As posted on www.supplychain247.com September 30th, 2013
Late last week, the United States Postal Service (USPS) rolled out proposed pricing changes that would take effect in January, if approved, and generate $2 billion in incremental annual revenue for the organization, which has been in financial dire straits.
The changes, which, if approved by the Postal Regulatory Commission, would take effect on January 26, 2014, are:
-a 3 cent increase on letters (1 ounce) to 49 cents and for letters additional ounces a 1 cent increase to 21 cents;
-letters to all additional destinations (1 ounce) to $1.15;
-a 1 cent increase for postcards to 34 cents; and
-an average increase for Package Services of 4.3 percent, among others
The USPS is requesting that price increases are exigent—or filed above the rate of inflation, whereas typically that are capped at the rate of inflation as measured by the CPI-U (Consumer Price Index), it said.
In a letter to customers, USPS Chairman of the Board of Governors Mickey Barnett highlighted that due to its severe financial conditions, which include a $15.9 billion net loss for fiscal year 2012 and an expected loss of $6 billion for fiscal year 2013, the USPS has an intolerably low level of financial liquidity even after defaulting on its Congressionally-mandated obligation to make prefunding payments for retiree health benefits.
Ongoing volume declines in First Class mail, the largest revenue generator for the USPS, are due in large part to an ongoing diversion from paper to electronic communications, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes.
Barnett said in the letter that as a result of these limiting factors and urgent financial needs, and in order to address the extraordinary and exceptional circumstances which have occurred, the Governors have directed the Postal Service to file pricing adjustment requests with the Postal Regulatory Commission by September 26 that include a 1.6 percent increase in market-dominant products (First-Class Mail and Standard Mail) consistent with the increase in the Consumer Price Index (CPI). The Postal Service will also file a request for an additional 4.3 percent price increase in market-dominant products, which is subject to a 90-day review, and which is necessary in order to ensure that the Postal Service will be able to maintain and continue the development of postal services of the type and quality which this country needs. These adjustments are designed to raise $2.0 billion in incremental annual revenue, he said.
“Due to the price sensitivity that exists throughout the mailing industry and among users of the mail, we believe seeking a 4.3 percent adjustment above the CPI-U increase for market-dominant products is a moderate course of action given the financial challenges we face,” he explained. “We believe this prudent price adjustment request is reasonable, equitable, and necessary, and it is far less than the double-digit increase that is authorized under the law to help the Postal Service to recover from the extraordinary and exceptional circumstances that have confronted us.”
Jerry Hempstead, president of Orlando, Fla-based Hempstead Consulting explained that the USPS has been the ongoing victim of the lack of action by elected officials who have not addressed the fundamental budgetary items which Congress imposed upon the USPS having to do with the funding of Retirement, Retiree Health, and Workmans Compensation.
“If you back out retiree health, workmans comp, and pay back the overpayment to the retirement plan and allow the USPS to pay off its debt then the USPS is in good shape financially,” he said.
“However, our Congress spent the overpayment to the retirement plan and they count in spending the $5.5 billion due for the pre-funding of retiree health. No other commercial enterprise is forced to fund and finance these line items as our Congress has done to the USPS.”
And Rob Martinez, president and CEO of Shipware Systems, a San Diego-based parcel consultancy, said that these proposed increases only have limited value in generating additional revenue in that the higher pricing makes the products less attractive, subsequently leading to further postal volume declines.
“The area that is growing and shows promise is the shipping segment. However, first-class mail is nearly 10 times more profitable then shipping packages,” he noted. “It will take a comprehensive set of solutions to shore up financial deficits include rate increases on certain products where they remain attractive and price competitive, restructuring postal facilities to reduce redundancy and improve efficiencies, elimination of Saturday delivery, moving from door deliveries to cluster boxes, Technology advancements and outsourcing components of mail distribution to the private sector, retiring more of the current workforce, but most importantly, Eliminating the need to pre-fund postal pensions into the future.”
As previously reported by LM, in order for the USPS to recoup its significant losses in recent years, it maintains that it needs to accelerate the implementation of its USPS five-year business plan, which it said would reduce annual costs by at least $20 billion by 2015. And along with its goal of $20 billion in annual reductions by 2015, the USPS would like to see annual savings rise to $22 billion by 2016. The plan’s goals include:
-eliminating the fund to pay future retiree health benefit premiums and is proposing to provide employee health benefits independent of federal programs, which it said would save the USPS $7.1 billion annually;
- moving from six days per week delivery to five days per week, which would result in an annual cost reduction of $2.7 billion; and
- pursuing the realignment of its mail processing, retail, and delivery operations, which would result in a savings of $8.1 billion annually and also seek other significant cost reductions to grow or retain revenues within its current business model.
Of the $20 billion in targeted savings within the next five years, the USPS said about $10 billion requires legislative action.
USPS officials said the PRC will review the prices before they are scheduled to take effect on January 26, 2014 and must agree that they are acceptable with applicable law.