Industry Profiles: U.S. Postal Service

Overview

The U.S. Postal Service (USPS) is the world's largest mail delivery service. Run as a self-funded independent agency of the U.S. government, the USPS processes approximately 680 million pieces of mail each day for a total of 207 billion annually. In fact, it handles an estimated 50 percent of the world's mail. With annual revenues of $65.8 billion in 2001, the USPS would rank as the country's twelfth-largest corporation by revenues, and its nearly 797,800 employees make it one of the largest civilian employers in the United States, behind Wal-Mart.

Although tight fiscal management in the 1990s helped to make the organization increasingly profitable after years of indebtedness, by the early 2000s, the organization was losing money and was saddled with more than $11 billion in debt. In 2001 the U.S. Postal Service's net loss was $1.7 billion. At that time, it faced a number of challenges including a weakening economy and rising operational costs. Some of these costs were associated with mail-related terrorist acts, such as the Anthrax scares that plagued the nation in 2001 and pipe bombs placed in rural midwestern mailboxes in mid-2002. The USPS also was trying to do more with less. For example, the agency was adding about 1.7 million additional addresses to its delivery base each year while reducing its work-force by approximately 30,000 employees.

History of the Industry

The U.S. Postal Service has a long and rich history that began in the early days of the colonial period. This historical period gave birth to the first American post office. Following repeated failures to develop a postal system in colonial North America in the seventeenth century, the British government delegated this critical responsibility to Thomas Neal in 1692. Neal's mail service was a dismal failure, and by 1707, the British government acquired the rights to the mail system. Although this new system was more successful than Neal's and broke even in the 1720s, it did not produce a profit until 1761. This newfound profitability was partly due to the management skills of Benjamin Franklin, who became co-deputy postmaster general in 1753, and partly due to a reciprocal agreement between the colonies and England.

Ironically, the successful postal service improved England's control over the American colonies at a time when the relationship between the two was deteriorating. The high postal rates were considered a prime example of "taxation without representation," and some Americans started to send mail via "alternative" mail distribution sources, such as postmen not associated with the British mail system who delivered mail for far less than what the colonial post office charged.

In 1774 Maryland newspaper publisher William Goddard initiated an independent postal system called the "Constitutional Post," which eliminated the need for alternative postmen. The system became more formal in 1775 when the Second Continental Congress made Benjamin Franklin the first postmaster general. In 1782, the Confederate Congress wrote an innovative, first-ever postal law allowing the Post Office a monopoly in the carrying and delivering of mail, establishing the office of postmaster general (PMG), setting postal rates, and carefully detailing the operating regulations of the postal service.

The U.S. Constitution's ratification in 1789 gave Congress the right to establish a post office, which it did that year on a temporary basis, but no comprehensive legislation had been passed to establish a permanent postal service within the new government's structure. Such a measure came in 1792, when Congress enacted a law to establish a new U.S. Post Office. Still, this new law was more an addendum to an earlier ordinance from 1782 under the Articles of Confederation than radical new legislation. The primary contribution was the establishment of the principles of the nation's postal policy, which stipulated that the Post Office was to be self-supporting (using any profits to expand the postal service), and that Congress (not the PMG) was to approve post offices and post roads. Therefore, Congress would completely control the post office and its growth, although the president would nominate the PMG. Moreover, the PMG was given the responsibility of managing the postal service, which included providing an annual budget to Congress that estimated the needs of the department.

In response to complaints by both rural and urban customers concerning high postal rates in 1851, Congress reduced the rates and stated that this would in no way reduce the postal service, even if postal deficits resulted from this action. Therefore, a customer service policy as opposed to a "self-supporting" policy drove the Post Office. This new policy eliminated distance as a factor in determining the price of a letter and led to greater use of the mail service through the modernization of the postal system, although it also produced annual postal deficits.

The Post Office continued to expand its service and influence throughout the nineteenth century. In 1829, under Andrew Jackson the postmaster general became a member of the president's cabinet, although organizationally it didn't become part of the executive branch for another 50 years. Other developments included initiation of mandatory prepayment of postage and the use of stamps in the 1850s; institution of a registered letter service in 1855 and a city free delivery system in 1863; development of the first railroad post office in 1864, which revolutionized postal service by allowing employees to sort mail as they traveled on trains; introduction of mail delivery to farm homes in 1896 and parcel service to rural areas in 1913; use of automobiles to deliver the mail, replacing horses, in the early 1900s; and initiation of the first regular airmail service between Washington and New York in 1918.

The Postal Reorganization Act of 1970, which created the current structure of the U.S. Postal Service, was the most detailed and radical reorganization in two centuries. The postal department was removed from the president's cabinet and Congress was no longer able to set both postal employee wages and postal rates. The "new" Postal Service was able to run more like a business enterprise. For example, it could hire its own personnel. Other changes resulting from the act included: establishment of a board of governors to oversee operations and select the postmaster general, who would also be considered the organization's chief executive officer; creation of the independent Postal Rate Commission to provide advice to the board of governors on postal rates and classifications; establishment of provisions for an independent personnel system and direct collective bargaining between postal management and unions; authorization of a general "public service" subsidy in an amount equal to 10 percent ($920 million) of the fiscal 1971 appropriations to the Post Office Department through the year 1979, declining by 1 percent per year through 1984, by which time the Postal Service was expected to be self sufficient; provision of a plan for gradually phasing out the preferential rates for various categories of mail, an attempt to ensure no class of service was subsidized by another; and authorization to modernize the postal system through borrowing money and issuing public bonds up to $10 billion.

Significant Events Affecting the Industry

Despite these efforts to make the Postal Service a more efficient organization, in the early 1990s its expenses continued to surpass revenues in some years and the organization was roundly criticized for being inefficient. Ironically, the USPS consistently operated on postal rates that were substantially lower than those in other major countries. While this comparison served as a rallying point for calls within the USPS to raise stamp prices, these attempts met with considerable opposition from the U.S. public. Against such opposition, rates for first-class stamps were boosted three times between 1990 and 1999, in contrast to four rate hikes during the 1980s. The net rate increase during the 1980s was ten cents or about 67 percent, while in the 1990s, including the increase of one cent in 1999, it was eight cents or 32 percent. Overall, U.S. postal rate hikes in the 1990s lagged behind the general rate of inflation, making the relative cost of mailing cheaper over the course of the decade. In January of 2001, the USPS raised its overall rates almost five percent. First-class stamps increased by a penny to a cost of 34 cents. An overall rate increase of almost eight percent followed in June 2002. At that time, the price of a first-class stamp climbed to 37 cents.

In the early 1990s, debt and declining business mail volume along with persistent public dissatisfaction forced the USPS to restructure and focus more on customer service. It hired independent companies to track its customer service and in 1992 brought in an aggressive new postmaster general, Marvin T. Runyon. Runyon was credited for turning the USPS around and making it a profitable enterprise. Borrowing principles common to private sector business, Runyon trimmed the ranks of management within the USPS to arrive at a more efficient decision-making structure. He also reduced the overall non-production workforce by 30,000 through early retirement packages and other incentives rather than resorting to layoffs. From running budget deficits as high as $2 billion in the early 1990s, changes under Runyon helped turn the organization around so that by the mid-1990s, aided by a key rate increase, the USPS was able to post profits in excess of $1 billion.

In 1998, Runyon ended his successful six-year tenure as postmaster general. His successor was William J. Henderson, a career postal official who had most recently served as Runyon's chief operating officer. By the early 2000s, John E. Potter was serving as the agency's postmaster general and CEO. Although the USPS continued to trim its expenses and reduce the size of its work-force, the negative effects of a weak economy, concerns about terrorism and safety, and declining mail volumes resulted in large financial losses. However, despite these difficulties, the agency continued to deliver to a growing number of addresses and achieve high customer satisfaction levels.

Following the terrorist attacks against the United States on September 11, 2001, the USPS was forced to respond to the circulation of mail tainted with deadly anthrax bacteria, which resulted in a number of deaths across the country. One security measure implemented by the agency was the use of electron-beam irradiation in certain locations to sanitize mail. This was in addition to other measures such as purchasing almost 5 million facemasks and 90 million pairs of rubber gloves to safeguard postal workers. The large supply of gloves was sufficient to supply each employee with as many as five pairs per day. In addition, 145 million postcards were sent to U.S. residents explaining what to do if they received suspicious items in the mail. Following the anthrax scare, the USPS was challenged again when Luke Helder, a 21-year-old college student from Wisconsin, planted 18 pipe bombs in the mail boxes of rural Americans in five states including Colorado, Illinois, Iowa, Nebraska, and Texas. Although no one was killed, the bombs caused injuries to several residents and postal workers. Over the course of five days, the agency devoted 150 postal inspectors to the case before it was finally resolved.

Key Competitors

The U.S. Postal Service faces competition not only from specific services such as United Parcel Service and Federal Express but also from advances in technology that make conventional letter mailing inconvenient or unnecessary. The growing use of faxes and private overnight delivery services in the early 1990s contributed to a loss of business mail volume. While demand gradually rebounded, beginning in the mid-1990s the Postal Service faced renewed competition from e-mail, which is much quicker and sometimes more versatile than conventional mail, and often may be sent with no added cost other than the price of Internet service access. Responding to this threat, the USPS developed a number of e-services for specialized needs. The agency's NetPost service provided customers with a new way to send either first class or standard (A) mail. Essentially, customers created a document to mail on their computer using one of several leading word processing or design software applications, including Microsoft Word. Next, they sent the document electronically to the USPS with their mailing list. Working with one of several approved print-and-mail services, the USPS then facilitated the rest of the process for the customer. Other services included USPS eBillPay, which allowed customers to pay their bills online, and USPS Send Money, which enabled people to send funds to other individuals, including those participating in online auctions.

Industry Projections

Postal volume in the United States expanded at uneven rates during the 1990s, including declines early in the decade and healthy growth late in the decade. From an average volume increase of 1.5 percent in 1995 and 1996, postal volume surged by 4.1 percent in 1997. After growing 2.4 percent in 1999 and 3.1 percent in 2000, volume fell 0.2 percent in 2001 and was expected to fall in 2001 by about 6 billion pieces, resulting in a projected net loss of $1.5 billion.

In April 2002 Postmaster General Jack Potter introduced the USPS Transformation Plan. A blueprint for the agency's future, the plan was developed to ensure its survival in a changing world. It "outlines strategies USPS can follow under current law, examines moderate legislative reform in key areas such as pricing flexibility, and presents long-term options to maintain universal service." Additionally, the plan proposes different possible business models under which the agency could operate including a government agency model, a private corporate model, and a commercial government enterprise model.

Global Presence

The U.S. Postal Service is the world's largest postal organization. However, about 97 percent of revenues come from domestic operations. The United States also continues to operate one of the lowest-cost postal services among major industrial countries. Compared to the United States' $.37 for regular first-class stamps in 2002, consumers in Japan paid $.65 and those in Italy paid $.55.

Employment in the Industry

The U.S. Postal Service maintains the second-largest civilian workforce in the United States. With approximately 776,000 career workers and another 115,100 part time and contingency workers, the Postal Service's payroll continued to grow during the latter part of the 1990s as it hired more workers to keep up with growing mail volumes. However, the agency was scaling back its work-force in the early 2000s, at which time operating expenses included $51.4 billion for compensation and benefits. For more than a decade, the USPS was plagued by periodic episodes of violence, often involving fatal shootings, at its facilities by current and former employees. These high-profile incidents caused management to take steps to avert such catastrophes in the future.

Sources for Further Study

bates, steve. "postal service tackles competition." nation's business, april 1997.

kurlantzick, joshua. "life in the slow lane: money and market share are two things the usps is losing its grip on. ready to step in?" entrepreneur, march 2002.

mcallister, bill. "in computer age, postal service needs more checks in the mail." washington post, 30 june 1997.

"postal service projects $1.5 billion year-end deficit; tackles transformation challenges at may 28 ratemaking summit." united states postal service, 7 may 2002. available at http://www.usps.gov.

"pmg unveils usps transformation plan today at the national press club." united states postal service, 5 april 2002. available at http://www.usps.gov.

pugh, tony. "u.s. postal service struggles to overcome history of waste, fraud, mismanagement." knight-ridder/tribune news service, 20 december 2001.

"security of the mail." united states postal service, 29 october 2001. available at http://www.usps.gov.

united states postal service annual report. washington, dc: united states postal service, 1997. available at http://www.usps.gov.

united states postal service annual report. washington, dc: united states postal service, 2001. available at http://www.usps.gov.

united states postal service. history of the united states postal service. washington, dc: united states postal service, 1993. available at http://www.usps.gov.