TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES Office of Inspector General | United States Postal Service RARC Report What’s Driving Postal Transportation Costs? Report Number RARC-WP-19-002 | March 18, 2019 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Table of Contents Cover Executive Summary....................................................................................................................................... 1 Observations..................................................................................................................................................... 3 Introduction................................................................................................................................................... 3 Overview of Postal Transportation..................................................................................................... 3 Understanding How Mail Moves Through the Postal System........................................... 5 Understanding How Postal Transportation Serves the Postal Network...................... 7 The Relationship Between Mail Volume and Postal Transportation Costs................. 10 How Much of the Increase in Transportation Costs was Due to Changes in Volume and Rising Input Costs?.......................................................................................................... 11 Ground Transportation...................................................................................................................... 13 Air Transportation................................................................................................................................ 15 Conclusion..................................................................................................................................................... 16 Appendices....................................................................................................................................................... 17 Appendix A: Description of 10-Year Analysis of Transportation Costs.............................. 18 Appendix B: Management’s Comments........................................................................................... 25 Contact Information...................................................................................................................................... 27 What’s Driving Postal Transportation Costs? Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Executive Summary Postal transportation costs have risen about 18 percent over the past 10 years.1 This happened despite the overall decline of 26 percent of mail volume and the relaxation of First-Class Mail service standards, which was expected to lead to significant savings. According to the Postal Service, the increase in postal Highlights transportation costs is being driven by the large growth in parcel volume and We wanted to get a better understanding of how much of the higher driver wages. While the Postal Service’s explanation may have some increase in transportation costs over the last 10 years was due to: merit, it does not fully explain the increase in transportation costs over the past (1) the changing mail volume, including the changing mail mix; and 10 years. (2) the increase in transportation-related input costs, including fuel prices and driver wages. It is true that an increase in parcel volume could put upward pressure on transportation costs. Parcels are larger and heavier than letters and flats. Our analysis estimates that 61 percent of the cost increase over Therefore, a parcel will cost more to transport than a letter or flat traveling the last 10 years was due to the change in mail mix and rising the same distance. However, some parcels receive little to no transportation transportation-related input costs. because they are entered into the postal network at the destination post office.2 This leaves 39 percent of the increase, approximately $418 million, Furthermore, any increase in transportation costs resulting from the growth in that warrants further explanation. parcels will be partially offset by transportation savings stemming from the decline in letters and flats. Our analysis allowed us to identify the area with the largest cost increase unexplained by volume and input costs — contracted It is also true that most costs increase over time due to inflation, and highway transportation designed to serve the Postal Service’s mail transportation costs likely faced upward pressure due to higher contractor processing centers that sort expedited mail and single-piece letters wages caused by the trucker shortage. However, it is unclear how much of the and flats. transportation cost increase over the past 10 years was due to these inflationary factors. As the Postal Service continues to manage its transportation network in response deserve further explanation. This identification is only the first step toward gaining to these changes, it may be helpful to better understand what is truly driving a deeper understanding of transportation costs and may point the way toward transportation costs. To shed light on this, we estimated how much transportation actions that could help to contain future costs. costs should have been expected to increase over the past 10 years as a result of: (1) the change in volume, encompassing both the decline in letter and flat mail Our analysis found the following: and the increase in parcel volume; and (2) the general increase in transportation- ■■ The change in transported volume, including the change in the mail mix, likely related input costs across the country, including the impact of things such as accounts for 15 percent ($157 million) of the increase in transportation costs fuel costs and driver wages. By isolating the impact of these two factors, we can over the last 10 years. identify transportation costs that are increasing beyond what is expected and thus 1 This estimate is from our analysis, which uses a two-year base that compares the average costs from FY 2008 and FY 2009 to the average costs from FY 2016 and FY 2017. 2 Parcels dropped at the destination post office make up percent of all parcels. What’s Driving Postal Transportation Costs? 1 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER ■■ The overall increase in transportation-related input costs, including fuel cost Our analysis allowed us to identify the transportation components with the largest and rising trucker wages, likely accounts for another 46 percent ($490 million) cost increase that cannot be explained solely by volume and transportation- of the cost increase over the last 10 years. related input costs. This is highway contracted transportation that is designed to serve the Postal Service’s mail processing facilities that sort expedited mail and ■■ This means that 39 percent of the cost increase over the last 10 years, or single-piece letters and flats. Some of this increase is likely explained by changes $418 million, likely occurred for reasons other than the change in volume and in how transportation was managed as a result of network realignment, including input costs. This does not mean that the 39-percent increases are necessarily the shift of some Priority Mail from air transportation to ground transportation. reasonable or unreasonable. It simply means that we cannot tell from this However, the magnitude of the increase hints that there may be more going on. analysis. Additional studies may be warranted. Therefore, this may be an area where additional analysis of the decomposition ■■ While these numbers represent the overall changes in transportation of costs or future audits are warranted. A better understanding of what is driving costs, the results varied widely by the type of transportation. In fact, some these costs could help the Postal Service find ways to contain them in the future. components had costs that either declined during the 10-year period or had a cost increase that was less than expected in response to the change in volume and input costs. Ten Year Change FY 2008 – FY 2017* $ Millions Percent Volume and Mail Mix Effect $ 157 15% Transportation-Input Cost Effect $ 490 46% Unexplained (Other) $ 418 39% Total $ 1,065 100.0% *Difference between the average cost in fiscal year (FY) 2008 and FY 2009 and the average cost in FY 2016 and FY 2017. What’s Driving Postal Transportation Costs? 2 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Observations Introduction To get a better understanding of what is driving transportation costs, we worked with Professor Michael Bradley, an expert in postal economics, to perform a Over the last decade, domestic transportation costs have been increasing.3 quantitative analysis of transportation costs over the 10-year period from fiscal While costs generally increase over time in response to inflationary pressures, year (FY) 2008 to FY 2017. This analysis was designed to estimate how much there were other factors during the last 10 years that should have put downward of the increase in transportation costs is due to two things: (1) the change in pressure on postal transportation costs. First, over the last 10 years mail volume mail volume, including both the decline in letter and flat mail and the increase in declined by 26 percent, and, holding all else equal, transportation costs would parcels; and (2) the increase in the costs of transportation-related inputs across be expected to decline as fewer pieces of mail needed transportation.4 Second, the country, including cost pressures that arise from things like fuel prices and during this same time, the Postal Service reduced the First-Class service the increase in wages due to the trucker shortage. By isolating these factors, we standards and predicted that this change would result in transportation cost can then identify the areas where transportation costs have increased for reasons savings.5 According to the other than these two factors and, therefore, warrant further examination. Postal Service, transportation costs rose in response to the An increase in parcels may Postal transportation is a complex system comprised of numerous components, increase in parcel volume and put some upward pressure each providing transportation to specific types of postal facilities and carrying a rising truck driver wages.6 While different mix of mail products. While overall transportation costs have risen over the Postal Service’s argument on transportation costs; the past 10 years, the cost trends of the individual transportation components are may have some merit, it likely however, this increase will be quite different, with some increasing and others declining over the same time. does not fully explain the Therefore, to better understand where costs have increased more or less than increase in costs. mitigated by the decline in expected, we conducted our analysis at the transportation component level. For letters and flats and the fact this reason, some general knowledge about postal transportation is helpful to An increase in parcels may that some parcels receive understand our results. put some upward pressure on transportation costs; however, little to no transportation. Overview of Postal Transportation this increase will be mitigated In FY 2017, the Postal Service’s domestic transportation costs totaled $7.3 billion, by the decline in letters and making up about 10 percent of the Postal Service’s total costs. Postal transportation flats and the fact that many parcels are dropped at the destination post office and is composed of an air network and a ground network, with ground transportation receive little to no transportation. Furthermore, while most costs increase over making up two-thirds of the Postal Service’s total domestic transportation costs in time due to inflationary factors — such as the increase in trucker wages due to FY 2017 (see Figure 1). the driver shortage — it is not obvious how much of the increase in transportation costs was due to this upward cost pressure. 3 For the purpose of this paper, the last decade refers to fiscal year (FY) 2008 to FY 2017. There was a decline in overall transportation costs between FY 2008 and FY 2009, but they have steadily increased since FY 2009. While this paper focuses on the change from FY 2008 to FY 2017, we note that in FY 2018 transportation costs continued to increase. According to the Postal Service, transportation costs increased from FY 2017 to FY 2018 by $623 million, or 8.6 percent, and the main reasons for this increase were higher air volumes, increasing fuel costs (both jet and diesel), and higher unit costs per mile for third-party contractors. U.S. Postal Service, 2018 Report on Form 10-K, https://about.usps.com/who-we-are/financials/10k-reports/fy2018.pdf, p. 18. 4 U.S. Postal Service, Cost and Revenue Analysis, FY 2008 and FY 2017, https://about.usps.com/who-we-are/financials/welcome.htm. 5 For discussion of whether the Postal Service achieved its expected savings from the operational window change, see U.S. Postal Service Office of Inspector General, Operational Window Change Savings, Report No. NO-AR-19-001, October 15, 2018, https://www.uspsoig.gov/sites/default/files/document-library-files/2018/NO-AR-19-001.pdf, p. 12. 6 Ibid. What’s Driving Postal Transportation Costs? 3 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Figure 1: FY 2017 Transportation Costs $7.3 Billion FedEx Day $1.7 B, 23.5% Contracted Highway $4.1 B, 55.5% FedEx Night $0.06 B, 0.8% Postal-Owned Vehicles GROUND AIR UPS $0.7 B, 9.7% 66.1% 33.9% $0.2 B, 2.2% Water Commercial $0.02 B, 0.3% Passenger Air $0.2 B, 2.9% Rail $0.04 B, 0.6% Commercial USPS Scheduled $0.3 B, 4.6% Note: Numbers may not add up due to rounding. Source: OIG analysis of FY17 Cost Segment and Component Report. Ground transportation consists of: (1) contracted highway transportation, truck transportation supplied by external contractors; (2) postal-owned vehicles, transportation supplied by postal employees using postal-owned trucks; (3) water transportation; and (4) rail transportation. Contracted highway is by far the largest transportation component, making up 55 percent of domestic transportation costs in FY 2017. Postal-owned vehicles provided 9.7 percent of domestic transportation costs in FY 2017. The Postal Service only uses a minimal amount of rail and water transportation.7 Rail transportation is used 7 The merits of moving mail via rail transportation are discussed in U.S. Postal Service Office of Inspector General, Strategic Advantages of Moving Mail by Rail, Report No. RARC-WP-12-013, July 16, 2012, https://www. uspsoig.gov/sites/default/files/document-library-files/2015/rarc-wp-12-013_0.pdf. What’s Driving Postal Transportation Costs? 4 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER solely for the movement of empty equipment, and a small amount of water this paper, we assume that transportation is used when necessary. Since the Postal Service only uses small Postal transportation is both functions occur in one amounts of rail and water, and these components are used for fairly unique building, and we use the term purposes, we focused our analysis of ground transportation on contracted designed to move different “post office” for simplicity. highway and postal-owned vehicles. types of mail between the Sectional Center Facilities As shown in Figure 1, in FY 2017, air transportation made up around one-third various types of postal facilities (SCFs) or Processing of domestic transportation costs for the Postal Service. The air network includes and Distribution Centers contracts with FedEx, UPS, and commercial airlines. The FedEx contract has within the postal network. (P&DCs) are often referred to two parts — one providing transportation at night and one during the day when as “mail processing facilities.” FedEx planes would otherwise remain empty. As shown in Figure 1, the FedEx While the nomenclature can be confusing, the term SCF is used when a P&DC day portion is by far the largest component of air transportation, making up 23.5 provides the function of sorting the mail to the destination post offices within its percent of total domestic transportation costs in FY 2017. The Postal Service also designated 3-digit service area.10 Most P&DCs provide the functionality of an has two types of contracts with commercial airlines. The first category puts mail SCF, but there are some P&DCs that do not sort mail directly to a post office. on existing commercial passenger flights, and the second type provides service For the purpose of this paper, we shall refer to both SCFs and P&DCs as SCFs. to certain geographic areas where the existing flight schedules do not provide These types of facilities are responsible for sorting expedited mail like First- adequate coverage, such as Hawaii and Alaska.8 Class Mail and Priority Mail. In addition, these facilities are where containerized Marketing Mail and Periodicals are broken down and the individual letters and Understanding How Mail Moves Through the Postal System flats are sorted along with single-piece First-Class Mail letters and flats. These Postal transportation is designed to move different types of mail between the facilities can also be used to transfer containerized mail from one truck to another. various types of postal facilities within the postal network. While the postal network is a complex system, we provide a simplified explanation of the network The third main type of postal facility is called a Network Distribution Center to better illustrate how postal transportation is managed. (NDC). These facilities primarily process non-expedited parcels, Periodicals, and containerized bulk mail, such as Marketing Mail in trays, bundles, or sacks. In Overall, there are three main types of mail facilities.9 Post offices are facilities addition to sortation, these facilities are also used to consolidate less-than-full where mail is entered (at windows or blue collection boxes) and where mail can containers and trucks of non-expedited mail.11 be picked up by customers (at the window or Post Office Boxes). Delivery units or carrier stations are where carriers prepare the mail for delivery. While in most To illustrate how mail moves through the postal network, Figure 2 shows a cases these functions occur in the same building, there are some post offices that simplified mail processing diagram for end-to-end mail. The top part of the do not house carrier operations. The reverse is also true. There are some postal diagram shows how expedited mail, such as First-Class Mail, Priority Mail, and facilities that house carrier operations but are not post offices. For the purpose of Priority Mail Express, travels through the network. The bottom half illustrates 8 For the first type of contract with commercial airlines, the Postal Service is dependent on the schedules of existing commercial flights. The second type of contract is designed to meet the Postal Service’s specific needs, so the contracts specify the origin, destination, and schedule that are necessary to fulfill those needs. 9 While there are additional types of facilities, such as annexes and facilities designed to handle international mail, these are the three main types needed to understand the transportation components. 10 The 3-digit service areas are defined by the first three digits of the ZIP Code. There are also mail processing facilities that provide similar functions but are smaller in scale. These are referred to as processing and distribution facilities. U.S. Postal Service, Glossary of Postal Terms, Publication 32, July 2013, http://about.usps.com/publications/pub32.pdf, pp. 183 and 201. 11 These facilities were formerly referred to as Bulk Mail Centers (BMCs). Ibid, p. 143. What’s Driving Postal Transportation Costs? 5 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER the mail flow for non-expedited mail such as Marketing Mail, Periodicals, and non-expedited parcels.12 As can be seen in Figure 2, various types of transportation are needed to move the mail through the postal network. Transportation is needed between the SCFs and their respective post offices, as well as between the SCFs themselves. Furthermore, transportation is needed between the individual NDCs, as well as between the NDCs and the SCFs they serve. Figure 2: End-to-End Diagram of Postal Network Simplified Diagram of How End-to-End Mail Travels Through the Postal Network Expedited Products ORIGIN ORIGIN ORIGIN DESTINATION DESTINATION DESTINATION Post Office SCF NDC NDC SCF Post Office Non-Expedited Products Source: OIG analysis. In reality, the flow of mail is much more complicated. Some mail originates and destinates within the same service area, and this mail would have a much more limited mail flow. For example, a First-Class Mail letter that is entered at a post office within the same service area as its destination may only travel from the originating post office to an SCF for sortation, and then from the SCF to the destination post office. In addition, mail can be entered along various parts of the network. While some 12 Examples of non-expedited parcels include Standard Post, Parcel Select, Media Mail, and Bound Printed Matter. What’s Driving Postal Transportation Costs? 6 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER is entered as shown in the diagram and traverses a long way in the network, ■■ Inter-SCF transportation is transportation between SCFs. The length of other mail is entered closer to its destination, such as at the destination NDC, these routes can vary substantially depending on the distance between destination SCF, or even at the destination post office. Moreover, in some cases facilities.14 mail travels through several mail processing facilities — either for additional ■■ Intra-SCF transportation provides transportation between SCFs and the post sortation or for the purpose of consolidating mail into containers — before it offices within their service areas. There is also some intra-SCF transportation reaches its destination.13 These things do not change the types of transportation that is used to deliver mail to customers. needed, but they do add to the complexity of managing postal transportation. The location where mail is entered and how far it travels will affect the need for Figure 3 illustrates where along the network inter-SCF and intra-SCF transportation capacity on the various transportation legs. transportation provide links between postal facilities. Understanding How Postal Transportation Serves the Postal The second type of highway transportation serves NDCs and their service areas. Network Since it provides transportation to the NDCs, it primarily carries Periodicals, Ground transportation is designed to move non-expedited mail, as well as Marketing Mail, and non-expedited parcels. The names of the components within expedited mail when it can do so and still get the expedited mail to its destination this type of transportation have similar naming conventions to the SCF-related in time to meet its service requirements. As mentioned above, our paper focuses transportation. on the two largest components of ground transportation, contracted highway and ■■ Inter-NDC transportation refers to the transportation between NDCs. Since postal-owned vehicles. NDCs are spread out across the country, these routes can be quite long.15 Contracted highway transportation is designed around meeting the needs of the ■■ Intra-NDC transportation provides transportation between NDCs and the two types of sorting facilities — SCFs and NDCs. The first type of contracted SCFs they serve. highway transportation is used to provide service either: (1) between different SCFs; or (2) between an individual SCF and the post offices within its service Figure 4 shows the simplified diagram illustrating where inter-NDC and intra-NDC area. This part of the purchased highway transportation network is designed to transportation is used to move mail between postal facilities. move expedited mail like First-Class Mail, Priority Mail, and Priority Mail Express. Ground transportation also includes postal-owned vehicle transportation, Therefore, while it is also used to transport non-expedited mail, the arrival and which is supplied using postal employees and postal-owned trucks. This type departure schedules are designed to ensure that the expedited mail reaches its of transportation covers mostly short distances, with most trips being less than destination within its service standards. Adherence to these more demanding 50 miles. Postal-owned vehicles move mail between nearby mail processing service standards may result in trucks leaving facilities at a predesignated time facilities, to and from airports, and to post offices, as well as occasionally pick up regardless of how full the truck is at the moment of departure. mail from mailers’ plants.16 The names of the transportation components within this category describe the relationship of the facilities they serve. 13 When and where that occurs is beyond the scope of this paper. 14 Inter-SCF is composed of three subcomponents. The average length of the routes covered by these three subcomponents ranges from 90 to 525 miles. 15 The average length is about 825 miles. 16 The postal-owned vehicle cost component also captures some costs associated with using postal employees to “spot” or stage trailers at mail processing facilities. This means the drivers help move trucks as needed to and from the docks for loading and unloading. What’s Driving Postal Transportation Costs? 7 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Figure 3: Inter-SCF and Intra-SCF Transportation Simplified Diagram of Inter-SCF and Intra-SCF Transportation Intra-SCF Intra-SCF ORIGIN ORIGIN ORIGIN DESTINATION DESTINATION DESTINATION Post Office SCF NDC NDC SCF Post Office Inter-SCF Source: OIG analysis. Figure 4: Inter-NDC and Intra-NDC Transportation Simplified Diagram of Inter-NDC and Intra-NDC Transportation Inter-NDC ORIGIN ORIGIN ORIGIN DESTINATION DESTINATION DESTINATION Post Office SCF NDC NDC SCF Post Office Intra-NDC Intra-NDC Source: OIG analysis. What’s Driving Postal Transportation Costs? 8 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Air transportation is generally used to move mail that has expedited service requirements, such as First-Class Mail, Priority Mail, and Priority Mail Express, when ground transportation may not be quick enough to ensure this mail will meet its service requirements. In addition, air transportation provides service to hard-to-reach areas, such as transportation within Alaska and to and within Hawaii. Figure 5 shows the simplified diagram, this time illustrating how mail travels through the postal network, with the addition of showing what type of mail is the primary type of mail served by the transportation components. Figure 5: Overview of Postal Transportation Simplified Diagram of How Mail Uses Postal Transportation E When needed to make service Intra-SCF or POV Inter-SCF Intra-SCF or POV E NE E E NE ORIGIN ORIGIN ORIGIN DESTINATION DESTINATION DESTINATION Post Office SCF NDC NDC SCF Post Office NE NE NE Intra-NDC Inter-NDC Intra-NDC LEGEND Primarily handles expedited mail (Priority Mail, Primarily handles non-expedited mail E Priority Mail Express, and First-Class Mail) NE (Standard, Periodicals, and non-expedited parcels) Source: OIG analysis. What’s Driving Postal Transportation Costs? 9 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER The Relationship Between Mail Volume and Postal Transportation While changes in cubic feet Costs and weight can correspond to As parcels replace letters changes in the overall number In general, one might expect transportation costs to decrease as the overall and flats on transportation, of mailpieces, this relationship number of pieces of mail declines. However, as we discuss below, the relationship between volume and transportation costs is a bit more complicated. does not always hold, especially the change in the number of when there is a change in mail mailpieces transported alone Not All Mail Receives the Same Amount of Transportation mix. As the volume of parcels When considering the impact of a volume change on costs, it is important to grows and the volume of letters is not an accurate indicator declines, the average size note that not all mail receives the same amount of transportation. In general, of how much transportation and weight of a piece of mail the longer the distance a mailpiece travels, the more transportation costs it incurs. As such, a mailpiece traveling from one coast to the other will incur more increases. For example, a single costs should change. five-pound Priority Mail parcel transportation costs than a similar mailpiece traveling only from Washington, DC, weighs about the same as 80 to New York City. one-ounce First-Class Mail letters.19 The same concept holds for cubic feet, as For some products, such as destination-entered Parcel Select, the Postal Service one parcel could take up the same amount of cubic foot space as a tray or sack provides rate incentives to induce mailers to enter the mail close to its destination. of letters. Therefore, as parcels replace letters and flats on transportation, the The closer the mail is entered to its destination, the less it needs to be change in the number of transported mailpieces alone is not an accurate indicator transported, and therefore the lower transportation costs it incurs. Some mail is of how much transportation costs should change. Furthermore, since most of the even entered at the destination post office, where it would be expected to receive transportation costs are based on cubic feet, a shift from smaller to larger parcels little to no transportation at all.17 Holding all else equal, a shift toward more will also increase transportation costs, even if the overall average weight of the mail that needs to be transported only a short distance should result in lower parcel does not change. transportation costs. This is especially relevant as parcel growth includes many Costs Do Not Move in parcels that are dropped close to their destination. While the Postal Service can Lockstep with Volume It’s Really About Size and Weight A decrease in mail volume, adjust routes and change Changes in the sheer number of mailpieces transported is not the sole or even especially insofar as it translates the number of trucks along primary driver of transportation costs — what really matters is the size and into a fall in cubic feet or weight, weight of the mailpieces. For example, since ground transportation is based on should clearly result in lower a route, there may be the space taken up in a truck, the main driver of costs for all ground components costs, other things being equal. some trips that cannot be discussed in this paper is cubic feet or cubic foot miles.18 In addition, the larger However, there is generally no part of air transportation costs, those costs associated with the FedEx day expectation that costs change eliminated without putting contract, is also based on cubic feet. The remaining air contracts are based on in direct proportion to a change the network in jeopardy. pounds. in volume. An exception is air 17 It may receive some transportation as there is a subcomponent of the intra-SCF transportation component that is used to deliver mail to the customer. For this one subcomponent, this mail will incur costs that fall in the Postal Service’s transportation components. But most of the mail dropped at the destination post office will incur only delivery costs. 18 U.S. Postal Service, Summary Description of Costs by Segments and Components, FY 2009, p. 14-6. 19 Five pounds equals 80 ounces (5 x 16 ounces = 80). What’s Driving Postal Transportation Costs? 10 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER transportation, where costs will increase in direct proportion to volume, since the 50-percent measure means that if volume declines by 10 percent, costs would Postal Service pays for the amount of mail it gives the contractor.20 only decline by half that amount.22 However, the story is different when it comes to ground transportation. There may How Much of the Increase in Transportation Costs was be limitations to how much the Postal Service can vary its ground transportation Due to Changes in Volume and Rising Input Costs? in response to changes in volume. Some short-term, small fluctuations in volume In this section, we discuss the results of our decomposition of transportation may not result in any change to overall transportation costs. For example, on costs. For this analysis, we focus on the eight main transportation cost any given day, a truck might need to leave a postal facility during a specified time components.23 Note that this analysis estimates the change using a “two-year frame and cannot wait to be filled up completely. If there were a small increase in base.” This means that instead of looking at the actual change that occurred volume along this route, this might simply result in filling the truck up more. The between FY 2008 and FY 2017, we looked at the change that occurred between opposite might also hold true — a small, short-term decline in volume along an the average cost in FY 2008 and FY 2009 and the average cost in FY 2016 and existing route might simply result in a less-full truck. FY 2017. This was done to avoid any anomalies that might have occurred in a However, over a longer period the Postal Service can better align its planned single year at either the beginning or end of the 10-year timeframe.24 For a more transportation capacity to accommodate volume shifts, arranging for more (or detailed technical explanation of this assumption and the rest of the analysis, fewer) trucks or trips by the same truck. That being said, there still may be some please see Appendix A. limits to the Postal Service’s flexibility. For example, in order to meet service This analysis takes each of the transportation components and decomposes the standards, trucks must leave and arrive at postal facilities during certain windows change in costs into three parts: of time, and these times must be aligned with mail processing operating windows. A late arrival of a truck can lead to significant delays later in the mail processing ■■ The cost change expected to occur as a result of the change in and transportation flow. While the Postal Service can adjust routes and change transported volume. This estimate takes into consideration the change the number of trucks along a route, there may be some trips that cannot be in mail mix in addition to the overall change in volume.25 This is done by eliminated without putting the network in jeopardy. Hence, over any given period, separately estimating volume growth for each of the relevant product groups.26 there will be trips (or trucks) that can be eliminated and some that cannot. For example, Parcel Select is adjusted to remove parcels that are dropped at a destination post office, as changes in the removed volume will have a The Postal Service measures how much ground transportation costs vary on minimal impact on transportation costs.27 This estimate will not include any average with volume over a longer time period, and the measure ranges from cost changes associated with the Postal Service making a change to what around 50 to 80 percent.21 To give an example of what this measure means, a transportation it uses for its products. For example, it will not include the change in cost associated with shifting mail from air to ground transportation. 20 There are minimum requirements on the FedEx and UPS contracts, but it is our understanding that these requirements are met most of the time. 21 These are the variabilities for contracted highway transportation and postal-owned vehicles. U.S. Postal Service, “Library Reference USPS-FY17-32, FY 2017 CRA “B” Workpapers (Public Version),” Postal Regulatory Commission Docket No. ACR2017, https://www.prc.gov/dockets/doclist/ACR2017/Library-References?page=2. Data are found in spreadsheet CS14-Public-FY17.xlsx. 22 This phenomenon is similar to other aspects of the postal network. For instance, a reduction in delivered volume indicates the direction of the change in delivery costs, but the magnitude of the cost reduction will be inhibited by the lost scale advantages as volume falls. The story is essentially the same in the transportation component. 23 We did not include FedEx night in our quantitative analysis because it is a relatively small component, and the necessary detailed data to perform this analysis were not available. In addition, we did not include the various commercial air contracts that serve small geographic areas due to their relatively small size and the complexity of dealing with the small, individual components (for example, Hawaii and Alaska). 24 For example, total domestic transportation costs were much higher in FY 2008 than in FY 2009. If we did not use a two-year base, the actual cost increase over the last 10 years would be understated. 25 The analysis also takes into consideration the variabilities that were discussed above. See Appendix A for a complete discussion. 26 In some cases, this was a “product” as defined by the Postal Service. Other times it was a group of products or a subgroup of products. For a more detailed description, see Appendix A. 27 Since there were numerous changes to the product lines over the last 10 years, the first step of this analysis is to redefine the products to reflect what they would have been in FY 2008. For a more detailed explanation, see Appendix A. What’s Driving Postal Transportation Costs? 11 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER ■■ The cost change expected to occur due to the change in the relevant Table 1: Decomposition of Transportation Cost Changes FY 2008 to FY 2017 transportation-related input costs. To calculate this estimate, we employ Change from FY 2008 to FY 2017 (2-Year Base) the most relevant transportation-related producer price index (PPI) for each $ Millions* individual cost component.28 This allows us to estimate how much costs Volume Input Cost should have changed in response to the inflationary cost pressures in the Actual Effect Effect Residual transportation market, including things such as changing fuel prices and % Change % Change % Change % Change increases in driver wages.29 Air Transportation ■■ The residual costs, which represent the change in costs that cannot be $25.3 ($34.8) $29.2 $30.9 Commercial Air explained by the changes in volume and transportation-related inputs. 15.4% (21.2%) 17.8% 18.8% These are calculated simply as the actual cost change minus the expected $236.7 $193.3 $267.1 ($223.8) cost changes resulting from shifts in volume and transportation-related input FedEx Day Turn 15.7% 12.9% 17.8% (14.9%) costs. A negative residual represents an area where the change in costs is $81.1 ($14.1) $12.6 $82.7 lower than expected. A positive residual represents an area where something UPS 114.3% (19.9%) 17.8% 116.4% happened to raise the costs beyond what is expected. The latter are areas Highway Transportation that may be of concern and most worthy of further study. Inter-SCF $434.2 ($41.3) $77.2 $398.4 Table 1 displays the results of our analysis. Overall, the total nominal costs Transportation between mail 45.0% (4.3%) 8.0% 41.3% for the eight transportation components included in our analysis increased by processing facilities 18 percent — $1 billion over the last 10 years. Of the total change in costs, Intra-SCF $324.3 $73.1 $22.4 $228.8 almost 15 percent of this increase, or $157 million, is expected in response to Transportation between mail processing 22.8% 5.1% 1.6% 16.1% the change in mail volume, including both the decline in letters and flats and the facilities and their post offices increase in parcels. While this result might seem counterintuitive given that overall Inter-NDC ($26.4) ($75.6) $30.6 $18.7 volume declined, it is being driven by the growth of parcel products. In addition, Transportation between NDCs (6.9%) (19.8%) 8.0% 4.9% a little over 46 percent of the increase in costs, or $490 million, can be expected Intra-NDC ($66.3) ($32.4) $29.2 ($63.1) to have occurred as a result of the overall increase in transportation-related input Transportation between NDCs and (18.2%) (8.9%) 8.0% (17.3%) costs. This leaves 39 percent of the cost change, or $418 million, that needs facilities in their service area additional explanation and thus warrants further study. $56.1 $88.5 $21.7 ($54.1) Postal-Owned Vehicles 4.1% 6.4% 1.6% (3.9%) Looking at the analysis for each of the eight individual components shows that there are large differences in where these unexplained costs occurred. As can be $1,065.0 $156.5 $490.0 $418.5 Total seen in Table 1, while some components had a relatively large residual — indicating 18.1% 2.7% 8.3% 7.1% areas that most warrant further explanation and study — others had a negative Percent of Cost Change 14.7% 46.0% 39.3% residual. We discuss the analysis of the components in more detail below. *Numbers in parenthesis in table represent negative numbers. Source: OIG analysis. 28 For intra-SCF and postal-owned vehicles, we used the producer price index (PPI) for local general freight trucking. For intra-NDC, inter-NDC, and inter-SCF, we used the long-distance truckload general freight trucking PPI. Finally, for all the air contracts, we used the scheduled freight air transportation PPI. 29 Since producer price indexes reflect a multitude of different factors, in some cases the changes in factors counteract each other. For example, an increase in prices due to trucker wages could be partially offset by a decline in fuel costs. What’s Driving Postal Transportation Costs? 12 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Ground Transportation transportation-related input costs is for the long-distance categories — inter-SCF, intra-NDC, and inter-NDC. This increase likely reflects an increase in wages due What the Analysis Tells Us to the nationwide trucker shortage.33 Since the mix of mail varies by transportation component, the impact of volume changes differs among components. For the ground components that provide What Else Happened? local transportation — intra-SCF There are two components in ground transportation where the residual category and postal-owned vehicles — Perhaps intra-NDC is an is negative — postal-owned vehicles and intra-NDC transportation. These costs were expected to increase represent areas where costs declined more than expected due to the change in response to the change in mail area where there are some in volume and transportation-related input costs. During the 10‑year period we and parcel volume. Specifically, the lessons learned on how the analyzed, the Postal Service started using more contracted transportation for expected increase occurs due to work that was previously done by postal employees. This likely explains part of the growth in ground parcels and Postal Service managed the decline in costs in postal-owned vehicles. However, a postal union was able Priority Mail. This result occurs 30 transportation in response to negotiate the return of some of this work to Postal Service employees.34 because a fairly large portion of ground parcels is still entered to a volume decline. The negative residual cost for intra-NDC possibly reflects the reduction in the upstream from the destination post number of mail processing plants, as it is possible that with fewer SCFs, the office and, therefore, receives local Postal Service needed less transportation between the NDCs and SCFs.35 In transportation. For these two transportation cost components, the cost increase fact, in the 10-year period in our analysis, contracted miles in the intra-NDC from parcel growth was not offset by the decline in letters and flats. component declined by 35 percent. Perhaps this is also an area where the Postal Service can look for lessons learned in efficiently managing the volume On the other hand, for the longer distance ground transportation — inter-SCF, decline and apply these lessons to other components. inter-NDC, and intra-NDC — we would expect a cost decrease in response to the volume change. For inter-SCF, this decrease was driven by the decline in The two areas that most First-Class Mail. For both types of NDC transportation, the decrease was driven warrant further study involve the by the decline in non-expedited parcels that were not entered at a destination transportation managed around The two areas that most postal facility.31 While there has been a growth in parcels overall, there has been the SCFs. Both inter-SCF and warrant further study a decline in end-to-end non-expedited parcels.32 intra-SCF transportation had a relatively large positive residual — involve the transportation The predicted impact of the transportation-related input costs also varies by accounting for almost 41 percent component, depending on what type of freight transportation the component managed around SCFs. of the cost increase for inter-SCF most closely resembles. The largest predicted increase due to the change in transportation and 16 percent for 30 Professor Bradley’s analysis as described in Appendix A. 31 Ibid. 32 These include parcels that used to travel as Parcel Post, as well as Bound Printed Matter and Media Mail. 33 “Drivers Wanted: Why the Trucking Shortage is Costing You,” Fortune, August 1, 2018, http://fortune.com/2018/08/01/drivers-wanted-trucking-shortage/. 34 American Postal Workers Union, “New Contractual Agreements in the MVS Craft,” http://www.apwu.org/news/deptdiv-news-article/new-contractual-agreements-mvs-craft. 35 The Postal Service announced its plan to align its network in 2011. The purpose of network realignment was to align the Postal Service’s network processing capacity with its declining mail volume through equipment and plant consolidations and operational changes. The first phase of the network realignment involved consolidating 141 mail processing facilities. U.S. Postal Service Office of Inspector General, Mail Processing and Transportation Operational Changes, Report No. NO-AR-16-009, https://www.uspsoig.gov/sites/default/files/document-library-files/2016/NO-AR-16-009.pdf, p. 7. The Postal Service initially said that network realignment overall led to transportation savings in ground transportation. U.S. Postal Service, “Direct Testimony Of Cheryl D. Martin On Behalf Of The United States Postal Service (USPS-T-6),” Postal Regulatory Commission Docket No. N2012-1, https://www.prc.gov/docs/78/78323/USPS-T-6_Martin_testimony.pdf, p. 9. What’s Driving Postal Transportation Costs? 13 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER intra-SCF. This means that we need to consider what else could have caused increase is a recent phenomenon, with miles increasing by 42 percent over the these costs to rise, beyond the changes in volume and transportation-related last five years (FY 2013 to FY 2017).37 According to the Postal Service, some of input costs. this growth may be explained by the need to add more trucks after the network realignment in 2012. Taking a closer look at these two SCF-related transportation components, both had relatively stable capacity utilizations over the 10-year period. As shown Figure 6: Capacity Utilization in Figure 6, while there has been some fluctuation in the average capacity utilization from year to year, the fluctuations have been relatively small — no INTER-SCF AND INTRA-SCF CAPACITY more than a 6-percent change. Furthermore, for both components the overall UTILIZATION FY 2008 TO FY 2017 capacity utilization has returned to its starting point over the 10-year period. This Contrary to what the Postal Service predicted, capacity utilization did not contrasts with what the Postal Service predicted would happen in response to increase as a result of network realignment. Instead, it has remained relatively the relaxation of First-Class Mail service standards and network realignment. It stable over the past 10 years for both inter-SCF and intra-SCF transportation. expected capacity utilization to increase, at least for inter-SCF transportation, as the reduction in service standards should have given trucks more time to fill up 60% with mail before they had to be sent to the next postal facility.36 In a discussion Inter-SCF with Postal Service management, they stated that capacity utilization may not 50% have declined as much as expected because, in some instances, letter and flat mail has different critical departure times than parcels. In these instances, the 40% Postal Service cannot combine both types of mail on one leg of transportation, Intra-SCF and instead will need two separate trucks. 30% Given this stability, and the fact that our analysis already accounts for the rising cost of trucker wages, this might mean one or two things are happening. 20% One, the Postal Service has increased the number of transportation miles within the SCF components — by either increasing the number of trucks or 10% the miles traveled by each truck. Two, there is something specific about postal transportation that is driving the costs up by more than the average transportation 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 costs across the country. Source: OIG analysis of TRACS data.. Using postal data, we were able to gain some insight into what was driving these costs. For inter-SCF, the large residual is likely caused by a 22-percent increase in the number of contracted miles during the 10-year period in our analysis. This 36 In her testimony, Cheryl Martin stated that capacity utilization should increase for inter-SCF transportation. While she expected transportation savings for intra-SCF transportation, she did not explicitly state if this would be due to increased capacity utilization. See U.S. Postal Service, “Direct Testimony Of Cheryl D. Martin On Behalf Of The United States Postal Service (USPS-T-6),” Postal Regulatory Commission Docket No. N2012-1, https://www.prc.gov/docs/78/78323/USPS-T-6_Martin_testimony.pdf, pp. 9, 12, and 14. 37 Miles in the inter-SCF component declined 5 percent from FY 2017 to FY 2018. What’s Driving Postal Transportation Costs? 14 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER On the other hand, intra-SCF had only a 4-percent increase in miles over the Air Transportation 10-year period but had a larger than expected increase in the cost per mile.38 In What the Analysis Tells Us discussions with postal management, they stated that the PPI used in the OIG’s model may not fully represent the significant cost increases actually experienced Both UPS and commercial air had costs that would have been expected to for local highway transportation. decline as a result of a change in volume, while FedEx Day was expected to increase. This is being driven by the fact that historically the majority of mail on The Postal Service has maintained that part of the increase in ground both UPS and commercial air was First-Class Mail (which has declined), and the transportation costs was due to the changes to the operating window and majority of mail on FedEx Day Turn was Priority Mail (which has increased). Our service standards, as well as the resulting move of some Priority Mail from air to analysis predicts that the overall change in transportation-related input costs for ground.39 However, given the magnitude of the unexplained cost increase and the air transportation accounts for almost 18 percent of the cost change over the last stable utilization rates, there may be an opportunity for the Postal Service to look 10 years. for ways to better manage these transportation components to lower costs in the future. What Else Happened? Costs did not increase as much as expected due to volume and transportation- The Postal Service has already begun to take a close look at these costs through related input costs for the FedEx Day Turn contract. The opposite was found for two programs, but it is not yet clear whether either program has been or will the UPS and commercial air contracts — costs increased more than expected. be successful. The goal of the first initiative, Highway Contract Route (HCR) There are two things that could help explain these results. First, as mentioned Optimization (formerly called Zero Base HCR) is to identify transportation with above, some Priority Mail was moved from air to ground transportation. Second, low utilization rates and to reduce duplicative trips.40 However, a recent OIG audit the Postal Service said that it attempts to manage its air transportation to optimize found that the cost savings from this program are questionable, and it likely did its use. According to Postal Service management, part of Postal Service’s not result in any cost savings in FY 2017.41 Postal management informed us that past reliance on FedEx was due to the security requirements inherent with this program is still ongoing. commercial airline flights. However, they said that as the Transportation Security In addition, the Postal Service has started to roll out Dynamic Routing Administration has expanded its screening operations in certain geographic Optimization (DRO), a new system to manage its contracted highway and locations, the Postal Service has been able to move more Priority Mail to lower- postal-owned vehicle transportation. Under DRO, the Postal Service will plan its cost commercial flights. transportation routes each week to align with forecasted mail volume. The OIG has not yet assessed the effectiveness of this program.42 38 Postal management stated that some of the increase that may not be captured in the OIG’s analysis is due to the growth in parcel volume, which has resulted in more transportation needed to pick up parcels from large e-commerce companies. This is due both to the overall increase in parcel volume and the addition of delivering parcels on Sundays. 39 U.S. Postal Service Office of Inspector General, Fuel Consumption and Cost Risk Mitigation, Report No. NL-AR-17-004, https://www.uspsoig.gov/sites/default/files/document-library-files/2017/NL-AR-17-004.pdf, p. 9. The network realignment also caused some First-Class Mail to shift from ground to air, as the change in operating windows allow for less time for First-Class Mail with a three-day service standard to be transported between facilities. U.S. Postal Service Office of Inspector General, Mail Processing Transportation and Operational Changes, Report No. NO-AR-16-009, https://www.uspsoig.gov/sites/default/files/document-library- files/2016/NO-AR-16-009.pdf, p. 22. However, it appears that the shift of Priority Mail from air to ground more than offset the shift of First-Class Mail from ground to air. 40 U.S. Postal Service Office of Inspector General, Management and Oversight of Highway Contract Routes, September 30, 2016, Report No. NL-AR-16-006, https://www.uspsoig.gov/sites/default/files/document-library- files/2016/NL-AR-16-006.pdf, p. 10. 41 U.S. Postal Service Office of Inspector General, Highway Contract Route Optimization Initiative Savings Calculation Methodology and Accuracy, Report No. NL-AR-19-002, January 30, 2019, https://www.uspsoig.gov/ sites/default/files/document-library-files/2018/NL-AR-19-002.pdf. 42 In a meeting with Postal Service management, they acknowledged that DRO is behind schedule, but stated that they expect the program to meet its predicted savings. What’s Driving Postal Transportation Costs? 15 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Conclusion As the Postal Service continues to manage its transportation network in response to these changes, it may be helpful to better understand what is truly driving As overall mail volume has continued to decline, and transportation costs have transportation costs. Our analysis attempts to shed light on this by estimating continued to increase, it is critical to understand that there is much more to the how much of the 10-year change in transportation costs is expected in response story than a simple comparison of those two trendlines. Parcel volume has been to the change in mail volume, including the growth in parcels, and the change rapidly growing, which could have a significant impact on transportation costs, in transportation-related input costs. By doing so, we can isolate where costs including where and what type of transportation is needed in response to where have risen more than expected. This identification is the first step toward gaining the growth in parcels continues to occur. While expedited parcels will need more a deeper understanding of transportation costs and may point the way toward expensive transportation, parcels that are entered into the postal network close actions that could help to contain future costs. This is especially relevant for to their destination will need little to no transportation. In addition, many factors transportation components with the greatest relative cost increases not explained affecting the transportation and shipping industries at large will continue to have by changes in volume or input costs — namely, inter-SCF and intra-SCF an impact on postal transportation costs. transportation. This is an area where further decomposition of costs or future audit work might be warranted in order to determine why cost increases are higher than expected. What’s Driving Postal Transportation Costs? 16 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Appendices Click on the appendix title below to navigate to the section content. Appendix A: Description of 10-Year Analysis of Transportation Costs.............................. 18 Appendix B: Management’s Comments........................................................................................... 25 What’s Driving Postal Transportation Costs? 17 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Appendix A: Description of 10-Year Analysis of Transportation Costs This appendix describes Professor Bradley’s analysis of the change in Step 1: Calculate the Expected Change in Costs in transportation costs over the last 10 years. The purpose of this analysis was Response to the Change in Volume (Including Change in to decompose the actual change in costs into three factors: (1) the change in Mail Mix) Over the 10-Year Period volume, including the change in mail mix; (2) the change in the transportation- This step takes into consideration the different growth rates (including declines) of related input costs; and (3) the residual that represents areas where additional individual products over the 10-year period. Looking at individual product growth explanation or study are needed. For example, if the analysis found that for a rates was necessary because not all mail affects transportation costs in the same given transportation component 85 percent of the increase in transportation costs way. For example, holding all else equal, mail that is larger and heavier costs were due to volume and transportation-related input cost changes, this would more to transport than mail that is smaller and lighter. Therefore, an increase in leave a residual 15 percent of transportation cost changes which merits further larger and heavier mail will have a substantially greater effect on transportation inspection. costs than a similar increase in smaller, lighter mail. This is especially important The analysis looked at how much costs have changed over a 10-year period, given the continued growth in the volume of parcels, which tends to be larger from fiscal years (FY) 2008 to 2017. The analysis uses a “two-year base” method and heavier than letters and flats. In addition, holding all else equal, mail that to avoid the results being skewed by any abnormal or temporary changes in one is entered into the mail stream further away from its destination will incur more year at the beginning or end of our selected 10-year period. Under this method, transportation, and therefore more transportation costs, than mail that is entered the average costs for FY 2008 and FY 2009 are compared against the average closer to its destination. This is relevant because a portion of the growth in parcel costs for FY 2016 and FY 2017. The percentage difference between those two volume is dropped close to its destination. averages therefore provides the change in the transportation costs over the full Step 1a: For Each of the Eight Transportation Components, 10-year period. Estimate the Percent of Costs That Are Used by Each Mail The analysis was done for each of the eight main transportation components Product separately (components are listed in Table 2 below) to gain a better This step uses postal data to estimate the proportion of each product in each of understanding of where transportation costs are increasing more — or less the eight transportation components for the beginning of the 10-year period.43 — than expected based on the volume and transportation-related input cost Table 2 displays these data. These data represent the average share of each changes. This breakdown into components was necessary because the change product during FY 2008. in mail volume and transportation-related input costs will have different effects on the individual components. Decomposing the cost changes of the individual components allows us to identify which transportation components are the most problematic in terms of unexplained costs. 43 Professor Bradley used data from the CRA B Workpapers, CS/14. What’s Driving Postal Transportation Costs? 18 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Table 2: Products’ Share of Transportation Components’ Costs Market Dominant First-Class First-Class Mail Marketing Mail Periodicals Parcel Post Priority Mail Parcel Select Package Services Packages Inter-SCF Highway 41.9% 9.1% 7.9% 2.3% 2.1% Confidential Confidential Confidential Intra-SCF Highway 24.2% 21.6% 10.0% 6.7% 5.2% Confidential Confidential Confidential Inter-NDC Highway 7.8% 28.4% 9.3% 29.7% 14.7% Confidential Confidential Confidential Intra-NDC Highway 7.8% 30.1% 6.4% 22.5% 16.3% Confidential Confidential Confidential Commercial Air 81.0% 2.3% 1.9% 0.1% 0.3% Confidential Confidential Confidential FedEx Day 21.0% 0.9% 0.7% 0.6% 0.6% Confidential Confidential Confidential UPS 79.9% 2.5% 1.8% 0.1% 0.3% Confidential Confidential Confidential Postal-Owned Vehicles 24.9% 21.3% 10.3% 6.6% 5.5% Confidential Confidential Confidential Source: Professor Bradley’s analytical memos to OIG. Step 1b: Construct Relevant Product Volume Series for the 10-Year Another example of why this step was necessary is how we handled Parcel Period Select. While all of Parcel Select is dropshipped (entered at a specific postal facility in order to receive a dropship discount), the portion of Parcel Select that is Since there have been significant changes in product lines between FY 2008 and dropped at the destination post office will have little to no impact on transportation FY 2017, the next step was to construct consistent product groupings over the costs. Therefore, we created a volume series that captures Parcel Select that 10-year period.44 A simple example is how we handled Parcel Post. Most of the does not include the volume that is dropped at the destination post office. volume that was market dominant Parcel Post in FY 2008 was transferred to the competitive products category and renamed Standard Post in FY 2013.45 It was Step 1c: Estimate Growth Rates for Each Product then renamed again in FY 2017 to its current name, Retail Ground.46 To account The next step was to use the volume series constructed in step 1b to calculate for these changes, we created a volume series from FY 2008 to FY 2017 for the growth rates for each product over the 10-year time frame. As mentioned combined Parcel Post that aggregates the volumes from Parcel Post, Standard above, the growth rate is measured using a two-year base. In other words, it is Post, and Retail Ground across the 10-year period. 44 The source of the detailed volume data was the Postal Service’s billing determinants. The billing determinants are filed each quarter by the Postal Service and show detailed volume and revenue information below the product level. 45 Postal Regulatory Commission, Order No. 1411, Order Conditionally Granting Request to Transfer Parcel Post to the Competitive Product List, Docket No. MC2012-13, July 19, 2012, www.prc.gov/docs/83/83756/ Order_No_1411.pdf and Order No. 1536, Order Approving Changes in Rates of General Applicability for Competitive Products, Docket No. CP2013-3, November 8, 2012, https://www.prc.gov/docs/85/85608/ Order_1536.pdf. 46 U.S. Postal Service, “Notice and Order Concerning Change in Rates of General Applicability for Competitive Products,” Postal Regulatory Commission Docket No. CP2016-9, October 19, 2015, https://www.prc.gov/ docs/93/93584/Order%20No.%202767.pdf, p.3. What’s Driving Postal Transportation Costs? 19 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER the change in volume between the average product volume in FY 2008 and FY Step 1d: Calculate the Overall Volume Growth Rate for Each of the 2009 and the average product volume in FY 2016 and FY 2017. Table 3 below Eight Transportation Components shows the calculation for Periodicals. This step combines the information from steps 1a and 1c to calculate an estimate Table 3: Growth Rate for Periodicals Using a Two-Year Base of volume growth for each of the eight transportation components.47 This was calculated using the following methodology. The proportion of each product within Actual Volume 2-Year Average a cost component (from step 1a) is multiplied by the growth rate from this product (from step 1c). The overall volume growth for each cost component is the sum FY 2008 8.6 B 8.3 B of all the calculations for each product within the component. Figure 7 shows an FY 2009 8.0 B example of how the equation would work for a theoretical cost component with FY 2016 5.6 B three products. 5.5 B FY 2017 5.3 B Growth Rate = (5.5 – 8.3) / 8.3 = -34% Source: OIG analysis. Figure 7: Example Equation for Overall Volume Growth of a Cost Component Overall Volume Proportion Volume Proportion Volume Proportion Volume of Product A Growth of of Product B Growth of of Product C Growth of Growth for Cost FY 2008 Product A FY 2008 Product B FY 2008 Product C Component (Step 1a) (Step 1c) (Step 1a) (Step 1c) (Step 1a) (Step 1c) A B C Source: OIG Analysis. 47 While we refer to this calculation as the volume growth in the transportation component, it reflects the estimated growth in the relevant cost driver — either pounds or cubic feet. This is the relevant estimate of “volume” for transportation costs. What’s Driving Postal Transportation Costs? 20 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Figure 8 illustrates how this calculation was performed for intra-SCF transportation. While actual data cannot be shown due to commercial sensitivity, this figure helps illuminate how we factored in the changes in product lines. For example, both Parcel Post and First-Class Mail packages have growth rates that reflect the combined volume series. In addition, as discussed above, we used the growth rate for non-destination delivery unit (DDU) Parcel Select (Parcel Select not dropped at the destination post office), since parcels dropped at the destination post office receive little to no transportation. Figure 8: Calculation of Intra-SCF Overall Volume Growth Rate Proportion of Intra-SCF Trasportation in FY 2008 Growth in Volume Over 10-year Period (FY 2008 - FY 2017) The Share of First-Class Mail The Growth in First-Class Mail Letters and Flats The Share of Marketing Mail The Growth in Marketing Mail The Share of Periodicals The Growth in Periodicals The Growth in Combined The Share of Parcel Post Parcel Post The Share of Package Services The Growth in Package Services The Share of First-Class Packages The Growth in Combined First-Class Packages The Share of Priority Mail The Growth in Priority Mail The Share of Parcel Select The Growth in Non-DDU Parcel Select Overall Volume Growth Rate for Intra-SCF Transportation Source: Professor Bradley’s analytical memos to OIG. What’s Driving Postal Transportation Costs? 21 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Table 4 shows the estimated overall volume growth rates for each of the eight from nearly 50 percent to a little over 80 percent. The variabilities are multiplied transportation components. by the overall volume growth rates to calculate the expected change in costs in response to a change in volume. The results are shown in Table 5. Table 4: Overall Volume Growth Rates (Two-Year Base) Table 5: Expected Change in Costs in Response to Volume Change Overall Volume Growth Rates Component (Two-Year Base) Expected Overall Volume Change in Costs Inter-SCF Highway -5.9% Growth Rates Volume in Response to Intra-SCF Highway 10.3% (Two-Year Base) Variability Volume Change Component    =  x  Inter-NDC Highway -24.7% Inter-SCF Highway -5.9% 73.2% -4.3% Intra-NDC Highway -11.9% Intra-SCF Highway 10.3% 49.7% 5.1% Postal-Owned Vehicles 10.6% Inter-NDC Highway -24.7% 80.3% -19.8% Commercial Air -21.2% FedEx Day Turn 12.9% Intra-NDC Highway -11.9% 74.8% -8.9% UPS -19.9% Postal-Owned Vehicles 10.6% 60.4% 6.4% Source: Professor Bradley’s analytical memos to OIG. Commercial Air -21.2% 100.0% -21.2% FedEx Day Turn 12.9% 100.0% 12.9% Step 1e: Estimate the Expected Change in Cost in Response to the Change in Volume UPS -19.9% 100.0% -19.9% The final step in estimating the expected effect of volume changes on Source: Professor Bradley’s analytical memos to OIG. transportation costs was to account for the variability, which is a measure of the amount by which costs vary with volume.48 For example, if a transportation cost Step 2: Calculation of the Growth in Transportation-Related Input component has a variability of 100, costs would rise or fall in direct proportion Costs with volume. On the other hand, if a transportation cost component has a Step 2 is the calculation of the growth in transportation-related input costs over variability of 80 percent, then a 10-percent increase in volume would only be the 10-year period of our analysis. Since the vast majority of transportation is expected to increase costs by 8 percent. purchased from third-party companies, the Postal Service’s transportation costs The variabilities differ by transportation cost component. For air transportation, reflect the prices that providers charge. To best capture how these prices will the variabilities are 100 percent, as the Postal Service only pays for the change, along with the broader cost movements in other inputs like labor, we use transportation capacity it uses. For ground transportation, the variabilities range the relevant producer price indexes (PPIs) for transportation as our measures 48 The variabilities are estimated by the Postal Service and approved by the Postal Regulatory Commission. What’s Driving Postal Transportation Costs? 22 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER of Postal Service input costs. This method allows us to capture how much costs NDC, we use the PPI for “general freight trucking, long-distance truckload” to should have changed in response to cost pressures in the transportation market, estimate the change in input costs for these two transportation components. For including factors such as fluctuations in fuel prices and the increasing wages of all air transportation components, we used the PPI for scheduled air freight. long-haul truck drivers. Table 6 displays the PPIs we used for each transportation component. Step 3: Decomposing the Total Impact of Changes in Volume and Transportation-Related Input Costs on Transportation Costs Table 6: Producer Price Indexes Used in Analysis The final part of the analysis was to subtract the results from steps 1 and 2 above from the actual change in costs over the last 10 years. The leftover amount PPI Associated Producer Price of each cost change — or “residual” — represents changes that cannot be Change Over 10 Years Transportation Index Name explained by changes in volume and transportation-related input costs. (2-Year Base) Component General Freight Intra-SCF Table 7 shows this decomposition. Column 1 shows the actual change that 1.6% Trucking - Local Postal-Owned Vehicles occurred in each transportation component between FY 2008 and FY 2017 (using a two-year base). Column 2 displays the expected change in costs in response to General Freight Intra-NDC the volume change — this includes both the percentages as calculated in Table 5 Trucking - Long- 8.0% Inter-NDC above and the corresponding dollar value. Distance Truckload (TL) Inter-SCF Column 3 shows the expected change in costs in response to the overall change FedEx Day Scheduled Freight Air in transportation-related input costs, as calculated in Table 6 above (both the 17.8% UPS Transportation percentage and corresponding volumes are shown). Column 4 displays the sum Commercial Air of columns 2 and 3. It represents the total effect of volume and transportation- Source: Professor Bradley’s analytical memos to OIG. related input costs on each of the transportation components’ costs. Column 5 represents the residual, the portion of the total change in each Since both intra-SCF and postal-owned vehicles are primarily short-haul, local transportation component that cannot be explained by the changes in volume and transportation, we use the PPI for local freight transportation to reflect the change transportation-related input costs. It was calculated by subtracting column 4 from in input costs. For the longer-haul transportation, inter-SCF, inter-NDC, and intra- column 1. What’s Driving Postal Transportation Costs? 23 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Table 7: Decomposition of Cost Changes Over 10-Year Period from FY2008 – FY2017 ($ Millions and Percent Change)* Change Due Change Due Change Due to Volume Actual Change to Volume to Input Costs and Input Costs Residual Component     =- $434.2 ($41.3) $77.2 $35.9 $398.4 Inter-SCF Highway 45.0% (4.3%) 8.0% 3.7% 41.3% $324.3 $73.1 $22.4 $95.5 $228.8 Intra-SCF Highway 22.8% 5.1% 1.6% 6.7% 16.1% ($26.4) ($75.6) $30.6 ($45.0) $18.7 Inter-NDC Highway (6.9%) (19.8%) 8.0% (11.8%) 4.9% ($66.3) ($32.4) $29.2 ($3.2) ($63.1) Intra-NDC Highway (18.2%) (8.9%) 8.0% (0.9%) (17.3%) $56.1 $88.5 $21.7 $110.2 ($54.1) Postal-owned Vehicle 4.1% 6.4% 1.6% 8.0% (3.9%) $25.3 ($34.8) $29.2 ($5.6) $30.9 Commercial Air 15.4% (21.2%) 17.8% (3.4%) 18.8% $236.7 $193.3 $267.1 $460.4 ($223.8) FedEx Day Turn 15.7% 12.9% 17.8% 30.6% (14.9%) $81.1 ($14.1) $12.6 ($1.5) 82.7 UPS 114.3% (19.9%) 17.8% (2.2%) 116.4% Source: Professor Bradley’s analytical memos to OIG. *Numbers in parenthesis represent negative numbers. What’s Driving Postal Transportation Costs? 24 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Appendix B: Management’s Comments What’s Driving Postal Transportation Costs? 25 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER What’s Driving Postal Transportation Costs? 26 Report Number RARC-WP-19-002 TABLE OF CONTENTS EXECUTIVE SUMMARY OBSERVATIONS APPENDICES BACK to COVER Contact us via our Hotline and FOIA forms. Follow us on social networks. Stay informed. 1735 North Lynn Street Arlington, VA 22209-2020 (703) 248-2100 For media inquiries, contact Agapi Doulaveris Telephone: 703-248-2286 We conducted work for this white paper in accordance with the Council of the Inspectors General on Integrity and Efficiency’s Quality Standards for Inspection and Evaluation (January 2012).
What's Driving Postal Transportation Costs?
Published by the United States Postal Service, Office of Inspector General on 2019-03-18.
Below is a raw (and likely hideous) rendition of the original report. (PDF)