Concensus Economic Forecasts Now Lower Than Those Available When Last USPS Public Forecast Made

Here is the latest list of announcement of slower economic growth announcements:

Goldman Sachs trimmed GDP growth to 2.6 percent for all of 2011 from 3.1 percent.

JP Morgan  cut GDP growth to 2.5 percent annual pace in the second quarter of 2011 from the previous estimate of 3 percent.  This followed a cut in full year growth to 2.5% from 2.6%.  The small decline in full year GDP growth reflects a shift in auto sales from the 2nd quarter to later in the year once supply disruptions caused by the Japanese Earthquake are resolved.

Macroeconomic Advisers has cut their GDP growth rate from 2.8% annual pace in the second quarter of 2011 from the previous estimate of  3.2%.

The slower growth forecasts were generally made before new data on housing sales and consumer spending were announced that indicated that neither housing nor retail sales are experiencing robust growth.  

Why does this matter for the Postal Service?

The decline in First Class mail, and in particular statements and bills, increases the Postal Service's reliance on economically sensitive advertising and parcel shipping.    So not only does the Postal Service face declines in revenue from the product that has traditionally generated most of its revenue, the revenue that remains becomes more sensitive to the business cycle.

 If revenue will increasingly rise and fall with the business cycle, so must costs.    Contracts with employees, transportation companies, and other contractors that assume a steady demand for services over an extended period of time need modifications that will allow the Postal Service to modify schedules as demand changes. 

The Postal Service made this change with the new APWU contract, and will seek similar changes in its other agreements. 

Similar changes are needed in its highway and air transportation contracts.   If contractors are not willing to provide service allowing for such flexibility, then the USPS may actually find it cheaper to use its own employees who can work a flexible schedule to handle certain movements.

Finally, the Postal Service needs to be able to look at its processing plant network as less of a fixed asset and more as a sunk asset.   The optimal network today will be different from the one needed five years and ten years down the road.  The Postal Service most likely already knows that only consolidating into existing facilities produces both sub-optimal cost-savings and sub-optimal service quality.   However, lack of capital prevents the Postal Service from creating an operating network that will fit the volume and mix and mail that a Postal Service focused on serving economically sensitive customers need.

Rate Increase Coming in 2011

In a letter to the Postal Regulatory Commission, the Postal Service asked for clarification regarding the total increase in rates under the cap.   The Postal Service stated that it wanted the clarification so that it could better to do its financial planning for Fiscal Year 2011.  However, mailers should clearly understand that rates will be rising in calendar year 2011.

Rate increases will be relatively modest.   Rate increases will be rising on average around 2% and most likely slightly below that figure.  

The price of  a single piece stamp will likely increase by a penny to 45 cents. (2.3%)   Bulk First Class mail will rise slightly less to ensure that rates for the entire class rise less than the cap.

The largest rate increases will likely be felt by Standard Mail parcels and non-machinable flats.   The Postal Service will likely raise these rates by between double and quadruple the cap for Standard Mail as a whole. The large rate increase on this product will occur due to the confluence of two factors that generally influence pricing decisions at any firm offering a product in commercial markets.  First, it is in the Postal Service's interest to ensure that all parcel products earn a positive return, and eventually a return equal to the firm wide average.   As single piece First Class mail volume declines, the Postal Service can no longer to price products that do not have a legislatively mandated discounted rate at a loss. 

Second, both UPS and FedEx are making significant changes in their rate structure that would allow the Postal Service to raise rates in small parcels significantly without affecting its market position.   The two private sector carriers are raising the minimum shipment charges on express shipments and expected to raise the minimums on ground parcels that large shippers pay for low weight shipments going to destinations in zones 2 through 4 or 5.  For smaller shippers what matters is not only the rate increases that the private carriers set for the base rate but also changes in accessorial charges for remote and home delivery, as well as changes in the method of calculating package density that can push a light-weight parcel into a heavier weight cell.   All of these changes combined means that shippers spending less than $100,000 annually on parcel and express shipments may see rate increases from in light weight parcels in the high single digit range from the private sector carriers early in 2011.   

The previous two times that that the Postal Service raised rates under the cap, the increase went into affect late in 2nd calendar quarter.   Clearly the Postal Service would like to raise rates earlier.   Whether the Postal Service could propose a rate increase under the cap that would go into affect earlier in 2011, and closer to the timing of the rate increases of United Parcel Service and FedEx requires greater knowledge of the law than I have. 

The Exigent Rate Case: Rethinking Price Regulation

Yesterday the Postal Service proposed a major change in its rate structure through an exigent rate case.   The general and postal press have focused on 1) the rate increases themselves with particular attention to the impact on First Class single piece mail; and 2) the exigent process itself, a rate setting process that is being used for the first time. 


Mailers have organized a major effort to stop the changes through a new group the Affordable Mail Alliance.   With only 90 days to press their case mailers have a major challenge in their effort to argue that:

1. the conditions necessary for invoking the exigent process had not been met; 
2. the rate increases proposed are too large;  and
3. the changes in individual rates result in rates that are not fair and reasonable and do not meet the pricing objectives in postal law.

Given the limited amount of time available for the proceeding, the level of discovery, expert testimony, and cross-examination in this proceeding will be limited.   While the procedural schedule is not yet out, the Commission will likely need around 20 to 30 days to review evidence and write its opinion which compresses the first nine months of a traditional rate case into a 60 to70 day period.

What makes the exigent rate increase particularly difficult for mailers and the Commission is that it represents more than just a simple across the board increase in rates.   The proposal represents a fairly bold rethinking of regulatory pricing and the economic thinking that guided postal pricing for nearly thirty years.  These new approach can be summarized in seven statements as follows:

1. Divergence to electronic alternatives for single piece mail is not affected by stamp prices.   "The Postal Service does not believe that the erosion of single-piece mail through electronic diversion can be materially affected by limiting the growth of the stamp price." (Statement of James M Kiefer on Behalf of the United States Postal Service, July, 6, 2010, p. 15)  "As long as these forces [that encourage electronic payment] are in play, efforts to hold down the stamp price to "protect" the single piece customer will be unlikely to spur usage of single piece mail among users, for whom continence trumps the small impact of the postage savings." (Kiefer, p. 16)
   
   From a business standpoint, this means that the Postal Service cannot protect itself from the decline in single piece First Class mail by holding prices down.   Given that single piece mail is now declining at a faster rate than it did before the recession, the Postal Service's single piece rates today will increasingly be required to bear the costs associated with reducing the workforce that currently handles single piece mail at a rate far faster than the rate of normal attrition.  The public should expect that single piece rates will begin rising faster than other postal products to generate cash to cover these costs.
   
2. The markets for single-piece and presorted First Class mail are different.   By separating the markets for single-piece and presorted First Class mail, the Postal Service presents a direct challenge to the theory behind workshare discounts as they are currently constructed. "Traditional workshare theory suggests that increasing presort First-Class Mail prices would simply cause customers to re-evaluate their decision to perform worksharing activities.  Essentially, the theory argues that if it costs less for a customer to presort mail than the postal discount, then they will do the sortation. Conversely, if it costs more to presort mail than the postal discount, then the customer will choose to tender unsorted mail to the Postal Service. While this argument may have been valid at the inception of the automation program, it ignores the realities of decisions that customers are making today. Much of today’s presort mail is generated not by physically sorting mail pieces but by using presorted mailing lists to produce the resulting mail in presort order. 
   
   Customers pay prices, not “discounts” and decide whether to mail or not to mail based on the total cost of mailing, including the postage paid (not just the price differential between single-piece and presort mail) and the costs of producing that mail. While at some level the size of the discount affects workshare decisions, the overall postage price affects the decision to mail or not to mail. If this price goes up substantially (because discounts are reduced) the decision to mail at all may be reconsidered."  (Kiefer, p. 18)
   
   The Postal Service carriers maintains the separation between individual and commercial users of First Class mail in its development of First class mail products regardless of shape and is clearly seen in the discussion of both letter and parcel rates.  
   
   The separation of individual and commercial mailers requires the Postal Regulatory Commission to overturn current precedent on First Class rates and worksharing discounts as applied in the Postal Regulatory Commission's 2009 Annual Compliance Determination.   The Postal Regulatory Commission will like spend some time deliberating this change but much of the public work on this issue has been completed as part of another proceeding, Docket No. RM2009-3.
   
3. Pricing is still subject to the Postal Regulatory Commission's worksharing rules even if the Postal Service does not believe it makes sense.   Mr. Kiefer's statement has numerous sections on worksharing to deal with the Commission's approach to measuring traditional worksharing discounts.   The inconsistency between these sections and the Postal Service's thinking on separating single piece and pre-sorted First Class into two separate markets indicates that the Postal Service still must prepare its proposal to meet Commission precedent even if it believes that the precedent does not allow for postal prices to reflect market realities.  While the Postal Service may want to challenge worksharing precedent and law, the Postal Service is holding off that challenge until at least 2011.   
   
4. Weight Categories for First Class Pre-sorted mail require rethinking.   The Postal Service has proposed allowing single piece First Class letters to hold 1.2 ounces and still pay a single ounce rate.   This allows more advertising inserts in letters, items that help make mail that normally is a business expense become a profit generating advertising opportunity.   The question that this change makes is: why 1.2 ounces?  As mailers and the Postal Service experiment with this proposed change, it is possible that the Postal Service may want to allow commercial mailers to send higher weights as long as the mailing meets automation requirements.
   
5. Pricing should not reflect bad operating processes or short term economic challenges.  The prices proposed for Standard Flats and Periodicals both are more modest than traditional price setting rules would require.   The process for handling flats are currently in flux and the costs associated with moving them in one to two years should reflect a different operating process than the Postal Service now uses.  Also if the Postal Service, started an aggressive program to remove excess capacity through a new round of early retirements and a national distribution strategy for flats similar to what it did with the NDC's it may be possible to reduce costs even further.
   
   The Postal Service's rates also reflect a limited recognition that catalogs and magazines are struggling in the marketplace that sees significant reductions in consumer demand.   Magazines in particular have seen significant drops in ad pages that reduce the amount of postage a magazine pays per issue.    The recovering economy has seen some increase in the number of advertising pages sold that will increase the amount of revenue the Postal Service generates per magazine.
   
6. Not all products that look the same compete in the same market.   The Postal Service in its press conference described two Standard Parcel markets.   The first is a product sample market that is a form of advertising and competes with other means of distributing product samples.    The second is fulfillment and includes the distribution of light weight parcels.   Physically, these items look very similar.  However, the value of the item to the sender is very different.   Samples are designed to generate sales so the postage price, combined with all other costs of producing the sample must product a positive return on the advertising expenditure.   Fulfillment parcels rates must allow the seller of the item to earn a profit on the sale including the item's cost as well as all other sales, marketing, and overhead costs associated with the sale.   The differences between the two markets are intuitive, proving this as part of a regulatory proceeding may not be. 
   
7. The Postal Service's regulated parcel services, regardless of class, are offered in competitive markets.   The Postal Service with the exigent filing has begun the process of moving its parcel products into the competitive product category. This would allow it to offer all parcel services to commercial customers within contracts just like its competitors do and offer services to individuals based on rates contained in published tariffs.  The Postal Service at its press conference stated that it will propose moving Standard parcels to the competitive category this fall and is evaluating moving other products to this category as well.  
   
   The Postal Service's position in the parcel market is unique in that it both offers services directly to consumers and businesses and offers its delivery network to its competitors for delivering light weight items and items destined to the rural households.   All of the Postal Service's parcel products sold directly to shippers have private sector substitutes, although some are offered at prices that the private sector finds unprofitable and no private sector carrier offers a service that is price competitive. 
   
   The Postal Service's last mile delivery service competes with other firms that can offer last mile delivery as well as the employees and regular contractors of United Parcel Service and FedEx Ground.  The use of the Postal Service's last mile service reflects a classic make or buy decision that United Parcel Service and FedEx Ground that these companies constantly evaluate to ensure that they meet their profitability objectives.   The Postal Service ability to raise its prices for the last-mile delivery of light weight and rural parcels depends on price of its customer's alternatives. 

The seven items listed above should give the mailing community a lot to think about as they deal with the details of the Postal Service's proposal.   They all reflect long-term issues that go beyond the rates themselves.  For many stakeholders, including the Postal Rate Commission, postal unions, and many mailers, the changes reflect challenges to their long standing positions.  In 90 days we will see if the Postal Service has overcome the pull of precedent and traditional viewpoints or if a new era in postal pricing has begun.

USPS: February Financial Results, Still Not Good Enough

In February, the Postal Service continued to show financial results that were significantly better than plan and slightly better than last year.   Its results reflect a more robust advertising environment that resulted in the first month of growth in Standard mail volume in revenue this year and a smaller decline in periodical revenue than volume that most likely indicated that periodicals in February had more advertising pages per issue than a year earlier.

The results for February continue to illustrate the risks going forward for the Postal Service.  The continuation of high single digit declines in First Class mail at a time that advertising is flat if not growing, suggests that the shift of transaction and correspondence mail to digital formats now occurs at a rate faster than what occurred before the recession. Excluding the holiday season, November and December, First Class mail volume has decline year-over-year at a 10.4% rate.   First Class revenue in the non-holiday months declined at a 7.8% rate   

While it is clear that the Postal Service's financial results are better than plan they are not sufficient to ensure its self sufficiency.  The following chart traces the monthly EBITDA ratio (earnings before interest, taxes, depreciation, and amortization divided by revenue) with and without the retiree health payment. The chart shows that removing the retiree health payment would result in the Postal Service earning a small operating profit every month this year.   The chart also shows that removing the retiree health payment is not sufficient to ensure postal self sufficiency as self sufficiency would require an annual EBITDA ratio of between 10% and 15%.  After five months the Postal Service's EBITDA ratio is 9.8% if you exclude the retiree health payments.  This ratio will decline between now and the end of the fiscal year as the Postal Service faces 6 to 8 more months of seasonally lower revenues and volumes that traditionally results in monthly financial returns that fall below the annual average. 

Financial self sufficiency requires the Postal Service to increase revenues by 5 to 6%, reduce costs by around 6% beyond what its current efforts produce, or some combination of the two in addition to the removal of the retiree health payments to become self sufficient.   More importantly, the Postal Service needs to find the fastest way to increase its EBITDA ratio in order to generate the cash necessary to cover the transition costs that creating a Postal Service that efficiency delivers universal service for mailers that mail only 150 billion pieces annually, most of which will be advertising.

Currently, the easiest option to make the changes necessary is for the Postal Service to raise rates.  The process to raise rates is known as is the time that would pass between the filing of the case and the implementation of higher rates. The Postal Service will file an exigent rate case asking for an increase of around 5% this summer, a rate increase that would be nearly sufficient to generate an EBITDA ratio excluding retiree health benefit payments to put the Postal Service close to a level of self sufficiency.  If the retiree payment issue is not resolved in the Postal Service's favor than double-digit rate increases would be required.   

If the retiree health care issue is not resolved by the time the Postal Regulatory Commission files its opinion on the exigent rate case, Postal Regulatory Commission precedent suggests that the PRC may have little choice but to recommend the double-digit rate increase necessary to cover the retiree health payments. The only caveat relates to the 5-day proposal, as the Postal Regulatory Commission could take into account savings from the 5-day delivery proposal in recommending rates.  However, I am not sure as to whether the 5-day delivery proceeding could be resolved before an exigent rate case is completed.

All other options require Congressional approval (e.g. 5-day delivery, and modifying the retiree health payments), freedom from Congressional interference (e.g. network optimization) and/or negotiations with unions (e.g. changes in work rules including increasing the proportion of part time employees, a process to manage employee dislocation during optimization including localized early retirement incentives and severance pay for layoffs when needed ).  In addition all of the significant cost savings options take more time from proposal to implementation than increasing rates and some will have transition costs to deal with employee dislocation.

The Postal Service will start the clock running on 5-day delivery within the next week.   It should see if it can start the clock on the other initiatives and negotiations sooner than now planned.  Otherwise, it will have no choice but raise rates repeatedly at a time that its customers increasingly find digital alternatives to be more convenient and cost effective.    

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.

Pricing Volume Mail

In my last post, President Burrus' Dilemma, I created significant concerns among mailers that my proposal to the APWU supported their idea to eliminate worksharing. Anyone proposing increasing rates 25% on the Postal Service's best customers in an environment where mail, and in particular First Class mail is at a real price disadvantage with electronic competitors is arguing for organizational suicide.

What I was trying to do was suggest that if the APWU wanted to make a proposal to handle mail now sorted by the private sector that would offer a better value to the Postal Service's customers, I would be glad to help. Given the current economic and competitive landscape, any APWU proposal would have to offer postal customers a better value or preparing such a proposal would be a waste of time and energy.

I would like to use this post to clarify my thinking on pricing volume mail to give my readers a better understanding of how difficult APWU's task of designing a product that offers a better value really is.

The Postal Service's rate structure is complicated and the use of worksharing discounts further complicates thinking about pricing. The primary problem is the word "discount." It suggests that the customer is getting a deal when in fact they are buying a more basic product from the postal service for a lower price. It also suggests that single-piece customers and volume customers are part of the same market for mail and that single piece prices are a real alternative for volume customers.

The alternative way of thinking of postal rates is to start with the basic service as the basis for all pricing. To how this alternative would work, below are two price charts listing prices as they are currently shown and the alternative bottom up alternative.

Current First Class 1 ounce rates table

• 150 pieces of barcoded mail sorted to the same 5- digit zip code - $0.335
• 150 pieces of barcoded mail sorted to the same 3- digit zip code - $0.357
• 150 pieces of barcoded mail sorted to the same distribution center - $0.360
• Barcoded mail that is unsorted (the residual rate) - $0.382
• Unbarcoded volume mail - $0.414
• Single piece mail (shown for comparison purposes) - $0.440

Bottom-up First Class rate table:

• 150 pieces of barcoded mail sorted to the same 5- digit zip code - $0.335
  
• Sorting 3-digit sorted mail to the 5-digit zip code - $0.022
• Sorting distribution center sorted mail to the 5-digit zip code - $0.025
  
• Sorting unsorted barcoded to the 5-digit zip code - $0.047
• Barcoding unbarcoded volume mail and sorting to the 5-digit zip code - $0.079

In this way, it becomes quite clear how difficult the task the APWU has. In order to compete with the private sector for the handling of mail that is not sorted to 5-digit level, it wold have to offer that service at a price less than the current charge for sorting mail, but less than what the private sector charges to do it.

In looking at the above list, the product that provides the largest margin is unbarcoded volume mail. The Postal Service charges 7.9 cents to barcode and sort this mail. Mailers have the choice of finding a presorters who will do it for less than that. The highest price the Postal Service could charge these mailers would be what the private sector charges for similar services. This is likely to be much less than the 7.9 cents the Postal Service now charges for this service. Assuming that the private sector charges half of the difference to cover their costs and profits, then the Postal Service could not charge more than 3.95 cents to compete. This is a lot less than the 10.4 cents that President Burrus offered in his challenge to mailers, and is why his response, while possibly appealing to his members was non-responsive to Senator McCaskill.

What this exercise further illustrates is why such a proposal could not be accomplished within the current regulatory structure or with the current business model. Allowing the Postal Service to truly compete would require some major changes. These include:

• Basing all volume prices on the price for the product that involves the least amount of Postal Activity. All other products could be purchased as options. For standard mail, finely sorted mail drop shipped to the lowest practical level would be the basis upon which all prices are based.
  
• Removing all links between single piece rates and volume rates. This approach requires treating single-piece and volume products as separate markets with totally different approaches to product pricing.
  
• Allowing volume based rates. By offering rates bases on the volume of individual mailings and total annual mailing volumes, the Postal Service could offer prices that reflect the impact that volume has on business relationship costs. This is similar to volume requirements for sale rates but differs in that there is no requirement for marginal increases in volumes. Volume based rates are a requirement for contract rates to provide additional handling at prices below list.
  
• Allowing private contract rates. In order for the Postal Service to compete with private sector firms offering sortation or other mail handling services, those prices should reflect local competition for these services. The published rates for providing additional handling services would reflect rate that any volume customer could get without negotiations. In this way, the Postal Service would offer its services to corporate customers in the same manner that its private sector competitors do.
  
• Specific financial self-sufficiency/profit objectives. The Postal Service cannot have the authority to offer contract rates that differ from published rates without a requirement that prevents it from offering prices below not only costs but below costs plus a reasonable margin. At a minimum it must be subject to the same profit discipline of its private sector competitors.
  

President Burrus's Dilemma

In August, APWU President William Burrus was asked by Democratic Senator Claire McCaskill to identify "the substantial steps the APWU is willing to take to assist the Postal Service in weathering its severe financial crisis? In crafting a response, he was faced with a dilemma: how does the APWU appear responsive without proposing anything that will affect upcoming contract negotiations with the Postal Service?

He could not offer any response that required changes in contract provisions as that would put the APWU in a weakened bargaining position even before negotiations have started. Instead he repeated his challenge to mailers and the Postal Service: "The American Postal Workers Union has challenged the postmaster general to discontinue the excessive discounts the USPS offers to large mailers, and instead to compensate postal employees for processing letters and flats at a cheaper per-piece rate. This would reduce the Postal Service’s costs; improve efficiency, and make better use of underutilized equipment and employees. As an added incentive, we propose to process parcels at no charge." (Answer to question 1, third paragraph) Unfortunately for the APWU, President Burrus's response will not appear to be responsive to Congress.

The Dead Tree Edition has clearly laid out the case that Postal Customers will make in refuting President Burrus's proposal in its post, "Mathematically Challenged Burrus Proposal Doesn't Add Up For USPS." Mailers look at President Burrus's proposal only as a significant increase in rates. The greatest increase would be born by those mailers that currently can sort mail while they print. These mailers are mostly likely now paying on average 35.1 cents for First Class mail. For these mailers, President Burrus's proposal represents a 25% increase in postage prices without changing the work that either the Postal Service or the mailer performs. Even the least business savvy member of Congress will understand that raising postage prices by 25% for a major group of customers will drive business away and make the current financial difficulties even worse.

President Burrus's proposal does provide the framework for developing postal products that will both make mail more attractive to some customers and provide jobs for unionized postal workers. These products would serve those customers that cannot sort mail while they print, or cannot sort mail while they print with sufficient density to pay the lowest postage rate the Postal Service offers. His proposal states suggests that the APWU would support the development of products for mailers that produce mail in quantity that requires physical sortation prior to delivery sequencing at rates less than the full letter rate of $0.44. Given that his first proposal of 43.9 cents is unlikely to have any takers among postal customers, President Burrus and his staff at the APWU has to come up with a more realistic price to sort mail currently physically sorted by private sector firms.

In a previous post, "Could the USPS Turn a Jobless Recovery into a Job Full Recovery?", this blog laid out the basic parameters of such a product. If the APWU, or for that matter any other postal union, is serious about competing for the physical sortation of mail now sorted in the private sector, they could contact me at the e-mail listed on this page and I would be glad to assist them in putting together a proposal that they can take to the Postal Service and eventually the Postal Regulatory Commission that would secure more jobs for postal union members.

This post created some consternation among postal stakeholders. A subsequent post, Pricing Volume Mail, clarifies the challenge of developing a product to compete with private sector sortation of mail.