Last week the U.S. Postal Service released is latest quarterly financial report, which detailed an immense loss of $2.1 billion. While the Postal Service’s downward financial spiral has clearly continued in unsurprising fashion, the report also reveals some emerging trends that are also worthy of further discussion and scrutiny.
Most notably, the Postal Service’s favored fiscal terminology – controllable income – has proven to be an increasingly dubious indicator of its fiscal health. That figure, which the Postal Service used to explain away its ongoing defaults on retiree benefits payments and isolate these defaults as a congressionally-imposed obstacle, has plunged.
The $587 million controllable loss, which only captures losses resulting from its direct product offerings, is now a clear-cut indicator that the Postal Service’s operations are failing to achieve profitability in every sense possible.
To remedy its financial problems, the Postal Service has taken a mistaken approach in encouraging the Postal Regulatory Commission to withdraw upward limits on postal price increases. The upcoming 10-year review of rates for market-dominant letter mail services present significant danger for consumers who rely on affordable and predictable pricing. Earlier this year when stamp prices rose, I wrote about how this concept was a bad idea for the Postal Service.
While the postal agency has many low-profit and unprofitable services, notably for some deregulated services, its regulated core First-Class mail services bring in twice the revenue compared to its delivery costs. Despite First-Class mail being a profit engine, the Postal Service points to its volume declines, partly driven by the widespread adoption of digital technologies, as a reason to raise prices on its regulated services.
That is a big mistake. Any rational competitive firm would take the exact opposite approach to slack demand by lowering its prices to stimulate volumes of business. Instead, thanks to the monopoly protection of mail that insulates it from competition, the Postal Service aims to raise consumer prices and soak up as much revenue as possible.
So, what is the real reason behind the Postal Service trying to raise rates on its most profitable services?
Instead of taking its First-Class mail margins and using them to restore its overall financial health or using them to solve languishing mail performance, the Postal Service is funding and supporting forays into unregulated and fledgling businesses, like same day delivery, food delivery, expanded package services and potential banking services. These unregulated offerings are often low margin or no margin businesses.
Essentially, they are throwing away good money for bad. They are trying to jack up prices on profitable regulated services to fund unprofitable unregulated services, all while crying poverty to Congress.
The Postal Service claims that, by law, competitive products and services must cover their costs. However, the meager requirements to be transparent about market-dominant products, leaves a wealth of competitive ventures susceptible to the Postal Service’s creative accounting measures and anachronistic stipulations. Doing so ultimately produces misrepresentations about the Postal Service’s finances.
Take for example the egregiously low rate that Postal Service competitive operations are required to cover for the total institutional costs of their delivery network – everything from facilities, trucks, personnel, equipment and more. Only 5.5 percent of this total amount is imposed upon competitive products, like costly packages. Such a share has been unduly maintained despite competitive products’ share of total attributable costs rising 13.4 percent to 28.0 percent in the last decade.
The postal service also has many exclusive sweetheart deals that likely lose a lot of money, but the terms and prices of these deals are never made public. Each new income statement from the Postal Service detailing billions of dollars of losses is just a reminder that some form of below cost pricing must be occurring somewhere. This means that regulated products are implicitly picking up the tab for unregulated ones. It also means that consumers are paying too much for their regulated services, the same services that the Postal Service wants to increase in price.
Fixing the Postal Service’s financial challenges first begins by resolving the agency’s contempt for transparency. Obtaining more information about business dealings and costs for sustaining all services will give postal leaders and their governing bodies the best chance to make operational fixes, including ceasing services that add to their skyrocketing debt.
The Postal Service owes consumers this accountability to avoid imminent insolvency and full collapse.
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