Transit is experiencing a post-pandemic decline in revenue and has a universal service obligation to be available to the entire public. - Metro Transit

Transit is experiencing a post-pandemic decline in revenue and has a universal service obligation to be available to the entire public.

Metro Transit

In 1775, before the U.S. Declaration of Independence had even been signed, the Continental Congress turned the Constitutional Post into the Post Office of the United States, whose operations were among the first functions of the newly established government.

The charter of the United States Postal Service (USPS) grew from its primitive beginning, serving the original 13 colonies, eventually moving westward with the new American frontier. Throughout time, the delivery service modernized and kept pace with the industrial age, adopting new modes of transportation like railroads, automobiles, and aircraft, to fulfill its core mission.

There are several parallels of the USPS story to that of American transit agencies. In fact, for transit agencies to encourage the broad adoption of new Mobility-as-a-Service (MaaS) and Mobility on Demand (MoD) solutions, we don’t have to look any further than the USPS for a revenue model use case.

A mandated mission but with fluctuating costs

The modern USPS continues to be a government run and regulated service, with a universal service obligation that is defined by a broad set of mandates, obligating the agency to provide uniform price and quality across the entirety of its service area. Deliveries must happen through the postal service’s fixed network, independent of utilization levels by the population. As has been highlighted in the news recently, the USPS is struggling to maintain relevance in an increasingly digitized society, resulting in declining utilization and revenues.

Other challenges for the USPS are due to the limitations on how much its fares, like postage or shipping labels, can increase, as well as how it can cover fixed costs such as large pension funds.

Looking at both examples side-by-side, transit agencies have a similar story to the postal service. Both are government run and regulated, with a pay-per-usage model. Transit is experiencing a post-pandemic decline in revenue and has a universal service obligation to be available to the entire public. Transit services operate on fixed networks, meaning the bus will run whether or not it is at capacity. There is very limited political appetite for increasing fares for the high-volume, small value transactions that define its operations.

However, where the two examples diverge is in how they sell fares. What’s interesting about the revenue model for the postal service is that users are no longer limited to buying postage exclusively through the USPS — now, stamps and other shipping labels are available for purchase at wholesale retail or third-party resellers, like, EasyPost, PayPal, or Amazon Shopper. This is an ideal illustration of a government-run organization that offers its services at less than face value to private third parties, even though it is subsidized by public funds. This arrangement has benefits for the postal service, which extends its reach using private third parties. And, for the private companies, they can offer the postal products as an additional benefit to their customers.

A new model to reduce costs and generate benefits

The USPS embraces third-party commercial organizations to resell postage via connections to the USPS back office to create a 2D barcode. Each commercial agreement is negotiated separately and is traditionally based on volume of transactions. The third parties usually charge a monthly fee to cover a limited amount of postage or use a pay-as-you-go model. The face value of postage bought at discount by third-party vendors appears consistent with the cost of postage acquired directly from the USPS. Price to the customer of the postage is less than the USPS face-value by an agreed percentage based on the commercial agreements, and according to some agreements, a portion of the discount on face value is passed to the customer or kept as profit by the third party.

Essentially, the USPS has embraced third parties as an additional sales arm to drive down operational costs (for example, less post offices), and drive-up utilization, increasing the mail being shipped.

Unfortunately, many transit agencies have pushed back against the concept of allowing wholesale retail of its fares and services. They are reluctant to sell fares to private organizations for fear of backlash over subsidizing private enterprises that will make a profit.

Lessons that apply to support transit agencies

Transit agencies could benefit from also allowing third-party commercial resale of transit fares in similar ways. For example, an integrated transit ticket can help to reduce operational costs with fewer ticket vending machines, and less media to be produced. Additionally, this model can deliver MaaS/MoD solutions to a much wider audience, which can result in net gains of ridership in areas that continue to struggle with post-pandemic effects. Through commercial extensions, like free rides on public transit to restaurants and events, or integrations with airports and intercity rail, transit can attract more passengers as travel returns to pre-pandemic levels.

Commercial resale of transit fares can also serve to capture the users that, without incentive to include transit in their journey, would have opted for another private transit mode (e.g., rideshare). Further, third-party selling of unused or underutilized transit capacity can leverage a yield management model with variable pricing, as is commonly done in other service industries like airlines, lodging, entertainment, and more. Transit agencies could consider this model and look to the USPS’s partnerships and moves to keep up with faster paced and increasingly digitized world for guidance. In the end, it could be a win-win-win, for the rider, the transit agency, and the third-party partners.

About the author
Audrey Denis

Audrey Denis

Audrey Denis is a strategy manager at Cubic Transportation Systems

Audrey is a strategy manager at Cubic Transportation Systems.

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