Is the Postal Service as Good as UPS and FedEx?

Recently, the Postal Service proudly announced its latest service performance results.

• Overnight service was 97 percent on-time, up from 96 percent the same period last year.
• Two-day service was 95 percent on-time, up from 93 percent the same period last year.
• Three-day service was 94 percent on-time, up from 91 percent the same period last year.
  
  

According to the New York Times, these results showed that First Class mail service performance is now at levels that rival the quality of a $40,587 Rolex. While this comparison is a bit factitious, comparing the Postal Service to private sector carriers suggests that it is possible for them to offer the same or better service quality. Firms that audit the bills of private sector carriers looking for refunds for missing service guarantees on overnight, second-day air, and ground services, have found that private sector carriers miss their service commitments on as many as 4% of all shipments.

The level of quality for measured First Class mail suggests that the Postal Service should be thinking really seriously about how improving service quality, and increasingly public reporting of improved service quality can increase revenue and market share in both competitive and market dominant products.

For competitive products, the Postal Service has two products that are now service competitive with DHL, United Parcel Service, and FedEx; Express Mail and Priority Mail.

Express Mail is price and service competitive with the private sector's economy overnight signature products when used as an overnight product. In addition, Express Mail is a price and service competitive alternative to the private sector's 2nd day air product over longer distances (e.g. Washington D.C. to Saint Paul, Minnesota) when tendered to the Postal Service after the final daily Express Mail pick-up. Express Mail is especially competitive with the competitors two day product when used in conjunction with carrier pick-up. In addition, if the Commission approves the proposed Express Mail Contract, contracts for Express Mail services may make sense for a wide range of potential customers interested in longer-distance 2nd Day service.

Currently, Priority Mail is possibly service competitive only in areas where private sector carriers currently have a two-day service commitment. For shorter distance routes (e.g. New York to Washington DC), the private sector generally offers overnight service for all products including their lowest cost ground parcel service. Priority Mail may offer overnight service for some items delivered within a Processing and Distribution Center's (PDC's) service area but does not make a commitment in that regard as the private sector carriers do and a PDC's service area is only a geographic subset of the area that the private sector commits to overnight delivery of ground parcels. However, service information reported in the quarterly reports suggests that Priority Mail is slower than First Class Mail for both local and longer distance mail. Therefore, one can assume that Priority Mail meets its service commitment at a lower lever than measured First Class mail information. Until more detailed service performance information is made public, the true service competitiveness of priority mail will not be known.

For short-distance Priority mail and all other products, the Postal Service could begin to use service as a competitive tool once it can tell customers exactly the service quality that is provided 95% of the time. At that point, mailers and shippers can more comfortably set their printing/shipping schedules to fit both the date they want delivery and the time that it takes the Postal Service to deliver. Given the current financial challenges, the future of the Postal Service may depend on delivering this service information.

Secular and Cyclical Trends

As with all businesses, the Postal Service must react to both secular and cyclical trends. Over the past two decades, the Postal Service benefited from a major secular trend in advertising that resulted in mail advertising growing faster than any media other than the Internet. More recently, a second secular trend, the switch of one-to-one and one-to-few communication from mail to the Internet has resulted in a 25% decline in single-piece First Class mail over the past nine years. These two secular trends have made the Postal Service more vulnerable to cyclical economic trends as it is much more reliant on advertising spending than ever before.

Right now marketing departments in companies that are expected to survive the economic slowdown are now being asked to reevaluate their advertising spending. A recent Advertising Age article on what some of the nations largest advertisers describes the future as the "Age of Austerity." While it has been clear for some time that traditional broadcast and print media has been hurting for some time, the decline in spending now appears to be hitting the Internet as well. (Online Ad Growth May be Losing Momentum)

On top of changes in spending from healthy companies, the Postal Service and others delivering advertising face the challenges of declines in spending from firms who are fighting for survival. In just the past few weeks Linens 'n Things, Steve & Barry's and Goody's Department Store have filed Chapter 11. Today, the Wall Street Journal reported that Merwyn's, a major department store on the west coast, may be in financial trouble as well. This is on the top of downturns in the real estate market that has reduced advertising spending from a wide range of firms from builders, to loan brokers, to real estate agents.

As with all cyclical trends, the economic cycle will end. Given that the U.S. expansion over the past few years did not see a growth in incomes, the revival of retail inflation is expected to slow the recovery. Bloomberg's survey of economists expect that economic growth will not rise above 2% until the third quarter of 2009. That is not until the 4th quarter of the Postal Service's next fiscal year.

In this next year, businesses cognizant of the pressures on consumer spending will be careful spenders of their advertising dollars. In this period, advertisers will be experimenting with the use of both traditional and Internet based media as they focus more attention on the value generated from every advertising dollar. This experimentation will have the effect of identifying new advertising approaches in using both traditional advertising and Internet media that create more value than current approaches. The Postal Service has no choice but do what it must to ensure that it remains a price and value competitive deliverer of advertising. It will do this as advertisers work to make the Postal Service's job of offering a good value proposition even more difficult. How well it manages this challenge along with the challenges of its secular trends will determine how well it recovers when the current cyclical downturn ends.

The Challenge of Declining Single-piece Mail Volumes

One of the purposes of this blog is to present the postal community with the facts on the ground and provide some guidance on why those facts are important to the postal regulator, postal administration, employees, customers and suppliers. This post presents the current facts about single piece mail, one of the biggest challenges facing the United States Postal Service. This challenge is best illustrated by two exhibits presented in my submission to the PRC on Universal Service. (I will add the exhibits to this post as soon as I figure out how to add an excel graph. If someone can help, please e-mail me

Exhibit 1 (page 19) presents First Class letter volume since 1988. It shows that a clear shift in the market for single piece mail happened around 1999. Since then mail senders have been consistently reducing their use of this product. In 2007 mailers sent only 75% of the single piece letters that they sent in 1999.

While the absolute change is striking, looking at the year-to-year percentage change raises the importance of this issue to the Postal Service. Exhibit 2 (page 20) illustrates this trend. The single piece volume in the first half of 2006 suggests that the volume decline is still accelerating.

The trend in First Class single-piece mail suggest four questions that need to be answered if the Postal Service is going to properly react to this trend.

1. Why is the decline occurring?

The decline in single piece mail reflects competition from the internet and e-mail. While this answer seems trite, it needs to be stated. While most research focuses on the expansion of high speed internet access in the home, probably a more important cause of the change illustrated to date is the expansion of high speed internet access at businesses and business acceptance of the importance of websites, wiki’s, e-mail, and other electronic means of communication. The change in business use of hard copy is illustrated by how e-mail and wiki’s have become indispensible for the dissemination of documents for local printing or for collaborative editing. In 1999, many of these documents would have been mailed.

The importance of changes in business use of the internet is illustrated by the decline in business share of single piece mail. In 2001, business generated 49% of all single piece volume. By 2007, their share declined to 45%.

As single piece mail reflects the decisions of millions of individuals and businesses on billions of individual pieces of advertisements, correspondence, bills, and payments. Each individual or business is choosing hard copy or electronic delivery based on set of convenience and financial considerations. A decline, as illustrated, suggests that the Postal Service is not only losing individual mailers but losing whole applications for hard copy communications. The most obvious example is airplane tickets which during this period went from primarily delivery by mail to electronic delivery. The question for Postal Service strategic planners is to identify individual applications for single piece mail and determine the risk that the Postal Service faces that it will lose these applications to electronic alternatives and the time frame that the loss could occur.

2. How should this trend be projected?

Forecasting future volumes of single piece mail is a difficult proposition. It is a market in transition. However, there is some evidence in other markets that went through a similar transition from being a dominant product to one that became either less dominant. The trend illustrated above suggests the beginning of a backward-S shaped decline curve. Such a curve will have a period of ever increasing declines followed by a period of shrinking declines ending with a new base level of volume.

One can imagine such a curve for the market for horse carriages. At one point, horse carriages had 100% of the market for passenger road transportation. However, the introduction of the automobile quickly resulted in the replacement of the horse carriage for nearly all customers. Today, there still is a horse carriage market but it is limited to the Amish and carriage operators serving tourists.

There is probably enough data now to develop such a forecast for single-piece First Class mail. What is not known includes what the base level of volume will be and what the shape of the S-curve will look like. Starting that investigation is critical both for the Postal Service and policy makers concerned about the future of single piece mail users.

3. How should Postal Service operations react to this trend?

If one assumes that the existing postal network is sized to reflect the volumes of 1999, then the existing capacity for handling originating mail is as much as 25% greater than it needs to be. Postal capacity has four components, facilities, transportation, sortation equipment, and labor. Of these, the Postal Service has had the most flexibility in dealing with labor as it can chose not to hire replacements for people retiring. However, the rate of decline suggests that normal retirement rates may not be sufficient to meet the decline in volume.

The Postal Service has asked for authority to offer early retirement to accelerate retirements and allow it to better match the decline in volume. If the decline in volumes is perceived to be a continuing issue, then in may want to open early retirement options for an extended period. This may allow it to accelerate the normal retirement rate to match the decline in volumes without too large of a bump in retirements that could hurt service.

As for facilities, transportation, and sortation equipment, excess capacity can only be handled through restructuring the network. To the extent that service can be provided in fewer facilities or smaller facilities then economies can be made through network realignments. Reduction in space used for originating mail could also free up space for automation equipment for flats and parcels which will allow the Postal Service to consolidate activities previously performed at Air Mail Facilities and Bulk Mail Centers.


4. Are there any opportunities from the downturn in single piece letters?

Another way to ask this question is, “can you turn a sow’s ear into a silk purse?” The answer may be yes. As the excess capacity is on machines handling originating mail, this is capacity that is designed now to directly compete with the services of pre-sort mailers of First Class mail. It may be possible to use this capacity for a new product handling unsorted, trayed, metered mail. Clearly, the per-piece cost of sorting letters on automated equipment is not that different whether you pay an employee $22.00 an hour or pay him $8.00. The Postal Service may even be able to offer a superior product as it may have the capacity to sort this mail on the day it received from the mailer, reducing mailing time by as much as day for mail now being presorted. However competing with pre-sorters may take innovative thinking of the Postal Service, the American Postal Workers Union, and the Mailhandlers Union. The pick-up and intra-facility handling costs have to be kept to a minimum to offer a competitive price to mailers. Also the Postal Service will have to run a streamlined process moving mail through acceptance and from acceptance to processing to ensure that mail accepted on a particular day are handled in timely manner.

The decline in single piece mail is just one of the Postal Service’s many challenges. As the questions above show, meeting that challenge will not be easy but avoiding the challenge is impossible.

Early Retirements at the Postal Service

Today, the PostCom website reported that Bob McLean, Executive Director of the Mailers Council, notified the Council members that the Postal Service has requested Voluntary Early Retirement Authority (VERA) from the Office of Personnel Management (OPM) so that it may seek early outs for 40,000 postal employees. Info posted on ruralinfo.net indicates that the Postal Service would like to see all early retirements happen before the end of the calendar year, December 31, 2008. Now what does this mean?

1. The Postal Service, if is granted this authority, will have the opportunity to deal with the challenge of too many employees working a declining volume of mail. Given that the Postal Service's business has become more economically sensitive as it has become more reliant on advertising and parcels; the Postal Service's problem is greatest in those regions of the country that have had the most significant declines in economic activity.
2. The Postal Service's request for Early Retirement authority suggests that it believes that the decline in volume goes beyond just the turndown in the economy and will be a continuing challenge going into FY 2009 and FY 2010.
3. Given that employees will not be leaving the payroll until next fiscal year, the Postal Service has few options for stemming its losses this year and will likely still have fiscal challenges next year.
4. Early retirement will be voluntary. Given the age and years of service of postal employees, it probably can get a significant number of employees taking early retirement even without incentives. Most eligible CSRS employees probably are old enough and have sufficient number of years of service to receive full benefits. Similarly, a significant portion of FERS employees may be eligible.
5. The number of eligible employees that take the incentives may be tempered because of the slowdown in the economy.
6. Early retirement will be limited to those employees who meet criteria of age and years of service. At a minimum the early retirement program will require an employee to be over 50 with at least 20 years of service with the Federal Government or any age with 25 years of service with the federal government. Early retirement benefits are somewhat larger for those over 55 and/or with 25 years of service.
7. As of June 2008, the Postal Service had 37.3% of its employees with at least 20 years of service and 16.3% with 25 years of Service. It is not clear from the Postal Service's Active employee Statistical Summary if that is employment with the Postal Service or employment with the Federal Government.
8. As of June 2008, 46.5% of the Postal Service's employees were over 50 and 25.4% were over 55.
9. As of June 2008, the Postal Service had 140, 525 CSRS employees. It is likely that all of these CSRS employees that work in a geographic area and craft made eligible for early retirement will be eligible. These employees were hired before 1983 and therefore have 25 years of government service or more. While many may be under 60, few are likely to be under 50.
10. As of June 2008, the Postal Service had 465,258 FERS employees, Many FERS employees may also be eligible, but their number depends greatly upon their current age and years in Federal Service. In all likelihood, they would need 20 years of Federal Service to be eligible.
11. If the Postal Service offers early retirement opportunities, it will be following United Parcel Service that just paid nearly $1.7 billion to reestablish an employee's pension benefit that allowed retirement with 30 years of service with full benefits prior to normal retirement age. This benefit extension was limited to the geographic region covered by the Central States Pension Fund. However, this region covers all of the states east of the Rockies, west of Pennsylvania and south of Virginia. As such, it covers most of country most affected by the decline in automobile industry sales, as well as areas in the Midwest and Southeast that were severely affected by the real estate bubble.

Mailers will need to watch how the early retirement program is handled. Reducing staff too quickly may create service challenges in the next calendar year. Reducing staff too slowly could create a fiscal crisis that could cause the Postal Service to need to raise rates beyond what is permitted by the cap to remain fiscally solvent.