its agents.
In 2007 (the year after the Health Care Funding Directive), the Post Office reported a net loss of more than $5 billion, compared with revenues of $900 million in 2006. After generating approximately $1 billion in free cash flow in 2006, the USPS used approximately $5 billion in cash in 2007.
But last year, lawmakers scrapped the pre-funding requirement. This elimination contributed $57 billion of non-cash gains to earnings. Before the change, the Post Office lost about $1 billion in his 2022 fiscal year.
Any consumer or investor looking at the Post Office should focus on cash flow. The 232-year-old agency didn’t generate free cash flow last year. Labor costs are rising and first class mail deliveries are declining.
In 2007, the Post Office generated approximately $75 billion in revenue. About $38 billion of that came from first class mail and $23 billion from parcels and services. 2022 revenue will be about $79 billion, of which about $24 billion will be first class mail and $31 billion will be parcels and services.
Although the USPS has worked hard to restructure its business, it remains responsible for delivering low volume mail at the same price to all addresses in the United States.
In addition, there is a growing need for capital investment in post offices. The agency plans to spend about $10 billion to deploy more than 66,000 electric vehicles by 2028. $3 billion will come from the Inflation Reduction Act and $7 billion will come from internal cash flows or borrowings. Annual spending on EVs is $1.6 billion. Over the past few years, capital expenditures have averaged about $1.8 billion annually.
Aside from the need for capital expenditures, the USPS said the planned first-class mail price hike in October is intended to “offset rising inflation.”
A 3-cent increase in postage stamp prices should increase revenue by $1.5 billion, all other things being equal. USPS has delivered approximately 50 billion first class mail in the last 12 months.
Please contact Al Root (allen.root@dowjones.com).
