The Post Office’s Money-Losing Rate Hike

Remember the old Saturday Night Live skit about the First CitiWide “change bank” that does nothing but make change? Our customers ask us how we make a profit, quips the bank’s spokesman. “The answer is simple — volume.”

As laughable as this dubious business plan sounds, it bears many similarities to the business plan the management of the U.S. Postal Service has been practicing for much of the past decade. And, as might be expected, the model isn’t doing much to help the Post Office — which lost $5 billion last year — cover its costs. This week, the Service raised the price of stamps again, in what is becoming an annual ritual.

First Class mail, the most lucrative category of mail, has seen its volume decline in recent years. The first quarter of 2008 saw nearly one billion fewer pieces of first class mail than the first quarter of 2007.

As a result, “Grow the Volume,” has been the adopted mantra of Post Office executives lately. While the volume of First Class letters has slipped into a downhill spiral, the agency’s leaders have targeted business mail in their strategies to increase volume. But, like the change bank plan, this strategy might be worth rethinking before it is too late.

As Postal Service Chairman Alan Kessler said in Congressional testimony last year, “Standard Mail, which contributes significantly less than First-Class mail to the Postal Service’s institutional costs, now comprises the majority of our volume.”

Alas, the letter-writers and greeting-card senders of the past have all but abandoned their craft for the convenience of cell phones, email, and instant messaging. The vast majority of the mail today, 85 percent, is sent by businesses. At the same time, two-thirds of all mail is sent to households.

Postal officials are quick to point out that business mail volume is heavily reliant on economic conditions. In an expansive economic climate, businesses are more likely to increase their mailings. This can be said of credit card offers, sale circulars, and the advertising mail that most people seem to love to hate. While email and economic conditions are not the only two factors causing mail volume to drop, they are certainly two of the biggest.

In the past, the Postal Service could count on raising the price of stamps and corporate mailings to meet its growing costs. But with mail volume in decline, raising the price of a stamp will only provide a temporary boost to revenue. In the long run, higher prices accelerate the drop in volume.

So the Postal Service has crafted its current strategy to “grow the mail,” using strategic discounts to business mailers designed to encourage increased volume. The problem, however, comes when the size of the discounts threatens the very profitability of the venture.

Postal Regulatory Commissioner Ruth Goldway wondered aloud in a 2007 ruling if a deal between the Postal Service and one of the nation’s largest banks “demonstrates that the Postal Service is not yet capable of negotiating a good bargain.”

If “growing the volume” won’t rescue the Postal Service, then it clearly must cut costs — particularly its labor costs — to remain solvent. As the nation’s second-largest employer, more than 80 cents of every dollar it spends goes toward labor.

But the Service’s four major labor unions have all grown accustomed to getting their way in collective bargaining talks. As a result, despite remarkable advancements (and major investments) in automated technology and equipment used to sort the mail, not to mention important new opportunities to consolidate or outsource its networks, achieving better productivity through lower labor costs remains a distant goal.

So, the Service has hitched its future to increased volume, with little concern to whether each transaction actually covers its own expenses. Has the Postal Service become the SNL Change Bank?

Don Soifer is executive director of the Consumer Postal Council in Arlington, Va.