Postage Increases Will Hurt USPS in the Long Run

Rather than raising prices at a time when its customers are just beginning to recover from the recession, the Postal Service should be emulating its closest competitors, FedEx and UPS.
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Just following the July 4th holiday, the Postal Service quietly announced a rate hike equal to ten times the rate of inflation. The decision to hit their customers with such a steep increase is only the most recent example of Postal management failing to treat the Service like a business - chasing three years of declining revenues with a rate hike that will send customers running and the Postal Service further into its own death spiral.

In addition to defying all logical business sense, the request for these rate hikes is illegal. In 2006, Congress understood that mail volume would continue to decline due to increased usage of the Internet - a fact that had been clear for ten years. In response, Congress passed a law that created incentive-based postal rates, and specified that postage rates could not rise more than the rate of inflation, assuming Americans would benefit from a Postal Service with greater flexibility. If the Postal Service could control costs to be less than inflation, it would reap financial rewards. If it could not, the Service would have to cut costs and improve its business. Gone were the days of just raising postage and expecting customers to pay. Or so we thought.

The problem lies in an "escape clause" in the 2006 law. It allowed postage to increase more than inflation only if the Service could show that there were extraordinary or "exigent" circumstances. At the time, Congress was thinking of severe circumstances - terrorist attacks or other massive crises - not lack of business savvy. But this month the Postal Service used this clause to raise rates, citing as an exigent circumstances the diversion of traditional mail to the Internet, combined with the recent recession. The rate increase that the Service seeks is ten times the rate currently permissible by law.

So what does that mean for the future of this American institution? What will happen if postage rates are increased ten times the rate of inflation? It is quite a simple proposition. More of the Postal Service's customers will leave the mail stream and the Service will be left with even lower volume and lower revenue.

Rather than raising prices at a time when its customers are just beginning to recover from the recession, the Postal Service should be emulating its closest competitors, Federal Express (FedEx) and United Parcel Service (UPS). From 2008 to 2009, FedEx and UPS had revenue declines of 16% and 12%, respectively. They both aggressively cut expenses during that same period by 14% and 9%. In the same period, the Postal Service experienced a smaller revenue loss of 9%, yet cut expenses by only 3%. While we applaud the Service for cutting expenses, it has not been nearly aggressive enough in doing so.

The Service should also create new products to grow business. Today, commercial mailers attempt to reach customers by using multiple classes of mail - first-class, standard (advertising), periodical, and parcel mail. The Service, however, treats those mailers as customers of each class of mail separately. There are none of the "bundled packages" that we see in the communications world of voice, TV, radio, Internet. Without growth in mail volume, all Americans will suffer.

So it is no surprise to anyone that the Postal Service is operating in the red to the tune of more than $7 billion dollars and that its solution to the shortfall is to treat the mailing community more like banks than valued customers.

Commercial mailers would bear the brunt of the proposed increase. For those (inconsistent) crusaders who rail against "junk mail," and yet want to keep their local post offices open, let's put one fact on the table: Commercial mail currently accounts for 85% of the Postal Service's revenue. While commercial mailers understand that the Service faces a huge financial problem, a massive rate hike is not the answer, precisely because a rate increase of this magnitude undoubtedly will cause that 85 percent of its current revenue to shrink further. Without that revenue, the Service could not even come close to maintaining all of the retail facilities that members of Congress and their constituents depend on.

The Postal Service and its Board of Governors, together with the Postal Regulatory Commission (PRC) and Congress, should be making aggressive cost-cutting moves, as well as doing all that it possibly can to reward current customers and attract new ones. By asking for a huge price increase, it is doing the opposite. If the Service will not withdraw the rate increase request, the PRC should find that it is not supported by either law or economics. If the PRC does not do this, Congress should once again point the Postal Service in the right direction.

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