Issue Brief
As recently as last September, the United States Postal Service projected a surplus of $150 million for fiscal year 2001. Just two months later, that became a projection of a $500 million loss, then a $1 billion loss, and finally in February, the Service again revised it projections, this time to possible losses of $2 to $3 billion this year. The horoscopes on the funnies page have been more on the mark.
But it turns out that the potential losses were foreseeable, had senior management at the Service cared to see what was before them. This, as Paul Harvey would say, is the rest of the story.
The Postal Service has media-friendly explanations for these dismal projections. The internet is killing their business. The economy has tanked. Fuel costs have skyrocketed. Labor arbitrations they do not control have jacked up their fixed costs.
Each of these reasons seems perfectly plausible, unforeseen, and excusable. Unfortunately, each reason withers under scrutiny.
Countless media stories point to the rise of email as a factor in the Service’s troubles. Yet first class mail volume has increased every year for the last ten years, and, in any event, correspondence among family and friends is not the driving force behind mail volume. Bill presentment and payment is the big-ticket item in first class mail, and online bill paying simply has not taken off the way it was hyped during the internet bubble. In fact, online bill paying services still physically mail out checks for most payments.
Digital payments and direct deposits do pose a threat to a significant portion of first class mail down the road, but they simply cannot explain multi-billion dollar losses in fiscal year 2001.
More plausibly to blame is the slowing economy, and the effects of that slowdown on mail volume. Management has suggested both that the slowdown to date has hurt high-margin mail categories, and that the “hard landing” they see coming will lead to increased revenue shortfalls in the near future. Of course, the front page headlines last Friday trumpeting surprisingly strong 2% growth in gross domestic product in the first quarter of 2001 throws a wrench into that argument. That’s double the fourth quarter’s admittedly anemic 1%, and hardly presages a recession. But that good news has not yet led the Service to reduce its loss projections for the year.
The argument about the economy also sidesteps an issue the Postal Service management would rather not face: they have declined for many years to do the kind of research that could give them reliable guidance about how the mail use of various economic sectors could impact their bottom line. While the Service looks at the economy as a whole, it does not regularly examine how different sectors of the economy use the mail very differently. Strong growth among high-tech and dot com companies, for example, is of much less value to the Service than, say, rapid growth of the banking industry. Consumer banking is still mail-intensive; dot coms are not. Making projections from the economy at large is doomed to lead to inaccurate readings.
Also in the headlines these days are rising fuel costs. One need only drive past the neighborhood service station to see near record-high prices at the pump. Given all the trucks and aircraft used by the Postal Service, it would certainly seem to account for some of the Service’s problems. But transportation costs represent only 10% of USPS costs, and fuel is only a relatively small subset of transportation costs. Thus, even today’s high fuel prices cannot account for the massive projected losses or the swings in projections for the year.
Finally, labor arbitrations are blamed for sudden increases in fixed costs. But this argument fails for three reasons. First, during its rate case review in 2000, the Service increased its projected labor costs, in order to reflect recent losses in labor arbitrations. Having already been counted once, then, these arbitrations could not account for projection errors the Service has made since that rate case review. Second, while blaming binding arbitration wins the Service sympathy in some quarters, it fails to recognize the little-reported fact that management-negotiated contracts over the last 30 years have been no less generous than arbitrated contracts. It’s a red herring. Finally, blaming recent labor contracts really skirts the more important issue; namely, if the Service did not have so many employees, and if it were not still adding workers, then labor agreements would pose less of a risk to the financial health of the Service. In other words, the Service is only reaping what it has sown through addressing its problems by hiring workers instead of increasing productivity. More on that below.
If the reasons cited by the Service do not account for the poor projections and large expected revenue losses, then what are the causes? The answer lies in three critical failures of top management in recent years. These failures are now becoming major problems for the Service.
The principal problem facing the Postal Service is its utter failure to make meaningful productivity gains over the years. As the General Accounting Office reported in September, postal productivity has increased only about 12% since 1970 (and declined in five of the last seven years). What this means, in effect, is that the billions of dollars invested in automation and other productivity-enhancers since the mid-1980’s have brought negligible results. The money was wasted. This explains, in part, how the Service could be approaching $15 billion in debt by next year and have so little to show for it.
A second problem is the Service’s failure to manage costs effectively in light of its mix of mail volume. The Service laments that growth in its high-margin products is slowing, while lower-margin mail subject to various discounts is growing faster. This is a situation of the Service’s own making. How can the Service be surprised that business mailers would make use of the sundry discounts that the Service offers them? Pre-sort discounts, bar code discounts—it should be expected that businesses would seek to maximize their discounts. But this should not spell disaster for the Service. After all, the discounts apply precisely because discount-eligible mail is less costly to deliver. If a business mailer submits mail already sorted to the carrier’s delivery route to reap the savings offered by the discounted mail, that should reduce the Service’s costs. If it does not, that points to management failure, not some unforeseen occurrence.
A third major problem is the Service’s labor costs, addressed in part above. It is a myth that the Service is helpless in the face of its labor costs. Management has elected to keep hiring new workers. The Service employs more than 100,000 non-tenured employees, and has large numbers of employees eligible to retire annually. Simply by not hiring new workers, the USPS could quickly reduce its workforce—if it wanted to.
In recent years, the Postal Service has done a wonderful job, for the most part, in managing the public relations side of its business. In fact, they have some prominent voices backing Postal reform on the terms desired by Service management. Yet the cracks in their story are beginning to spread, and the pressure may be leading to mistakes. Witness management’s colossal blunder of threatening to end Saturday mail delivery. This only serve
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