Parcel shipping: USPS rolls out proposed price changes

Faced with the possibility of a projected $7 billion shortfall for Fiscal Year 2011, the United States Postal Service (USPS) said yesterday it is proposing price increases to get on the right track to better financial footing.

In a filing with the Postal Regulatory Commission, the USPS is proposing four-to-six percent price increases for various products, including its 18 Market Dominant products. These changes, if approved by the PRC, would take effect on January 2, 2011. The PRC’s decision is due in early October.

The USPS said these prices changes would generate $2.3 billion for the last three quarters of Fiscal Year 2011 and an estimated $3 billion for the full 12 months of Fiscal Year 2012.

Due largely to an ongoing diversion to electronic alternatives, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes, the USPS has been under difficult circumstances for more than three years. It has seen mail volume drop by more than 25.6 billion pieces—or 12.7 percent—in the last fiscal year, with total volume currently at 177 billion pieces. And the USPS also is working to restructure retiree health benefits for as many as 800,000 retirees, even though it only has an active work force of 596,000 career employees. Left uncorrected, that bill will reach $4 billion next year.

“We are facing this problem because of a massive drop in mail volume and the fact that the bulk of our costs are fixed by laws, contracts, or regulations. Our operating flexibility is severely limited right now. Our network is expanding by a million delivery points every year, and we are subject to a lot of legal requirements that limit our ability to reduce service commensurate with the decline in demand.”

This proposed price increase is part of a plan rolled out by the USPS in March that addressed key areas that would make it a more financially viable entity, including:

• establishing a more flexible work force to respond to changing demand patterns. More than 300,000 of its 596,000 career employees are expected to retire in the coming decade.
• adjusting delivery days to better reflect current mail volumes. This likely would mean the end of Saturday home delivery, although most of its 32,741 post offices would remain open that day;
• modernize customer access by providing greater access to services through grocery stores, drug stores and office supply outlets;
• establishing a more flexible work force to respond to changing demand patterns. More than 300,000 of its 596,000 career employees are expected to retire in the coming decade;
• ensuring that pricing of its market dominant mailing products are based on demand for each product and its costs, rather than capping prices for every class of mail at the rate of inflation, as is the current requirement;
• permitting the USPS to evaluate to introduce more products to meet changing customer needs.

Also part of this plan was to enact what the USPS called a “modest” rate increase in 2011. USPS officials have said its price cap of 0.6 percent, which is based on the Consumer Price Index is insufficient to cover its extraordinary losses. Under the Postal Act of 2006, prices are capped at the rate of inflation, although it allows for increases beyond the Consumer Price Index. And to get those increases, the USPS must prove “exceptional or extraordinary circumstances” in order for the PRC to consider prices above the rate of inflation.

Among the proposed USPS rate changes are:

• raising First Class Stamps to 46 cents, with a new Forever Stamp available in October;
• an 8 percent increase for Periodicals;
• a 5.6 percent increase for Standard Mail;
• 6.7 percent increase for Package Services;
• a 5.2 percent increase for Special Services;
• a recommended increase for catalogs of 5.1 percent; and
• Standard Mail parcels increasing by about 23 percent.

“Our overall approach to this price change was a moderate increase,” said Maura Robinson, USPS vice president, Pricing, on the conference call. “For products that are not covering their costs, we are taking steps towards improving profitability…like Periodicals and Package Services.

In her comments on the proposed 23 percent increase for Standard Mail Parcels (13 ounces or less), Robinson said it is for lightweight parcels and geared towards improving profitability for what is currently an underperforming product. With parcels operating in a competitive market and classified in a regulatory structure, Robinson said the USPS is proposing that Standard Mail Parcels be reclassified as competitive probably by October to reflect the fact that customers use these parcels for different purposes, as well as to establish the Postal Service as a profitable provider of parcel services in the marketplace.

“This increase [for Standard Mail parcels] is huge,” said Jerry Hempstead, principal of Orlando-based Hempstead Consulting. “It is unconscionable, and the USPS is saying it has to raise it that much for the product to become profitable. For shippers, this is a huge, unexpected, and unplanned for in your budget increase.”