Postal Service Nears Collapse

Business Week's cover story examines the coming implosion of the US Postal Service as we know it.

Business Week‘s cover story examines the coming collapse of the US Postal Service as we know it.

[GAO Director of Physical Infrastructure Issues Phillip] Herr and his team concluded that the postal service’s business model was so badly broken that collapse was imminent. Abandoning a long tradition of overdue reports, they felt they had to deliver theirs 18 months early in April 2010 to the various House and Senate committees and subcommittees that watch over the USPS. A year later, the situation is even grimmer. With the rise of e-mail and the decline of letters, mail volume is falling at a staggering rate, and the postal service’s survival plan isn’t reassuring. Elsewhere in the world, postal services are grappling with the same dilemma—only most of them, in humbling contrast, are thriving.

The USPS is a wondrous American creation. Six days a week it delivers an average of 563 million pieces of mail—40 percent of the entire world’s volume. For the price of a 44¢ stamp, you can mail a letter anywhere within the nation’s borders. The service will carry it by pack mule to the Havasupai Indian reservation at the bottom of the Grand Canyon. Mailmen on snowmobiles take it to the wilds of Alaska. If your recipient can no longer be found, the USPS will return it at no extra charge. It may be the greatest bargain on earth.

It takes an enormous organization to carry out such a mission. 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.

[…]

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.

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.

[…]

This should be a moment for the country to ask some basic questions about its mail delivery system. Does it make sense for the postal service to charge the same amount to take a letter to Alaska that it does to carry it three city blocks? Should the USPS operate the world’s largest network of post offices when 80 percent of them lose money? And is there a way for the country to have a mail system that addresses the needs of consumers who use the Internet to correspond?

The Capitol Hill debate is primarily about money. The USPS and its employee unions are lobbying for the least painful remedy: They want the agency to be relieved of its requirement to build a health-care trust fund for its future retirees. They are supported by junk mailers, greeting card manufacturers, and magazine publishers whose businesses are, in some cases, subsidized by the post office’s generously low mailing prices. Never mind that their benefactor loses money on some of their products, most notably magazines and some junk mail.

[…]

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.

[…]
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.

But we don’t need the Postal Service to create apps; startups without all the overhead could do it much more efficiently.

Like most Americans, I suspect, I no longer send or receive personal letters. The combination of email and near-free long distance telephone service has eliminated the benefits. And my wife and I are ahead of the curve on electronic banking, receiving and paying almost all our bills online. So, aside from holiday cards–a tradition I’d frankly be happy to see die–we hardly ever mail anything or have a need for stamps. Indeed, I don’t know offhand what the going rate is for a 1st Class letter. (We buy “Forever Stamps” that don’t have a denomination on them, as we otherwise wound up with lots of stamps that were outdated, requiring putting a second stamp on the envelope.) So, the only things in the mail most days are magazines, catalogs, the occasional government notice, and unsolicited junk. The last of these, of course, is a nuisance.

Aside from changes in custom brought on by technology, what most struck me about the story was the similarity to the decline in the auto industry and much of the rest of the American heavy manufacturing industry. Deals made with labor unions generations ago are now killing the golden goose. Wages and benefits are simply too big a chunk of revenues now and they can’t compete with companies, like FedEx and UPS, without those legacy burdens.

Relatedly, health care costs for employees and retirees are simply crippling. This not only makes it hard to compete with American companies who officer less generous benefits but gives a huge leg up to foreign companies who have no health care burden at all because government provides coverage. This is why I’ve thought for awhile now that the collapse of the American health insurance model is imminent. Companies, not individuals, will ultimately demand that we move to some sort of government provider model so as to get the burden off of American business.

via Glenn Reynolds

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Adair says:

    Because, most of the activities are held in E-campaign itself. But in the olden days receiving the docs from postal are more interested and thrilled

  2. sam says:

    “Companies, not individuals, will ultimately demand that we move to some sort of government provider model so as to get the burden off of American business.”

    Word.

    “In contrast, the USPS operates all of its post offices.”

    I heard something interesting about the USPS — it doesn’t own any of its post offices. The POs are built privately, then leased to the government.

  3. Eric Florack says:

    But we don’t need the Postal Service to create apps; startups without all the overhead could do it much more efficiently.

    Indeed.

    Aside from changes in custom brought on by technology, what most struck me about the story was the similarity to the decline in the auto industry and much of the rest of the American heavy manufacturing industry. Deals made with labor unions generations ago are now killing the golden goose. Wages and benefits are simply too big a chunk of revenues now and they can’t compete with companies, like FedEx and UPS, without those legacy burdens.

    Correct. There is no better example of the difference between a government model and a priavte enterprise model than this. We have government healthcare why, again? Because we’re stupid.

    Companies, not individuals, will ultimately demand that we move to some sort of government provider model so as to get the burden off of American business.

    Of course there’s another option; Getting government out of the healthcare business, and lowering the costs thereby. The very reason the system is collapsing s because government runs it… and we need no better proof I think then the melt-down of the USPS.

  4. DC Loser says:

    I’ve long believed that Universal Healthcare’s greatest advocate will be the Chamber of Commerce, when they seize upon the issue as a competitive one with countries where business don’t have the burden of healthcare costs.

  5. There is no better example of the difference between a government model and a priavte enterprise model than this.

    One thing that has to be remembered when making this comparison, however, is that Fedex and UPS are not perfect private sector analogs to the USPS. Fedex and UPS can choose what services to provide and not to provide (i.e., if they don’t want to take packages down into the Grand Canyon via pack mule, they don’t have to). Plus they are able to focus on a key aspects of the market (express mail, shipping packages) whilst not having to focus on dying parts of the mail service (personal letters, bill, etc).

    The difference is not so simplistic as simply public v. private, but the question of being able to focus on targeted markets v. providing universal services.

    And yes, there are a host of things that the USPS need to do/consider doing: close some post offices, eliminate Saturday delivery, start charging based on distance, etc.

  6. James Joyner says:

    @Eric and @Steven: Right. USPS is hamstrung by having to be the worst of both worlds. They’re a government service that has to pay for itself in a free market. They have all manner of service requirements not imposed on their private sector competitors while at the same time are unable to set their rates based on what the market will bear.

  7. Dave Schuler says:

    This story caught my eye, too, James. I found some of the emphases in the story peculiar. For example, it wasn’t until the second page of the article that they mentioned employee and retiree benefits, one of the USPS’s key problems. It will be quite difficult to cure the USPS’s problems without reducing healthcare costs.

    I also think that some of the commenters either aren’t quite clear on the USPS’s niche or have got ahold of the wrong end of the stick. The USPS continues to have a monopoly on non-express first class mail. It’s an exaggeration to say that UPS and FedEx can cherry-pick the segments they want. They go into the segments they’re allowed to enter and, as we’ve seen, they’ve done well in them.

    Once upon a time in urban areas there were two mail deliveries a day, six days a week. That hasn’t been the case for decades and now they’re talking about eliminating Saturday deliveries. It may be a chicken and the egg situation but I think it at least bears some reflection that decreasing service by the USPS has created a niche for email rather than email has crowded the USPS out.

    Finally, first class mail subsidizes third class mail, not the other way around. That’s not something that can be overcome by increasing the volume of third class mail but that appears to be the Postal Service’s strategy.

  8. The USPS continues to have a monopoly on non-express first class mail. It’s an exaggeration to say that UPS and FedEx can cherry-pick the segments they want. They go into the segments they’re allowed to enter and, as we’ve seen, they’ve done well in them.

    This is, of course, true. And was a bigger deal, I would argue, in the past. Indeed, when one considers that one of USPS’ major problems is the decline in the first class mail, that puts the situation into perspective.

    But, to further my point, even if UPS could deliver first class mail, it could decide where it wanted to deliver it and how much it wanted to charge, and would be unlikely to do what USPS does, let alone at the same price. The universality issue is rather key.

    It may be a chicken and the egg situation but I think it at least bears some reflection that decreasing service by the USPS has created a niche for email rather than email has crowded the USPS out.

    I find this unpersuasive. Whether or not I have twice daily delivery, that can’t trump the instantaneous nature of e-mail or paying bills online.

    Further, twice-daily delivery died well before e-mail and the like existed, so I don’t see how chickens and eggs can be asserted regarding ending twice-daily delivery and the rise of electronic alternatives.

  9. john personna says:

    What exactly is FedEx blocked from doing? Is “first class” just a name? I mean, you can send a letter via FedEx Ground.

  10. john personna says:

    Big picture, I think the unexpected outcome was that internet and cell phone technology would lead to us all paying more, much more, than our old phone and mail for new services. I think I used to send Pac Bell $20-30 bucks, and spend maybe $5-10 on postage. Now it’s $70 for cell phone and $40 for internet. The post office didn’t loose to lower cost or more efficient providers. The services they provided are now just piggy-backed on what we really want, what we’re really paying for. (immediate media, 7×24)

    We wouldn’t pay $40/mo to do email, but having paid that $40/mo, the email is “free.” We wouldn’t pay $70 to have email in our phone, but having a (reasonably advanced) phone, it’s “free.”

    Our system isn’t terrible. There probably are some places where a government-certified service would have expanded faster (the slow take-off of pay-pal, for instance), but in theory a better pay-pal could displaces it.

    … you know, just like a better Microsoft Office was able to break that monopoly …

  11. TG Chicago says:

    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.

    Wait, what? They open and scan all your mail? Freaky.

  12. James Joyner says:

    @TG Chicago: We use a company that scans all our bills and lets us pay them online. It’s incredibly convenient. We also PDF a lot of our important papers, like mortgage paperwork, receipts, and the like, and scrap the original.

  13. @James: But would you trust a government entity to open your mail and “scan” it to you? I dare say I wouldn’t

  14. James Joyner says:

    @Doug: I’d be leery of it. Although, really, most of the scannable mail (i.e., not magazines, catalogs, and ad circulars) is from some government entity (tax assessors, etc.) anyway.

  15. anjin-san says:

    The very reason the system is collapsing s because government runs it…

    Please. The office of the Postmaster General goes back to what, the Second Continental Congress? Your “argument” does not even merit a response.

  16. Gustopher says:

    “Deals made with labor unions generations ago are now killing the golden goose.”

    Ah, yes, the conservative response to everything is to screw over the workers.

    The USPS problems could be solved by raising the rates on junk mail, which would also reduce the junk mail and make everyone (other than the junk mail senders) much happier.

  17. James Joyner says:

    @Gustopher: The major structural problem the article talks about is the benefits package, which is inordinately generous compared to private sector competitors. Unskilled and semi-skilled labor can’t be paid is if they’re indispensable and compete with firms that don’t follow suit.

    But, again, the most obvious solution is for the state to take over retirement and, especially, health coverage. Which is hardly the standard conservative response.

  18. TG Chicago says:

    @Joyner:

    We use a company that scans all our bills and lets us pay them online. It’s incredibly convenient.

    So that includes your medical bills and bank / credit card statements? You’re allowing that stuff to be stored on a third party’s server? I don’t think I’d be wild about that.

  19. TG Chicago says:

    @Gustopher

    The USPS problems could be solved by raising the rates on junk mail, which would also reduce the junk mail and make everyone (other than the junk mail senders) much happier.

    Yeah, I was surprised to read in the article that the USPS loses money on “some” junk mail. Why on earth would they allow that? Making sure to profit on all junk mail seems like a no-brainer.

    As far as the “pack mule” situation goes, I’d think that for certain hard-to-reach customers, the USPS could agree to deliver the mail to the nearest Post Office and hold it for the customer for the standard rate. That way, the customer could go to the Post Office to pick it up or pay a premium for direct-to-door delivery.

  20. James Joyner says:

    @TG Chicago: We don’t have any medical stuff to speak of, thankfully. But, yeah, credit card statements and the like are PDF’d. My wife was using them for years before we got married and we’ve kept it up the 5+ years since. It simplifies things greatly.

  21. Trumwill says:

    My thoughts are similar to TGC’s, except that I was thinking that you could basically deliver it out once a week. If you want it before then, you pick it up. I’d need a better idea of how much money is geared towards continental transportation and sorting compared to door-to-door delivery. It might well be that it wouldn’t actually save all that much money if most of the costs are continental transportation, sorting, and facilities.

    I would add that with the exception of Alaska and Hawaii, UPS doesn’t really cherry-pick delivery locations. They do charge different rates, but they don’t gouge rural people. Glasgow, MT is in the middle of nowhere (4.5 hour drive to Billings, the nearest urban hub), but sending a next-day package by way of UPS (a 40lb package from Tampa, hypothetically) is less than it costs to send one to Denver ($287 to $264) and Seattle ($292 to $264). UPS ground is a little bit more than Seattle ($55 to $60) and more than a little bit more than to Denver ($47 to $60). Sending a letter next-day is a little more expensive than to either Seattle or Denver (Less than $5 difference on a $40 charge).

    On the other hand, right now they only offer premium services for letter-delivery. So if you want to send a letter but aren’t in a hurry to get there, there is no option but the USPS without paying 100x the cost for a delivery time you don’t particular need. However, if the USPS disappeared tomorrow, I expect that both UPS and FedEx would expand their presence in that area. Particularly if they were allowed to use mailboxes. I really don’t know one way or the other.

  22. Mithras says:

    *shrug* Old and rural people like the postal service. They’re the GOP base. Which members of Congress would like to cut their own throat by defunding the postal service?

  23. James Joyner says:

    @Mithras: Amusingly, the politics seem to cut the other way. A portion I didn’t quote, since the politics was less interesting to me than the economics:

    Democrats receive the vast majority of the contributions made by postal workers’ unions, according to campaign finance records, so they tend to be sympathetic. President Barack Obama inserted a proposal in his 2012 budget to absolve the USPS of $4 billion of its retiree health-care liabilities in 2011. This would enable it to slog through another year without extraordinary changes. Meanwhile, Senator Thomas Carper (D-Del.) introduced a bill on May 17 that would relieve the USPS of its prefunding headaches. “If we do nothing, we face a future without the valuable services that the postal service provides,” Carper cautioned in a statement the same day. The bill would give the postal service access to as much as $75 billion it claims to have overpaid the federal retirement system. Naturally, the USPS and its unions are pushing for this because it would swiftly erase the agency’s red ink. Others in Washington dispute the postal service’s claim and call this wishful thinking at a time when there is such concern about the rising deficit. They also add that the bill would do nothing to address the larger issues afflicting the USPS.

    House Republicans are less charitable. They oppose anything that could be construed as a bailout. They are pushing instead for the USPS to make deep budget cuts. Even so, budget hawks sound nervous. In a March hearing, the often provocative U.S. Representative Darrell Issa (R-Calif.) said two post offices could be closed in every congressional district. He added with a laugh: “Let’s hope there’s not one—or three—in mine.” (A spokesman for Issa says that the congressman was trying to “introduce a bit of levity” into the proceeding and is fully in favor of shuttering postal facilities.)

    For what it’s worth.

  24. But, again, the most obvious solution is for the state to take over retirement

    So you favor seizing the personal savings of the 16% of people who have saved for their retirement and restributing to the 84% who have blown all their income on immediate consumption?

  25. Trumwill says:

    So you favor seizing the personal savings of the 16% of people who have saved for their retirement and restributing to the 84% who have blown all their income on immediate consumption?

    I would expect that he supports a forced savings program. Like maybe taking 6.25% out of each end of a paycheck and applying that towards retirement. 🙂

    More seriously, the problems with social security demonstrate pretty clearly the issues with expecting a third-party to cover for your retirement. Doubly so for Medicare. Not that we would be better off without these measures, because the alternative is pretty dreadful, but… making promises today for payments tomorrow is a always dicey.

  26. Mithras says:

    @James Joyner – yes, it’s patently obvious the Democrats wouldn’t vote to defund the postal service. My point was that the GOP has no incentive to close post offices, as that creep Issa pointed out.

  27. Eric Florack says:

    One thing that has to be remembered when making this comparison, however, is that Fedex and UPS are not perfect private sector analogs to the USPS. Fedex and UPS can choose what services to provide and not to provide (i.e., if they don’t want to take packages down into the Grand Canyon via pack mule, they don’t have to).

    \\

    Does anyone doubt that the USPS will eventually be forced into that reality?
    The comparison remains valid. What we’re talking about here is allowing the USPS or FEDEX to provide a limited service so as to make it sustainable.

    So, in healthcare, does anyone doubt that an all encompassing government healthcare wont be limiting services?

  28. Eric Florack says:

    And here’s a point you guys seem to have missed; THe models for the USPS assumed that there would never be any competition.

    Sound like any unions you know?