More people than usual have been asking us lately, what’s up with the Postal Service? The short answer is that it’s a one-man show, more than ever before, and there’s no Plan B. There is Louis DeJoy and his Delivering for America plan. That’s it.
The Postal Service is an essential agency with a very uncertain future. The two main bodies responsible for policy oversight, Congress and the USPS Board of Governors, decided to turn the keys to the enterprise over to DeJoy and hope that his results will match his extremely confident talk. Congress gave DeJoy the valuable legislation he asked for, and the Governors appointed him and stand solidly behind him.
USPS is a kind of legislative third rail for members of Congress. Direct involvement in trying to fix the hurting agency guarantees controversy to any lawmaker. The interests of “stakeholders” in the agency are many and different, whether they be rate-payers for market-dominant mail, senders of competitive packages, competitors to the mail and package services of the agency, employee unions, postal management, private sector suppliers to the $70 billion agency, or politicians themselves. The reality of conflicting interests is only made more acute by the difficulty of solving the USPS puzzle.
The presidentially-appointed Postal Governors are part-time folks who have other vocations. They agree to meet monthly for a couple of days to vote on policy decisions. The Governors are paid only $30,000 a year, plus expenses, and have no staff support other than the very large USPS team that reports to DeJoy. The Governors’ two most important decisions are hiring the Postmaster General and approving rate changes.
A forceful, confident Postmaster General like DeJoy ensures that the hurdle is very high for any Governor, much less a majority, to oppose or question anything that he wants to do. DeJoy makes it clear that everyone involved, including Governors, must give 100% support for his leadership. It appears to be a choice of supporting him or firing him. No middle ground is possible.
PMG DeJoy has made it clear to USPS mailers that we need to fall in line and support his plan and all of his actions without fail. If we don’t, he threatens to freeze us out. He also makes it clear that he does not welcome advice, disagreement, or criticism from other agencies about his plan, including the Postal Regulatory Commission, the Government Accountability Office, and the USPS Office of Inspector General.
When the PRC tried to gain some information about the inner workings of the DeJoy plan, two years into its start and three years into his tenure, the Postal Service objected loudly. It continues to resist efforts by the regulator and interested stakeholders to, for example, learn how the postal agency came up with its foundational forecast of $160 billion in losses over ten years. Or on what assumptions the agency postulated that by 2030 market dominant mail volume will decline by 37% and package volume will increase by about 7%. To DeJoy, this kind of information is proprietary to him, his staff, and the Governors.
The core of the USPS plan is to milk the legacy, declining mail products for as much cash as possible while investing heavily in a new, modern network that will be package-centric but handle both mail and packages. The new network would be similar to Amazon’s with carriers picking up their packages and mail at large, modern sorting facilities rather than at local post offices.
The hope is that packages would grow a lot and be profitable enough to cover enough costs to subsidize USPS public service requirements such as delivering to every address six days a week and running tens of thousands of retail outlets, aka post offices, that do not cover their own cost. Packages would be taking on the role that annual government appropriations did for about 200 years before 1980.
The “full 10-year plan” that USPS released over two years ago focuses on correcting the agency’s ten-year forecast of $160 billion in losses. It was divided into four parts, two requiring external help and two considered “self-help” by the Postal Service.
Most of the external help has been received and implemented. $58 billion or 36% of the plan is “legislative and administrative action” that “includes Medicare integration and eliminating the pre-funding requirement.” USPS got most of what it asked for in the Postal Service Reform Act of 2022.
The administrative action that is still wanting according to USPS involves how the agency funds benefits for employees still under the old Civil Service Retirement System. As USPS says in its two-year update on the ten-year plan: “We have sought from the Office of Personnel Management (OPM) changes to reflect fair and proper apportionment of CSRS benefit costs according to modern actuarial principles, which would eliminate CSRS amortization payments and save USPS $2-3 billion per year and up to $34.6 billion over 10 years. We will continue working with the Executive Branch to realize these changes.”
The next biggest portion of the ten-year plan is the pricing flexibility for market-dominant products that USPS received from the Postal Regulatory Commission, valued at $44 billion or 28% of the plan. This part of the strategy is known generically as milking the legacy products while you can. DeJoy is implementing the flexibility with a vengeance, using the full authority from 40-year high inflation and the “density” add-on which rewards lower mail volume.
USPS also unilaterally decided to raise rates twice a year which disrupts the mailing industry and requires agency pricing decisions before it knows what has been the impact of the previous hikes. Speeding up the price increases is driven by the milking strategy rather than any attempt to retain or grow mail.
The self-help portion of the USPS plan mostly revolved around DeJoy’s laser focus on his area of expertise—logistics. He is personally leading a complete overhaul of the USPS network. He hopes for a $34 billion improvement on the cost side, 21% of the plan, and $24 billion in revenue enhancement beyond just rate hikes, or 15 % of Delivering for America.
At the heart of the remake of the USPS network is a focus on growing the agency’s share of the package market while conceding that mail volume which still provides the majority of revenue is inevitably going away.
Bottom line: Not so good
Ten months into fiscal year 2023, USPS has lost $5.8 billion. The agency projected breakeven this year in its ten-year plan released two years ago. That does not inspire confidence in the plan. About eight months ago, USPS issued its annual plan showing a projected loss of $4.5 billion; it’s now headed toward a loss of over $6 billion.
Operating revenue is down 0.6% this year, unprecedented after price increases. It’s because mail volume has plummeted 8.9%, and package volume is off 2.5%. Overall volume is spiraling downward at -8.6% so far this year.
Milking mail: Not so good
The “milking the mail” portion of the plan is not going so well. For the first time in USPS history, the agency is experiencing declines in total operating revenue following large rate hikes. Agency leaders are comforting themselves with the belief that the volume declines are part of the ongoing secular reduction in the mail along with the current weakness in the advertising market. USPS also loves to cite the fact that its rates are lower than most other nations. Many mailers will tell you that they are being forced to reduce mail because of the rate increases and that comparisons with other countries are irrelevant, but USPS leadership is not interested in listening.
The reason USPS rates were so low for so long was because it had tremendous economies of scale as by far the largest postal system in the world. The agency liked to boast that it delivered 40% of the world’s mail. Following the end of annual appropriations for public service costs in 1980, the USPS enjoyed its best two decades with mail volume doubling from 100 billion in 1980 to 200 billion in 1999. Reasonable, predictable rate increases every three years, along with the introduction and proliferation of private sector work-sharing with USPS incentive discounts were the formula for success. A growing economy didn’t hurt.
The days of a positively reinforcing USPS marketplace are over. Indeed, many believe that the script has been flipped to a death spiral. No longer do reasonable rates and discount incentives begat more mail volume which creates more economies of scale, profitability, and price increases in line with inflation. The opposite now is happening with the full support of USPS and the PRC. Losses of mail volume and the bottom line now lead to higher and more frequent rate hikes which reduce volume and therefore economies of scale and increase losses which, absent any other solutions, cause more rate increases.
Growing packages: Not so good
As USPS rushes to invest in a multi-billion new Amazonian network and launches a rebranding of the lower-cost portion of its package offerings as USPS Ground Advantage, its package results are terrible. Competitive product volume is down by 50 million boxes through July of FY 2023. Competitive revenue is up a mere $96,188, or 0.4%, not enough to make a dent in a $5.8 billion loss.
Perhaps it helps to recall that overall package volume skyrocketed during the pandemic and has come back to earth after the crisis. After having trouble handling the volume driven by COVID-19, USPS and the other large carriers rushed to build up capacity, and many new entrants emerged in the market.
The sobering truth about the package market was described by Satish Jindel, president of ShipMatrix Inc., a consultancy, in Freightwaves:
“Parcel market dilemma: Excess capacity with stagnant demand Supply-demand imbalance unmatched in past 3 decades”
“With just the three national carriers and Amazon’s private fleet, industry capacity exceeds 110 million parcels per day. As of June 2023, the market demand was about 70 million parcels per day. With capacity far in excess of demand, the parcel market is in for a very uncertain future.”
Jindel goes on to describe the Postal Service’s massive over-capacity and to suggest an approach to gain market share:
“Another wild card for pricing change could come from the Postal Service, which has capacity to handle 60 million parcels per day while actually handling only 26 million per day. If it elects to target market share gain, it could do so at a rapid pace by giving attractive rates to consolidators like DHL eCommerce, Pitney Bowes Inc., OSM Worldwide, and others. That would help the Postal Service attract more business to consumer parcels by leveraging its monopoly on placing lightweight parcels in the mailboxes for better protection from weather and theft.”
Unfortunately, word on the street is that USPS is moving away from private-sector partnerships to try to own the direct customer relationship. Hopefully, this is not completely true as USPS is not known for maximizing ease of use and customer satisfaction.
To the surprise of many, USPS filed at the PRC two initiatives to try to increase mail volume. This would be the first such effort in over three years.
One is a growth incentive for mailers of First-Class Mail and/or Marketing Mail who can hit a target in the calendar year 2024 over both 1 million pieces and what they mailed in the class in the fiscal year 2023. They would be rewarded with a 30% postage credit on the amount exceeding the benchmark for future use. This proposal must move fairly quickly through the PRC to start on time. Comments are due by September 11, and we believe the program is worth supporting.
It won’t be a panacea, however. For example, some large mailers already have reduced their volume far enough below the 1 million minimum to make participating possible. The program is a noble effort that might be overwhelmed with the macro strategy of milking mail.
A more direct approach to stopping the death spiral would be to return to annual rate increases based on inflation. This approach is very doable as USPS has close to $20 billion in cash and is allowed to bank any amount of rate authority for future use when inflation has subsided and hopefully, the downward spiral slows.
The other initiative is the first market-dominant Negotiated Service agreement signed and filed by USPS in many years. In that time, USPS has signed dozens of competitive package NSAs. The agreement is with Publisher’s Clearing House. It contains two factors that mailers have emphasized for some time. If the rate paid on prospecting mail could be reduced to enable more mailings with a positive ROI, both USPS and the mailer would benefit from the multiplier effect. Prospecting leads to orders, shipments, subscriptions, payments, and other types of follow-up mail.
The PCH NSA is well worth supporting in comments due by September 11. If it receives regulatory approval, it can become a template for other mailers to reach similar NSAs with USPS. Postal law requires that NSAs be made available under similar terms to similarly situated mailers.
Unfortunately, the PRC already has indicated that it will make approval very difficult, maybe impossible. It did so in a Chairman’s Information Request filed on August 23. The CIR asks for information from PCH that is confidential and indicates that the PRC is going down the road of trying to prove what is “anyhow mail” and what is new mail, an unprovable distinction. USPS and PCH thought they overcame this canard by building in strong safeguard for USPS being made whole if PCH does not make very ambitious multiplier effect goals.
The CIR asks for:
a.Please provide PCH’s annual advertising budget for the past 5 years.
b.Please indicate the portion of the annual advertising budget used for physical mailings.
c. Please provide an analysis of the per-piece cost of a physical mailing detailing the individual components, i.e., the per-piece cost of designing, printing, and preparing a mailpiece.
d. Please provide an analysis of the total increase in costs over the past 5 years for each per-piece cost component.
e. Please compare the total increase in costs over the past 5 years for the mail component to the total increase in costs over the past 5 years for the non-mail components (i.e., designing, printing, and preparing).
f. Please indicate if PCH has received discounts from firms that specialize in designing, printing, and preparing mailpieces. If so, please indicate the discount amount.
g. Please provide the estimated lifetime value of the “dormant prospects” that PCH refers to on page 4 of the Request. Please explain the process by which PCH considers a mailing to be profitable or not.
h. Please provide the estimated response rate for the “dormant prospects” that PCH refers to on page 4 of the Request. Please provide an analysis of the “multiplier effect” for the “dormant prospects” as compared to the regular mailings that PCH undertakes absent a discount.
The regulator probably has the best of intentions, but it lacks the understanding that this type of questioning will return to the chilling effect on market-dominant NSAs that the Postal Rate Commission imposed in the early 2000s.