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.
Showing posts with label corporatization. Show all posts
Showing posts with label corporatization. Show all posts
Tuesday, February 2, 2010
Tuesday, January 26, 2010
Could the Budget Kill Efforts to Save the Postal Service?
In the next few days, President Obama will deliver the State of the Union Address and reveal the 2011 budget. White House spokesman have already announced that the budget will include a freeze in discretionary spending in fiscal years 2011 through 2014. The spending freeze creates an additional barrier on top of the normal budget scoring process to efforts to find a solution to the Postal Service's financial problems.
The budget scoring process put the retiree health care payment schedule in place in order for the Postal Accountability and Enhancement Act (PAEA) to pass. The budget scoring process derailed the normal legislative process as a method to deal with the Postal Service's financial problems last year. The relief that was granted was included in last-minute legislation that did not require budget scoring.
The relief that Congress granted last year did not solve the long term problems of the Postal Service. Congress will soon see a report from the Government Accountability Office (GAO) on potential business models and regulatory frameworks that could offer long term solutions. It is unclear whether the GAO's mandate will cover key financial questions regarding the Postal Service's true liabilities for CSRS pensions, retiree health care benefits, and workers compensation payments which affect the viability of all business modes that the GAO is likely to consider.
The Problem with the retiree health care liability was studied by both the USPS - Office of Inspector General (USPS-OIG), and the Postal Regulatory Commission (PRC) and both studies recommended lower payment schedules than the current schedule. Choosing either the USPS-OIG or the PRC schedules would reduce the Postal Service's payment to Office of Personnel Management (OPM) and in the budget scoring process would require cost savings in non-postal programs or other payments from the Postal Service for the change to be budget neutral.
A new report from the USPS-OIG, The Postal Service's Share of CSRS Pension Responsibility, creates even more budgetary problems if the results are accepted. This report indicates that the Postal Service has overpaid its liability by $58.7 billion more than previously estimated. If this overpayment is transferred to cover the Postal Service's retiree health care liability, the Postal Service's obligation for retiree health care costs would be even smaller. Again, the primary obstacle to accepting the USPS-OIG analysis is the Congressional budget scoring process.
Fixing retiree and other liabilities was critical in postal reform efforts outside the United States. In these countries, legislatures realized that a viable national postal operator and universal service required that the postal operator not be burdened with retiree obligations at levels that would force layoffs or price increases.
The Postal Service and nearly all stakeholders realize that the first step to solving the Postal Service's problems will involve recognizing that 1) retiree payments reflect actual obligations and 2) the payment schedule for this actual obligation should follow private sector standards for funding retiree obligations. The National Association of Letter Carrier's Fact Sheet presents the arguments that stakeholders will make before Congress over the coming month.
Given budget scoring, these arguments will fall on deaf ears unless stakeholders can find ways to replace the "funds" that fixing the pension and retiree health care obligations creates. Failure in the effort to find a fix will force the Postal Service to raise rates substantially, make cuts in service beyond eliminating Saturday, and reduce the workforce faster than it has proposed to date.
Is there a solution? Is there a solution using a governmental business model? My paper, Examination of Postal Business Models, tried to answer these questions in assessing potential business models and concluded that there is a solution and governmental business models did not offer one. It is time for others looking at Postal business models, and in particular those stakeholders that want to retain a governmental model to explain how their model can solve the problem of Postal liabilities and get the changes that they envision passed by Congress.
The budget scoring process put the retiree health care payment schedule in place in order for the Postal Accountability and Enhancement Act (PAEA) to pass. The budget scoring process derailed the normal legislative process as a method to deal with the Postal Service's financial problems last year. The relief that was granted was included in last-minute legislation that did not require budget scoring.
The relief that Congress granted last year did not solve the long term problems of the Postal Service. Congress will soon see a report from the Government Accountability Office (GAO) on potential business models and regulatory frameworks that could offer long term solutions. It is unclear whether the GAO's mandate will cover key financial questions regarding the Postal Service's true liabilities for CSRS pensions, retiree health care benefits, and workers compensation payments which affect the viability of all business modes that the GAO is likely to consider.
The Problem with the retiree health care liability was studied by both the USPS - Office of Inspector General (USPS-OIG), and the Postal Regulatory Commission (PRC) and both studies recommended lower payment schedules than the current schedule. Choosing either the USPS-OIG or the PRC schedules would reduce the Postal Service's payment to Office of Personnel Management (OPM) and in the budget scoring process would require cost savings in non-postal programs or other payments from the Postal Service for the change to be budget neutral.
A new report from the USPS-OIG, The Postal Service's Share of CSRS Pension Responsibility, creates even more budgetary problems if the results are accepted. This report indicates that the Postal Service has overpaid its liability by $58.7 billion more than previously estimated. If this overpayment is transferred to cover the Postal Service's retiree health care liability, the Postal Service's obligation for retiree health care costs would be even smaller. Again, the primary obstacle to accepting the USPS-OIG analysis is the Congressional budget scoring process.
Fixing retiree and other liabilities was critical in postal reform efforts outside the United States. In these countries, legislatures realized that a viable national postal operator and universal service required that the postal operator not be burdened with retiree obligations at levels that would force layoffs or price increases.
The Postal Service and nearly all stakeholders realize that the first step to solving the Postal Service's problems will involve recognizing that 1) retiree payments reflect actual obligations and 2) the payment schedule for this actual obligation should follow private sector standards for funding retiree obligations. The National Association of Letter Carrier's Fact Sheet presents the arguments that stakeholders will make before Congress over the coming month.
Given budget scoring, these arguments will fall on deaf ears unless stakeholders can find ways to replace the "funds" that fixing the pension and retiree health care obligations creates. Failure in the effort to find a fix will force the Postal Service to raise rates substantially, make cuts in service beyond eliminating Saturday, and reduce the workforce faster than it has proposed to date.
Is there a solution? Is there a solution using a governmental business model? My paper, Examination of Postal Business Models, tried to answer these questions in assessing potential business models and concluded that there is a solution and governmental business models did not offer one. It is time for others looking at Postal business models, and in particular those stakeholders that want to retain a governmental model to explain how their model can solve the problem of Postal liabilities and get the changes that they envision passed by Congress.
Monday, December 28, 2009
Postal Service as Editorial Fodder
A recent editorial by the Washington Times and a columnist in the Los Angeles Times provide illustrations as to how ideological predilections and reporting on a deadline produce more heat and less light about how to solve the problems facing the Postal Service. These commentaries reflect the seasonal interest in the Postal Service use it to ship packages and send correspondence that they rarely send in the other 11 months of the year.
Readers of this blog are more familiar with the problems that the Postal Service faces these writers. They will have no problems identifying how the writers of the two pieces illustrated their minimal knowledge of the postal market or the USPS.
Common to both pieces is a misunderstanding of how limited the competition between the Postal Service and United Parcel Service and FedEx really is. The Postal Service is in the business of delivering documents, small parcels (those under 10 pounds) shipped by all senders, and larger parcels shipped by households and others that ship parcels infrequently. FedEx and UPS focus on business-to-business shipments and household deliveries of larger parcels. FedEx and UPS use the Postal Service to deliver small parcels to households as the revenue generated to drop one small parcel at a household is not equal to the cost of delivery for those two carriers. More of the Postal Service's volumes compete with newspapers like The Los Angeles Times and Washington Times, than with UPS and FedEx.
So why does what is printed now in two newspapers matter to postal stakeholders? They are important because they provide some hint as to what the debate over the future business models will look like. Right now, postal policy is most likely a low level priority of both the Obama Administration and Congress. Postal Policy is not a hot button issue in the blogosphere, talk radio, cable news except when used to illustrate why the financial health of the Postal Service suggests that public option is a bad idea.
This will change when the Government Accounting Office issues its report on potential business models in March or April of 2010 and the issue of postal operating losses and retiree healthcare payment schedules raise the threat of default on payroll next fall, and the risk that debt limit will be hit in 2011. Postal policy will bubble to the top of public discourse in the spring and summer of 2010 because the blogosphere, talk radio, and infotainment programs on the cable news networks will see postal policy as an issue that their readers and listeners can easily understand, or more importantly understand an ideological position relative to future postal business models.
The rise of postal policy in public discourse will be helped by the fact that the "hot button" issues of 2009 will have mostly be dealt with. This includes health care, financial industry reforms, and possibly even energy policy and global warning. At that time, there will be few other "hot button" issues on the plate of Congress that the blogosphere, talk radio, cable news can talk about that every reader, listener, or viewer will easily understand and writers, hosts, or panelists can easily frame the problems of the Postal Service around their ideological perspective.
The Washington Times editorial uses the Postal Service to present a polemic against government provided services. It links together a series of anecdotal stories about poor customer service at retail outlets and the inability of the Postal Service to meet its Priority Mail commitment with references to news stories illustrating evidence that its operating process are breaking down. In conclusion, the Washington Times does not present solution, instead it concludes with a remark suggesting that households abandon the Postal Service for parcel delivery.
The Los Angeles Times piece (reprinted in the Allentown Morning Call) is more thoughtfully written but David Lazarus but illustrates the types of conclusions that are drawn when based on misinformation provided by the Postal Service employees who have a real interest in maintaining the status quo, limited understanding of customers of and competition within the document and parcel delivery markets that results, and limited time to assess the information collected in interviews.
The remainder of this post reflects comments that I sent to Mr. Lazarus and represent my initial reaction to a number of the points that he raised.
The question of privatization is often tied to the question of the monopoly. A privatized Postal Service does not require eliminating the monopoly. Examples of privately owned, legal monopolies exist among regulated utilities serving large territories and unregulated rural retail monopolies selling everything from gasoline to groceries.
"The postal service is asking for a national dialogue on this," Richard Maher, a Postal Service spokesman in Los Angeles said. "What is our role going to be in the future? We need to have a conversation about that."
The dialogue was mandated by Congress and GAO will have a report on the subject that the USPS is trying to influence at the end of March. They wrote a paper on the topic and hired 4 independent thinkers, including myself to look at the question. For more information go to www.postaljournal.com for links to all papers an links to presentations made on the topic at a recent conference in DC.
Who wants the take over the Postal Service's business?
The interviews with FedEx and UPS are reflective of their view. They do not want to get in the “mail” business because it is not a growth business like parcel shipping in Asia. They are being a little disingenuous as FedEx is the USPS’s largest transportation supplier. UPS is a significant supplier. Both use the USPS to deliver parcels under 5 pounds to households and to addresses that FedEx and UPS call “remote” For them, remote means many zip codes in outer suburbs of big cities. They also like having a competitor who is undercapitalized and a bit inefficient as it allows them to charge more for services in the US and use those profits to invest in faster growing markets abroad. They will be major players in policy debate to come.
If not UPS or FedEx who?
The only other US private sector firm who would be a logical buyer would be Pitney Bowes but the USPS might be too big for them to swallow. Similar problems would exist for foreign buyers, including Canada Post, Deutsche Post, and TNT Post Group. Buying the USPS, especially given its current financial position, business model, and restrictions on operations, customer relationships, etc would be not viewed as a viable proposition. Also, these companies, as well as UPS and FedEx have better uses of capital than in investing in the USPS. TNT has specifically indicated it is exiting the mail business outside of the Netherlands.
The big private shippers probably would be happy to cherry-pick profitable urban routes but would want nothing to do with having to schlep mail up and down unprofitable rural roads.
FedEx and UPS already do that with their pricing structure. The private carriers (they are carriers and not shippers; those that send stuff are shippers) have substantial surcharges on home delivery and “remote” delivery, and retail services, (e.g. anyone who does not have a corporate account) All of these surcharges makes the USPS cheaper for individual shippers of parcels and commercial shippers of light weight parcels to homes and remote areas. So they already cherry pick in the parcel business. There is some indication in Europe that entry into the mail delivery market even into the most high-volume high-income neighborhoods is difficult to do profitably Furthermore not all urban carrier routes are profitable as routes in low income urban neighborhoods have much less mail per stop than those in high income neighborhoods and "cream skimmers" may find that the number of routes that could be served profitably are too few to justify investment in a start-up delivery business.
It seems to me that the only privatization scheme that stands even a remote chance of working would be to break the postal service network into hundreds of regions and territories, and then have local companies compete for mail-delivery rights in each area. But you'd still have to wonder how any such private-sector players would be more successful at the game than a long-established heavyweight like the Postal Service.
Breaking up the Postal Service has been suggested before. The problem with this solution is that almost all buyers of mail service want the company that collects / accepts the mail to have the ability to seamlessly deliver to any address in the US. Mailers, and in particular larger mailers, want to maximize their purchasing leverage by buying from one or two transportation sources not 50. That is why both FedEx and UPS have national parcel, express and freight networks and ATT, Sprint, T-mobile, and Verizon all offer nationwide wireless service. The privatization scheme that would have the best chance of working would be an IPO with a significant employee ownership. It could come only after the USPS could show it could operate profitably under private sector business and employment law. This is what happened with Conrail in the 1980’s.
"If the system was privatized, it might cost 44 cents to get a letter across Los Angeles but $5 to get it to Connecticut," said Richard Maher, the postal service spokesman. "When you think about a network that delivers to all homes every day -- it's huge," he said. "Would a private company be able to do that? I don't think so. I think we would lose universal service."
These are canards. Every country uses a uniform rate for single-piece mail and in many cases for Parcels. (look at the rate structure for parcel in Germany where you can send a parcel anyplace in the world and only have to choose among some 20 or so rates based on the size of the box and the destination country.) Business mailers (LL Bean, Bank of America, etc, may see rates that are not uniform. In fact, those advertising mailers that drop their mail at local post offices rather than anyplace in the country already have the distance based rates that Mr. Maher says would be so terrible. If distance based rates are introduced to First Class for commercial mailers, percentage differences between local and distant rate will likely be much less than 100% rather than the 1,136% that the Postal Service spokesman describes.
The percentage difference between local parcels and those shipped cross-country vary with weight. The percentage does not exceed 100% until the parcel exceeds 17 pounds. This suggests that the impact of transportation on rates for items that are sorted at origin and destination would be quite small.
The Universal Service Obligation (USO) argument has been gone over many times. The driver of the USO is commercial mailers, who must mail to every possible address. The rates charged these mailers can be set to cover the total cost of delivering to every address printed on their mail using either a uniform or distance-based rate. The acceptance of remote surcharges by customers or FedEx and UPS illustrate that private sector carriers can devise non-uniform rates that allow them to deliver to all addresses in all 50 states. UPS and FedEx have a common carrier obligation which creates a common law requirement to actually deliver to all points that they say they reach according to advertised service commitments. Similar obligations exist for other trucking, rail, air and telecommunication carriers and are enforced by regulators and courts. In addition, there are lots of publicly traded utilities that provide “universal service” as it is within their charter to offer the service to every potential customer. With a common carrier obligation, the only financial problem for the Postal Service would be developing rates that cover the costs of single-piece mail sent or received by single piece mailers in the nation's most rural areas as defined by the Department of Agriculture.
Moreover, why limit the system's network of post offices to stamps and boxes? Why not have the post office deal in all manner of communications, from book and cell phone sales to DVD rentals? Heck, why not sofas, lattes and Wi-Fi access?
I agree with you that the USPS should be able to do more beyond what it does now. I also believe that just as private health insurers did not want a public option to compete with them, Starbucks, ATT, Amazon, Banes and Nobel, Citibank, and all kinds of other firms in the private sector do not want a government entity competing with them. In the United States we do not have a tradition of having a government entity actively competing with the private sector. Also the employment laws and business laws that apply to the government do not work really well for an entity like the USPS that gets 70% of its revenue now from customers that mail more than 500 pieces at a time. If the Postal Service must expand outside traditional mail business, then the only choice is a corporate private-sector model for the Postal Service.
This brief post illustrates the massive education effort that lies ahead for stakeholders in the mail industry. Editorial writers and business journalists have influence far beyond the few people who buy their papers and contacting them individually or in groups will be critical for stakeholders. But stakeholders can not stop there as the primary source of news and opinion on the future of mail will come from the web, talk radio and cable news. The tea-party movement shows how the internet, talk radio and cable news could drive and amplify a public policy issue that every voter uses, has a personal connection to, and can develop a vision for its future based on their political ideology and personal interests. With the Government Accounting Office report coming out this spring, it is time for stakeholders to begin this effort. Without it, Congressional reaction to the report will be driven by influences whose livelihoods and businesses do not depend on the future of mail.
Readers of this blog are more familiar with the problems that the Postal Service faces these writers. They will have no problems identifying how the writers of the two pieces illustrated their minimal knowledge of the postal market or the USPS.
Common to both pieces is a misunderstanding of how limited the competition between the Postal Service and United Parcel Service and FedEx really is. The Postal Service is in the business of delivering documents, small parcels (those under 10 pounds) shipped by all senders, and larger parcels shipped by households and others that ship parcels infrequently. FedEx and UPS focus on business-to-business shipments and household deliveries of larger parcels. FedEx and UPS use the Postal Service to deliver small parcels to households as the revenue generated to drop one small parcel at a household is not equal to the cost of delivery for those two carriers. More of the Postal Service's volumes compete with newspapers like The Los Angeles Times and Washington Times, than with UPS and FedEx.
So why does what is printed now in two newspapers matter to postal stakeholders? They are important because they provide some hint as to what the debate over the future business models will look like. Right now, postal policy is most likely a low level priority of both the Obama Administration and Congress. Postal Policy is not a hot button issue in the blogosphere, talk radio, cable news except when used to illustrate why the financial health of the Postal Service suggests that public option is a bad idea.
This will change when the Government Accounting Office issues its report on potential business models in March or April of 2010 and the issue of postal operating losses and retiree healthcare payment schedules raise the threat of default on payroll next fall, and the risk that debt limit will be hit in 2011. Postal policy will bubble to the top of public discourse in the spring and summer of 2010 because the blogosphere, talk radio, and infotainment programs on the cable news networks will see postal policy as an issue that their readers and listeners can easily understand, or more importantly understand an ideological position relative to future postal business models.
The rise of postal policy in public discourse will be helped by the fact that the "hot button" issues of 2009 will have mostly be dealt with. This includes health care, financial industry reforms, and possibly even energy policy and global warning. At that time, there will be few other "hot button" issues on the plate of Congress that the blogosphere, talk radio, cable news can talk about that every reader, listener, or viewer will easily understand and writers, hosts, or panelists can easily frame the problems of the Postal Service around their ideological perspective.
The Washington Times editorial uses the Postal Service to present a polemic against government provided services. It links together a series of anecdotal stories about poor customer service at retail outlets and the inability of the Postal Service to meet its Priority Mail commitment with references to news stories illustrating evidence that its operating process are breaking down. In conclusion, the Washington Times does not present solution, instead it concludes with a remark suggesting that households abandon the Postal Service for parcel delivery.
The Los Angeles Times piece (reprinted in the Allentown Morning Call) is more thoughtfully written but David Lazarus but illustrates the types of conclusions that are drawn when based on misinformation provided by the Postal Service employees who have a real interest in maintaining the status quo, limited understanding of customers of and competition within the document and parcel delivery markets that results, and limited time to assess the information collected in interviews.
The remainder of this post reflects comments that I sent to Mr. Lazarus and represent my initial reaction to a number of the points that he raised.
Can this system be saved?
The answer is yes. However, it cannot survive as it does now. It is also clear from other countries that a postal service can provide universal service, even places as remote as the Australian outback and the Arctic areas of Canada at a uniform price. Put another way, is it time we privatized the postal service?I think the answer here is yes as well but not in the manner that you are thinking. By 2020, The Postal Service and mail in general will primarily be a means of delivering advertising. (It is close to that now.) What should the US Government's responsibility for advertising delivery be? Personal Correspondence is less 4% of all mail volume and bill payments by check will likely disappear by around 2030. (There is already no check clearinghouse in Great Britain or Sweden.)The question of privatization is often tied to the question of the monopoly. A privatized Postal Service does not require eliminating the monopoly. Examples of privately owned, legal monopolies exist among regulated utilities serving large territories and unregulated rural retail monopolies selling everything from gasoline to groceries.
"The postal service is asking for a national dialogue on this," Richard Maher, a Postal Service spokesman in Los Angeles said. "What is our role going to be in the future? We need to have a conversation about that."
The dialogue was mandated by Congress and GAO will have a report on the subject that the USPS is trying to influence at the end of March. They wrote a paper on the topic and hired 4 independent thinkers, including myself to look at the question. For more information go to www.postaljournal.com for links to all papers an links to presentations made on the topic at a recent conference in DC.
Who wants the take over the Postal Service's business?
The interviews with FedEx and UPS are reflective of their view. They do not want to get in the “mail” business because it is not a growth business like parcel shipping in Asia. They are being a little disingenuous as FedEx is the USPS’s largest transportation supplier. UPS is a significant supplier. Both use the USPS to deliver parcels under 5 pounds to households and to addresses that FedEx and UPS call “remote” For them, remote means many zip codes in outer suburbs of big cities. They also like having a competitor who is undercapitalized and a bit inefficient as it allows them to charge more for services in the US and use those profits to invest in faster growing markets abroad. They will be major players in policy debate to come.
If not UPS or FedEx who?
The only other US private sector firm who would be a logical buyer would be Pitney Bowes but the USPS might be too big for them to swallow. Similar problems would exist for foreign buyers, including Canada Post, Deutsche Post, and TNT Post Group. Buying the USPS, especially given its current financial position, business model, and restrictions on operations, customer relationships, etc would be not viewed as a viable proposition. Also, these companies, as well as UPS and FedEx have better uses of capital than in investing in the USPS. TNT has specifically indicated it is exiting the mail business outside of the Netherlands.
The big private shippers probably would be happy to cherry-pick profitable urban routes but would want nothing to do with having to schlep mail up and down unprofitable rural roads.
FedEx and UPS already do that with their pricing structure. The private carriers (they are carriers and not shippers; those that send stuff are shippers) have substantial surcharges on home delivery and “remote” delivery, and retail services, (e.g. anyone who does not have a corporate account) All of these surcharges makes the USPS cheaper for individual shippers of parcels and commercial shippers of light weight parcels to homes and remote areas. So they already cherry pick in the parcel business. There is some indication in Europe that entry into the mail delivery market even into the most high-volume high-income neighborhoods is difficult to do profitably Furthermore not all urban carrier routes are profitable as routes in low income urban neighborhoods have much less mail per stop than those in high income neighborhoods and "cream skimmers" may find that the number of routes that could be served profitably are too few to justify investment in a start-up delivery business.
It seems to me that the only privatization scheme that stands even a remote chance of working would be to break the postal service network into hundreds of regions and territories, and then have local companies compete for mail-delivery rights in each area. But you'd still have to wonder how any such private-sector players would be more successful at the game than a long-established heavyweight like the Postal Service.
Breaking up the Postal Service has been suggested before. The problem with this solution is that almost all buyers of mail service want the company that collects / accepts the mail to have the ability to seamlessly deliver to any address in the US. Mailers, and in particular larger mailers, want to maximize their purchasing leverage by buying from one or two transportation sources not 50. That is why both FedEx and UPS have national parcel, express and freight networks and ATT, Sprint, T-mobile, and Verizon all offer nationwide wireless service. The privatization scheme that would have the best chance of working would be an IPO with a significant employee ownership. It could come only after the USPS could show it could operate profitably under private sector business and employment law. This is what happened with Conrail in the 1980’s.
"If the system was privatized, it might cost 44 cents to get a letter across Los Angeles but $5 to get it to Connecticut," said Richard Maher, the postal service spokesman. "When you think about a network that delivers to all homes every day -- it's huge," he said. "Would a private company be able to do that? I don't think so. I think we would lose universal service."
These are canards. Every country uses a uniform rate for single-piece mail and in many cases for Parcels. (look at the rate structure for parcel in Germany where you can send a parcel anyplace in the world and only have to choose among some 20 or so rates based on the size of the box and the destination country.) Business mailers (LL Bean, Bank of America, etc, may see rates that are not uniform. In fact, those advertising mailers that drop their mail at local post offices rather than anyplace in the country already have the distance based rates that Mr. Maher says would be so terrible. If distance based rates are introduced to First Class for commercial mailers, percentage differences between local and distant rate will likely be much less than 100% rather than the 1,136% that the Postal Service spokesman describes.
The percentage difference between local parcels and those shipped cross-country vary with weight. The percentage does not exceed 100% until the parcel exceeds 17 pounds. This suggests that the impact of transportation on rates for items that are sorted at origin and destination would be quite small.
The Universal Service Obligation (USO) argument has been gone over many times. The driver of the USO is commercial mailers, who must mail to every possible address. The rates charged these mailers can be set to cover the total cost of delivering to every address printed on their mail using either a uniform or distance-based rate. The acceptance of remote surcharges by customers or FedEx and UPS illustrate that private sector carriers can devise non-uniform rates that allow them to deliver to all addresses in all 50 states. UPS and FedEx have a common carrier obligation which creates a common law requirement to actually deliver to all points that they say they reach according to advertised service commitments. Similar obligations exist for other trucking, rail, air and telecommunication carriers and are enforced by regulators and courts. In addition, there are lots of publicly traded utilities that provide “universal service” as it is within their charter to offer the service to every potential customer. With a common carrier obligation, the only financial problem for the Postal Service would be developing rates that cover the costs of single-piece mail sent or received by single piece mailers in the nation's most rural areas as defined by the Department of Agriculture.
Moreover, why limit the system's network of post offices to stamps and boxes? Why not have the post office deal in all manner of communications, from book and cell phone sales to DVD rentals? Heck, why not sofas, lattes and Wi-Fi access?
I agree with you that the USPS should be able to do more beyond what it does now. I also believe that just as private health insurers did not want a public option to compete with them, Starbucks, ATT, Amazon, Banes and Nobel, Citibank, and all kinds of other firms in the private sector do not want a government entity competing with them. In the United States we do not have a tradition of having a government entity actively competing with the private sector. Also the employment laws and business laws that apply to the government do not work really well for an entity like the USPS that gets 70% of its revenue now from customers that mail more than 500 pieces at a time. If the Postal Service must expand outside traditional mail business, then the only choice is a corporate private-sector model for the Postal Service.
This brief post illustrates the massive education effort that lies ahead for stakeholders in the mail industry. Editorial writers and business journalists have influence far beyond the few people who buy their papers and contacting them individually or in groups will be critical for stakeholders. But stakeholders can not stop there as the primary source of news and opinion on the future of mail will come from the web, talk radio and cable news. The tea-party movement shows how the internet, talk radio and cable news could drive and amplify a public policy issue that every voter uses, has a personal connection to, and can develop a vision for its future based on their political ideology and personal interests. With the Government Accounting Office report coming out this spring, it is time for stakeholders to begin this effort. Without it, Congressional reaction to the report will be driven by influences whose livelihoods and businesses do not depend on the future of mail.
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