Trump is delivering on his rants about the US Postal Service's Amazon deal — but his argument is flawed (AMZN)

On Thursday, Trump ordered the
Trump previously tweeted that
An increase in package deliveries due to e-commerce is one of the brightest points in the USPS' troubled financials — and Amazon is partly to thank for that.
However, the agency may be undercharging customers, including Amazon, to ship packages, something Citi estimates could be saving the e-commerce giant up to $2.6 billion.

President Donald Trump can't stop slamming the United States Postal Service as he feuds with Amazon.

On Thursday, Trump ordered the creation of a task force to investigate the USPS and its "unsustainable financial path." Trump's order stated that the USPS had lost $65 billion since the Great Recession and needed to be "restructured to prevent a taxpayer-funded bailout."

The order follows weeks of criticism of the USPS — and specifically, its deal with Amazon.

"Only fools, or worse, are saying that our money losing Post Office makes money with Amazon," Trump tweeted earlier in April. "THEY LOSE A FORTUNE, and this will be changed. Also, our fully tax paying retailers are closing stores all over the country...not a level playing field!"

Trump doubled down with another tweet, saying Amazon is "costing the United States Post Office massive amounts of money for being their Delivery Boy."

"Amazon should pay these costs (plus) and not have them bourne by the American Taxpayer," he said. "Many billions of dollars. P.O. leaders don’t have a clue (or do they?)!"

I am right about Amazon cos... @ Donald J. Trump

And when asked about the issue by reporters, Trump said, "Amazon has the money to pay the fair rate at the post office, which would be much more than they're paying right now."

It's true that because of the rise of e-commerce and some retailers' subsequent struggles, stores have been closing across the US. And it's true that in February, the Postal Service posted a net loss of $540 million in the first quarter.

What is more complicated is whether Amazon is to blame.

"Trump is trying to say that Amazon is the reason the post office is losing millions of dollars," Logan Purk, an analyst at Edward Jones, told Business Insider. "And in reality, that's not the case."

But there is plenty of evidence that the Postal Service's business model is unsustainable — and that Amazon is profiting because of that.

Amazon is giving the Postal Service a lifeline

The USPS is in rough shape.

Last year, it reported a net loss of $2.7 billion on $69.6 billion in revenue. The agency also has enormous costs for pensions and healthcare, as it is required to pre-fund retirees — a $6.9 billion payment it did not make at the end of last year.

The USPS has a monopoly on letter delivery, which it has long used to subsidize its parcel-delivery business. Now, those roles could reverse as the number of parcels shipped skyrockets and the number of letters sent plummets in the age of email and social media.

"Mail delivery has slowly been replaced by email," Purk said, adding: "That's what's really hurting profitability."

Last year, shipping-and-package revenue jumped by $2.1 billion, an increase of 11.8% over the previous year. According to the Postal Service, much of that growth was thanks to e-commerce.

The Postal Service's low fixed costs and mandate to deliver mail to Americans makes it an ideal option for Amazon's "last-mile" delivery, or a package's journey from a fulfillment depot to its final destination. Amazon drops off its sorted packages, and a postal worker delivers them on their usual route.

Roughly two-thirds of Amazon packages pass through the USPS at some point in their delivery, making the e-commerce giant one of the agency's biggest customers, Citi analysts said.

But some people, including Trump, argue that Amazon should be paying the USPS more.

The Postal Service and Amazon declined to comment on the record for this article.

Amazon could — and maybe should — be paying the USPS up to $2.6 billion more

The crux of the issue is whether the Postal Service is undercharging not only Amazon, but everyone who ships packages through it.

And the answer is complicated.

A report by Citi last year found that if the USPS were to cover its costs by increasing package-shipping prices, each package would cost an average of $1.46 more to ship.

Trump referred to the report earlier this month, though he was mistaken in saying it was recent and suggesting the $1.46 figure applied to only Amazon — Citi estimated it applied to all packages sent through the Postal Service.

The $1.46 figure may not be completely accurate, as argued by Business Insider's Josh Barro. But, it is still likely that the USPS increasing prices would impact Amazon in a signficant manner.

The Citi report described the USPS's pricing model as "unsustainable," saying it continues to bleed money that it needs to invest in benefits and things like new delivery vehicles.

Amazon would be one of the companies hit hardest if the Postal Service were to increase prices — the Citi analyst Christian Wetherbee estimated that a price hike would cost Amazon $2.6 billion.

Wetherbee told Business Insider that Amazon's business "has been built almost on the back of this pricing model."

"Whether they're taking advantage of it or not, or just being astute players in the market and taking advantage of the cost arbitration, they are the ones who have probably leveraged it the most," Wetherbee added.

The USPS isn't built to maximize profitability. It is a government service designed to deliver mail to Americans — even if it is not profitable to do so. The Postal Service's only requirement is to cover the costs it is mandated to pay, but it's largely not doing that now, especially in terms of pre-funding pensions.

As a result, the USPS may need to increase prices — though it has so far avoided doing so, most likely saving Amazon and other bulk shippers millions of dollars.

Wetherbee said: "The real big-picture argument would be: Could Amazon have afforded to make this huge push into free home delivery as aggressively as it did if the price was what UPS or FedEx would charge? ... Could they have grown this as successfully without this subsidy, if you will?"

Amazon is not the sole company getting this deal with the USPS — it's everyone who ships through the agency. But the argument is that the USPS's "unsustainable" pricing model is saving the company significantly more than any other retailer because of the volume of its e-commerce orders.

Trump versus the fools

So is Trump right?

On a basic level, no.

Trump, known for his love of the deal, is treating the USPS as a business when it isn't one. It's a government service whose structure makes it perfect for Amazon to help reduce costs through using it for last-mile delivery, a notoriously expensive service that neither FedEx or UPS wants to lose money doing themselves.

And while Amazon probably has a reasonable contract with the USPS, it doesn't have a special deal designed to scam the American taxpayer.

The USPS does, however, need to address its pricing model — it could certainly stand to charge more than it does. And if Trump continues his pressure, it may have to do exactly that.