USPS' December - Better But Still on the Precipice

USPS finances marked steady improvement on a month-by-month basis in its first fiscal quarter.  These improvements allowed it to earn a small operating profit in the December and a smaller than forecast loss for the quarter.   The improvements while promising do not suggest that within the foreseeable future the Postal Service can earn a sufficient operating profit to sustain the enterprise even if its retiree obligations are removed.


What does the data tell us?

Revenue and Volume

In general, the trends in revenue and volume suggest that the Postal Service's business is now recovering at about the same pace as other advertising and parcel delivery modes.  The economic recovery is tempered by increasing preference of consumers for documents in digital form. 

First Class Mail: The declines in volume in First Class mail in November and December represent a return to the trend in 2007 and 2008.    Single piece First Class most likely declined at high single digit rates (6-9% decline Y-to-Y).  Bulk first Class volumes likely saw volumes decline at a rate similar to what was seen for Standard mail (1-2% decline Y-to-Y).  First Class bulk volumes may have benefited from financial mailers ending advertising budget cuts and some tentative increases by some mailers.

Periodicals: Periodical mail is a troubled product.   There is not indication that recovery in the general economy or advertising markets are having an immediate impact on periodical volumes.   This market faces new competition beginning in 2010 from the iPad and other tablet computers that should shift even more content to digital delivery.    The Postal Service faces the real possibility that by 2020, periodical volumes will be much less than half of the volume now handled.

Standard Mail: Standard mail may have bottomed out in Postal Service's first quarter.   The declines reflect the cautious spending by retailers on advertising.  Going forward, the Postal Service should experience slightly better than normal seasonal patterns as economic tailwinds should loosen advertising budgets.   The Postal Service would benefit if it could develop programs targeted for geographic markets with the most limited real estate inventory. 

Package Services and Shipping Services: These two segments represent the regulated and unregulated parcel products that the Postal Service offers.   Combined, the 1st quarter trends are not promising as the declines in the regulated package services more than offset significant growth in unregulated shipping services.   However, because two-thirds of the regulated products volume in 2009 was from bulk printed matter the Postal Service's success in attracting parcel shippers will not be clear until the 1st quarter RPW figures come out.

Comparing the revenue and volume trends to those of UPS and FedEx is difficult because 1) a portion of the USPS volumes are counted as volume by the Postal Service and either FedEx or UPS; and 2) the Postal Service's revenue for single piece parcels is set under a price cap while competitive services offered in the private sector saw their prices rise.  The trends experienced by the Postal Service's shipping services alone at least equaled the experience of UPS and FedEx.   It will be worth keeping an eye on the monthly statistics in the next few quarters to see if the Postal Service's marketing and operating changes have resulted in market share growth.

Summary: Revenue and volume trends suggest that FY 2010 revenue and volume will be significantly better than the projection made in September and included in its budget.   This means that instead of having percentage declines in revenue in the mid to high single digits in 2010, the Postal Service could see a revenue decline of between zero and four percent, with the decline determined whether the recovery in advertising spending can sufficiently counter digital diversion of printed documents.

   

Year-To-Year Change in Volume
	October 2009	November 2009	December 2009
First Class	-11.5%	-3.3%	-3.9%
Periodicals	-14.5%	-6.3%	-11.5%
Standard Mail	-22.2%	-4.6%	-1.2%
Package Services	-9.9%	-16.2%	-23.8%
Shipping Services	-5.0%	3.1%	8.6%

Year-To-Year Change in Revenue
	October 2009	November 2009	December 2009
First Class	-9.1%	1.3%	-1.8%
Periodicals	-15.5%	-10.5%	-12.2%
Standard Mail	-19.0%	-14.0%	-1.4%
Package Services	-15.6%	-10.9%	-23.9%
Shipping Services	-1.7%	6.7%	12.0%

Costs and Operating Margins

Costs throughout the first quarter were generally on plan and 3.9% below last year.   Excluding the retiree health obligation expenses are 5.8% below comparable figures for FY 2009.  This is an admirable reduction in costs but not sufficient for the Postal Service to be financially self sufficient.

A self sufficient Postal Service would have an annual EBIDA margin of between 12.5% and 17.5%.   [The EBIDA margin equals (revenue minus operating expenses excluding interest, depreciation and amortization) divided by revenue.]  As the Postal Service cannot adjust its labor or other expenses much on a quarterly basis, it must earn EBIDA margin much greater than the annual figure in the first quarter in order to meet an annual target.

In the first quarter of FY 2010 the Postal Service had an EBIDA margin of 3.5%.  This improves to 13.6% if the retiree health benefit obligation is removed.  Comparable margins for the first quarter of 2009 were 3.0% and 12.2%.   While margins are better this year, the Postal Service does not even reach the low end of the target range in the first quarter until the retiree health obligations are removed.   For it to come close to the target range for the year it will have to break traditional financial patterns and find a way to adjust costs as volume and revenue changes on a seasonal basis.

 

Looking toward the future


The three months worth of data reviewed raise certain issues that those trying to envision postal policy for 2015 and beyond should think about:

• The current Postal Service's revenue and net income plan are clearly no longer relevant.   The economic recovery is stronger than the Postal Service forecast in September and volumes of economically sensitive First Class bulk, Standard, and Shipping Services products are above plan and will likely remain better than plan all year as the economy continues to recover.  This is consistent with what both customers of the Postal Service and its competitors are saying about their businesses.
• The Postal Service by the middle of this decade will handle significantly less single-piece First Class and Periodical mail than today.  Volumes and revenue from these products will continue to decline regardless of economic growth.
• The growth of all other products will depend upon the tug-of-war between economic growth and digital diversion.
• The Postal Service cannot become self sustaining without relief from the retiree health payments.
• The Postal Service needs to incorporate real financial goals other than break-even in order to ensure that it remains a viable enterprise, otherwise stakeholders will not understand the severity of the financial challenge ahead.  
• Announcements of new operating strategies should indicate how they will allow the Postal Service to meet relevant financial goals.
• Decline in single piece mail will require continuing contraction of the network of facilities sorting originating mail at a rate faster than normal employee attrition and existing work rules can accommodate.   The pace of this consolidation will likely depend upon the ability of the Postal Service to locate facilities in logistically optimal locations and fund the capital, employee redundancy and other transition costs associated with consolidations.
• The trends in flats volumes across all products may require a new processing strategy with fewer sortation facilities than the network processing letters. Given the time it takes to plan, allow public input, and implement new operating strategies, a new coherent strategy for flats should be introduced soon.
• Meeting required operating margins will require putting all revenue and cost cutting options on the table.   Obstacles in the law and regulatory policy to rational pricing and management decision making need to be clearly identified and their impact quantified.  Obstacles in the law and regulatory policy that delay rational pricing and management decision making need to also be clearly identified and their impact quantified.
• Postal Service labor contracts will need to reflect the new business reality of real financial targets, lower volumes and a smaller operating footprint.  In order to maximize the number of full time jobs in the new environment, new job classifications are needed that include characteristics of the work now performed by clerks or mailhandlers and letter or rural carriers.

USPS Presentation of Action Plan

February 23, 2010	Contact: Sue Brennan 202.268.6363 sue.brennan@usps.gov usps.com/news

Action Plan for the Future of the U.S. Postal Service

Postmaster General John E. Potter to give briefing

What:	Postmaster General John E. (Jack) Potter is hosting a conference to address  the future of the U.S. Postal Service and to announce new business model
Who:	John E. Potter, Postmaster General and Chief Executive Officer Louis J. Giuliano, Chairman, Board of Governors, U.S. Postal Service Meldon J. Wolfgang, Partner/Managing Director, The Boston Consulting Group Thomas Dohrmann, Principal, McKinsey & Company
When:	Tuesday, March 2 9 a.m. – 12 noon Welcoming Remarks                                            Chairman Giuliano Introductory Remarks                                           PMG Potter Projecting U.S. Mail Volumes to 2020                  Mr. Wolfgang Options for a Changing Environment                   Mr. Dohrmann Keynote Presentation                                           PMG Potter
	Break Panel Discussion with Potter, Giuliano, Thurgood Marshall, Jr., Vice Chairman, Board of Governors, Patrick R. Donahoe, Deputy Postmaster General and COO and Robert F. Bernstock, President, Mailing and Shipping Services
Where:	National Transportation Safety Board (NTSB) Conference Center 429 L’Enfant Plaza SW Washington DC 20024-2111
Background:	The Postal Service is facing serious and substantial challenges: declining mail volume, increased use of the Internet for bill payment and presentment, a lingering recession and legislative constraints on how and when we can close Post Offices or what types of products we can sell at retail. After four months of intense research and discussion, the Postal Service will announce an action plan to address these concerns, as well as a number of steps necessary to close a substantial gap by the year 2020. The Postal Service has decided on a future path that calls for greater business model flexibility and changes to the way it does business.

Postal Service in Triage

Anyone who has ever been in an emergency room has had to deal with a triage nurse.   The triage nurse's job is to conduct an initial assessment of every patient that comes for emergency treatment and prioritize the patients based on the severity of their illness or injury.

Triage gets complicated when there is second door for patients that come in ambulances.   These patients skip the triage nurse and may have their first assessment by the emergency room nurse or physician.  This second door may allow a patient who is less sick than one who is driven to the emergency room to see a physician faster, or at least be placed on a gurney in an emergency room corridor.

Further complications exist in the case of natural disasters, mass-casualty accidents, and suicide bombings all of which may overwhelm the capacity of the medical facilities available.   Then the choices become even more daunting.   Instead of just choosing which patient can wait to be treated, the triage process may have to decide who is too injured to try to save and for those that it can save what organ/limb must be sacrificed for expediency in order to save even more lives given the available resources.   Medical care in Haiti following the earthquake was like this as limited facilities, supplies and medical personnel forced some horrific decisions to amputate limbs that could have been saved in a medical environment that was not so stressed.

The decision by the Postal Service to eliminate one day of delivery is equivalent to a decision that a business in triage makes.  Given the substantial losses, even discounting the retiree issues, the Postal Service had no choice but to find a way to cut costs faster than its current cost cutting efforts had produced.  Specifically, it needed to find a way to cut costs by between $2 and 4 billion above and beyond existing efforts in order to survive.

In its business triage, the Postal Service faced the question, "How can it cut costs in order to save the business without harming the brand and relationships with customers?"  The decision to eliminate one day of delivery is equivalent to an amputation.   It may save the business but it will create new challenges for it going forward.  Decision-makers had confidence in this decision because posts in other countries had made similar changes and their brand and customer relationships survived intact.

In the next year the Postal Regulatory Commission will review whether the Postal Service made the correct decision in its triage process, in the equivalent of a pre-amputation second opinion.   The focus of the PRC will likely be checking to see whether the cost savings projected are realistic and evaluating the likelihood that the impact on customers will be a form of business gangrene or benign.

One of the biggest challenges facing the PRC will be putting the decision to eliminate 5-day a week delivery into context.  The Postal Service made the decision to develop a 5-day a week proposal as part of a business triage process in the fall of 2008 that also generated some additional efforts to cut costs.  These included:

• Preparing a proposal to offer a Voluntary Early Retirement Offering;
• Preparing a case to close post offices;  
• Completing preparations to complete plant consolidation studies;
• More intensive efforts in carrier route evaluations; and
• Preparing a proposal for 5-day delivery.

The Voluntary early retirement offer had minimal impact. From this the Postal Service learned that it could not reduce its workforce quickly cost free. Within a few months an offer with financial incentives was introduced.

The PRC's evaluation of post office closures is nearing its end and the list of post offices that will be closed has shrunk from more than 3,000 to less than 200.   The potential cost savings has most likely shrunk as well.  The failure of the Postal Service to eliminate all of the corporate offices that it wanted reflects both the need to continue to provide service in the communities affected and the lack of a ready strategy to replace corporate offices to be closed with contract or franchised offices in those communities.  

Plant consolidation study announcements were publicized in earnest from the spring till fall of 2009.   These consolidations were chosen based on the knowledge and experience of local management.   A national strategy to restructure the bulk mail network was begun and then expedited after the initial efforts both improved service and reduced costs.   Even without PRC review, plant consolidation proposals take a full year to complete the entire process meaning that efforts begun in 2009 could not begin producing savings for a full year.

Time to Make Flat Rate Boxes More Convenient

The Postal Service has created a strong marketing campaign around flat rate boxes.  But there is a better way to offer a flat rate service more convenient and more profitable,    It is remarkably simple.

• Allow flat rate box rates for any box meeting required dimensions.   To assure compliance certify boxes sold by third-parties as meeting the size requirements.
• Sell flat rate stamps like stamp books and around the size of half a book of stamps.  flat rate stamps could be sold in supermarkets using current procedures for stamp consignments.
• Sell flat rate stamps like high value lottery tickets.  Print them on a roll with each stamp numbered to prevent fraud.  Then they could be sold at any convenience store, gift shop or shipping supply store.
• Allow third parties to sell flat rate stamps and complying boxes as a package.

The key advantage here is allows customers to use flat rate rate Priority Mail without having to go to the Post Office to get supplies.  A customer could pick up a box and a flat rate stamp at an office supply store, supermarket or gift shop.  

They could call the the Postal Service for carrier pick-up or drop off the parcel at the Postal Service.   What could be easier?

Analizing the Postal Service as a Cancer Survivor

Many of the readers of this blog have known me for many years either through work I have done related to the postal industry or from presentations at international conferences.   These readers know that since 1996, I have been a somewhat flinty survivor of oral cancer; having gone through chemo and radiation in 1996 and 1997, surgery in 2000 and surgery in 2007.   As far as I am concerned, I have been cancer free since 2000, but my last surgery left me with more serious speech defects and the inability to swallow.   This experience, and the financial challenges that significant illness creates has in many ways aided me in my understanding of the Postal Service by directing me to look more closely at key financial questions that most others ignored.   In addition, the loss of some speaking ability has force me to listen more and dig deeper into issues before presenting my ideas in print, in this blog or in presentations.

Oral and head and neck cancer is different from many other cancers in that treatment for advanced cancers, and in particular recurrent cancers leave significant facial deformities and loss of speaking and  swallowing functions. As opposed to many other cancers, survivors cannot hide the changes to their face and neck, or loss of speaking or swallowing ability if they are to remain fully engaged in the world.  As a survivor of multiple treatments, I like all cancer survivors am a bit delusional.  Cancer survivors,  in order to deal with the harsh treatment need to downplay the pain associated chemo and radiation, the two-week hospital stays that surgery often entails, the visible changes to our body once treatment is completed, and the limited support available for those with significant side effects from treatment.  Cancer may have kicked me around but as the song from the unsinkable Molly Brown says, "I ain't down yet."

In many ways, the cancer has treated me a bit like the black Knight in Monty Python and the Holy Grail. Even after losing all of his limbs he still wants to fight.



Here are a couple of articles about and by Roger Ebert, a television and print film critic who has lost both the ability to swallow and talk to cancer has talked and written candidly about how it feels to deal with these changes. His descriptions of what he misses most from not eating and the other issues hit home to me remarkably well. I pass them on to spread the word about the challenges that oral cancer causes.

• Nil By Mouth  - Roger Ebert's thoughts on what you miss when you can no longer take nutrition by mouth.
  
• Roger Ebert:  The Essential Man - An interview in Esquire of Roger Ebert in which he candidly talks about his fight with cancer
  
• Roger Ebert's Last Words - Roger's thoughts on the reaction to the article and his willingness to be photographed as he is today.

I am posting today with the objectives that the readers of this blog will take the time to support organizations that help those with head and neck cancer and those that lose some or all of their ability to take nutrition by mouth. Cancers of the head and neck most likely affected over 40,000 people in 2009 which is about equal to the number of cases of ovarian and cervical cancers. You may find this surprising because there is significant public attention to ovarian and cervical cancers and head and neck cancers are rarely mentioned in the news. Part of the reason is that most survivors retreat in hiding as their illness takes away part of their face and their ability to communicate and socialize. Roger Ebert is a rare instance of someone who is in the public eye who is both open about his disease and articulate.

When I first was diagnosed with tongue cancer in 1996 there was little support for patients. I therefore urge you to make a small donation to one of the following non profit organizations. The goal is to prevent cancer, find treatments that allow patients to survive with nearly full functionality, and aid survivors who lose significant capabilities in swallowing and communications.
Here are the organizations and their websites:

Foundation for those who cannot get all of their nutrition by mouth

• Oley Foundation - The Oley Foundation provides support for consumers who lose their ability to take all of their nutrition orally and learn about research, medical advances and ways of coping with the emotional, insurance, and employment challenges as well as the paraphernalia and supplemental nutrition needed for survival.

Oral and Head and Neck Cancer

• Support for People with Head and Neck Cancer (SPOHNC)  - SPOHNC publishes the only patient centered newsletter and coordinate support groups for patients.
• Oral Cancer Alliance The Oral Cancer Alliance runs oral cancer alliance events nationwide that run free oral cancer screenings. For those in the DC area, Howard University Dental School is running this activity.
• Oral Cancer Foundation This foundation, which has been around for a little over a decade has the most comprehensive web presence on oral cancer and is often the first place that patients diagnosed today go for information.

I urge you send this post on to others that know me or who may have an interest in helping others who have or may in the future suffer from head and neck cancer or must deal with the challenges of needing supplemental nutrition.  Thank you for this indulgence for a post that is off topic.

Is it Time to Choose Alternative Delivery?

Mailers face greater uncertainty today than ever before about the future of the Postal Service.  Mailers face the real possibility that rates could begin rising faster than inflation in 2011 and beyond if the Postal Service's volume projections do not pan out or Congress fails to make all of the changes necessary to ensure a viable postal enterprise.  The face the likelihood of less service as the Postal Service switches to 5-day service and less certain service as the inevitable glitches arise during the transition.

So what should a mailer do?

Most mailers have few options.   If they want to delivery to households, access to the mailbox is key and only the Postal Service has access.  Therefore, if they want a delivery to a household, they have to have a product that does not require delivery to the mailbox.  Valassis currently is expanding its use of alternative delivery networks in numerous media markets across the United States for delivery of its saturation advertising products.   In these markets, Valassis partners deliver the ads in plastic bags on door steps instead of the mail box.   This delivery mechanism that works well for saturation advertising and work even better if others saturation mailers, including Valpak, political candidates, community colleges, and health care facilities would partner with Valassis and use the same network.  Right now Valassis and other have the choice of alternative delivery firms for saturation advertising in at least 28 states, with local firms serving customers in most others.

Periodical mailers tried to develop an alternative delivery network for household delivery of periodicals nearly 20 years ago with Publisher's Express.   This experiment ended once the Postal Service lowered its rates and increased mailer worksharing which eliminated the cost advantage that Publisher's Express promised. 

Mailers seeking delivery to business addresses may have options but few have explored them fully.  Most business addresses do not have mailboxes, so alternative delivery services have greater access to the recipient than they do for home delivery.

A vibrant periodical delivery industry has existed for over 35 years focused on deliveries to business addresses.   This industry offers delivery of daily, weekly, and monthly periodicals to businesses in most metropolitan areas.  These firms currently generate less than 25% of revenue generated by the Postal Service and the private sector in the delivery of periodicals to business addresses in the markets they serve.   As these firms regularly stop at most businesses in their service area on a daily or weekly basis, they could add volume from mailers to businesses that use the Postal Service at very competitive prices

Right now mailers to businesses facing the greatest price pressure are those that mail periodicals.  Advertising in trade and business publications down so finding a cheaper delivery route could sustain the print product until the economy and advertising recovers, or the publication fully switches to a digital only format.    The problem is even greater for mailers whose format will not pass the Postal Service's "droop test."  Alternative periodical delivery firms would have little trouble handling this mail now at rates more than competitive with the Postal charges now or will charge after the new "droop test" rules go into effect.  


Right now, I would advise mailers that are concerned about the uncertainty associated with the Postal Service's rates, service quality, or acceptance rules should begin exploring what alternatives now exist.   I would expect that most would find the breadth of offerings now available would surprise them.   If you need assistance in exploring available options, and if necessary creating new ones using the existing alternative delivery infrastructure contact me at alan.robinson@directcomgroup.com .

Potential 5-day Delivery Implementation Schedules

A previous post, "Is 5-Day Delivery Inevitable?", laid out a potential schedule for when the Postal Service could implement a switch to 5-day delivery.   As the Postal Service's filing with the Postal Regulatory Commission is coming in the matter of weeks, this post takes a second look at likely implementation schedules for stakeholders to think about.   This post lists four potential schedules:

• a fast track schedule;
• a standard track;
• a slow track due to longer PRC review than the USPS anticipates;
• a slow track due to longer time to get Congressional action.

Fast Track Schedule - assumes a short PRC review and Congress acting either just before the 2010 election or in the lame duck session.

• March, 2010 - The USPS files a service change request with the Postal Regulatory Commission.
• September 2010  - PRC issues report on the Postal Service's proposed changes
• October 2010 - November  2010 - Congress holds hearings on the Postal Service's proposal and the PRC report.  
• December 2010 - Congress passes a law allowing the Postal Service to offer 5-day a week delivery.
• May 2011 or June 2011 - Implementation of 5 day a week service.   

Standard Track Schedule - assumes an average time for the PRC review

• March, 2010 - The USPS files a service change request with the Postal Regulatory Commission.
• November 2010  - PRC issues report on the Postal Service's proposed changes
  
• December 2010 - Congress holds hearings on the Postal Service's proposal and the PRC report.  
• December 2010 - Congress passes a law allowing the Postal Service to offer 5-day a week delivery.
• May 2011 or June 2011 - Implementation of 5 day a week service.   

Slow Track Schedule due to longer PRC review - assumes that the PRC review takes longer than the review of station and branch closings

• March, 2010 - The USPS files a service change request with the Postal Regulatory Commission.
• March 2011  - PRC issues report on the Postal Service's proposed changes
  
• April 2011 - Congress holds hearings on the Postal Service's proposal and the PRC report.  
• Between April and September 2011 - Congress passes a law allowing the Postal Service to offer 5-day a week delivery.
• Between September 2011 or February 2012 - Implementation of 5 day a week service.   

Slow Track Schedule due to longer Congressional deliberations - assumes that Congress does not act before the end of any lame duck sessions in 2010.

• March, 2010 - The USPS files a service change request with the Postal Regulatory Commission.
• December 2010  - PRC issues report on the Postal Service's proposed changes
  
• February 2011 - Congress holds hearings on the Postal Service's proposal and the PRC report.  
• Between March and September 2011 - Congress passes a law allowing the Postal Service to offer 5-day a week delivery.
• Between September 2011 or February 2012 - Implementation of 5 day a week service.   

Walking Between the Law and Disaster

The Postal Regulatory Commission held its public forum on the Postal Service's Annual Compliance Review (ACR) yesterday.   The tenor of the discussion suggests that the Commission facing the challenge in this proceeding of walking the fine line between the law and disaster.

Simply put, the ACR proceeding raises two questions relating to the law.

• Did the Postal Service's ACR filing show that it complies with the requirements of 39 U.S. Code to 1) provide prompt, reliable, and efficient services to patrons in all areas[39 U.S.C. § 101 (a)] ; and 2) "to assure adequate revenues, including retained earnings, to maintain financial stability?" [39 U.S.C. § 3622(b)(5)].
  
• If it did not, what actions can or should the Postal Regulatory Commission take?

Did the Postal Service's ACR filing show that it complies with the requirements of 39 U.S. Code to 1) provide prompt, reliable, and efficient services to patrons in all areas; and 2) "to assure adequate revenues, including retained earnings, to maintain financial stability?

The first question  raises the question about both service quality and postal finances.   As service quality in transportation firms often depends on both efficient operations and financial strength focusing on the financial issues raised by this question is sufficient for understanding the challenge facing the PRC.

During the public forum no party other than the Public Representative directly indicated that they understood that the Postal Service did not generate sufficient revenue in 2009 to maintain financial stability.  Most parties requested that the PRC take the long view in looking at the question of financial stability.  This focus hinted that most parties believe that the Postal Service's business plan did provide service at a sufficiently efficient level to ensure that current rate levels generated adequate revenues to cover operating and legislatively mandated costs and generate retained earnings sufficient to maintain financial stability.

This sentiment is consistent with the public statements of the Postal Service's CFO Joe Corbett who stated in an interview with the Federal Times, "We will need [some assistance from Congress] or we will have difficulty paying all of our obligations this year. And going into next year, we might not have enough cash to operate. ... We are dangerously close to running out of cash."

If the Postal Service is insolvent, as the Federal Times headline implies, then by definition the Postal Service is not sufficiently efficient and does not generate sufficient revenue to maintain financial stability.    While the pension and retiree health care issues affect the question of financial stability the PRC is faced with the challenge of making a determination on this issue prior to any action by Congress.  Furthermore, the Postal Service has numerous other operating and market challenges that threaten its financial stability that go beyond its retiree benefit issues.

Given the information available to the Commission, both on the record and in the public domain,  it may have little choice but to come to the same conclusion that CFO Corbett and the Government Accountability Office have drawn, that it is not now a financially stable enterprise.   This question then forces it to address the second question listed above.  

What actions can or should the Postal Regulatory Commission take?

The Public Representative has presented a serious, but highly unpopular proposal to deal with the issue of financial stability.  It proposed that the Commission order the Postal Service institute rate increases in 2010 and 2011 that would cumulatively raise rates between a 6.3% and 21.2%.   The public representative noted that these increases would only return the Postal Service to break even.  In a recent post, I noted that a more realistic proposal that included retained earnings could raise rates between  25% and 42.6%.


The prospect of such large rate increases, clearly have large mailers concerned and created a conundrum for the Commission.  Large rate increases raise the possibility that large rate increases now would accelerate the diversion of mail to digital alternatives, worsening the prospects of financial stability in 2011 and beyond.   (Further study is needed to understand how rates, convenience of recipients, or communication cost-effectiveness drive the switch to digital delivery.)

Commissioner Dan Blair, in his comments raised procedural concerns that the ACR review could turn into a mini rate case.   His concerns reflect the intent of the PAEA to generally eliminate the traditional processes of setting postal rates.

So what options do he and other Commissioner's have if they join the consensus that the Postal Service is nearly insolvent?  It is this question that inspired the title of this post, "walking the line between the law and disaster."

In my view, the Commission can walk this line if it focuses less on the obvious, the Postal Service's near insolvency. Instead, it should use the ACR Review to advance a framework for discussing the options available to make the Postal Service a financially stable enterprise.   Then, the Commission would provide the Postal Service, postal stakeholders, and Congress a method to understand the financial impact of current law and how that law may need to change to create a financially stable enterprise.  To that end, I would suggest that parties to the proceeding and the  Commission focus on answering or at least asking the following questions.

• What financial goals indicate financial stability for the Postal Service?   We know that a financially insolvent Postal Service cannot pay its bills. We know that accounting break-even does not produce financial stability under any financial management theory. We do not know what financial goals a financially stable Postal Service should have, if accounting break-even is no longer appropriate.  Nearly all foreign posts have addressed this question first in examining reform of their postal policy.   Postal policy in the United States has never addressed this question.
  
• What level of retained earnings is sufficient?   Under the Postal Reorganization Act, accounting break-even was considered sufficient.  The 3-year rate cycle, combined by actions of Congress resulted in the Postal Service having almost no retained earnings.  In the near term, the Postal Service will soon need to end deferment of capital projects and maintenance, and improving operating efficiency will require capital expenditures to reduce the number of facilities and locate these facilities in locations that promote both cost efficiency and better service quality, transition costs to reduce the workforce at a rate at least equal to the impact of new technology and reduced mail volumes.   All of these actions cost money and there is no information on how much it would or could cost or the level of earnings necessary to implement these plans.
  
• What impact do restrictions on capital have on postal efficiency and service quality?   Currently capital spending is limited to what cash is available. The ability of any enterprise to rightsize its operations in the face of changing demand depends on the capital available to restructure its operations and provide incentives for excess employees to leave.  Showing how capital constraints are linked to cost efficiency and service quality could provide Congress with a better understanding as to how serious the current situation truly is.  

In focusing on these questions, the Commission can provide postal stakeholders with a greater understanding of the problems that the Postal Service faces without making these problems worse through imposing significant rate increases.  In this way, the PRC will use its authority in a way that forces Congress, the Postal Service and the Obama administration to seriously discuss the financial details of what it will take to ensure that the Postal Service is a financially stable enterprise far beyond 2010.

IRS Cracks Down on Worker Status Abuse

The Associated Press has reported that the IRS and many states are cracking down on on the widespread use of the contractor model for workers.    By using the contractor model, the company saves the cost of payroll taxes, workers compensation expenses, and unemployment insurance levies.    The interest in this issue is likely driven by declining tax revenue during the recession as well as pressure by labor unions and competitive businesses that use an employee model. 

In its most recent report on the topic, the Government Accountability Office estimated that employee mis-classification resulted in the underpayment of an estimated $2.72 billion in Social Security taxes, unemployment insurance taxes and federal income taxes in 2006.  The IRS has just begun a 3-year study of the use of contractors.



The progress of this study will be followed closely by the courier, express and postal industry, as the industry is built upon a contract worker model.   Nearly all local couriers and delivery drivers are contractors.  FedEx Ground and FedEx Home both use contractors for local delivery.  The USPS uses contractors for providing its most rural delivery service.   Outside of the courier, express and postal industry, the contractor model is used extensively in construction and information technology.

While the IRS actions will attract the most attention, state level investigations will likely have a greater impact on the industry.  New York State alone investigated 19,200 cases in 2009, a figure 6,900 more than were investigated in the prior 16 months.   Other states and localities have investigated abuse of contractor status as part of money laundering schemes, and abuse of the workers compensation system by employers.

Investigations and prosecutions at the state level provide a populist image for prosecutors seeking political advancement.  Even more importantly, if these investigations and prosecutions raise revenue for the state or locality, the revenue raised can become critical during a time of lower tax revenue.

Closing the USPS' Income Gap

The Public Representative performed a service for postal stakeholders in their estimates of the required rate increases to return the Postal Service to break even by 2011 under various estimates of the Postal Service’s retiree obligations. These estimates represent the worst case scenarios for mailers as they assume that the return to break even could only come from increases in rates.

Unfortunately for mailers, the Public Representatives estimates of rate increases are not enough to return the Postal Service to self sufficiency. Simply put, the break even goal for 2011, a goal that guided rate cases under the Postal Reorganization Act, is not sufficient to ensure a financially viable Postal Service. A more realistic goal would include these two parameters:

• A target for cash flow that is sufficient to fund capital expenditures, working capital, transition costs of a shrinking network and workforce and potential dividends and taxes or payments in lieu of taxes.
• An EBITDA (earnings before interest, taxes, depreciation and amortization) and an interest expense ratio such that a government guarantee would not be required to raise capital in the debt markets, even if private capital is not employed.The Postal Service may need an EBITDA of between 10% and 15% in order to generate the targeted levels of cash flow.

These targets are independent of the business model employed. They reflect goals that are necessary for both governmental and corporate business models. As such stakeholders that believe that one type of business model or another will prevent job cuts, require fewer closures and relocations of postal plants, preserve the current model of providing retail service, or prevent near-term rate increases above the current rate cap constraints will likely be disappointed if their business model choice is selected by Congress.

So what would really happen to postage rates if the Public Representative used more realistic financial targets? Using the Office of Inspector General recommendations for financial relief, postage rates might need to rise at least 25% without more aggressive actions on restructuring the operating network or modernizing the retail model. Without relief, postage rates might need to rise by 40% or more. (Both of these estimates do not account for the impact of price increases on mail volume.) Not a pretty picture and one that no postal stakeholder believes would ensure a viable postal enterprise as vibrant as it is today.

Reworking the Postal Service's Thinking on Future Business Models

Last fall the Postal Service presented its approach to future business models in the paper: Assessment of United States Postal Service Future Business Models.  The Postal Service's approach was presented by Vice President of Strategic Planning Linda Kingsley and General Counsel Many Anne Gibbons at the Rutgers Conference in DC held last fall in a talk entitled A New Business Model for the United States Postal Service.

The Postal Service's approach retained the current governmental enterprise features of the Postal Service.   They wanted certain changes to improve their viability that have been repeated by Postal management multiple times.

1. Adjust the retiree health care payment schedule
2. Eliminate the 6-day per week delivery requirement
3. Remove non-business reasons for stopping rationalizing the sortation network and modernizing the retail network
4. Introduce market-based pricing for all customers
5. Remove limitations on product diversification
6. Remove the Postal Service from budget scoring
   

Given the political opposition to most of these changes, they appear to be pipe dreams. Given the new found concern about budget deficits, changes to the retiree health care payment schedule, no matter how warranted, would require offsetting budget cuts or additional sources of revenue for passage. Changes in service levels and operating and retail networks and introducing market-based pricing require hard information on the business plan that supports these changes. Removal of limitations on product diversification requires Congress to accept a government enterprise competing with the private sector.

Since the publication of the Postal Service's paper last fall, it appears to have taken some steps to revisit the challenges that it now faces in order to develop a more realistic proposal for a new business model.   The following three studies represent only some of the work that I have learned about that should be completed prior to the presentation of the Government Accountability Office paper to Congress this spring.  In addition, I am aware of two other contracted studies that the Postal Service has undertaken that may fill in the gaps in its previous work on business models relating to financial goals and objectives, financial needs in transition, and the future of mail volume in the world of digital documents. 

	Study Content	Consultant	Completion Date
1	Future Postal Strategies – Reshaping Network & Labor Changes	Accenture	March 2010
2	Recommendations for Reshaping Wholesale and Retail	McKinsey	March 2010
3	Future Rate Study	Price Waterhouse (IBM?)	March 2010

What I find most intriguing is how closely, the topics of the three studies listed above as well as the other studies that may also be underway follow the eight challenges that face the Postal Service which this blog noted last November in the post, Challenges Facing All Business Models.  They are re-posted here for your convenience:

1. Maintaining Mail’s Importance to the Economy – The mail industry is responsible for over eight million jobs and $800 billion in economic activity. The business model can accelerate or retard economic growth depending on how well it serves customers that need mail delivery.
2. Minimizing Financial Risks to the Federal Treasury – At the end of the third quarter of 2009, the Postal Service’s obligation to the Treasury for debt, retiree health benefits and workers compensation payments is $ 72.7 billion.
3. Ensuring Financial Self Sufficiency – Since the passage of the Postal Reorganization Act, financial self sufficiency has been an objective of postal policy but was never defined much beyond the concept of accounting break even. While the Postal Accountability and Enhancement Act (PAEA) has as its objective that revenue and retained earnings of the Postal Service should be sufficient to endure financial stability, the current operating losses and limited cash reserves suggest that the Postal Service faces a significant challenge of being truly self sufficient.
4. Adjusting to New Market Realities Serving Wholesale Customers – With the decline of the Postal Service’s business handling transactions and correspondence, both the Postal Service’s ability to provide universal service and its financial viability will depend upon meeting the service needs of its wholesale customers that send 500 or mail pieces at a time and will in the future generate more than 70% of revenue and 80% of the volume that the Postal Service handles.
5. Adjusting to New Market Realities Serving Retail Customers – Over the next decade the Postal Service will see demand from retail customers declining below the 30% of revenue it is today.  Adjusting the retail interface and operating network serving these customers creates significant financial, operating and political challenges.
6. Adjusting Operating Costs to New Competitive Realities – The market realities of serving postal customers requires a leaner processing and transportation network and a modernized retail network.
7. Funding Transition and Modernization Costs Rationalizing - Postal Service operations to reflect new market realities in wholesale and retail markets will require substantial cash outlays to cover the costs of right-sizing the network and workforce, modernizing the retail network and optimizing the processing network. The business model must find ways to raise this cash when operating losses, retiree health care payment schedules, and debt to cover prior-year losses provide few options
8. Creating a Workforce for the Long Term – The new market realities and the operating and retail networks that serve them can provide good jobs for postal employees.  However, the existing civil service based employment law framework, labor agreements and consultative requirements with management associations all reflect significantly different market and operating realities and the labor-management environment that existed four decades ago. These challenges are not unique to the Postal Service.

While I cannot predict what the consultants to the Postal Service will say in their reports, my sense is that their reports represent the logical next steps of the analysis presented in Examination of Potential Postal Business Models.

Leaving the Mailstream - Mail Systems Technology

There is no better example of the impact of digital documents than what is happening to trade publications. This shift is particularly hard on the Postal Service as it removes from the delivery network mail going to high density business addresses.   Now the trade publication for the mailing industry is now shifting from print to digital publication.   If a journal targeted to companies that produce mail no longer use the mail, then which ones will in the future?


Check out the digital edition of Mail Systems Technology.  When you flip through the pages on your computer think about how this would look on an iPad, Kindle or other tablet computer.  Looks like a good fit.

Note:   You can see how blogs like this one are changing trade journalism.   The November 24th post The Future of the Document is the Future of Mail, is reprinted on page 24 in the issue linked above.   Those who read this blog learned about the link between types of documents and mail over two months before subscribers to the magazine.

UPS Buys USPS

Just in case you have not seen it.  Catch the latest news on this merger from Red Tractor. USA

Rethinking The Value of Postal Regulatory Policy

I have never been much of a fan of old regulatory process of setting postal prices.   The contradictions among the competing objectives of pricing policy in the law created a zero sum game that resulted in mailers and the Postal Service spending millions to litigate prices that could be set in a much less constrained litigious environment. 

Currently, the Postal Regulatory Commission is in the middle of a proceeding to see whether what the Postal Service presented in its Annual Compliance Report puts it out of compliance with requirements in postal law in regards to financial stability and requirements in regards to pricing workshare discounts.

As stated in previous posts, I agree that postal stakeholders, and in particular Congress, the Office of Management and Budget, and the U.S. Treasury acting as shareholder and creditor, need to know whether the Postal Service has a business plan, working under existing law, that will ensure financial stability.  If such a plan does not exist, then those parties representing the shareholder and creditor interests in the Postal Service need to see a set of alternative plans with hard numbers that would produce financial stability under alternatives that require changes in existing law.

While the PRC, with its knowledge of postal data and operations can provide assistance in this effort, its forte is not evaluating business plans.  Its strength is examining in a legalistic manner whether a particular plan follows regulatory precedent in meeting the objectives of postal law.

The problem with the PRC's attempt to evaluate the Postal Service's business plans is seen in the language that the parties use to discuss the issues that the PRC's review of the Annual Compliance Review generates.    The first paragraph of the summary of the Comments of Time Warner on Issues raised in Commission Information Request No. 1 illustrates this point.

In these comments, we explain why Time Warner believes that § 3622(b)(5) does not, and cannot, raise  an issue of "compliance" within the meaning of § 3653(b).We review Time Warner's previous comments on the scope of § 3653(b) and the Commission's discussion of those comments, and we conclude that the Commission has as yet made no statement responsive to the two major points of our analysis: (1) that it is impossible to make a determination of Postal Service noncompliance with the "objectives" and "factors" of § 3622(b) and (c) because those factors and objectives are not addressed to the Postal Service but to the Commission, relating to the Commission's design of a new ratemaking system; and (2) that it is impossible to make a determination of Postal Service noncompliance with the "objectives" and "factors" of § 3622(b) and (c) because a set of nine mutually competing "objectives," "each of which [is required] to be applied in conjunction with the others" (§ 3622(b)) and fourteen mutually competing "factors," which are required only to be "take[n] into account" in designing the new system (§ 3622(c)) are not conceptually susceptible to a "determination of noncompliance" (unless all that is meant by "noncompliance" is that they are disregarded completely).

Remember, this language is the first paragraph of the summary of document presented in a proceeding designed to look at what is necessary to make the Postal Service a financially stable business. I cannot imagine anything being further from the language of business than what Time Warner's lawyers wrote in that paragraph and leads me to two questions. 

• How did we get here?
• How and when do we stop spending our time and resources in activities that do not ensure that mailers continue to use the Postal Service to advance economic activity?

President Obama and 6 Day Delivery

Both the National Association of Letter Carriers (NALC) and American Postal Workers Union (APWU) report on their respective websites that President Obama supports 6-day Delivery.   Both postal unions use the following line from the 2011 budget that President Obama presented to Congress to support their argument that President Obama supports 6-day delivery.   "That 6-day delivery and rural delivery of mail shall continue at not less than the 1983 level."

If this line implies that President Obama supports 6-day delivery, then it is a peculiar way to say it given that it is written in a form that follows the legislative language written by Congress.  The language is similar in structure to language in the budget that describes provisions relating to child support enforcement, and closure of small rural post offices.  The identical language is in the budgets of President Bush. 

More likely, this language is nothing more than a statement of the law relating to uses of the Postal Service Fund and Congressional appropriations to that fund.   So in fact, rather than a statement in support of 6-day delivery by President Obama, this line is nothing more than a restatement of the law as passed by Congress

So if President Obama has not staked a position in regards to 6-day delivery, what does the budget say about its position in regards to Postal Policy.    The only indication comes from the language in the budget that was not part of 2010 budget submitted by President Bush.

The Postal Service faces a serious financial crisis due to unprecedented reductions in mail volume. These reductions, in turn, reflect greater reliance on the Internet (a.k.a., "electronic diversion") and the effects of the business cycle, including cost-cutting by businesses and consumers during the recession. The Administration will work with the Postal Service, its employee unions, the Congress, and other stakeholders to make sure the Postal Service has the tools and authorities it needs to remain viable as a pillar of the American economy and a vital public resource through the current crisis and over the long haul.

This statement does nothing more than state that the Obama administration plans to work with all postal stakeholders to ensure that it remains viable over the long haul.   This statement provides no indications if President Obama's positions on postal policy are similar to those of any stakeholder.  At best all stakeholders, including the APWU, or the NALC, can expect that they will have a seat at the table as more serious discussions about the future of the Postal Service begin this Spring.

Is 5-day Delivery Inevitable?

The Postal Service's presentation of its 5-day delivery proposal appears to be on a fast track for presentation to the Postal Regulatory Commission.  In announcing the MTAC agenda, the Postal Service has included a 90 minute briefing on 5-day a week delivery on February 17.   The Postal Service will repeat this presentation on the web four additional times in February.

• Friday, February 19, 2:00 - 4:00 p.m.
• Tuesday, February 23, 2:30 - 4:30 p.m. 
• Wednesday, February 24, 2:00 - 4:00 p.m. 
• Friday, February 26, 1:30 - 3:30 p.m. 

Mailers interested in attending the webinars on 5-day delivery should send an e-mail to Connie.Totten-Oldham@usps.gov with the date you prefer.  She will send an invitation along with instructions for viewing the presentation and joining the conversation.

These presentations could represent the Postal Service's last outreach effort prior to a PRC filing.  Given, the scale of this outreach effort, it is possible that the Postal Service management will present a proposed PRC filing to the Board of Governors after this outreach effort is completed.  Then the process is out of the Postal Service's hands.

For mailers trying to plan for 5-day delivery, the following schedule seems realistic.   

• March, 2010 - The USPS files a service change request with the Postal Regulatory Commission.
• March 2010 through November 2010 - The PRC conducts the review of the change in service to 5 day a week delivery.  (This time frame would be an aggressive schedule for the PRC to meet and it is possible that it could run as long as a year.)
• November 2010 - February 2011 - Congress holds hearings on the Postal Service's proposal and the PRC report.   These hearings would occur during either a lame duck session of Congress or within the first month of a new Congress and are unlikely to happen until after the PRC completes its analysis of the Postal Service's proposal.  
• February 2011 - September 2011 - Congress passes a law allowing the Postal Service to offer 5-day a week delivery.  It is possible for Congress to act quickly, but eliminating the 6-day delivery requirement may not come outside of a more comprehensive postal reform bill that would take the full first legislative session of the next Congress.
• Summer 2011 or January 2012 - Implementation of 5 day a week service.   As the Postal Service does not usually implement major operating changes in its first fiscal quarter, the shift to 5-day delivery will begin either before the fall mailing season begins or after the new year.  The summer implementation would occur only if Congress acts within the first month or two of the new Congress.

This schedule has some interesting implications for the Postal Stakeholders.

• The PRC will review elimination of 6-day delivery during the 2010 midterm elections.  The publicity from hearings on the Postal Service could force every Congressional candidate to take a position on 6-day delivery and other issues relating to the Postal Service.
• The Postal Service has to manage its business for at least another 15-24 months as a 6-day a week operation.   During this period the Postal Service will continue to accrue operating losses that it believes could be avoided by reducing the number of delivery days.
• The reduction in delivery days will occur at a time the requirement to coordinate digital communications with mail requires a level of service quality for Standard Mail from the Postal Service higher than what is now offered.    

Who will brief Obama on the nature of the mail market?

At a You Tube forum, President Obama was asked, "'Mr. President, our deficit (national debt) is higher than ever at $12 trillion. Will you consider allowing the private sector to buy and take over the most troubled government-run agencies such as the U.S. Postal Service?"

The President's response suggests that his administration has left him poorly prepared for questions about the future of the Postal Service.   As questions about the future of the Postal Service will likely be on his plate over the next 9 months, it is time for his staff to do the legwork that will have him better prepared.   This post reviews information that he needs so that he can develop the level of understanding necessary to direct his staff in regards to future of the Postal Service.

Competition with FedEx and UPS
FedEx and UPS do not have the "high end" business-to-business portion of the postal market.  They serve the parcel side of the parcel market.   Yes they dominate business-to-business parcel delivery, but that is not to say that they do not also deliver a substantial volume of parcels to households, including households in the most rural sections of the Great Plain and Mountain West states.  They make these deliveries at a profit, just like they make profits in their business-to-business parcel deliveries.

Where FedEx and UPS compete with the Postal Service is in portions of the parcel market that fit the capability of the Postal Service's network.   The Postal Service is the specialist in handling, and more importantly delivering parcels under 5 pounds.  In this role, the Postal Service not only delivers small parcels that are dropped at a Post Office, but also an increasing share of the light weight ground parcels that FedEx and UPS picks up from its customers.  In fact, both FedEx and UPS are doing their best to convince their customers to shift light weight ground parcels to their products that use the Postal Service for delivery as a way to both lower the shipment price and provide service to that customer at a profit.  (It is not known what portions of the profits from delivering these parcels are received by UPS and FedEx or the Postal Service.)

The Postal Service is also the specialist in handling the parcel shipping needs of households. Households are a very tiny portion of the parcel delivery business.   Household shippers generate most of the Postal Service's heavier parcels.  The preference that household mailers have for the Postal Service makes the Postal Service an ideal provider of return services, as the new joint Postal Service-UPS service shows.  Households are the Postal Service's best customers because 100 years of marketing parcel delivery services to households creates a level of comfort that is tough to shake.  

Businesses in general use FedEx and UPS for their parcels, even if the Postal Service does the actual delivery, because the service levels and prices are better.  In addition, business customers find the characteristics of the customer relationship, from methods of payments to tracking capabilities, to the responsiveness of both telephone and in-person sales people are better at UPS and FedEx than the Postal Service.

Private Sector Firms Would Deliver Only the Most Profitable Business
The Postal Service's delivery competitors outside of the parcel market all focus on either the Postal Service's lowest priced or lowest margin products.  

For over 25 years, the Postal Service has faced competitors in the delivery of periodicals, a product that the Postal Service's cost system currently indicates are handled by the Postal Service at a loss.   The Postal Service's competitors deliver periodicals to every business address in metropolitan areas from Boston to Los Angeles, and in New York to buildings with doorman.  These businesses limit their deliveries to points where there is no mailbox and therefore no need to violate the Postal Service's exclusive right to the mailbox access.  The firms also offer a better quality service, as the periodicals and newspapers that they deliver are delivered earlier in the day than the Postal Service and their delivery service often includes replacement copies if the original is not received by the recipient.  The longevity of these firms is a testament that the private sector can deliver at a profit a product that the Postal Service delivers at a loss.

Today, Valassis announced the expansion of its use of private delivery of advertisements to households. Valassis will have the private carrier, CBA Industries, deliver what the Postal Service calls Enhanced Carrier Route (saturation mail) to addresses that do not receive the Newark Star Ledger.  CBA Industries is offering Valassis a service equal to or better than the Postal Service's lowest priced product for commercial advertising mail.

Finally, rural communities have always had shoppers and other free advertising focused journals delivered to boxes nailed to the post that is there for the mailbox.     These products could use the Enhanced Carrier Route products that the Postal Service offers.   However, private delivery offers the producers of the shoppers shorter lead times between the sale of advertisements and actual delivery than what delivery using the Postal Service would offer.   The decades long success of shoppers suggest that firms offering delivery in rural areas can earn sufficient profits to maintain and grow this business. 

Universal Service Could Not be Provided by the Private Sector

The experience of foreign postal operators suggests that rural service, including service to Lapland in Sweden and Finland, the rural plains of Saskatchewan and Manitoba, as well as the Arctic regions of Canada, and the Outback in Australia can be provided under private sector business objectives.   These firms, while all currently owned by the national government all have a charter that requires universal service for both citizen and business mailers.  In the case of Australia, the charter requires many more postal outlets per capita than the Postal Service has now.  All of these enterprises operate at a profit and operated at a profit through the recession.

Sweden Post, which in many ways has distribution patterns that are not much different that states in the Mountain West, with a couple of big cities and a vast rural areas that have tiny villages hundreds of miles from urban centers, has shown that it can offer universal service at a profit even if you face a competitor that only delivers mail sent by large volume business mailers in Sweden's urban areas.   Sweden Post will soon become a private sector corporation as the government of Sweden will be selling shares to the public soon.

The reasons why these posts can profitably offer universal service are the same reasons that FedEx and UPS deliver to every address in the United States.   First, their largest customers demand it.     Large customers want the entire mailing delivered and look at the total delivery cost of the mailing in making their assessment of the value of the delivery service.   As such, these customers are likely to accept any pricing scheme produces a reasonable total delivery cost for a mailing.   If simplicity requires a uniform price, as it often does with letter mail, then the price offered for each piece must earn a profit for the mailing.  Single piece mail is similar in that a uniform rate is set to ensure that the product is profitable including items delivered and tendered to the most urban and rural areas


For higher priced items, like the parcels that FedEx and UPS handle, surcharges to rural areas that reflect cost differences ensure that each parcel is handled profitably. pieces going to the bottom of the Grand Canyon, and each of these customers business can be priced to insure that the entire mailing is profitable.  If there is a need for a subsidy, as there is for parcels to the Canadian Arctic, then there are specific government subsidies paid to Canada Post. 

Finally, what makes universal service work for postal operators, that work under private sector business objectives is the flexibility to change every aspect of how the services are provided, from the characteristics of retail outlets, to pricing of single piece and volume products, to extensive freedom to offer new services that customers want even if other firms in the private sector now offer them.   This flexibility and commercial freedoms are not available to the the Postal Service.   The Postal Service is not likely to gain this flexibility and commercial freedom under governmental models.

* * * * * * * * * *
The Obama administration is supposed to come up with a solution for the retiree health liability shortly.   Postal stakeholders know that resolving retiree health payment scheudle is only a part of the solution that is needed in developing a new business model and regulatory framework.   Let's hope that they take the time to fully understand the mail market and the unique needs of the Postal Service's customers, the processes of producing mail, the characteristics of the Postal Service's workforce, and  how postal operators outside of the United States provide universal service at a profit with private sector business objectives before that complete their analysis of the Postal Service's problems and potential solutions.