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Decline of Snail Mail Killing U.S. Postal Service June 5, 2011

Posted by tkcollier in Business, In The News.
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The USPS has 571,566 full-time workers, making it the country’s second-largest civilian employer after Wal-Mart Stores (WMT). It has 31,871 post offices, more than the combined domestic retail outlets of Wal-Mart, Starbucks (SBUX), and McDonald’s (MCD). Last year its revenues were $67 billion, and its expenses were even greater. Postal service executives proudly note that if it were a private company, it would be No. 29 on the Fortune 500.

The problems of the USPS are just as big. It relies on first-class mail to fund most of its operations, but first-class mail volume is steadily declining—in 2005 it fell below junk mail for the first time. This was a significant milestone. The USPS needs three pieces of junk mail to replace the profit of a vanished stamp-bearing letter.

During the real estate boom, a surge in junk mail papered over the unraveling of the postal service’s longtime business plan. Banks flooded mailboxes with subprime mortgage offers and credit-card come-ons. Then came the recession. Total mail volume plunged 20 percent from 2006 to 2010.

Since 2007 the USPS has been unable to cover its annual budget, 80 percent of which goes to salaries and benefits. In contrast, 43 percent of FedEx’s (FDX) budget and 61 percent of United Parcel Service’s (UPS) pay go to employee-related expenses. Perhaps it’s not surprising that the postal service’s two primary rivals are more nimble. According to SJ Consulting Group, the USPS has more than a 15 percent share of the American express and ground-shipping market. FedEx has 32 percent, UPS 53 percent.

According to the U.S. Postal Service Inspector General’s Office, it covers 79 percent of most of its employees’ health benefits, compared with the typical 72 percent for federal workers.

The USPS has stayed afloat by borrowing $12 billion from the U.S. Treasury. This year it will reach its statutory debt limit. After that, insolvency looms.

On Mar. 2, Postmaster General Patrick R. Donahoe warned Congress that his agency would default on $5.5 billion of health-care costs set aside for its future retirees scheduled for payment on Sept. 30 unless the government comes to the rescue. “At the end of the year, we are out of cash,” Donahoe said.

The USPS has historically placed the interests of its unions first. That hasn’t changed. In March it reached a four-and-a-half-year agreement with the 250,000-member American Postal Workers Union, which represents mail clerks, drivers, mechanics, and custodians. The pact extends the no-layoff provision and provides a 3.5 percent raise for APWU members over the period of the contract, along with seven upcapped cost-of-living increases. The union is happy. “Despite the fact that the postal service is on the edge of insolvency, the union and management have reached an agreement that is a ‘win-win’ proposition,” said APWU President Cliff Guffey on the union’s website. A USPS spokeswoman said the agency agreed to the raise because it feared the decision would otherwise be made by an arbitrator who might be even more deferential to the union.

Three decades ago, most postal services around the developed world were government-run monopolies like the USPS. In the late ’80s, the European Union set out to create a single postal market. It prodded members to give up their monopolies and compete with one another. The effort roused an industry often thought to be sleepy and backward-looking.

Many countries closed as many of their brick-and-mortar post offices as possible, moving these services into gas stations and convenience stores, which then take them over—just as the USPS is trying to do now, only far more aggressively. Today, Sweden’s Posten runs only 12 percent of its post offices. The rest are in the hands of third parties. Deutsche Post is now a private company and runs just 2 percent of the post offices in Germany. In contrast, the USPS operates all of its post offices.

Some of these newly energized mail services used the savings to pursue new business lines. Deutsche Post bought DHL, a package deliverer that competes with FedEx and UPS. “More than half of our workforce is outside of Germany,” says Markus Reckling, executive vice-president for corporate development at Deutsche Post. “It’s pretty much the same thing for our profits.”

Many used their extra cash to create digital mail products that allow customers to send and receive letters from their computers. Itella, the Finnish postal service, keeps a digital archive of its users’ mail for seven years and helps them pay bills online securely. Swiss Post lets customers choose if they want their mail delivered at home in hard copy or scanned and sent to their preferred Internet-connected device. Customers can also tell Swiss Post if they would rather not receive items such as junk mail.

Sweden’s Posten has an app that lets customers turn digital photos on their mobile phones into postcards. It is unveiling a service that will allow cell-phone users to send letters without stamps. Posten will text them a numerical code that they can jot down on envelopes in place of a stamp for a yet-to-be-determined charge.

In the late ’90s, there was talk within the USPS about reforms, including privatizing the organization. Robert Reisner, a former USPS vice-president of strategic planning, recalls raising some of these issues during a visit to the White House with a Clinton Administration official: “She said, ‘Well, we would have to ask our union friends. You know they are critical to the coming campaign.’ ”

At the same time, e-mail took hold. By 2000 the USPS was losing money. The GAO warned that the service might not be able to cover its retiree health-care costs.

Congress came up with what it thought would be a fix. In 2006 it relieved the postal service of $27 billion in pension liabilities for workers with military service. At the same time, the USPS agreed to make annual payments of $5.5 billion for the next 10 years to build up a fund for future retirees. John E. Potter, the Postmaster General at the time, was ecstatic when the bill was signed into law. “We’re planning for the future right now,” he said. “Today the postal service is operating in the black.”

The USPS was O.K. that year. Then, over the next three years, the economy collapsed, and the service lost $12 billion.

via The U.S. Postal Service Nears Collapse – BusinessWeek.

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