Alliance Report – March 31, 2023

Mail volume is plummeting

  • PMG says he’s not causing it

  • Expect a full rate filing next week

The USPS financial report for February, the fifth month in FY 2023, was released, and the mail volume decline seems to be accelerating. And packages are not compensating, as the Postal Service’s ten-year plan says they will.

Mail Volume
Oct 2022   +2.6%
Nov             -7.1%
Dec           -10.6%
Jan 2023  -8.7%
Feb           -10.8%
FYTD        -6.7%    (FYTD=fiscal year to date)

USPS competitive packages are not compensating for the loss of mail:

Package Volume
Oct 2022   +0.6%
Nov            -10.0%
Dec              +1.3%
Jan 2023    -5.0%
Feb              -7.0%
FYTD          -3.9%

Despite record-high rate increases, USPS revenue is not doing well:

Oct 2022   +4.4%
Nov             -2.7%
Dec             +1.9%
Jan 2023   +0.3%
Feb              -6.0%
FYTD          -0.4%

Mailers believe that by far the main reason for volume declines in the mail is the record rate hikes implemented over 2-1/2 fiscal years, with more anticipated semi-annually going forward.

USPS has the regulatory authority to raise rates again on July 9, 2023:

  • +5.4% for First-Class Mail and Marketing Mail letters,
  • +7.4% or more for Marketing Mail flats and Carrier Route flats, and
  • +8.1% for Periodicals.

USPS is not getting the boost in revenue it expected from double-digit rate hikes, with revenue down 0.4% this fiscal year.

USPS should defer planned July rate hikes

USPS should defer any rate increases on mail until next January at the earliest. If the agency does use the authority in July, it risks accelerating an already very concerning downward spiral in mail volume.

Recent “flash” estimates of USPS volume show the trend in mail and package volumes continues to worsen. For example, mail volume was down 11.4%, and packages were down 6.4% in the week ended March 25.

Postal managers are looking into the causes of the declines and they seem to believe that First Class is declining as they expected and Marketing Mail is being pulled down by non-price factors such as a pullback in advertising and economic uncertainty.

In any case, price is one thing USPS can control and all indications are that they should moderate increases in the current environment until they have more experience with the impact of their record hikes over the past couple of years.

The Postal Service faces the prospect of much less pricing authority for their planned January 2024 rate hikes that will be based on only 6 months of the Consumer Price Index. The cap is likely to be in the 2% area for compensatory mail like First Class and 4% for non-compensatory like Marketing Mail flats.

It’s the perfect opportunity for the agency to demonstrate business acumen beyond just logistics by smoothing out rake hikes for this very challenging time in the U.S. economy. Some or all of the July hikes could be “banked” and used later

PMG indicates no intention to moderate rate hikes at the MTAC meeting

Unfortunately, Postmaster General DeJoy was very clear in his meeting with his Mailers Technical Advisory Committee meeting this week that he has no intention to use anything less than the full rate authority. And with postal management working to bolster the case that the volume would decline anyway with or without the record rate increases, we should expect full use of the authority. If the nine Governors responsible for approving rate increases change Mr. DeJoy’s mind or overrule him, it will be a surprise.

At the MTAC meeting, Mr. DeJoy focused almost entirely on the new and improved processing and distribution network he has begun to put into place. He believes that spending billions over the next few years to rebuild the network is necessary to save the USPS. Much of the focus is on building package processing capacity which the PMG said he would double in two years. He said that USPS already has excess capacity to process mail, albeit in a very inefficient manner.

Mr. DeJoy talked about several senior-level organizational changes he has been making, mostly to speed up his transformation of the agency. He also talked about how USPS is applying lessons it learned from the first new facility in Athens, Georgia to apply them to the cascade of new plants he plans. He is confident USPS will activate 100 new network facilities in 18 months.

The Postal Service is not supplying detailed information on the network plan to mailers or the general public. Many are deducing that USPS wants to avoid the requirements to go through a regulatory process at the Postal Regulatory Commission if it were to release detailed plans with costs and savings. We rely on sources such as the website Save the Post Office for information on what the agency is spending our money on.

Management shares their hopes for a great reduction in the number of truck trips between larger processing facilities and local post offices, because all the sorting and distribution will be done at the new, larger plants. Carriers will spend more work time driving to and from large plants rather than the post office near their route. The Postal Service is adding more routes to offset the reduced time carriers will have to deliver.

Management also touts that the new facilities will be better places to work for postal employees, thereby reducing costly turnover.

And the plants will handle packages much better than current processes, enabling USPS to compete for the “last 150 miles” as the PMG put it. He said the agency is no longer looking to dominate just the last mile because it would lose that game.

The PMG said that USPS is starting to realize savings from his plan, citing 17 million work hours saved already toward the FY 2023 goal of 34 million.

Mr. DeJoy did not address pricing, products, growth, volume, or the marketing of USPS during his remarks, except to praise the television ads that the agency is rolling out to promise a better Postal Service in the future with new facilities and trucks.

When asked about the volume declines and rate increases during the Q and A, Mr. DeJoy was very clear that he is not causing mail volume to fall because it has been doing so for 15 years. He also said that price is one of the few tools he has at his disposal to raise the money needed to build his grand scheme for the USPS network.

Bottom line

We expect the USPS to file the full rate authority next week. Management is building the case that factors other than price are responsible for very large volume declines. The Governors have a track record of supporting whatever Mr. DeJoy puts before them. There are no signs of that changing.

These types of declines have occurred only twice before—during the great recession and the COVID pandemic. In both cases, USPS received revenue bailouts. For the recession, the agency received an exigent surcharge of 4.3% on mailers rates in 2014-2016. During the pandemic, USPS benefitted from a $10 billion grant from the U.S. government.

Record rate increases are not showing signs of bailing out the Postal Service in 2023.