The long-awaited Postal Reform Act was signed into law this month, repealing the outdated Postal Accountability and Enhancement Act (PAEA) from 2006. This new law repealed two of the most critical parts of this act – the first no longer requiring the agency to cover health care costs 50 years in advance. The second removed the price cap set in place by the Postal Regulatory Commission (fka The Postal Rate Commission). Though removing the cap may limit marketing budgets, this increase allows USPS to pay their workers fairly and allow room for innovation and growth.
When the Postal Reorganization Act of 1970 became law, it required the postal service to serve all Americans while also breaking even. Fast forward 50 years later, and the United States Post Office has remained fiscally underwater, showing net losses of $4.9B and $9.2B in 2021 and 2020 respectively. Postmaster General and CEO of USPS, Louis DeJoy, created a 10-year plan dubbed Delivering for America, that has already begun. The goal of this plan is to cut USPS’ losses, allowing them to operate on a financially self-sustaining basis by year three, and float between a $1.3B and $2.1B growth model until 2030.
The current issues
Increased costs, less volume. Domestic mail revenue has declined 36% since 2007. Each year the cost to deliver mail increases (don’t forget about the price cap) mostly due to the increased number of delivery points (+1M each year), while the number of pieces continues to decline. Increased volume, and lack of innovation. Package revenue increased by $11.6 from 2007 to 2018 but came to a halt in 2019 when it couldn’t keep up with the rate of growth. The boom in 2020 had proven USPS’ capabilities were not meeting its standards when the volume spiked back up again, leaving customers unsatisfied with late deliveries. USPS was built to thrive on moving letters and flats quickly and efficiently (150B pieces each year, and declining) while packages average out around 5B each year. Packages require increased cubic space, resulting in higher costs. Underperforming Transportation. DeJoy is moving away from air transport as these steps are out of USPS control, which affects delivery performance due to weather, flight delays, and other reasons. In the last two years, mail delivery via air as considered on time has dropped from 92.6% to 55.6%. Unrealistic delivery times. Current service standards for 3 days, FCM (First Class Mail) traveling 300 to 3,000 miles require the same delivery time. All FCM deliveries fell below their on-time targets in 2020 by at least 6 points. Price caps. Though the PAEA set a price limit on mailing services, this has proven to hurt USPS – had the cap not been approved, USPS would have generated $55B in cumulative gross revenue. To put it in perspective, our FCML price sits at $0.55 (not including the $0.03 increase) whereas the global average is almost tripled at $1.23. Retirement funding! For every revenue dollar USPS makes, 6.4 cents gets placed into their retirees’ healthcare, that was $11.6B in 2020.
Medicare. The new law will require retired postal employees to enroll in Medicare when eligible and all prefunding would be eliminated. USPS Connect and continued innovation will help integrate each distribution center, delivery unit, and post office across the country to better contribute to the e-commerce era. Extend entry and access points and improve reliable ground transportation. Service standard extensions. Current FCM standards reach 96% delivered in 2-3 days, with 79% of deliveries via ground transportation. Proposed FCM will hit 96% delivered by day 4-5, with 88% of deliveries via ground. Extending service standards will allow USPS to achieve cost savings while guaranteeing 95% on-time reliability. Upgrades to the surface and air transportation. Optimizing routes and capacity utilization are key. USPS has awarded a $120 million contract to XPO to help with transportation. Next-Gen Delivery Vehicles (NGDV). This new fleet of vehicles plays a big role in DeJoy’s plan. The vehicles sector currently has the highest amount allocated for investments, with facility buildings and processing equipment coming in close behind. $40B will be allocated to NGDV design, including 50,000 – 165,000 vehicles with walk-in cargo platforms, right-hand drive configurations, safety features, and the latest in telematics data. New vehicles will start to roll out in 2023, and the goal is to have the fleet fully electric by 2035. Oshkosh Defense was awarded a 10-year contract, an investment starting at $482 million that may grow to be worth over $6 billion.
If the Delivering for America Plan is successful, USPS will recoup anywhere from $140B-$179B from its current expected losses. The cost of postage and services is expected to increase, as are the service standards for deliveries. This federally governed system relies only on monies received from stamps and service fees and is the only government agency not funded by taxpayer dollars. The USPS may finally begin to start operating on a self-sustaining basis once the new plan starts to take effect.
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Written by: Amanda Ornelas