Economy and Internet challenge U.S. Postal Service

Despite a slowing economy and growing competition from the Internet, the U.S. Postal Service aims to break even in 2008 by increasing its package delivery business by about 10 percent, a top executive told Reuters on Wednesday.

The Postal Service will eventually be profitable, but that goal must be balanced against giving customers the best price possible, said Patrick Donahoe, the chief operating officer and deputy postmaster general.

This year, the Service expects about 10 percent growth in Priority Mail, Express Mail and related products that compete with Fedex Corp, United Parcel Service and other companies, Donahoe said. That group of products now makes up about one-tenth of the Service’s business, with First-class mail and periodicals accounting for the rest, he said.

To attract more business from small companies, the Service began offering price discounts to high-volume Express Mail shippers and commercial Priority Mail customers on Monday. The discounts were made possible by a 2006 law giving it more freedom to customize pricing of package delivery products.

As the Postal Service attempts to enhance its package business, the slumping economy has cut revenue below expectations.

With businesses sending less mail, the Service lost USD 707 million in its fiscal second quarter as mail and package volume fell 3.3 percent. During the first half of its fiscal year, the Service reported a net loss of USD 35 million while generating USD 39 billion in revenue.

Donahoe said the Postal Service should break even in 2008, despite the steep loss in the first half of the year.

The Service also has to contend with consumers increasingly using the Internet, instead of the Postal Service, to pay bills and send correspondence. That has forced it to cut costs by USD 8 billion since 2001, mostly through automation.

Despite the Service’s efforts, one former senior official said it still faces crippling payments for retiree benefits.

The 2006 law requires the Service to fund retiree health benefits through a 10-year schedule of payments ranging from USD 5.4 to USD 5.8 billion annually through 2016.

Although the law gave the Service more flexibility in pricing and creating competitive products, Guy said with its history of failed products, the Service can not realistically expect any great financial windfall from package delivery.

With limited borrowing power and limited revenue, Guy said the Service may be unable to make its annual payment to the retirement fund as soon as next year. Congress will eventually have to modify the law or give the Service a subsidy, he said.