Mailers Call for Consolidation

Mailers rallied to the Postal Service’s defense at a House hearing Thursday July 24 saying it’s time to begin consolidating big mail processing plants and urging Congress not to block any closings.

That message had to be welcomed by Deputy Postmaster General Patrick Donahoe, who told the Subcommittee on Federal Workforce, Postal Service and the District of Columbia, that the service is in danger of posting a loss of more than $1.5 billion this fiscal year.

“The trend is worsening,” he told the panel as he cited the impact of declining mail volumes, a worsening economy and higher fuel prices on the federal agency. The financial problems make consolidation of some of the nation’s 400 mail processing plants more urgent, he said.

Two postal union leaders dissented, calling the USPS’s new network plan, “premature” and lacking “transparency.”

But representatives of large mailing industry organizations told the panel that it’s high time for the long-promised consolidations of mail plants to begin.

“Unless Congress allows the Postal Service to consolidate facilities now, we soon will be talking about more than 40,000 [postal] layoffs,” warned Mailers Council Executive Director Robert McLean.

He portrayed the Postal Service as on the verge of yet another “death spiral” caused by higher rates and decreasing volume. “We have to allow the Postal Service to change,” Jerry Cerasale, a senior vice president of the Direct Marketing Assn., told the lawmakers.

Rep. Dennis Kucinich, D-OH, stopped by the late afternoon hearing long enough to make one of the very points the mailers were stressing.

Kucinich, the one-time presidential candidate, demanded an inquiry into why USPS is closing an airmail processing facility at a Cleveland airport near his home.

“I don’t want to see any change in that facility,” he demanded as Donahoe attempted to assure Kucinich the processing isn’t needed anymore. A retail postal counter will remain at the airport, Donahoe said.

That was almost the same argument thatDonahoe had to give Rep. Kenny Marchant, RTX, the panel’s ranking member. Marchant was troubled about what lies ahead for a bulk mail facility in his district.

Bulk Mail Center Outsourcing in Review

All bulk mail facilities are being considered for outsourcing, Donahoe acknowledged. The underlying reason, Donahoe said, is that 80% of Standard Mail, which used to be what the bulk mail centers processed, is now being dropshipped, bypassing the bulk mail centers entirely. “It’s left us with great buildings with nothing in them,” he said.

That seemed to satisfy Marchant.

Donahoe and the mailers argued that the 2006 Postal Accountability and Enhancement Act had clearly mandated that USPS streamline its operations. And he made clear that USPS does not want any more of the restrictions that Congress laid last year on some of its first proposed plant consolidations.

Subcommittee Chairman Danny Davis, D-IL, began the hearing declaring that USPS already has the authority to change the network. “...the Postal Service must do a better job of realigning its processing and transportation networks, improve the data used in its computerized and statistical modeling and minimize service disruptions,” he said. Most witnesses agreed that the network plan recently submitted by the Postal Service was vague.

“As evidence of the lack of transparency, I ask members of the committee a simple question,” said the prepared statement of American Postal Workers Union President William Burrus. “After reading the plan, do you have a clear idea of which facilities would be consolidated and what criteria would be used to make the decisions?” Mail Handlers Union President John Hegarty attacked the USPS plans for consolidations as “premature,” saying they were based on “a temporary condition.”

Phillip Herr of the Government Accountability Office suggested that the Postal Service use its annual reports to Congress to fill in specifics on how the networking plan was being implemented. Anthony Conway, executive director of the Alliance of Nonprofit Mailers, said that “the days of business as usual are over. Rationalizing the Postal Service network is no easy chore,” he added, “but it must go forward.”

PRC Sees Progress

In prepared testimony, John Waller of the Postal Regulatory Commission (PRC) commented that the recent filing with Congress on network rationalization shows improvement over earlier USPS efforts on network redesign. One example given was that previous network modeling used national average productivities while productivity of mail processing equipment varies widely among facilities.

“Another assumption not supported by available data is that productivity necessarily improves as the size of processing facilities increases,” said Waller, who is director of the PRC’s Office of Accountability and Compliance. Waller’s concern is that if network plans are based on flawed productivity assumptions they can produce costly reductions in service and efficiency. Consequently, he said, “the efforts described in the Service’s current network realignment document to standardize processing plant operations are a hopeful sign.” He noted that the Postal Service has a challenge to maintain delivery performance and control transportation costs in the face of consolidations that will expand the distance between processing plants and delivery locations. Waller also pointed out that the Flats Sequencing System that will be deployed this fall is meant to increase productivity and cut carrier costs. He said it holds great promise but needs careful oversight to verify the impact on costs and delivery performance. The PRC “hopes to be able to see the projected benefits verified,” he said.

Reprinted with permission. July 28, 2008 edition

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Quarter Follows Troubling Postal Volume Trend

Total mail volume for the first quarter of fiscal year 2008 continued a downward slip, declining by 3%, or 1.7 billion pieces, compared with the same period last year (SPLY).

This is the fourth consecutive quarter of declining volume, a fact that Chief Financial Officer and Executive Vice President H. Glen Walker put into perspective during a presentation before a mailers group late last month. He said that for the past 50 years volume has declined only six times on a full year basis. “So the decline is very troubling,” he added.

Volume dropped in all classes except for Periodicals. And this was the third straight quarter of volume decline in Standard Mail, which has been the volume workhorse for a number of years.

The first quarter volume figures suggest the Postal Service really has its work cut out for it in the new competitive products group set up under the Postal Accountability and Enhancement Act (PAEA). Despite the announced surge in Express Mail right before the holidays (see BMR 01/28/08, p. 7) volume declined by double digits and dropped significantly in Priority Mail as well (see chart).

Without getting into specifics, Walker said the agency is not expecting to bounce back substantially in the coming months. “I’m not saying we would be down three percent but we don’t see the picture becoming suddenly a lot better,” Walker said. “We’re hoping for the best but planning for the worst,” he said.

The combination of the increased rates and a decline in business and consumer confidence are the real factors, he said. The agency was down $500 million in revenue from projections, but was able to make up $300 million of that by cutting expenses .

For the quarter revenue was up 3.5%, at $20.4 billion, fueled by the May 2007 rate increases and expenses were level with SPLY at $19.7 billion.

Reprinted with permission. October 8, 2007 edition

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MTAC Group Focuses on Service Consistency, Critical Entry Times

A hardworking and productive workgroup of postal representatives and mailers has put in its plug for more consistent delivery service and raised the importance of critical entry times (CETs) as part of the industry/USPS/Postal Regulatory Commission (PRC) collaboration to develop new service standards and measurements for market-dominant products.

The workgroup established by the Mailers’ Technical Advisory Committee (MTAC) presented its report to the PRC late last month. The next step will be the Postal Service’s proposed service standards, which should come out in a Federal Register notice by Oct. 20. Along with this notice may be a CD containing the proposed service standards for 3-digit pairs by product. There are 850,000 such pairings for each of the four products: First Class, Standard, Periodicals and Package Services. The Postal Service will also propose a performance measurement standard that will likely include some hybrid of the external IBM measurement system now used to evaluate First Class mail and the intelligent mail barcode (IMB). The Postal Accountability and Enhancement Act (PAEA) authorizes the use of an internal measurement such as the IMB if the PRC approves it.

One of the biggest issues that came out of the MTAC group is the critical link between USPS CETs, service standards and service performance measurements. A change in CETs is effectively a change in service standards. And mailers expressed concern to the PRC that late in the game the Postal Service indicated it may change CETs as part of a detailed network plan it must give Congress by June 2008. Mailers are concerned about the potential changes and the timing as well. They’re worried they won’t know the specifics and be able to respond to them before final service standard rules come out this fall. Another concern is that negative changes in CET could impact postal operations if too many mailers are entering mail in a shorter window in order to meet the CET.

Other key issues here are that CET data is not accessible to mailers or USPS in one central source and the fact that local postal facilities can arbitrarily change CETs without USPS oversight. The workgroup agreed that the existing service standards could be a starting point but that the service performance within these goals has not been acceptable. The workgroup is recommending that USPS set a more comprehensive system of performance goals that takes into account the total delivery universe including the tail of the mail.

Once service standards and measurements are in place, the workgroup wants an annual review to see if they still hold up and the Postal Service has apparently agreed to this review. The MTAC workgroup also wants to see a formal resolution process for service issues. Right now, when customers have service problems there is no consistent path for addressing them.

Product Specific Recommendations

First Class Mail: The MTAC group supports use of the existing service standards but wants USPS to set additional performance goals to improve consistency of delivery and to shorten the number of delivery days beyond the service standards.

Standard Mail: This group is seeking consistency and predictability. Consequently, the workgroup is recommending service standards that use a range of days, such as 3-5 days, similar to the Fall Mailing Guidelines that Standard mailers have been using as their de facto service standards for years. The group would like to see a one-day adjustment of service standards during the heavy fall mailing season to reflect the realities of this period.

Periodicals: This group supports maintaining existing service standards but emphasizes the importance of CETs that reflect “local operational realities and their impact on mailer operations and service expectations.” New standards must reflect the importance of overnight newspaper delivery in the local market, the group said.

Package Services: This group is also stressing the need for consistency and recognizes there may be a major gap between the service standards for origin-entered Package Services and current service performance. It is recommending that this gap be gradually reduced over a two year period.

Reprinted with permission. October 8, 2007 edition

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Study Suggests Transactional Mail Somewhat Steady

A drop in business-to-business mail and increased worksharing are the primary causes of the decline in single-piece mail volume, rather than increased online bill paying, according to a new analysis of paper versus electronic delivery.

While the Internet’s share of payments is rising, the volume of payments mailed has remained stable for the last three years, says Alex Fu, a strategy analyst in the Global Industry Development Group at Pitney Bowes.

“Electronic payment channels are experiencing rapidly growing adoption rates. However, check payments in the mail are now stabilizing in the US, so that mostly only new demand is going electronic,” Fu said.

Europe faces a slightly different dynamic because there have traditionally been fewer payments in the mail due to widespread use of direct debit.

As a result, Fu said, in Europe, “mail is no longer severely threatened by Internet bill payment.”

Fu also concludes that the growth in electronic presentment adoption is slowing. “Most bill-intensive consumers have already adopted ‘online viewing’ of bills and statements and also maintained the mailed statements.”

Consequently, 90% of U.S. consumers and 70% of European consumers use both electronic media and paper for presentment and “still overwhelmingly prefer paper,” he said. Interestingly, the author said about 80% of consumers who use just paper have no plans to go electronic.

Younger people worldwide prefer to receive bills online, but Fu points out this age group also receives fewer bills and there is no concrete evidence the preference for online billing will continue as they become more economically active.

The paper says most of the substitution effect from electronic billing has occurred with Fu expecting stable volumes or, at the worst, an ongoing erosion of paper mail in the range of 1-3% annually of existing mail volume.

According to Fu, “This prognosis is corroborated by the actual rate for Europe in the last five years of only 1.2% annual decline of statements.”

“In the US, bills and statements are actually growing, especially for B2C where they have experienced more than 3% growth in the last five years.”

Of course, biller penalties could alter this prognosis,” Fu points out. This refers to cases now sprinkled around the country where utilities or other businesses charge a fee for customers who want mailed statements.

But Fu doesn’t see that as a major trend. Rather, “We believe that progressive billers will instead increasingly turn to use the monthly statements as a relationship and promotional tool and will cease viewing it purely as a cost item.”

Fu’s paper is entitled, “Bills, Statements and Payment – Paper and Electronic Delivery.”

To view the paper, go to www.postinsight.com

Reprinted with permission. September 10, 2007 edition

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FedEx Earns $1.6 Billion from USPS in FY 2006

For the fifth year in a row, FedEx was the top USPS supplier in terms of payments received in fiscal year 2006, according to figures compiled by Akerman Senterfitt Wickwire Gavin PC’s Postal Industry Practice Group.

FedEx transports Express, Priority and First Class Mail for the Postal Service and earned $1.6 billion in postal revenues, triple the amount of the next largest supplier. In August 2006 FedEx and USPS extended their deal for another seven years. The new UPS deal to transport mail for the Postal Service is also likely to yield a large sum for UPS, but the contract was announced this summer, well into FY 2006 so UPS is not in the top echelons of suppliers.

Akerman Senterfitt Wickwire Gavin said that American, United, Delta and Continental Airlines were among the top 25 postal contractors for FY 2006, but United and Delta aren’t likely to appear next year. In September 2006 UPS announced it had awarded air mail contracts to only seven airlines and United and Delta were not among them. Kalitta Air, which was in the top five, provides air cargo services for the Postal Service. Akerman Senterfitt Wickwire Gavin compiles a list of the top 150 contractors based on payments received in FY 2006, using a list from Postal Service data provided in response to a Freedom of Information Act request. Construction, leasehold and real estate project payments are not necessarily on the list and the list has not been audited and may not be fully accurate.

Persons interested in receiving a copy of the top 150 contracts for FY 2006 can contact: David Hendel with Akerman Senterfitt Wickwire Gavin at 703-761-0367 or David.Hendel@Akerman.com

Reprinted with permission. February 12, 2007 edition

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Postal Accountability and Enhancement Act (Summary of Key Provisions)

Escrow Fund

Abolishes the escrow requirement and replaces it with a requirement to pre-fund retiree health benefits; outlines a 10-year payment stream.

Returns to the Treasury Deparment the obligation for retiree benefits of postal employees that are attributable to their military service. The funds already designated for escrow and any over-funding of the Postal Service’s Civil Service Retirement System liability will be transferred to the new Health Benefits Trust Fund, to begin pre-funding retiree health benefits.

Modern Rate Regulation

Renames the Postal Rate Commission the Postal Regulatory Commission (PRC) and gives the PRC broad new regulatory powers. Divides postal products into market-dominant and competitive categories.

Market dominant products are:

First-class mail letters and sealed parcels
First-class mail cards
Periodicals
Standard mail
Single-piece parcel post
Media mail
Bound printed matter

The PRC has 18 months to develop new regulations for both groups of products. In developing its market-dominant product regulations, the PRC must take into account 9 objectives – such as maximizing incentives to reduce costs and increase efficiency, creating predictability and rate stability and maintaining high quality service standards – as well as 13 factors. Among the factors to be taken into account are “the value of the mail service actually provided each class or type of mail service to both the sender and the recipient, including but not limited to the collection, mode of transportation and priority of delivery” as well as “the requirement that each class of mail or type of mail service bear the direct and indirect postal costs attributable to each class or type of mail service through reliably identified causal relationships plus that portion of all other costs of the Postal Service reasonably assignable to such class or type.”

Increases in market-dominant product rates will be tied to a Consumer Price Index-based price cap; the cap is applied at the class level. The Postal Service is permitted to round rates and fees to the nearest whole integer so long as the effect does not cause the overall rate increase for any class to exceed the CPI.

The Postal Service may use any unused rate adjustment authority for any of the five years following the year this authority occurred. Increases in competitive products are not capped; the Board of Governors will set rates under rules developed by the PRC that ensure they cover attributable costs and make a contribution to institutional costs.

Competitive products listed in the law are:

Priority mail
Expedited mail
Bulk parcel post
Bulk international mail
Mailgrams

Ten years after the enactment of the bill, the PRC will revisit the market-dominant rate system and revise it to achieve the objectives and the factors contained in the bill.

The Postal Service has 12 months from the date of enactment to file one last rate case under current rules.

Exigency language was included whereby the PRC will set procedures so that rates may be adjusted on an expedited basis due to either extraordinary or exceptional circumstances, provided that the PRC determines, after notice and opportunity for public hearing and comment, within 90 days of the USPS request, that this adjustment is reasonable, equitable and necessary.

Workshare Discounts

Language on workshare discounts defines them as rate discounts provided to mailers for the presorting, prebarcoding, handling or transportation of mail. Workshare discounts cannot exceed the cost the Postal Service avoids as a result of worksharing.

Financial Reporting

The Postal Service must comply, beginning in 2010, with certain provisions of Sarbanes-Oxley.

An accounting system must be developed to allow the Postal Service to separate the assets and liabilities of the market-dominant and competitive product lines.

The competitive product line will be required to pay a proxy for a Federal income tax to the market-dominant product fund (proxy because as a federal agency the Postal Service is exempt from such taxes).

Service Standards

The Postal Service is required to establish a set of service standards for its market-dominant products within 12 months.

The Postal Service must then develop an annual plan, which it will submit to Congress, to meet the service standards.

Network Realignment

The law urges the Postal Service to expeditiously move forward in its network streamlining effort and keep unions, management associations, and local elected officials informed as an essential part of this effort and abide by any procedural requirements in labor bargaining agreements.

The Postal Service plan should include a description of the long-term vision of the Postal Service for rationalizing its infrastructure and workforce as well as how this vision will be implemented. Each year the Postal Service is to report on how postal decisions have impacted this network rationalization plan.

Reprinted with permission. January 1, 2007 edition

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Airline Deals Sealed

USPS has lined up seven contracts with commercial airlines to move mail, effective Sept. 30.

The contracts are with: American Airlines, Dallas, TX; American Trans Air, Indianapolis, IN; Continental Airlines, Houston, TX; JetBlue Airways, Queens, NY; Midwest Airlines, Milwaukee, WI; Sun Country Airlines, Minneapolis, MN; and US Airways, Washington, DC. The agreements contain on-time delivery requirements and performance standards similar to those established in 2003 as part of the Postal Service’s previous three-year commercial air contract. They include a 93% ontime rate for First Class mail – slightly more rigorous than the 92% rate in 2003 – a 95% ontime rate for Priority Mail and a 98% on-time rate for Express Mail. If carriers fall short of these standards they will be evaluated on a case-by-case basis.

Previously, the Postal Service suspended work with some carriers until they showed they could improve their service.

The new contracts provide more liberal ground handling time. This is to factor in time for events that are beyond the carriers’ control, such as weather.

Tony Pajunas, network operations vice president, said the contracts contain the previously used tracking provisions so USPS can account for a customer’s mail the entire time it is in the air transportation system. The airlines are required to scan mail at three key points: when they take possession from the Postal Service or when mail is loaded onto a flight, during mail transfers to connecting flights, and when the mail is delivered to the Postal Service once the flight has arrived.

Total value of the seven contracts for fiscal year 2007 is estimated at around $225, although the value of the five-year contracts is dependent on each carrier’s capacity, service performance and mail volume transported, The volume of mail to be transported under the contracts is estimated at about 450 million pounds for FY 2007.

The contracts cover domestic transport of Express Mail and First-Class Mail, and Priority Mail originating from designated Transportation Security Administration sites.

Reprinted with permission. October 9, 2006 edition

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UPS, USPS Forge Major Partnership

UPS has penned a three-year deal, with a two year option, to dramatically expand its domestic air transportation service for USPS First Class and Priority Mail, effective July 1.

The contract, which expands UPS mail transportation for the Postal Service from the current 16 cities to 98 cities, comes at a time when USPS is renegotiating contracts with commercial airlines. According to Anthony Pajunas, postal manager of logistics, at least three commercial airlines, United, Southwest and Spirit, have declined to renew their contracts.

In the case of United, which will no longer move mail for the Postal Service effective June 30, the company was only offered a two-month extension of its three-year contract.

At a press conference heralding the UPS deal, Pajunas said the contract provides for significant flexibility because the Postal Service can change its volume mix with UPS five times per year. The parties would not disclose the volume of mail to be moved using UPS’s extensive network of 575 owned or charted aircraft, claiming that information is proprietary. But they quipped that it would be in the “millions of pounds.”

USPS officials also would not say how many commercial carriers are now moving mail for USPS, noting that contracts are now being renegotiated. Performance has been a critical issue and the limited extension of the United contract is one indication the Postal Service is coming down hard on carriers that don’t meet performance standards.

Indeed, the UPS deal raises a number of interesting competitive issues. With the seven year FedEx deal up for renegotiation next year, the UPS arrangement could put the Postal Service in good bargaining position, some mailers pointed out. UPS Vice President for Transportation Mike Martini would not comment on whether UPS would try to bid for the volumes under the FedEx contract when it expires. At the same time, postal observers say USPS needs to be careful not to put all of its eggs in too few baskets when it comes to air transportation.

Leading off the press conference, Postmaster General Jack Potter said, “The Postal Service is one of the largest users of air transportation in the nation and UPS operates one of the world’s largest airlines. It only makes sense for the Postal Service to take advantage of the reach offered by UPS.” Potter said it is “prudent for the Postal Service to work with suppliers that have the transportation of like commodities as a principal mission.”

Several mailers agreed, arguing that if the Postal Service wants to behave more like a business it makes sense for it to align itself with a high-growth company like UPS.

Mike Eskew, chairman and CEO of UPS, said the contract “can help support the Postal Service’s service commitment to its mail customers while creating new growth opportunities for our company.” He said the company would use its existing capacity to handle the new postal volume. The Wall Street Journal disclosed last week that the contract is worth about $100 million to UPS.

Pajunas said the announcement does not reflect any change in the agency’s air, ground mix for mail delivery. “The focus on expanding our ground network is continuing,” he said, but where mail is moved through the air USPS wants the best quality.

Although the officials said the contract differs from those of commercial airline contracts with regard to some aspects of measuring performance, the same scanning technology will be used. Now airlines scan the Distribution and Routing code of mail as it enters and exits the airline system to show whether it meets delivery standards. Under the standard contracts carriers are paid based on pieces scanned.

When USPS revisits the UPS contract after three years, it will look at performance, price and what the market is at the time in making a determination about a two-year extension, Pajunas said.

Reprinted with permission. July 3, 2006 edition

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