U.S. Postmaster General seeks bailout to deal with high costs, lower revenue

THE MIAMI HERALD 23rd October 2001
U.S. POSTMASTER GENERAL SEEKS BAILOUT TO DEAL WITH HIGH COSTS, LOWER REVENUE

By John Dorschner, The Miami Herald Knight Ridder/Tribune Business News

Oct. 23–The U.S. Postal Service was already in financial trouble when, on the morning of Sept. 11, its board of governors met to seek a rate increase to 37 cents for first-class mail. After the decision was made, they rushed to their windows to see smoke billowing from the Pentagon. Since then, the discovery of anthrax-tainted letters has put a tremendous strain on the quasi-private company, increasing expenses while the volume of mail, particularly from lucrative direct mail, has been plummeting. Postmaster General John Potter said Monday he plans to ask Congress for a bailout to deal with the organization's soaring costs and plummeting revenue. "Other businesses have gotten relief in the form of funding, and we certainly . . . will ask for help," Potter said on NBC's Today show. The Postal Service doesn't know how much the terrorist attacks are going to cost overall, but just the destruction of a post office near the World Trade Center is calculated to be at least $60 million. For the three weeks following the Sept. 11 attacks, postal revenue was down $500 million — and that was before the anthrax scare. Many direct mailers since then have announced they are scaling back. All this comes in addition to the existing problems caused by the declining economy, e-mail, online bill paying, plus increased competition in the package market from companies like Federal Express and UPS. "The terrorists just exacerbated the previous problems," said Rick Merritt of PostalWatch.org, a consumer watchdog organization. "The real problem is that as they raise rates, the use of mail drops, which makes them raise rates again, and at some point the Postal Service will send itself into a death spiral." Groups representing direct mailers echo the "death spiral" analysis, but Robert Cohen, economist with the Postal Rate Commission, thinks the concept is exaggerated, pointing to statistics that show volume drops after a rate increase, but then picks back up. "The Postal Service has a problem in the short term," Cohen said, "but over a long period of time I'm sure they can adjust." At the moment, the service's biggest customers — the direct mailers of advertisements, catalogs and publications — want the adjustment to be made by way of a government bailout. "It is on a pathway that it has got to collapse financially unless it gets outside support from Congress," said Gene Del Polito of the Association for Postal Commerce, which represents direct mailers. The alternative would be drastically higher postal rates. "We've bled a lot. We can't bleed any more," Del Polito said. Last year, the Postal Service had two rate hikes — the first a penny increase for first-class letters, the second a boost for mass mailers. The service was already planning a new rate hike before the terrorist attacks, to make up for a $1.6 billion shortfall in 2001. On the morning of Sept. 11, its Board of Governors met in Washington to decide to seek a huge rate increase — bumping the price of a first-class letter from 34 to 37 cents. Mailing magazines, advertising and packages would go up about 10 percent. After they made their decision, the governors rushed to the windows of the conference room — to see smoke billowing from the Pentagon. Since the anthrax scare started, many direct mailers have decided to cut way back on promotions, Del Polito said, realizing that "anything you don't perceive as critical, you toss away." Direct Newsline, a trade publication, reported that one envelope printer in New York was anticipating a 20 percent drop in orders, and many others announced they were delaying mail promotions. At Ultimate Software in Weston, the marketing department is de-emphasizing direct mail, sending out a promotion only to persons for whom the company has an exact name, rather than simply a title or company. "And we're re-directing more funds to telemarketing," said Joanne Urbank, director of marketing. Before anthrax, the Postal Service's short-term problem was the recession. "When the economy tanked a year ago," Cohen said, "that affected many things. Companies have less money, so they spend less on advertising, including direct mail. Volume just started dropping. . . . "The long-term problem is first-class mail," Cohen said, particularly the non-bulk category, meaning personal mail. This is a highly profitable category, and its growth has been declining for more than a decade, going back to the 1980s, when faxing became widespread. Over the past three years, as e-mail usage has soared, the volume of personal mail has dropped 6.2 percent, according to Cohen, and the trend is supposed to accelerate in the years ahead. The electronic trend is also hitting the bulk first-class mail, which includes bills being sent to customers and the customers paying them. A growing percentage of people are going to the ease and speed of online paying — a trend that has picked up speed recently. Princeton eCom, which handles online electronic billing and paying for companies like Bank of America, reports that for the past two weeks, it has seen a sharp increase in online transactions — up almost one-third. Looking for long-term fixes, critics of the Postal Service point to the problems that started at its inception, in 1970, when the quasi-public organization was created. By design, the service is supposed to break even, but "the problem is that there is no real incentive to keep costs down," said Merritt of PostalWatch. The last year the Postal Service didn't run a deficit was 1999. At present, it is getting close to its Congress-mandated debt ceiling of $15 billion. Labor costs account for more than 75 percent of the Postal Service budget of almost $70 billion, and with unions representing the vast majority of the 800,000 workers, it has been hard for the organization to cut costs or use technology to improve productivity per employee. Many mailers have urged that Congress privatize the Postal Service, as has been done in Germany. Ten days before the terrorist attacks, William Henderson, a career postal employee and Postmaster General from 1998 to 2001, endorsed the privatization concept. For the moment, however, that idea appears to be dead. "Now that you have a nation concerned about anthrax," said Del Polito, "and the government wants greater security . . . it's highly unlikely that Congress will deregulate."

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