Some Thoughts on the US Postal Service

Just a few quick thoughts on the troubles at USPS. I suspect you’ll hear a lot more about this in the next few days/weeks provided that Europe doesn’t fall apart first. If Europe does have an acute issue, the USPS will be reported about on page 37, not the first page of any media.

As everyone knows, email is killing the Postal Service. Not just email, but electronic bill delivery and electronic banking. Google Ads have supplanted an awful lot of direct mail aka “junk mail”. There is no evil here, just “progress”. Times are a-changin’. Regular mail is slowly going the way of the buggy whip. The volume of mail delivered (measured in pieces of mail) is down some 16% in just two years, revenue is down 11% and headcount down 12%.

Obviously revenue is down less than volume because of price increases. Offsetting volume declines with price increases only works for so long. Mail is not a service which takes place in a vacuum- the more expensive it gets, the less likely we are to use it. Google Ads are far more effective and cheaper than most direct mail. Sending an e-card to mom for her birthday has many advantages over going to the store, picking a card, waiting online to pay for it, remembering to mail it 5 days ahead of time and of course, having the right postage (those square cards need “extra postage” though how much is a mystery).

The Post Office will exist for a long time though- I believe it is one of the only few mediums that retain an official status of notification for things of legal nature. The post mark determines if your taxes were paid on time, not whether it gets there on time. I’m not sure if there is a legal alternative to registered or certified mail (anyone know if courts acknowlege UPS or FedEx?) Priority Mail is also a product not matched by UPS or FedEx in terms of price/time. And who doesn’t like opening mail or getting a good old fashioned catalogue? Then again, people liked a good buggy whip too.

I’ve seen a few major proposals in how to “save” the Post Office. These include cutting the frequency of mail delivery and changing pension funding. Neither proposal will help for long in my opinion unless implemented differently than proposed. The first involves going from 6 day per week delivery to 5 days. As volume declines, cuts are made to help reduce the unit cost of delivering mail. Cutting one day will help, probably on the order of about 15% in costs. But- and here is the trap- a large portion of delivery is mostly fixed in cost. Pretty soon, you find that variable costs can’t be reduced much more. Facilities, trucks, energy and some labor are always required to have enough scale to get mail from LA to NY in a few days. Cutting a mere 15% or 20% of the cost will not solve the problem for long.

The other proposal changes funding of the Postal Service pension program. The USPS is required by law to fully fund, each year, the accrued pension liabilities. Obviously, as your revenue and thus cash flow available to fund pensions falls, this becomes more and more difficult- particularly since pension contributions tend to grow when markets are weak even as headcounts fall. The USPS proposed changing to a pension funding mechanism which smooths contributions over a number of years. This proposed system is how the rest of the corporate and government world does it- and is why most pension funds are severely underfunded! Clearly, changing the pension accounting is a short-term gimmick.

So what to do? If one really wants to save the USPS (without large and growing taxpayer support), I’d suggest this:

• Change delivery from 6-days to 3-days: every other day that is, with some addresses getting mail Mon, Wed, Fri and the others getting mail Tues, Thurs, Sat. This would hardly make a different to 99% of residential customers but would save an enormous cost as variable costs would be spread further and fixed costs could be reduced with better utilization (think fewer trucks and more mail per truck).
• If getting mail less frequently either bothers you or is a problem for business, I have another solution: charge for 6-day delivery. Personally, I like getting mail- I would pay $50- $100 per year for 5 or 6-day delivery. I don’t know what amount would be sufficient to cover the extra cost, but judging by the small cuts proposed, I doubt this number would be very large. For businesses, let them pay even more. Or per piece. This variation on simple flat-rate mail does not defeat the purpose of inexpensive flat-rate service, it merely aligns the price with the cost structure. Businesses are already pushing people to electronic means. For example, Humana Insurance charges $10 per invoice if you pay the bill with a check in the mail instead of by some sort of electronic payment arrangement.
• Change the Postal Service pension system to be more in-line with the rest of the country’s benefits. Full disclosure: I have not examined Postal Service benefits in detail, but from what I understand they are more generous than Social Security and Federal or State pensions. In terms of tax-payer fairness, they could be brought in-line with the others and still be generous by 401K standards.

If you are interested, the PS’ 2010 annual report is chock full of interesting data. Feel free to post comments if you uncover useful info.

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