Tuesday, December 17, 2013

How USPS Is Like an Airline, and Why That Matters

A postal official made a revealing statement last week about the U.S. Postal Service’s attempt to get higher-than-inflation rate increases.

If USPS’s “financial challenges were alleviated by the timely enactment of laws that close a $20 billion budget gap, the Postal Service would reconsider its pricing strategy,” Deputy Postmaster General Ron Stroman wrote last week in a Post & Parcel letter to the editor. The request for “exigent” rate increases – on which a ruling is due Monday --was “a last resort,” according to USPS’s #2 man.

USPS has spent years trying to pass exigent rate increases to help it dig out of the red. So why would it even think about walking away from a legal victory that could be worth a couple of billion dollars a years?

My theory: Postal officials aren’t sure an extraordinary rate increase will help the agency. They’re worried that breaching the inflation-based cap that has kept most postal rates in check will undermine confidence in the mail system, pushing mailers to switch even more communications to digital delivery.

In the simplistic thinking of some Congress members – whom USPS is apparently trying to appease with its rate request – the answer to insufficient revenue is simple: Increase your rates.

But postal officials know that higher prices don’t mean more revenue if they lead to fewer mailings. They’ve seen this movie before in the pre-rate-cap days, and the ending wasn’t pretty, including a drastic decline in catalog mailings.

It helps to understand that, as I wrote in 2009, the U.S. Postal Service is like a money-losing airline that is flying a lot of half-full planes. Many of the airline’s costs are the same regardless how many passengers are on the planes.

You can’t fly with fewer pilots or reduce the jet’s depreciation just because most of the seats are empty. Nor can the Postal Service deliver to fewer addresses just because its mail bags are not as full as they used to be.

If the airline raises its prices, competitors will lure away passengers with lower fares. At the margin, even a bargain-rate passenger is profitable; the only cost of adding one to a plane is a few gallons of jet fuel, a bag of stale pretzels, and a tiny can of soda.

Jacking up postal rates merely causes marketers to prospect more with email instead of direct mail, publishers to convert more subscribers to digital editions, and corporations to offer more incentives for customers who switch to electronic billing.

What the Postal Service needs is mostly in the hands of Congress, which structured USPS in the pre-internet days to be a cash cow for the federal government. Times have changed, and the cash cow has been milked so dry it can’t replace 25-year-old delivery vehicles that are held together with duct tape and rubber bands.

But the laws and practices that drained the Postal Service of billions of dollars remain unchanged. And, more than ever, USPS needs less not-in-my district Congressional interference that stymies reasonable downsizing of its distribution network.

What the Postal Service doesn’t need are rate-cap-busting price increases that drive away customers.

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7 comments:

Anonymous said...

If the USPS was like an airline would there have been a wage increase spread out over 2 and half years with 7 cost of living increases equalling about 8% completed by 2015? The rest of the Federal government has not seen anything like this. If it did taxes would be going up to provide service. Airlines on the other hand would go belly up.

M. Jamison said...

The problem with this analysis is that it fails to recognize that rates are some of the lowest in the world and the elasticity studies just don't support the contentions of the vast majority of the mailing industry (yes some products are more susceptible to increases).
Mail is still a unique media and still works better than e-mail and some other alternatives. Keeping rates low while cutting service and standards will do more to erode the value of mail than reasonably small increases in rates. The CPI price cap is an artificial measurement that no other business sticks by rigidly. It does serve as a nice place for the mailers to hang their ideological hats.
The mailers cry "Socialism" when anyone suggests that the postal network is a public service providing a number of public goods yet what is more evident than the corporate version of socialism when an industry seeks to capture government infrastructure?

Anonymous said...

Double down on what Jamison said

John Klein said...

The USPS has a tremendous unique but underutilized asset: It has hundreds of thousands of workers who every day go to every signgle mailbox for every single resident and business.

The network could be used not only for delivery of the mail, but as eyes and ears for other branches of government. Think of the power of all these postmen & postwomen looking for missing children, lost vehicles, unlivable/unkempt home exteriors.
This workforce could be utilized as inspectors for many types of situations.

Another use might be to check up on aging seniors by seeing every day if they flipped a sign so that the postperson would know they are OK that day. Seniors, or senior's relatives could register the senior for this service, and if the senior failed to flip the sign each day, the postal person could report to authorities to check the residence for a possible senior in distress.

Would any of this be feasible with the gridlocked congress we have???

Anonymous said...

The irony is that the Post Office would be running a surplus of $600 million this year if it weren't for Congress. The Postal Accountability and Enhancement Act of '06 was passed in a lame duck session by the Republican congress in 2006. It forces the Post Office to pre-pay, in first dollars, 75 years worth of healthcare for retirees in 10 years. They are being forced to put $5 billion in first dollars aside to cover retiree healthcare benefits. No private business or any other government agency does anything close to that. their revenues are self generated and they do not receive any tax dollars from the Federal govt.

Anonymous said...

The USPS s more like a utility than an airline. It delivers its relatively consistent product flow with established transmission lines.

The difference is pricing. We pay for utilities at the point of delivery and it is metered service. The supplier pays a price to put the product on the grid, whether phone, electricity, water etc.

Allow customers to choose a range of pricing for delivery based on convenience. Pick up at post office would be free. Regional boxes a bit more, home delivery a bit more. Business service would be higher than residential, like the phone company. Demand charges could be applied like the electric company. I think you would be surprised that giving the customer choice just might reduce labor demand and create a new mostly unobjectionable revenue stream.

Peter Drew said...

Just read the actual legislation mentioned above. The USPS is required to pay between 5.4 and 5.8 billion dollars a year from 2007 to 2016 in the Retirement and Health Benefits Fund to fully fund that account through 2056.

This pre-funding method is unique to the USPS. No corporation, if corporations still offered actual pensions, would be required to do this. This cash suck is killing the USPS. Congress knows what it did but turns a blind eye and tells the Postal Service to raise rates.

Yes, US postal rates are lower than those found in other developed countries, but forcing higher rates because of a flawed benefits funding scheme just adds to the Postal Service's difficulty in remaining competitive in the marketplace. Some efforts to grow particular segments have resulted from this mess, including a drive to increase package delivery volume and Sunday delivery of Amazon.com packages.

But without some relief from the huge payments required to be socked away for distant retirement payouts, it's going to be very tough going for the next several years.

There has already been an interruption in the payment schedule. From Wikipedia: "In June 2011, the USPS had to suspend its weekly payment of 115 million into the fund because it had reached 8 billion dollars in debt and the retirement plan had a surplus of 6.9 billion dollars. The Postal Service has not made any of the pre-funding payments since that time."

Congress has the power to reduce the burden on the Postal Service. It just doesn't seem to have the will, in fact, it doesn't really seem to care. It's a shame.