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New studies reinforce dire outlook for USPS

Mar. 2, 2010 - 04:03PM   |  
By GREGG CARLSTROM   |   Comments
Postmaster General John Potter says the Postal Service can close about half of a projected 10-year deficit by cutting costs -- slashing work hours, for example, and closing underused processing facilities -- and raising rates.
Postmaster General John Potter says the Postal Service can close about half of a projected 10-year deficit by cutting costs -- slashing work hours, for example, and closing underused processing facilities -- and raising rates. (Justin Sullivan / Getty Images)

The U.S. Postal Service is on pace to lose $238 billion over the next 10 years, with annual deficits hitting $33 billion by 2020 five times the current level according to two new studies released today.

One report, from the Boston Consulting Group, projected mail volumes will drop substantially over the next decade. Standard Mail volume advertising mail is expected to remain nearly flat, growing from roughly 83 billion pieces to 86 billion. But First-Class Mail volume will plummet, according to the study, from 84 billion pieces today to 53 billion next year a 37 percent drop.

First-Class Mail is the Postal Service's most profitable class of mail, so that declining volume will push the Postal Service deep into the red, according to the second study, from McKinsey & Co. It will cause a significant decline in the Postal Service's revenue per household an important financial metric for the agency. The Postal Service generated roughly $1.80 in daily revenue per household in 2000; that figure has already dropped to $1.40, and Boston's study projects it will fall further, to $1 per household, by 2020.

"The number of daily pieces of mail delivered to a household will be dropping from four to three," said Meldon Wolfgang, a partner at the Boston Consulting Group. "That means the revenue will drop on a real basis, and it's driven largely by this shift to Standard from First-Class Mail."

Postmaster General John Potter presented the numbers this morning to dozens of mailing industry executives and union officials. Potter said the Postal Service can close about half of that 10-year deficit by cutting costs slashing work hours, for example, and closing underused processing facilities and raising rates. The Postal Service cut more than 115 million work hours last year, the equivalent of roughly 65,000 full-time employees; the agency is on pace to cut another 93 million hours this year. But managers acknowledge that it's becoming more difficult to find places to cut.

"We are rapidly reaching the point of diminishing returns," Potter said of the cuts. "There's only so much you can cut before you begin to seriously impact service."

Closing the rest of the quarter-trillion dollar gap will require significant legislative changes. Two of them are familiar requests: Potter wants Congress to change the way the Postal Service funds its future retiree health benefits, which could save up to $5 billion annually; and he said the Postal Service will later this month formally ask the Postal Regulatory Commission (PRC) its regulator to approve a switch to five-day mail delivery.

Potter estimated that the switch to five-day delivery would save $3 billion annually. That's a slightly more ambitious figure than what the PRC has projected: last year, it estimated that moving to a five-day schedule would save $2 billion but also decrease mail volume by about 2 percent.

Potter also suggested a new way to cut costs: He said Congress should grant the Postal Service the authority to close post offices for economic reasons, something it's not allowed to do under current law. Potter wouldn't offer any specific numbers, but he suggested the Postal Service wants to close a substantial number of post offices, and focus on building business through alternate retail outlets stamps sold at supermarkets, for example and the Internet.

"In an ideal world, that's what we'd like our retail outlet to be, a computer," Potter said. "That, I believe, is the future. Being locked into brick-and-mortar is not a healthy situation."

Congress has not been particularly supportive of these ideas in the past. Potter first proposed five-day delivery last year and found little support on Capitol Hill; the Postal Service asked for a long-term fix to its retiree health benefit problems, but Congress only approved a one-year patch; and legislators are never enthusiastic about closing post offices.

"We're well aware that the political process will have to weigh in on our changes," sand Louis Giuliano, chairman of the Postal Service's Board of Governors. "Many of these proposals can only be implemented with legislative change … and it is absolutely critical that [those changes] be made in a timely manner."

Potter said the Postal Service also plans a substantial price increase for mailing services in 2011. Prices for many products, like First-Class Mail, are capped: The Postal Service can't raise its rates faster than the inflation rate. But there's a loophole in the law that allows the agency to impose what's called an "exigent" rate increase when it faces substantial deficits.

"We are going to use the exigent price increase ability we have," Potter said. "It will be in moderation. We are not talking about closing the entire gap using that tool, but it is one of the top five tools we have available to us in terms of closing that gap."

Potter said prices will not increase before 2011. The Postal Service pledged last year not to seek an exigent rate increase in 2010.

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