Part 1 of the Postal e-volution series

Part 2 ~ net change: How the challenges of electronic commerce stack up for USPS

Part 3 ~ market wars: Postal Service rivals clamber for position in the new e-commerce economy

Part 4 ~ Commercial Freedom: Is USPS being left behind as ost offices abroad go global?

Part 5 ~ Creating a Postal Service to serve America's future

Like it or not, NALC members are caught up in the unprecedented revolution that is reshaping the communications and delivery industry. On the surface it is symbolized by the global computer Internet, but it reaches far beyond modems and mice. Corporate competition and spreading privatization of postal services overseas also are affecting the atmosphere.

The changing mix of mail that letter carriers deliver six days a week to every address in America is undeniable. The consequences of that shift, including the potential loss of billions in first-class mail revenues, demand our attention because every NALC member—active and retired—has a vital stake in the survival of the USPS.

In a series of articles over the months ahead, The Postal Record will explore the changing nature of communications, the implications of the Postal Service’s “e-volution” for letter carrier jobs, the economic impact of that change on USPS finances, how the Service is trying to reinvent itself to grow in the high-tech world, and the aggressive tactics of the Service’s corporate rivals and their political allies. Also under review will be lessons that can be drawn from deregulation and privatization of postal services overseas and how letter carriers can help shape a new Postal Service in the new century.

This first installment offers a general overview, followed by a more detailed look at postal economics—how fixed costs, projected mail volume and revenues, productivity and the demands of universal service coalesce.

While technology may spur apprehension about the future of the Postal Service, it’s important to remember the decisions that will shape that future are political and social as well as technical and economic. Because of the USPS’s unique legal status, Congress and the White House are natural venues for efforts to reinvent—or hamstring—the Service. And with the growing concern over the need to close a “digital divide” separating the web-savvy from the Internet impoverished, how to fulfill the Postal Service’s traditional role of binding the nation together is an increasingly important question for our country.

Like any crystal-ball exercise, the view ahead on many of these issues is hazy. By marshaling the facts and collecting informed opinions, these articles will try to frame the important issues so NALC members and their families can begin to take action to ensure the postal future.

DEALING WITH "E" EVERYTHING

E-commerce, e-mail, electronic billing and payments. If it starts with an “e” it probably will have an impact on postal services in the United States and postal jobs. Technology creates new parcel business as more people stay home and let third parties deliver their purchases. This new system also may initially generate more advertising mail, as retailers reach out to those stay-at-home shoppers. But this electronic boom cuts both ways for the Postal Service, because as on-line financial transactions become more secure and popular, first-class mail volume can drop dramatically.

Universal medium
With letter carriers making deliveries to every address in America six days a week, the Postal Service is the nations's only universal communications medium. USPS gives these statistics on households with:
Mail service	100 %
Radio	99 %
Television	98 %
Telephone	94 %
Computer with Internet access	34 %
Fax machine	12 %

USPS’s rivals in the package and hard-copy delivery industry also are being pressured by these developments, but in different ways. While they try to portray USPS as an outdated, inefficient remnant of big government, they are

hustling to build their own infrastructure to keep up with growing demand. They claim the Postal Service has no business in their business, when in fact they cherry-pick lucrative business deliveries while giving short shrift to residential customers or slapping them with surcharges.

Corporate competition is only one factor influencing postal evolution. In America and abroad, the political winds have swirled and shifted in remarkable ways. Only 15 or so years ago, the USPS was the most “liberalized” postal service in the world, a largely independent agency that paid its own way. Elsewhere around the globe, post offices for the most part operated in a strictly controlled monopoly atmosphere, with substantial government subsidies. Today, the view is reversed, like turning around a telescope. In New Zealand, Sweden and soon Germany, just to name three, the traditional postal monopoly has been erased. Nations as diverse as Holland and Argentina are experimenting with private enterprise in postal operations. And the trend around the world is for more of the same.

Similarly, in the 1980s the shrillest voices in the debate over the future of the USPS were congressional arch-conservatives who wanted to dismantle the Service as a matter of principle. As surely as the sun rose, Rep. Phil Crane of Illinois would introduce a bill on the first day of each new session of Congress to end the postal “monopoly.” The goal of these partisans was to downsize the government and let “the free market” determine what services America needed and at what price.

To be sure, the ideologues have not vanished. The libertarian Cato Institute can be counted on to trot out discredited arguments every month or two to “Cancel snail mail,” as a recent newspaper article suggested.

“The notion that we need to have a national mail system ... is as defunct as the rotary phone,” Cato “expert” Stephen Moore wrote. His specious reasoning: “Nowadays, Federal Express and UPS will deliver to any address in the country.... If you live on an iceberg in Alaska, so long as you have a computer and a telephone line, you can communicate instantly with a double-click of your keyboard.”

CORPORATE CLOUT

Moore, of course, doesn’t mention that FedEx or UPS charge extra to “deliver to any address.” Nor does he say what happens to the Alaskan—or Kansan—who doesn’t have a computer, or needs a physical pickup or delivery, not a virtual one. But, even if those questions go begging, the political reality is that the free-enterprise fanatics are far less prominent today than 15 years ago.

Instead, the center of the anti-Postal Service universe has shifted to its dark-suited commercial rivals. “Closing down the USPS is an option that ought to be considered seriously,” FedEx CEO Fred Smith told Congress last year. USPS “must be confined to non-competitive markets”—that is, making unprofitable deliveries his company wouldn’t touch—“and dismantled as these markets shrink.”

Smith’s argument, echoed by his counterparts at United Parcel Service and other firms, is backed up not by logic but rather by campaign contributions. FedEx and UPS control two of the three largest corporate political action committees and are not shy about strong-arming lawmakers at the federal and state level. These rivals are intent on blocking USPS from expanding into “non-traditional” services by whatever means necessary. Wherever the Service looks for ways to compensate for expected revenue loss due to new technology, it finds a corporate foe baring its teeth.

The brave new world of cyberspace and the high-flying, high-tech economy also have given rise to another faction in the debate over the postal future—not ideologues or competitors, but traditional USPS supporters who believe fundamental changes are essential to meet the challenges and capitalize on the opportunities of tomorrow. This group includes some on Capitol Hill who favor new legislation, generally called “postal reform,” that seeks to strike a balance between corporate competitors’ demands and the social responsibilities of the Service.

Another example is Ruth Goldway, a member of the Postal Rate Commission and a self-described “consumer advocate.” She doubts the political process can shore up the Service and argues USPS must be privatized.

“The best way to save the institution from oblivion,” she wrote recently in The Washington Post, would be to spin it off from the federal government through an IPO (an “initial public offering” of stock to investors). She compares her plan not only to postal deregulation abroad, but also the movement in this country to deregulate other public “utilities,” such as electricity, natural gas and water.

The fact such a prominently placed participant in postal operations is ready to abandon 225 years of American history and postal evolution suggests the old battle lines over privatization are becoming blurred. In this revolution, allies and enemies have become jumbled, defying efforts to pin on neat labels of friend or foe.

It is in this mixed context of technological and political transformation that the Postal Service finds itself facing an uncertain future. USPS has major resources, not the least being a dedicated, skilled workforce that is motivated by a sense of public service as well as economic reward. But there are basic economic factors that are driving both postal evolution and the debate over where the Service is—and should be—headed. The following article explores those forces.

UNDERSTANDING THE FORCES SHAPING OUR FUTURE

Academics may joke that economics is the “dismal science,” but for working people who spend their days turning the wheels and pulling the load of the global economy, there’s very little humor in how big business gets to the bottom line. Since the Postal Service is big business, NALC members must get a handle on the USPS as it is today if they hope to sort out forces that are shaping the future of their company.

Letter carriers’ knowledge of delivery operations and the public service function of the USPS is second to none. What we need to better understand is the economics of the Postal Service and how the technological, commercial and political challenges of the future might impact the USPS as a financially self-sustaining enterprise. A primer on USPS economics follows:

A truly big business. The Postal Service is a ubiquitous presence in American life. It is so familiar that few people, including those who work for it, stop to think about its sheer size. It is by far the nation’s largest employer: In December 1999, nearly a million people worked for the Postal Service—794,000 career employees and 168,000 non-career workers. In 1999, the USPS delivered more than 200 billion pieces of mail. With $62.5 billion in revenues last year, it ranked 25th on Fortune magazine’s Global 500 list of the world’s largest enterprises.

The cost of universal service. The sheer size and scope of the nation’s postal network—with its 38,000 post offices and 230,000 daily delivery routes—is the Postal Service’s most important economic asset. It is what makes the USPS valuable to mailers and to the country. It offers universal access to every household and business in the country six times a week and permits economies of scale that allow us to provide the most efficient and affordable mail service in the world.

But operating a universal postal network is costly. According to USPS data prepared for the Postal Rate Commission, the overhead costs of running the USPS in 1998—costs that are “fixed” and are not affected by the volume of mail—exceeded $25 billion in 1998. Every year this cost grows as the USPS adds new routes, buys and fuels new vehicles, and builds new post offices to serve the 1 to 2 million new delivery points created each year as the nation’s population and economy grows.

How can the Postal Service and the country afford such a cost? The answer is partly legal and partly economic. The legal explanation is that by prohibiting private delivery of letters and reserving mail delivery to the Postal Service, the Private Express Statutes permit the USPS to spread the cost of universal delivery over the largest possible volume of mail. Without the “letter mail monopoly,” private companies would deliver only to easy-to-serve geographical areas (business districts and high-income residential) with high volumes of mail and leave the harder-to-serve, high-cost areas (rural and inner city) to the USPS. This would result in higher overall costs for everyone.

The economic explanation may be even more important: As the national economy has grown and the service sector has expanded, the volume of mail has increased dramatically, expanding much faster than postal employment or the network of post offices, routes and delivery points that make up the Postal Service’s institutional costs. As the graph above suggests, the productivity gains resulting from these trends set up what we can call a “virtuous cycle” for the USPS: Rising volume allows the Service to spread its fixed, institutional costs across more pieces of mail, thereby holding down the cost of mailing letters and encouraging mailers to generate even more volume.

The mix of mail matters. As Table 1 indicates, the core business of the Postal Service is letter mail—First-class mail (bills, statements, correspondence, etc.) and Standard A mail (direct mail, advertising, solicitations). Together, they represent more than 90 percent of USPS volume and nearly 80 percent of USPS revenue. Periodicals, Priority Mail (small parcels and heavier weight documents) and Standard B Mail (parcels, bound printed matter, etc.) are important, but letter mail is the overwhelming majority of the Postal Service’s business. This is reflected in the average revenue per piece the USPS gets from its customers for delivering all types of mail. In 1998, it stood at just 29.3 cents per piece. (The comparable per-piece figures for United Parcel Service, which delivers mostly parcels, and Federal Express, which specializes in overnight document delivery, are $6.75 and $3.50 per piece respectively.)

But not all mail is created equal. First-class mail is more important to the Postal Service’s finances than any other class of mail because it contributes disproportionately to the overhead costs of the USPS. Although existing rate-setting rules say that postage rates for each class of mail are required to cover all costs directly attributable to those classes, the Postal Rate Commission (PRC) is allowed to assign more or less of the Postal Service’s institutional costs or overhead expenses to different classes of mail. In view of its greater relative value to senders, the PRC has assigned $17.7 billion of the $25.7 billion in total USPS overhead costs to first-class mail and has marked up its rates accordingly. Thus, first-class mail contributes 17.5 cents per piece toward the USPS’s overhead while Standard A Mail contributes just 6.3 cents per piece (see Table 2).

Although Priority, Express and International Mail contribute more per piece toward institutional costs than first-class mail, their volumes are tiny compared to first-class mail. Indeed, as Table 3 shows, first-class mail accounts for 51 percent of USPS volume, 57 percent of USPS revenue, and nearly 70 percent of the Postal Service’s overhead costs. The financial health of the USPS therefore depends as much on the mix of mail as it does on the volume of mail.

Table 1
USPS's volume and revenue come from letter mail USPS volume and revenue by class of mail, PFY 1998
Product/Service	Volume (mil. of pieces)	Revenue ($ millions)	Revenue Per Piece
.
First Class Mail	101,173	$33,984	$0.336
Standard A	82,875	$13,753	$0.166
Priority Mail	1,164	$4,150	$3.566
Periodicals	10,317	$2,072	$0.201
Standard B / Parcel Post	971	$1,626	$1.674
International Mail	944	$1,600	$1.695
Express Mail	66	$855	$12,909
Other	1,100	$2,800	-----
.
Total Mail Revenue	197,943	$60,840	$0.293

Table 2
First-class mail shoulders burden of universal service Contributions to overhead costs by class of mail, PFY 1998
Product/Service		Overhead Contribution ($millions)	Overhead Contribution Per Piece
.
First Class Mail		$17,705	$0.175
Standard A		$5,221	$0.063
Priority Mail		$1,829	$1.572
Periodicals		$31	$0.003
Standard B / Parcel Post		$185	$0.190
International Mail		$346	$0.367
Express Mail		$482	$7.281
Other		$0	-----
.
Total Mail Revenue		$25,733	$0.130

THE FUTURE OF THE POSTAL SERVICE

To a large degree, the future of the USPS will depend on the future of letter mail—how much it grows or declines and how its composition changes—as well as what new services the USPS can provide to enhance the value of letter mail or to replace mail that is diverted by technology or private sector competition. The remainder of this series will explore these issues in greater detail, but a brief overview can provide some hint of the outlook for the Postal Service’s future.

How much mail will the Postal Service deliver in the future? Last October, the General Accounting Office, a federal agency that investigates public policy issues for Congress, warned the House Postal Service Subcommittee that $17 billion of the Postal Service’s annual revenues (half the first-class total) are at risk as a result of the rapid growth of electronic billing and payment services. The GAO went on to report the Postal Service’s own forecast that first-class mail volume would begin to fall in the near future—by 2.5 percent annually between 2003 and 2008. In short, the USPS is predicting that first-class volume will decline from a projected level of 107.5 billion pieces in 2002 to just 90 billion pieces in 2008, a 16 percent reduction.

What would such a decline mean? A loss of 17.5 billion pieces of first-class mail would be unprecedented and pose a significant financial danger to the USPS. At present rates, it translates into an annual revenue loss of approximately $5.5 billion, of which about $2.75 billion goes toward the Postal Service’s institutional costs. By their very nature, institutional costs do not decline when mail volume declines: Every house and business must be served. It takes roughly the same amount of time for a carrier to deliver 2,000 letters on a route as it does to deliver 1,700 letters. Similarly, a post office must be fully staffed even if customers buy fewer stamps.

Of course, the first-class volume forecast presented by the GAO could be wrong. But it is not totally implausible. As the next installment of this series will discuss in detail, the technology for presenting and paying bills electronically is in place in more than half the households in America and the companies that send out most statements and bills are aggressively marketing electronic alternatives to mail. At the same time, a whole slew of Internet companies are trying to get a piece of the bill-paying action. It is only a matter of time before the volume of bills and payments presently delivered by the USPS begins to decline.

What is less clear is whether other kinds of first-class mail will replace the lost volume. In the 1980s and 1990s, electronic funds transfers (EFT) and fax (and to a lesser extent e-mail) diverted from the USPS tens of billions of first-class letters sent by businesses to other businesses. Fortunately, the lost business-to-business volume was more than offset by huge increases in the volume of business-to-household mail. But that, too, is changing as technology now threatens this business-to-household mail.

REMEMBER THE MESSAGE IN THE MIX

Of course, not all the news is bad. The GAO, for example, reported last October that the USPS predicts Standard A volume to grow by an average of 4.1 percent annually over the next 10 years. Moreover, Priority Mail and Parcel Post volumes are expected to benefit from the Internet shopping boom as more and more Americans order goods online for home delivery. After all, most books, CDs and airline tickets and much of the clothing and housewares purchased online are delivered by the Postal Service.

The problem is that future growth in these areas remains uncertain while the decline in first-class financial mail volume is almost certain to happen. Indeed, as future installments of this series will make clear, the Internet poses a potential threat to Standard A volume as online advertising gains in popularity. At the same time, the Postal Service’s private sector competitors are moving aggressively to capture the market for delivering e-commerce purchases.

But even if we assume Standard A and package volumes grow strongly in the future, the USPS would not necessarily be out of the financial woods. As described above, not all mail is created equal when it comes to the finances of the Postal Service. As the mix of mail shifts from “high-contribution” first-class mail to other classes (Standard A, etc.), the financial position of the USPS could erode. Increasing the volume of Priority Mail, which now contributes $1.57 per piece toward the Postal Service’s overhead costs, is an obvious solution. But in order to replace the lost overhead contributions of a decline in first-class mail of 17.5 billion pieces forecast by the GAO, the Postal Service would have to boost Priority Mail volume by 150 percent between 2003 and 2008. That is a heavy challenge—although not inconceivable.

Table 3
Not all mail is created equal Percent of total volume, revenue and overhead contributions, PFY 1998
Product/Service	Volume	Revenue	Contribution to Overhead Costs
First Class Mail	51.1.. %	56.7..%	69.4..%
Standard A	41.9.....	23.0....	20.4....
Priority Mail	0.6....	6.8....	7.1....
Standard B / Parcel Post	0.2....	1.3....	0.0....
Express Mail	0.1....	1.5....	1.9....
Periodicals	5.2....	3.5....	0.0....
International Mail	0.5....	2.7....	1.1....
Other	0.5....	4.7....	0.0....

POLITICS AND THE FUTURE

The economics of the Postal Service today will not necessarily bind its future development. Politics and the actions of NALC members will also play a role. If the Postal Service is to survive it will have to develop new products, compete with private companies to capture a significant share of the e-commerce deliveries and adapt to new technologies. Its freedom to do so will require political action by letter carriers—both to fend off attacks by the Postal Service’s competitors and to advance reform legislation that gives the USPS the commercial freedom it needs to survive while permitting it to fulfill its historic mission of providing universal service at uniform and affordable rates.

In order to succeed, letter carriers must fully understand the nature of both the threats and opportunities facing the Postal Service. The remaining installments of this series are designed to arm letter carriers with the information necessary to effectively and aggressively act to secure their futures. )

Article from the March 2000 issue of The Postal Record.

© copyright, National Association of Letter Carriers, all rights reserved.

Return to NALC homepage, , What's New; The Postal Record or NALC Publications.

This page was last updated July 7, 2000.

If you have questions or comments about technical aspects of the NALC homepage, please write to the National Association of Letter Carriers at 100 Indiana Ave., NW, Washington, D.C. 20001-2144 or send e-mail to nalcinf@nalc.org.

Please direct all other comments or inquiries in writing to the National Association of Letter Carriers at 100 Indiana Avenue, NW, Washington, D.C. 20001-2144 -- see the bottom of the NALC homepage for more specific information .