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USPS warns of “risky” approach to flats pricing policy

Wednesday, January 2nd, 2013

The US Postal Service has said it will adopt above-inflation rate increases for its loss-making Standard Mail Flats service each year up to 2016.

The move is prompted by the Postal Regulatory Commission’s 2010 order that rates should rise towards full cost coverage, so that other mail services do not subsidise the shipping of items like catalogues.

But USPS suggested the pricing strategy was “risky” in its latest annual regulatory compliance report, out on Friday.

To make the Flats rate increases without violating its inflation-based price cap, USPS said it would be unable to increase rates for other Standard Mail services by quite as much as it would like.

As a result, it warned that complying with the Commission’s orders for Standard Mail Flats meant it would be “spending” too much of its price cap on generating income from “mail volume that may not be around to pay those prices in the future”.

Decline

One key reason USPS has shied away from increasing Standard Mail Flats rates to full cost coverage has been the danger that it would push catalogue publishers into finding alternative distribution channels, at a time when catalogues are already moving into digital outlets like tablets.

Assuming the “systemic” decline in Standard Mail Flats volumes continue, USPS warned that the rest of Standard Mail services would be required to shoulder a larger portion of network costs, and by keeping those rates “low”, “the Commission’s strategy could weaken these products’ ability to bear this burden”, USPS said.

The USPS Standard Mail Flats service had an 80.7% cost coverage in the 12 months ending 30 September, 2012, according to Friday’s report. This was a 1.4 percentage point improvement on the 2011 cost coverage, reversing a three-year decline in the service’s cost coverage.

However, the service saw volumes decline 12.4% (or by 844m pieces) during the 2012 financial year compared to the previous 12 months, with revenues down $261m (10.5%).

At the end of last year USPS had its initial rates proposal rejected by regulators for Standard Mail Flats, after proposing to increase the rate by the inflation-based amount, rather than an above-inflation amount, in order to protect catalogue industry volumes. The Postal Service at the time argued that it would comply with the 2010 order to move towards full cost coverage by reducing the costs of delivering the service.

Last month USPS had its second rate proposal, for a 2.617% increase effective 27th January, approved by the Commission.

In Friday’s report the Postal Service said that from 2014 through 2016, Standard Mail Flats would have rates increased by 1.05 times inflation.

However, it warned that doing so could cause problems.

“All else equal, larger price increases could improve cost coverage of Standard Mail Flats,” said the Postal Service, adding: “Of course… not all else is equal, and pricing decisions under the Consumer Price Index cap involve complexities that make the rallying call of ‘raise the price’ a potentially counter-productive reaction.”

The Postal Service said other Standard Mail services were covering their costs, other than Parcels, which has been affected by products transferring to the competitive portfolio.

Friday’s report said First Class services covered their costs other than Parcels, which was similarly affected by products moving to the competitive portfolio, and Inbound Single-Piece International services, which have rates set by the Universal Postal Union.

Satisfaction

Along with cost coverage updates, the report also revealed that customer satisfaction rates among residential and SME customers increased in 2012.

But, a survey of randomly-selected customers saw “mixed” views among large business customers, with increasing satisfaction for Periodicals and Standard Mail services but a fall in customer satisfaction for products including International, First Class and Parcel Post services.

The Postal Regulatory Commission is expected to issue a notice and order seeking public comments on the latest USPS Annual Compliance Report at some point this week.

Source: Post&Parcel/USPS

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