Collaboration in Civic Spheres

U.S. Postal Service: Declining Mail Volumes, Higher Rates

by Matt Rosenberg October 25th, 2010

SUMMARY: The continuing proliferation of electronic communications is having an effect on volume of traditional mail delivered by the U.S. Postal Service. A new report prepared for the Postal Service’s Inspector General’s Office by researchers at the George Mason University School of Public Policy suggests that significant rate hikes will prove necessary and that there is latitude to do so, so long as rates remain somewhat lower than those charged in other developed economies, such as many European nations and Japan. Rate hikes can be mitigated to some degree if Postal Service productivity increases, fixed and retail costs are reduced, and delivery is reduced from six days weekly to five. Lower postal rates for non-profit organizations may need to be re-evaluated, as well.

BACKGROUND: The current first-class rate for mail of one ounce or less is 44 cents. In July, citing the effect of the recession on mail volumes and revenues, the Postal Service filed an application with the independent Postal Regulatory Commission for a rate hike to 46 cents but in late September, the application was denied, with the commission finding the Postal Service’s fiscal woes were more due to its business model than the recession. The Postal Service plans to appeal the ruling.

KEY LINK: “Implications Of Declining Mail Volumes For The Financial Sustainability Of The Postal Service,” Office Of The Inspector General, United States Postal Service, 9/29/10

KEY FINDINGS:

  • U.S. Postal Service mail volume peaked at 213 billion pieces in 2006, declined to 177 billion in 2009, and is projected to be 170 billion in 2010.
  • If annual volume declines much more below recent levels, the Postal Service could either “enter a graveyard spiral” of continuing price hikes and mail volume declines or it could reach a new “price-cost equilibrium” by using available latitude to hike first-class rates closer to what’s charged in other developed economies.
  • Postal service rates are as much as 86 percent higher in European nations and Japan than in the U.S., in terms of purchasing power. The U.S. Postal Service will remain “financially sustainable” so long as its prices are “somewhat lower” than the highest prices in other developed nations, and its revenues cover its costs.
  • At an annual volume of 150 billion pieces rates would have to rise from 17.5 to 28.7 percent above the annual increase in the consumer price index or CPI (1.1 percent from 10/09 through 9/10) for the postal service to remain financially sustainable. Lower increases would be needed with reductions in fixed and retail costs, in number of delivery days from six to five weekly and with a slight increase in productivity.
  • At an annual volume of 125 billion pieces, rates would have to rise 31 to 44.9 percent above the annual CPI gain for the postal service to remain viable.
  • At an annual volume of 100 billion pieces, rates would have to rise 53 to 71.6 percent above annual CPI gain
  • At an annual volume of 75 billion pieces, the postal service would have to raise rates to what would likely be an unsustainable level, of 94.9 to 121.6 percent above CPI gain.
  • At lower volume levels, first class mail, especially single pieces, will decline and the Postal Service “will essentially cease being a two-way communications medium and will evolve into a broadcast medium.”
  • If and when annual Postal Service mail volume falls to a point between 125 billion and 100 billion, fixed costs will become more than half of total costs, requiring even greater focus from management. Plummeting revenues from declining mail volumes would force cuts in pre-paid health benefits, prior year’s worker’s compensation, debt service, delivery of periodicals, the operation of 36,000-plus retail and outlets, and would necessitate re-evaluation of current lower rates for non-profit mail.

RELATED: “CRS: ‘The U.S. Postal Service’s Financial Condition – Overview & Issues For Congress,” Public Data Ferret, 3/21/10

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