Tuesday, August 18, 2009

Postal Service Bankruptcy

The headline says it all, "The U.S. Postal Service: Our Next Bankruptcy?" While the stark headline is startling, the potential impact is even more so. The article by Delia Lloyd was published on the website Politics Daily, a new politics website that now attracts 3.6 million unique users every month. It is not clear whether the article and the millions that will read it will sufficiently raise awareness of the Postal Service's difficulties to move postal policy higher on the agenda of Congress and the White House.

The problem right now for the Postal Service is that its troubles have been moved into the high pitched debate over health care reform. By mentioning the troubles of the Postal Service at two health care forums, President Obama made an easy but ill-informed comparison of the Postal Service with its largest private sector rivals FedEx and United Parcel Service.

While it is true that FedEx and United Parcel Service are weathering the economic storm, a more realistic comparison would be with the printing, mail preparation, and advertising industries that generate mail that represent over 80% of the Postal Service's revenue. The more realistic comparison would also include foreign postal operators whose business mix more closely matches the Postal Service's revenue sources.

An examination of the mailing industry worldwide clearly shows that the industry is suffering and that entities that plan to survive and continue to serve their customers and meet universal service obligations are making significant changes quickly. Both large and small printers have declared bankruptcy and some have liquidated. Advertising agencies are hurting so badly that some have begun to offer services at no cost just to keep talented employees on staff until the economy turns around. Throughout the industry, production facilities are shutting down and businesses are shrinking to levels that management believes will allow the enterprise to survive.

Overseas, postal operators have reacted aggressively to deal with the changing mail market and economic conditions. Postal operators in Great Britain and the Netherlands are taking a hard-line in their labor negotiations with their ability to settle with their unions depending upon how well labor understands that bailout of the postal operator to save jobs is unlikely. Deutsche Post is closing its remaining stand-alone post offices and replacing them with contract offices run by either its former subsidiary Poste Bank or other contractors. Operators in numerous countries are redoubling their efforts to streamline processing networks and optimize their delivery operations. Privatization proposals are popping up in Japan, Denmark, Sweden, and Latvia as the capital needs of dealing with the changing marketplace and modernizing operations become greater than what governments are willing to provide or what the operators can raise through postage rates without affecting demand so much to threaten the continuation of universal service.

But realizing that the entire American mail industry is in trouble, does not excuse Congress for creating a postal policy that has resulted in the Postal Service being the only western postal operator that is in such a precarious financial position and without the means to weather the economic downturn. In many ways, the modification of Postal Policy is reminiscent of Congress's initial foray into reforming railroad policy with the passage of the Regional Rail Reorganization Act of 1973. That act opened up some flexibility in pricing and service just as the Postal Accountability and Enhancement Act did but did not fully recognize the extent of change required to ensure that railroads could survive the technological and competitive changes that they faced. It took additional trauma in the railroad industry and two more legislative efforts before the modern framework for the railroad industry developed within which railroads are profitable, growing and able to provide substantial number of highly paid jobs.

By raising the concept of bankruptcy, Delia Lloyd illustrates how Congress has to rethink postal policy. In a bankruptcy reorganization, the objective is to create a new company that will be a viable enterprise with the prospect of paying back its creditors and new investors who provide the debtor-in-possession financing that funds the restructuring necessary to fund the restructuring and operating losses during the transition. In bankruptcy, creditors have it in their interest that all contracts entered into prior to bankruptcy are subject to renegotiation. Renegotiation of labor contracts is often critical because creditors are unlikely to fund the transition unless they believe that labor agreements reflect the new business reality. This is exactly what happened in the GM and Chrysler bankruptcies and the Federal Government's loans were dependent upon new agreements with suppliers, dealers, and organized labor. Creditors have significant leverage over bankrupt companies and their employees as they can raise the threat of liquidation if the company's management cannot develop a viable path through reorganization.

As the Postal Service's largest creditor, Congress is on the hook for scores of billions of dollars for retirement health benefits, workers compensation payments, and postal debt. Its financial interest is similar to the interest that creditors have in companies undergoing bankruptcy reorganization.

The one challenge to the bankruptcy model is the Postal Service's universal service obligation, as that for all intents and purposes takes the liquidation threat off the table. The Federal government has a constitutional responsibility to ensure the continuation of mail service, let alone the responsibility to ensure that mailer needs are met. Fortunately, there are models that deal with the challenges of reorganizing a financially bankrupt company whose business is such that liquidation is not an option. These models are the models that have been used to restructure railroads, shareholder-owned public utilities, and government-owned public utilities.

As the postal policy debate moves forward, the term "bankruptcy" will likely remain a favorite of editorial pages, columnists, headline writers, and politicians. While a real Postal Service "bankruptcy" is unlikely to move beyond the rhetoric of postal policy, the use of term will likely force postal stakeholders to make changes in all of their business and contractual relationships with the Postal Service as a condition for giving the Postal Service the time flexibility, and the resources needed to ensure that Congress's financial interests are secured.


Delia Lloyd said...

Hi Alan
Delia Lloyd here. I wrote said column on PoliticsDaily.com. Thanks for this very informative coda to my article-it has really opened my eyes to the comparative dimension of the problem. I also like the comparison you draw to the print industry rather - as rhetoric has it - health care which I agree is an entirely different can of worms. (Albeit one the President himself opened up!)
All best,
Delia Lloyd

Joseph said...

I feel the USPS management has to stop managing the organization the same way that Ben Franklin did and think like an organization of the 21st century and manage like Bill Gates. They are measuring over night delivery which today’s society really does not care if the mail takes 1 or 2 days to get delivered. They are processing mail during their most cost laden times at an extra premium. They are spending a good amount of money trying to improve less than 18% of their business . They need to manage the organization for profit and change their dinosaur methods.

John said...

The postal service has a problem with money. And the biggest problem was a poison pill Congress fed it in 2006 during the Bush administration when it was forced to fund future retirements at an unprecedented level. No other federal government is required to pre-fund future retirements at such high levels. It's too bad the Bush administration hadn't forced private corporations to fund future retirements at such levels. Then perhaps the hundreds of thousands of people who have lost retirements in recent years would not face such a dire future.
But neocons and republicans don't care about promised payments unless they involve a golden parachute for a big executive or bonuses for failed bankers in too big to fail corporations the federal government has bailed out.