Can Parcel Growth Support the Sustainability of the USO?

As a result of ongoing digitalisation, Universal Service Providers (USP) across Europe faced significant declines in letter mail volumes and significant growth in parcel mail driven by the growth of e-commerce, most recently strengthened by the Covid-19 pandemic. Profit margins of letter mail are generally expected to be higher than those of parcel mail, because USPs are typically the only major provider of letter mail, whereas they face competition from parcel provider rivals. In this paper we consider the drivers of these profit margins. Then, considering the likely future trends in letter mail decline and parcel growth, we analyse how the financial viability of the universal service obligation (USO) could be affected. We find based on our modelling that under traditional USOs (e.g., daily delivery) future parcel volume growth consistent with historic trends is, at first glance, sufficient to sustain overall profitability by compensating the negative impact on profitability from letter volume declines. Real-world data overall supports this by showing that USPs generally continuing to return a profit. However, USPs profitability in several countries were also likely to be affected by structural changes in their markets and changes in USO obligations suggesting that, without those changes, their profitability may have been lower. Considering finding a negative impact on USP profitability in several modelled scenarios, we conclude that the changes in volumes and volume mix that USPs face, at the very least, mean that the risk of the USO becoming unsustainable has increased.