U.S. Postal Service: Will it survive?

Commentary about business and finance.
Aug. 17 2011 5:51 PM

Deliverance

The U.S. Postal Service must make massive changes if it is going to survive.

U.S. Postal Service worker Magda Aguirre places mail into a sorting machine at the U.S. Post Office sort center. Click image to expand.
Is the U.S. Postal Service doomed?

It is hard to think of a better deal than mailing a letter. In exchange for nothing more than a first-class stamp, the U.S. Postal Service will come to your house, pick up your envelope, and deliver it anywhere in the country. It will bring it from Hawaii to Miami. It will carry it from Bangor, Maine, to Dededo, Guam, a distance of 8,000 miles. If you got the address wrong, it will bring the letter back. These services are completed with extraordinary accuracy and speed. The cost? A mere 44 cents, less if you bought your forever stamps years ago.

America's postal service is elegant, efficient, even amazing, given the enormous size of the country and the low cost of stamps. But the U.S. Postal Service is a hulking, foundering, money-hemorrhaging bureaucracy. A government watchdog has deemed the whole business unsustainable. Next month, it might actually run out of cash. It raises the question: How is the postal service going to be viable as mailed letters become increasingly obsolete?

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One thing is for sure: The fiscal situation at the USPS is bad—really bad. According to its most recent quarterly report, the USPS lost $3.1 billion between April 1 and June 30. Add that to billions of dollars in losses racked up since the recession hit—the USPS has been in the red for 18 of the last 20 fiscal quarters. It has also amassed tens of billions in unfunded liabilities, mostly in pension and retiree health-benefit obligations.

The problem is not mismanagement. The problem is that the USPS has an enormous, expensive physical and human infrastructure. It operates more than twice as many U.S. outlets as McDonald's. It runs the largest vehicle fleet on Earth. It has a staff of nearly 600,000, despite considerable reductions in the last decade. To pay for all those people, trucks, and buildings, the USPS needs to handle a lot of mail.

The recession accelerated the longtime trend of businesses and individuals shifting correspondence to the Internet. (After all, 44 cents is still more than nothing.) Mail volumes have plummeted more than 25 percent since 2006. Moreover, the mix has gotten cheaper—more bulk mail, fewer first-class letters. Unlike some of its other national counterparts, the USPS has no other revenue stream to speak of except for delivering mail, so less mail means a lot of red ink. The USPS plunged deep into the red in 2007. By 2020, with no big surge in first-class mail likely even if the economy recovers, cumulative losses will total an estimated $238 billion. That's three times the size of the auto bailout.

The postal service has tried valiantly to stanch the bleeding. It has told Congress it wants more room to charge higher prices, reduce the number of deliveries, invest in new technologies, and negotiate new terms with its workers. (The USPS is structured a bit like Fannie Mae and Freddie Mac—it is an independent organization with federal backing, and Congress has a check on it.) It has shuttered post offices. It has streamlined operations. In the last four years alone, it has reduced its staff by 110,000 and saved some $12 billion.

But it is not nearly enough, and the USPS says so itself. In its most recent quarterly statement, it writes: "Postal Service efforts to positively impact cash flow will not be, either individually or in the aggregate, sufficient to avoid a cash shortfall in 2011." The report continues: "Absent significant changes … the $15 billion debt ceiling will be reached in September 2011, thereby exhausting the Postal Service's external funding ability. No assurance can be given that Postal Service efforts to secure legislative changes will be successful, or that Congress will enact legislation in time to favorably impact 2011, or at all."

The catastrophe is twofold. The USPS is going to need a higher debt limit or big changes pronto, or it is going to run out of cash. Then it needs significant—maybe even radical—changes to return it to fiscal stability. Indeed, a congressionally ordered Government Accountability Office report from April 2010 starts with the blunt line: "USPS's business model is not viable due to USPS's inability to reduce costs sufficiently in response to continuing mail volume and revenue declines." The "business model" is not "viable." Changes are necessary. So what might those changes look like?

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