How the U.S. Postal Service Could Save Itself

Postage stamp prices are set to rise, but the USPS really needs to do this to remain viable

Is the United States Postal Service really on the verge of raising postage rates again just a few months after cranking up its mailing costs?

Yup. The USPS hiked a first-class stamp from 45 cents to 46 in January (and from 44 cents to 45 in early 2012), and now those familiar with the Postal Service’s fiscal situation expect the currently brewing round of rate hikes to push the price of a first class stamp up by another 3 cents, to 49. The price increase is apt to be even bigger for bulk mailings like magazines and advertisers.

Needless to say, the prospect of higher postage prices is being met with anything but a warm embrace. But in the interest of fairness, we should take a closer look at the USPS fiscal reality before we decide to roll our eyes.

Numbers Don’t Lie

The U.S. Postal Service’s financial struggles are no secret. The organization lost $15.9 billion in fiscal 2012 despite generating revenue of $65.2 billion. Though the loss has been whittled down to a mere $3.9 billion through the first three quarters of 2013 thanks to some respectable cost-cutting measures, between declining demand for letter delivery and still-mostly uncontrolled expenses, tacking on a 6% increase to the current price of a stamp feels like rewarding poor performance.

As is almost always the case, though, there’s more to the story.

For the record, I’m not a fan of the Post Office’s turnaround effort. It’s admittedly easy to look in from the outside and pass judgment, but there’s something insincere — almost contemptuous — in the way the USPS has worked to solve its most debilitating problems.

One of those problems is abnormally large payroll costs. Around 80% of the USPS’s revenue is spent on salaries and employee benefits. For the sake of comparison (and this admittedly isn’t an apples-to-apples comparison), UPS (UPS) proverbially puts about 2/3 of its revenue back in the pockets of its employees. FedEx (FDX) spends about 45% of its revenue on labor costs. That’s more than a dismissible disparity.

Thing is, it’s not as if the USPS didn’t do it to itself. The organization has whittled down its total worker headcount by about 17% between 2008 and 2012. It’s a good first step. But considering the total number of pieces the Postal Service annually handles has fallen 21% during the same period and is expected to fall for years to come, the workforce reduction hasn’t been adequate.

The poorly managed employee count and allocation can’t get all the blame, however. The delivery service is also dealing with swelling costs that are out of its control. Delivery costs are up 27% since the year 2000 thanks to burgeoning fuel prices. The Consumer Price Index has only grown by 8% during that period.

There’s Not Much Of an ‘On the Other Hand’

In the mailing service’s defense, a few years ago the U.S. government mandated that the Postal Service pre-fund its pension obligations 75 years into the future, but only gave the USPS 10 years to do it — a feat even the best-performing corporations would struggle to complete.

Also in defense of the United States Postal Service, it wasn’t built from the ground to be a profit center for the U.S. government, so we can’t exactly judge the organization based on its ability to turn a profit. (The downside of that mind-set: Unlike for-profit corporations, there’s no real incentive to cut costs and/or be more competitive.)

Still, government-backed and controlled or not, it’s tough to defend the USPS’s business operation.

For example, USPS employees mostly belong to one of three different unions, and union rules largely forbid any employee “crossing over” and helping a member of another union do a particular job. That lack of flexibility has meant noticeable lack of customer service, or even customer concern.

Meanwhile, FedEx (non-union) and UPS (a union shop) have at least created an environment where all employees have a basic incentive to serve the company’s customers well.

Here’s the Real Fix

I know … everybody’s an expert when they’ve got nothing to lose by voicing an opinion. But hear me out — there might be hope for the United States Post Office yet.

As for the impending price increase for first-class stamps, let’s give it a pass. Sorry, but if a consumer can afford 46 cents, he or she can afford 49 cents. Mass mailers are allegedly going to be on the hook for a little more of a price increase, but again, advertisers and magazine publishers aren’t going to close shop just because delivery expenses grew more than a tad.

Higher postage prices aren’t going to make a big dent in the problem, though. Where the USPS could really work its way back to viability is (ironically) the one area where it thinks it’s not particularly well-positioned … package delivery.

As it stands right now, only about 17% of the Post Office’s revenue is driven by package delivery. The USPS handled 3.5 billion packages in 2012, generating $11.6 in revenue for its effort. FedEx generated $44.3 billion in revenue last fiscal year doing the same thing, and UPS hauled in $54.1 billion.

It’s tough imagining the Postal Service catching up to those two private companies in terms of package delivery, but it can — it’s just going to take work, and an adoption of the service mentality that UPS and FedEx currently encourage. But the framework for a high-caliber parcel delivery service is in place.

For those intimately familiar with the Post Office’s operation, a concern immediately arises with that idea — first-class letters are immensely more profitable than package delivery. For every dollar of first-class letter revenue the Post Office loses, it would need to add $3 in package delivery revenue to generate the same profit. That’s a tall order. Then again, the USPS is fighting for its life in a world that has a lot of other delivery options. This isn’t the time for the organization or its employees to get picky about how the Postal Service works its way back to relevancy.

The U.S. Post Office also needs to consider raising prices on some of its parcel shipping services.

That seems counterintuitive if it wants to be more competitive with UPS or FedEx. But think about this — both of the privately run shippers will sometimes use the Post Office to handle some or part of some of its deliveries. Why? Because it’s cheaper than doing it themselves!

To the United States Postal Service: If your competition is hiring you to do their work and (presumably) still turning a profit, you can charge a little more.

A lot of other things need to fall into place for the United States Postal Service to get back on its feet, beginning with a little less contempt for customers. But given how package revenues are projected to grow 28% by 2017 while letter delivery revenue is expected to fall nearly 18% for the same time frame, it’s time for the postal system to make changes bigger than the routine stamp increase.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/09/how-the-us-postal-service-could-save-itself/.

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