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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Workgroup Nearly Ready to Recommend Service Standards

The workgroup developed to recommend service standards and service performance measurement systems for market-dominant products under the new postal reform law may soon complete the service standards portion of its charter.

The Mailers’ Technical Advisory Committee (MTAC) workgroup is broken into four subgroups, by product, and each appears to have its own ideas about what service standards businesses need. Some think the existing service standards would meet their businesses’ needs...if the Postal Service were to meet those standards most of the time.

The First-Class Mail subgroup is reviewing the existing standards and has asked the Postal Service for additional data on issues such as service performance to ZIP Code areas outside the contiguous United States, forwarded/returned pieces, remittance mail and international mail. The FCM would likely accept the existing service standards if USPS met those standards the majority of the time, but there is a particular concern about the “tail of the mail” – the percent of mail that does not get delivered within the existing 1-, 2- and 3-day First-Class Mail service standard.

The Periodicals subgroup is considering starting under the new law with the existing service standards. Periodicals mailers want to start performance measurement at this point, then re-visit the standards once measurement data has been gathered and analyzed. The Standard Mail subgroup is looking at developing different service standards for drop shipped Standard Mail (about 75% of the Standard Mail volume), which would consist of a matrix with a range of days shown for delivery depending on the facility type where the mail is drop shipped (DBMC, DSCF, DDU) and whether the mail is carrier-route presorted. The Packages Mail subgroup is still wrestling with how USPS existing service performance tracks to its existing service standards for the various categories of packages (e.g., Parcel Post, Library Mail, Media Mail, Standard Mail parcels and Bound Printed Matter parcels).

Meanwhile, the Postal Service is hard at work seeding mail internally with barcodes to gather diagnostics that show current plant-to-plant service performance, which it then can compare to the existing service standards. Mailers suspect some at USPS may be surprised to see how existing service performance measures up to the existing service standards, particularly for certain product categories.

The Postal Regulatory Commission (PRC) is actively involved on the workgroup and all four subgroups. Observers speculate the PRC wants the MTAC workgroup process to evolve a bit further before it begins its rulemaking process around service standards and measurement under the new law. PRC resources also continue to be tied up finishing off the R2006-1 rate case. It is likely that the workgroup’s final recommendations to the PRC will be of an evolutionary nature, with different recommendations – particularly for service performance measurement –across a time line of the next few years. There are few mature passive technology solutions in place today for measuring service performance, but industry and the Postal Service may be reluctant to recommend extensive and costly interim solutions with passive Intelligent Mail measurement solutions on the drawing board.

The MTAC workgroup has a target of mid-September to hand off recommendations to the PRC. Issues not raised or resolved in the workgroup can be raised in the formal public process at the PRC later this fall.

Reprinted with permission. May 7, 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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PRC Supports Network Realignment Goal, But Not All Means

The evolutionary network development (END) strategy to make the postal network as efficient as possible uses flawed computerized simulation and optimization models, ignores valuable assets and lacks detail on transportation network efficiencies, the Postal Regulatory Commission (PRC) said in a recent recommended decision.

The PRC wholeheartedly supported the purpose of END to enhance operational flexibility and efficiency, capture resulting costs savings and preserve existing service standards. But the Commission determined that the record of evidence “does not provide assurance that the proposed realignment program, as currently envisaged, will meet its declared goals.”

One big problem, according to the PRC, is that the END simulation models used to determine how to change and consolidate facilities, assume national average productivities rather than looking at facility-specific data. USPS did this because it said the data would otherwise be too unwieldy. “There is extraordinarily wide variation in productivity at postal facilities,” the PRC said. “The likelihood that the systemwide average productivity may substantially overestimate or underestimate the productivity of a given plant/operation is high, in view of the wide range of productivity of plants and operations across the system,” the PRC said. Consequently, mistakes could be made about which plants should be closed, which should be enlarged and which should be converted to hubs in an effort to maximize productivity.

The PRC is critical of what it sees as an assumption in the optimization model that bigger plants are more efficient. In fact, “the productivity of processing plants/operations not only varies over a remarkably wide range, but varies inversely with size.” Pointing to a Government Accountability Office analysis, the PRC said that smaller plants are, on average, more productive than medium-sized plants and that medium-sized plants are, on average, more productive than large ones. “This is the task that the Optimization Model faces. It needs to use the actual mail processing costs for particular facilities/operations in order to determine which facilities could handle a given workload at the lowest cost,” the PRC said.

The PRC is also critical of USPS for failing to provide estimates of transportation cost savings that will be realized when subclasses of mail are merged together under the planned realignment. The theoretical network will be about 997 million miles annually, compared with 994 million miles annually now. “Thus, surface mileage, and presumably cost, actually increases in the future network,” the PRC said.

And the PRC said USPS needs to take into account the potential residual value of facilities that may no longer be needed to process mail when considering consolidating operations. Savings could be attained by closing unnecessary facilities, the PRC said.

Impact on Service Unknown
USPS sought PRC review of END because of the potential nationwide impact on service from such large-scale network realignment, with potential service upgrades and downgrades. USPS did not volunteer any estimates of what the impact would be because it could not anticipate how its network will be configured in the future.

The PRC was able to look at two estimates of the impact of realignment on First-Class singlepiece letter mail service standards from END computer model runs. One run identified an optimal future network consisting of 187 processing plants – compared with 335 now. Under that model run 4.48% of First-Class single-piece letter mail was downgraded, 1.37% was upgraded, and the net reduction of overnight First-Class single-piece letter mail was 3.11%. The PRC also looked at the most recent optimal configuration identified by the END model, which called for retaining 303 processing plants. This led to a net reduction of 0.61% in the number of First-Class single-piece letter 3-digit ZIP Code pairs that qualify for overnight service, or 1.55% reduction in terms of volume.

The PRC is concerned that there is no indication of the impact on service standards applicable to ZIP Code pairs for First-Class presorted or other bulk letters, First-Class flats, Priority Mail, Periodicals, Standard Mail or Parcel Post. Similarly there is no information on how the network realignment might impact various kinds of services from the mailer’s point of view, such as daily delivery times. The impact on dropship discounts, in particular, needs to be understood, the PRC noted. The Postal Service plans to substitute more than 60 regional distribution centers for the current 21 bulk mail centers (BMCs). Mailers who now get discounts for dropshipping at the BMCs would have a greatly expanded number of dropship points required and separations required to receive comparable discounts, increasing the effort and expense involved in getting the discounts. The PRC thinks “these aspects of service performance are sufficiently important to warrant examination before a nationwide network realignment plan is implemented.

Reprinted with permission. January 1, 2007 edition

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USPS Stays the Course on Confirm Plan

Despite criticism that proposed changes to the Confirm mail tracing system will discourage use, the Postal Service is sticking with its plan. The agency said the proposal it included as part of the R2006-1 provides the fairest way for Confirm to cover its costs while responding to customer behavior.

But critics say the proposal will reduce demand for Confirm, a result that runs contrary to USPS’s stated desire to improve transparency of the system and to seize the opportunities afforded by automation and advanced technology. The Postal Rate Commission is hearing arguments on Confirm pricing as part of the rate case. The plan is to go from the current three-tiered subscription level model to a transaction-based approach where units are purchased in blocks of 1 million with pricing declining as volume of unit purchases increases. One of the biggest complaints about this approach is that it eliminates an unlimited use option. So even though the fee declines with volume those who use Confirm the most will pay the highest increase.

In testimony filed with the PRC, USPS disagreed with suggestions that it stick with the existing fee structure and raise the rates. It said covering costs using the existing fee structure is improbable because:

1. “Fee increases decrease demand, and may cause subscribers to stop using Confirm, or to diminish use;

2. Higher fees for Platinum [the top tier] subscribers would encourage migration to the Gold [middle] tier;

3. Pure arbitrage could greatly reduce the number of direct end user subscribers; and

4. Users of disparate sizes face the same fees.”

An alternative plan proposed by the Office of the Consumer Advocate (OCA) retains the three tiers, keeps the lowest, Silver, subscription service at the same price, while increasing Gold by 16% and Platinum by 95%, along with a 50% increase for quarterly additional ID codes.

USPS calls this a flawed approach because it makes no allowance for decreased demand in response to price and, in particular, does not allow for migration to less expensive tiers (see BMR 9/11/06, p. 1).

USPS argues the current structure has encouraged some Confirm users to purchase more scans than they actually use. While this overpay ment has helped the shortfall in Confirm revenues, USPS doesn’t expect it to continue when fees are substantially higher.

In fact, under its proposal USPS expects a 10% decrease in Confirm use, including an assumption that more users will decide to seed their lists rather than using Confirm for every piece. The unlimited option also means that “grossly different costs per scan can exist between customers in the same tier,” USPS said, “This pricing approach definitely favors high-volume subscribers, a consequence that is unduly exacerbated by the fee increases proposed by the OCA.”

Concern about arbitrage is another reason USPS gave for wanting to eliminate unlimited scan pricing. The concern here is that a reseller of Confirm service takes advantage of unlimited scans for a fixed price by serving as go-between for several subscribers, offering each a savings over the costs of subscribing directly to USPS. Maintaining the existing fee structure while attempting to increase revenue by 50% to achieve cost coverage “would increase the opportunity for pure arbitrage reselling,” USPS said.

Grayhair Software Inc. (GHS) President Cameron Bellamy took issue with this assertion. He said that Confirm scan resellers compete with one another based on the added services they provide, not on scan pricing. “GHS is unaware of any Confirm reseller whose business model is based on simply paying the fee to become a Platinum subscriber and reselling raw scans to other subscribers in a different category,” he said.

Reprinted with permission. December 4, 2006 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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Electronic Diversion Main Cause of First Class Decline

Household bill payments through the mail, a major component of First Class Mail volume, declined to 66.6% in fiscal year 2005, with an estimated shift of 400 million pieces from mail to other payment methods in that year alone, according to testimony filed by the Postal Service as part of the 2006 rate case.

The decline in bill payments by mail is a direct result of the use of electronic payment alternatives, with more than two-thirds of all households paying at least some bills electronically last year, USPS says. This source of electronic diversion is more pronounced because the households that use electronic methods pay more bills on average than those that do not. Consequently, the use of alternatives to mail for bill payments is affecting the households that would otherwise be paying the most bills by mail. The findings were included in testimony by Peter Bernstein, a consultant to the Postal Service, in an examination of the likely reasons for the decline in First Class Mail volume, which peaked at 103,526 million pieces in 2000 and declined 5.3% in four years to 98,071 million pieces in 2005.

Other potential causes of the decline were considered and largely dismissed in the testimony. Using Postal Service and Federal Reserve data, the testimony argued that for the past 20 years First Class Mail rates have basically remained constant in real terms, rising after a rate increase and then declining by about the same amount as inflation reduces the real price of the new rate. Yet from 1979 through 1991 First Class volume exceeded the GDP but then stopped growing and began to decline in the 2001-2005 period. Consequently, the author concludes, the actual decline in First Class Mail is not explainable by changes in its real price.

Similarly, Bernstein rejected the idea that changes in demographics explain the change in volume of First Class Mail. He said the demographic changes that have occurred should lead to more, not less, First Class volume. For example, both homeownership and advanced education have increased, and these factors generally correlate with increased mail volume.

Shifting to Standard Mail is also not a likely factor. Evidence suggests that since 1987 the share of First Class Mail that is advertising mail seems to be increasing – a sign that there is no long-term trend away from First Class advertising. The USPS Household Diary Study showed advertising mail as a percentage of First Class mail received by households increasing from about 10% in 1987 to a high of over 18% in 2001. The percentage declined to about 16% in 2004 and then rose again to over 18% in 2005, during a period when a number of financial institutions were promoting credit cards and other services using First Class Mail. The Diary Study isn’t conclusive, Bernstein said, because it focuses solely on households and is a random sampling. Nevertheless there is no evidence that there has been a long-term shift away from advertising via First Class Mail toward Standard Mail, he said.

In support of this conclusion, the testimony points out that Standard Mail has not witnessed spikes in recent years that would suggest a major shift from First Class. Rather, aside from the dramatic growth in Standard Mail in the 1979-1991 period, volume in this category has grown at about the pace of real GDP.

“Therefore, while mailers no doubt shift advertising mail between First Class and Standard, depending on changes in relative rates or the marketing objectives of the mail, the evidence does not support the hypothesis that the slowdown and decline in First Class Mail volumes is due to advertising mail shifting from First Class to Standard,” Bernstein concluded.

Reprinted with permission. June 19, 2006 edition

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