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USPS to seek above-inflation postage rate increase for 2014

Wednesday, September 25th, 2013

The US Postal Service has announced plans to bust its inflation-based price cap with a 6.5% increase to retail stamp prices for First Class Mail, and a 5.9% increase for business rates.

The rate increase is subject to regulatory approval, and could still be avoided if Congress can pass comprehensive postal reform by the end of this year.

The cash-strapped federal agency is hoping the move will generate an extra $2bn in revenue each year when it takes effect from 26th January 2014.

The basic stamp price for First Class single letters will go up from 46c to 49c. Additional ounces will cost an extra 1c, rising to 21c.

Postcards will see a 1c increase, to 34c, while international letters to all destinations will be priced at $1.15.

Business mail rates for monopoly products will also increase, by 4.3% above the 1.6% rate of inflation.

USPS will have to make a request to regulators to make an “exigent” rate rise, as ordinarily it is limited in its rate increases to the annual rate of inflation.

The last attempt to make an exigent rate increase, on the grounds that the recession had decimated USPS profitability, was rejected by the Postal Regulatory Commission, since a recession was not seen as sufficiently extreme a circumstance to trigger the price cap get-out clause in US postal legislation.

“Last resort”

“the Postal Service continues to contend with a systemic imbalance between revenues and costs”

This time, the USPS Board of Governors has told customers that the Postal Service needs to bust its price cap because of its “precarious financial condition”.

Mickey Barnett, the Board of Governors chairman, insisted that making the above-inflation rate increase was a “last resort”.

He claimed the above-inflation increase was actually “a moderate course of action” compared to the double-digit rate increase he suggested USPS was authorised to implement according to US postal law.

Barnett suggested that if the US Congress can pass comprehensive postal reforms to tackle the financial crisis at the Postal Service, USPS could still step back from the announced rate increase.

“If these financial challenges were alleviated by the timely enactment of laws that close a $20bn budget gap, the Postal Service would reconsider its pricing strategy,” he said.

“Despite an uncertain legislative process, we are hopeful that legislation can be enacted this year. Nevertheless, without the legal authority to close the budget gap, the price adjustments announced today are necessary.”

Losses

USPS recorded a $15.9bn net loss last year, although that included a $11bn payment to the federal government on which it defaulted. The Postal Service has reached its $15bn credit limit with the federal government, and expects to record a $6bn loss for its current fiscal year, which concludes at the end of this month.

The latest financial results for USPS, filed with regulators yesterday, show that for the 11 months up to the end of August, the Postal Service has made a $5.1bn net loss, better than the expected $7.2bn loss for the period.

Not including the payments required by Congress to pre-fund future healthcare liabilities and workers compensation arrangements, USPS has made a $711m “controllable” loss this year, also better than expected.

In the fiscal year to date, USPS mail volumes have dropped by 4% year-on-year, while parcels and express mail volumes have grown by 4.7%. Highly profitable First Class Mail has seen volumes drop 6.1%, Standard Mail volumes have dropped 2.1%.

Overall, USPS revenues have grown 1.4% year-on-year to $60.6bn, 2% better than planned.

Despite the improvement in financial results and the fact that USPS has cut 350 mail processing facilities and 22,000 delivery routes from its network since 2006, downsizing its workforce by 203,000, Barnett said the changes have been “insufficient” to restore USPS financial stability.

“Our business model is inherently inflexible as we have limited ability to restructure to adapt to a changing marketplace. As a result, the Postal Service continues to contend with a systemic imbalance between revenues and costs,” he said.

Customers

US mailers have reacted with some concern to the USPS decision to break its annual price cap.

“As we saw in 2007, above-inflation postage increases can have a devastating effect on mail volume”

The Direct Marketing Association said it was “seriously concerned” the rate increase would “significantly harm” the Postal Service and the mailing industry in the “very near future”.

“Rather than lowering prices at times of weak sales — a common practice in businesses across the United States — the Board of Governors has misguidedly decided that raising prices will help cure its lack of sales,” said the trade association. “On the contrary, the problem of decreased mail volume will only worsen as mailers cease to rely upon the United States Mail to reach consumers.”

The DMA said it would fight the USPS rate request through the 90-day review process at the Postal Regulatory Commission.

“As we saw in 2007, above-inflation postage increases can have a devastating effect on mail volume. DMA will work to avoid that folly in 2013,” the organisation said.

The Greeting Card Association said its 200 member companies were “disappointed” by the rate announcement, which it said would be “no substitute” for comprehensive postal reforms in putting USPS back on a sustainable footing.

Rafe Morrissey, GCA’s Vice President of Postal Affairs, added his hope that the US regulator will deny the exigency request once again.

“Raising rates or cutting critical services will exacerbate the Postal Service’s current predicament by driving away much-needed mail volume to other competitors,” said Morrissey. “Pursuing both simultaneously, as some propose, is a recipe for disaster.”

Source: Post&Parcel/USPS/PRC/DMA/GCA

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