Monday, December 28, 2009

Postal Service as Editorial Fodder

A recent editorial by the Washington Times and a columnist in the Los Angeles Times provide illustrations as to how ideological predilections and reporting on a deadline produce more heat and less light about how to solve the problems facing the Postal Service.   These commentaries reflect the seasonal interest in the Postal Service use it to ship packages and send correspondence that they rarely send in the other 11 months of the year.

Readers of this blog are more familiar with the problems that the Postal Service faces these writers.   They will have no problems identifying how the writers of the two pieces illustrated their minimal knowledge of the postal market or the USPS.

Common to both pieces is a misunderstanding of how limited the competition between the Postal Service and United Parcel Service and FedEx really is.   The Postal Service is in the business of delivering documents, small parcels (those under 10 pounds) shipped by all senders, and larger parcels shipped by households and others that ship parcels infrequently.  FedEx and UPS focus on business-to-business shipments and household deliveries of larger parcels.   FedEx and UPS use the Postal Service to deliver small parcels to households as the revenue generated to drop one small parcel at a household is not equal to the cost of delivery for those two carriers.   More of the Postal Service's volumes compete with newspapers like The Los Angeles Times and Washington Times, than with UPS and FedEx.

So why does what is printed now in two newspapers matter to postal stakeholders?  They are important because they provide some hint as to what the debate over the future business models will look like.   Right now, postal policy is most likely a low level priority of both the Obama Administration and Congress.  Postal Policy is not a hot button issue in the blogosphere, talk radio, cable news except when used to illustrate why the financial health of the Postal Service suggests that public option is a bad idea.

This will change when the Government Accounting Office issues its report on potential business models in March or April of 2010 and the issue of postal operating losses and retiree healthcare payment schedules raise the threat of default on payroll next fall, and the risk that debt limit will be hit in 2011.    Postal policy will bubble to the top of public discourse in the spring and summer of 2010 because the blogosphere, talk radio, and infotainment programs on the cable news networks will see postal policy as an issue that their readers and listeners can easily understand, or more importantly understand an ideological position relative to future postal business models.  

The rise of postal policy in public discourse will be helped by the fact that the "hot button" issues of 2009 will have mostly be dealt with.   This includes health care, financial industry reforms, and possibly even energy policy and global warning.  At that time, there will be few other "hot button" issues on the plate of Congress that the blogosphere, talk radio, cable news  can talk about that every reader, listener, or viewer will easily understand and writers, hosts, or panelists can easily frame the problems of the Postal Service around their ideological perspective.

The Washington Times editorial uses the Postal Service to present a polemic against government provided services.   It links together a series of anecdotal stories about poor customer service at retail outlets and the inability of the Postal Service to meet its Priority Mail commitment with references to news stories illustrating evidence that its operating process are breaking down.  In conclusion, the Washington Times does not present solution, instead it concludes with a remark suggesting that households abandon the Postal Service for parcel delivery.

The Los Angeles Times piece (reprinted in the Allentown Morning Call) is more thoughtfully written but David Lazarus but illustrates the types of conclusions that are drawn when based on misinformation provided by the Postal Service employees who have a real interest in maintaining the status quo, limited understanding of customers of and competition within the document and parcel delivery markets that results, and limited time to assess the information collected in interviews.

The remainder of this post reflects comments that I sent to Mr. Lazarus and represent my initial reaction to a number of the points that he raised.

Can this system be saved?
 The answer is yes. However, it cannot survive as it does now. It is also clear from other countries that a postal service can provide universal service, even places as remote as the Australian outback and the Arctic areas of Canada at a uniform price. Put another way, is it time we privatized the postal service?I think the answer here is yes as well but not in the manner that you are thinking. By 2020, The Postal Service and mail in general will primarily be a means of delivering advertising. (It is close to that now.) What should the US Government's responsibility for advertising delivery be? Personal Correspondence is less 4% of all mail volume and bill payments by check will likely disappear by around 2030. (There is already no check clearinghouse in Great Britain or Sweden.)

The question of privatization is often tied to the question of the monopoly.  A privatized Postal Service does not require eliminating the monopoly.   Examples of privately owned, legal monopolies exist among regulated utilities serving large territories and unregulated rural retail monopolies selling everything from gasoline to groceries.

"The postal service is asking for a national dialogue on this," Richard Maher, a Postal Service spokesman in Los Angeles said. "What is our role going to be in the future? We need to have a conversation about that."
The dialogue was mandated by Congress and GAO will have a report on the subject that the USPS is trying to influence at the end of March. They wrote a paper on the topic and hired 4 independent thinkers, including myself to look at the question. For more information go to for links to all papers an links to presentations made on the topic at a recent conference in DC.

Who wants the take over the Postal Service's business?
The interviews with FedEx and UPS are reflective of their view. They do not want to get in the “mail” business because it is not a growth business like parcel shipping in Asia. They are being a little disingenuous as FedEx is the USPS’s largest transportation supplier.  UPS is a significant supplier.  Both use the USPS to deliver parcels under 5 pounds to households and to addresses that FedEx and UPS call “remote” For them, remote means many zip codes in outer suburbs of big cities. They also like having a competitor who is undercapitalized and a bit inefficient as it allows them to charge more for services in the US and use those profits to invest in faster growing markets abroad. They will be major players in policy debate to come.

If not UPS or FedEx who?
The only other US private sector firm who would be a logical buyer would be Pitney Bowes but the USPS might be too big for them to swallow. Similar problems would exist for foreign buyers, including Canada Post, Deutsche Post, and TNT Post Group. Buying the USPS, especially given its current financial position, business model, and restrictions on operations, customer relationships, etc would be not viewed as a viable proposition. Also, these companies, as well as UPS and FedEx have better uses of capital than in investing in the USPS.   TNT has specifically indicated it is exiting the mail business outside of the Netherlands.

The big private shippers probably would be happy to cherry-pick profitable urban routes but would want nothing to do with having to schlep mail up and down unprofitable rural roads.
FedEx and UPS already do that with their pricing structure. The private carriers (they are carriers and not shippers; those that send stuff are shippers) have substantial surcharges on home delivery and “remote” delivery, and retail services, (e.g. anyone who does not have a corporate account) All of these surcharges makes the USPS cheaper for individual shippers of parcels and commercial shippers of light weight parcels to homes and remote areas. So they already cherry pick in the parcel business. There is some indication in Europe that entry into the mail delivery market even into the most high-volume high-income neighborhoods is difficult to do profitably  Furthermore not all urban carrier routes are profitable as routes in low income urban neighborhoods have much less mail per stop than those in high income neighborhoods and "cream skimmers" may find that the number of routes that could be served profitably are too few to justify investment in a start-up delivery business. 

It seems to me that the only privatization scheme that stands even a remote chance of working would be to break the postal service network into hundreds of regions and territories, and then have local companies compete for mail-delivery rights in each area. But you'd still have to wonder how any such private-sector players would be more successful at the game than a long-established heavyweight like the Postal Service.
Breaking up the Postal Service has been suggested before. The problem with this solution is that almost all buyers of mail service want the company that collects / accepts the mail to have the ability to seamlessly deliver to any address in the US.   Mailers, and in particular larger mailers, want to maximize their purchasing leverage by buying from one or two transportation sources not 50. That is why both FedEx and UPS have national parcel, express and freight networks and ATT, Sprint, T-mobile, and Verizon all offer nationwide wireless service.  The privatization scheme that would have the best chance of working would be an IPO with a significant employee ownership. It could come only after the USPS could show it could operate profitably under private sector business and employment law. This is what happened with Conrail in the 1980’s.

"If the system was privatized, it might cost 44 cents to get a letter across Los Angeles but $5 to get it to Connecticut," said Richard Maher, the postal service spokesman. "When you think about a network that delivers to all homes every day -- it's huge," he said. "Would a private company be able to do that? I don't think so. I think we would lose universal service."
These are canards. Every country uses a uniform rate for single-piece mail and in many cases for Parcels. (look at the rate structure for parcel in Germany where you can send a parcel anyplace in the world and only have to choose among some 20 or so rates based on the size of the box and the destination country.) Business mailers (LL Bean, Bank of America, etc, may see rates that are not uniform. In fact, those advertising mailers that drop their mail at local post offices rather than anyplace in the country already have the distance based rates that Mr. Maher says would be so terrible. If distance based rates are introduced to First Class for commercial mailers, percentage differences between local and distant rate will likely be much less than 100% rather than the 1,136% that the Postal Service spokesman describes.

The percentage difference between local parcels and those shipped cross-country vary with weight.  The percentage does not exceed 100% until the parcel exceeds 17 pounds.  This suggests that the impact of transportation on rates for items that are sorted at origin and destination would be quite small.

The Universal Service Obligation (USO) argument has been gone over many times.   The driver of the USO is commercial mailers, who must mail to every possible address.   The rates charged these mailers can be set to cover the total cost of delivering to every address printed on their mail using either a uniform or distance-based rate.   The acceptance of remote surcharges by customers or FedEx and UPS illustrate that private sector carriers can devise non-uniform rates that allow them to deliver to all addresses in all 50 states. UPS and FedEx have a common carrier obligation which creates a common law requirement to actually deliver to all points that they say they reach according to advertised service commitments.   Similar obligations exist for other trucking, rail, air and telecommunication carriers and are enforced by regulators and courts.  In addition, there are lots of publicly traded utilities that provide “universal service” as it is within their charter to offer the service to every potential customer. With a common carrier obligation, the only financial problem for the Postal Service would be developing rates that cover the costs of single-piece mail sent or received by single piece mailers in the nation's most rural areas as defined by the Department of Agriculture.

Moreover, why limit the system's network of post offices to stamps and boxes? Why not have the post office deal in all manner of communications, from book and cell phone sales to DVD rentals? Heck, why not sofas, lattes and Wi-Fi access?
I agree with you that the USPS should be able to do more beyond what it does now. I also believe that just as private health insurers did not want a public option to compete with them, Starbucks, ATT, Amazon, Banes and Nobel, Citibank, and all kinds of other firms in the private sector do not want a government entity competing with them. In the United States we do not have a tradition of having a government entity actively competing with the private sector. Also the employment laws and business laws that apply to the government do not work really well for an entity like the USPS that gets 70% of its revenue now from customers that mail more than 500 pieces at a time. If the Postal Service must expand outside traditional mail business, then the only choice is a corporate private-sector model for the Postal Service. 

This brief post illustrates the massive education effort that lies ahead for stakeholders in the mail industry. Editorial writers and business journalists have influence far beyond the few people who buy their papers and contacting them individually or in groups will be critical for stakeholders. But stakeholders can not stop there as the primary source of news and opinion on the future of mail will come from the web, talk radio and cable news.   The tea-party movement shows how the internet, talk radio and cable news could drive and amplify a public policy issue that every voter uses, has a personal connection to, and can develop a vision for its future based on their political ideology and personal interests.   With the Government Accounting Office report coming out this spring, it is time for stakeholders to begin this effort.  Without it, Congressional reaction to the report will be driven by influences whose livelihoods and businesses do not depend on the future of mail.


Bleep said...

One note for this article. 2010 will see both Dems and Repubs opening discussion and/or possible formulation of a commission on Social Security and Medicare Reform.

Unlike the author, I feel this will take a lot of the heat and attention off Postal Issues just like Healthcare debate did.

Potter intends to go to Congress seeking 5 day delivery and/or mass closing/consolidations.

2010 being an election year may very well result in some Congressional posturing and formulation of Postal Commission(s) to address issues; and apply a band aid to Postal Service until 2011 after the Elections.

Clerk contract expires November 2010, Letter Carriers and Mail Handlers expire on November 2011.

I agree with the author that 2010 & 2011 should be very interesting years for Postal Issues unless items listed above or unforeseen issues like terrorism and further economic downturns occur.

Anonymous said...

Look at the Australia model they do offer several other services in lobby like banking services. I believe that by working with private companies and having 38,000 outlets this would provide private companies a broad reach to provide the brick and mortar they may not want to invest in. I believe one thing you should look at in these other countries are limitations to enter the market place in there countries and the small size area they cover. The other thing is in many of these countries when they privatized many facilities under the governmental entity we closed immediately. Most people and postal unions have a major melt down when any office is identified as being under review for consolidation. What would happen in a private scenario is the current 38,000 offices would probably become maybe 10-12K. At that point who would congress have to hang their hat on look what we are doing to keep your office open. I think there are options but lets make sure we don't throw out the baby with the bath water. There needs to be a study completed to determine the most effective means for delivery of communications. We always say the private sector has the most effective means and you can site many reasons why the government (politicians) should be kept out of anything. But you can also site many instances where private enterprise failed the American people (AIG, GM, Chrysler). I noticed that bleep identified pending contract negotiations. It is time that salaries and benefits of craft employees are looked at seriously as in the past the arbitrators just kept giving and giving. It is time to look at getting the salaries in line with the work being performed by the craft.

Anonymous said...

I agree, salaries need to be loked at. Postal carriers are UNDERPAID, not what you are portraiting. Tomorrow for example, the temps in the northeast will be 20 below zero wind chills with little to no visibility. In the midwest there is snow piled up 3 ft high in a good portion of that area. Yet while you post a reply saying we are overpaid, you sit in a climate controlled office, probably typing your comment on the clock, while the carrier on your route has 3 or 4 layers of clothing, doing his 8 hours plus a 1 hour pivot from another route due to cutbacks in personel, and told to complete it in 8.

Last week, while ou sat in your comfy homes waiting for that package you ordered via the computer to come, your mailman had 70-80 other packages also to deliver, along withhis regular burden of letters and magazines. This upswing in mail volume this time of year is done with little to no overtime but goes unrecognized by people like you.

Yes they do need to look at salaries, just not as you think.

raunak said...

The problem with the postal system is the same all around the world and there is not solution to it as it seems.
It cannot be privatized or closed as it reaches the rurals

Postman Pat said...

Excellent article. Change some of the company names and it would apply to postal services in most developed economies. Keep up the good work.

self storage software said...

The postal system is that one that needs to improve.

Business For Sale Australia said...

Wow, even the The Washington Times editorial uses the Postal Service to present a polemic against government provided services.

business for sale said...

interesting information about the postal service, and by the sounds of things they could do with improving