USPS is slashing first-class delivery, cutting billions of dollars, and looking to cut thousands of workers. How did it get this bad?
Neither snow, nor rain, nor heat, nor gloom of night will keep your postman from delivering that Mad Men DVD you've been waiting for. But legacy labor costs and the disruptive force of the Internet? Yeah, that'll do it.
Today, the Postal Service announced roughly $3 billion in service cuts that will slow down the delivery of first-class mail for the first time in 40 years. Starting in April, it plans to shutter more than half of its 461 mail processing centers, stretching out the time it will take to ship everything from Netflix DVDs to magazines. One-day delivery of stamped envelopes will all but certainly become a thing of the past.
The announcement is just the latest sign of a sad and increasingly dire fact: the Postal Service is in shambles. This past fiscal year, it lost a mere $5.1 billion. In 2012, it's facing a record $14.1 billion shortfall and possible bankruptcy. In order to turn a profit, Postmaster General Patrick Donahoe says the agency needs to cut $20 billion from its annual budget by 2015. That's almost a third of its yearly costs.
How did it come to this? The culprits include the Internet, labor expenses, and, as with pretty much every problem our country faces now, Congress.
THE INTERNET KILLED IT
In the days of yore, sending letters by mail was pretty much the most efficient way to communicate in writing. Then the Internet happened. Although total mail volume stayed relatively steady until 2006, it has dropped an astonishing 20 percent in the past five years. More important, first-class mail, the Postal Service's biggest moneymaker, has fallen 25 percent during the past decade. That's a huge problem for its bottom line. The agency now delivers far more "standard mail" -- what most of us call junk mail -- than first-class mail. According to Businessweek, it takes three pieces of junk to equal the earnings from a single stamped first-class envelope. J. Crew catalogs and pizza menus alone won't pay the bills.
The two graphs below, courtesy of a report from the American Enterprise Institute, show the overall collapse in volume.
As the charts show, during the first half of the decade, the slow decline of first-class mail was balanced by rising stacks of corporate junk. When the economy tanked, both went into a free fall. The Postal Service delivers less mail at a smaller profit margin than it did just five years ago. And it gets worse. By 2020, first-class mail volume is expected to drop by half.
LABOR COSTS KILLED IT
Yet even as its profits have dwindled along with the mail it handles, the agency's labor costs have remained stubbornly high. Salaries and benefits make up 80 percent of the Post Office's budget. By comparison, FedEx spends 43 percent of its budget on labor, while UPS spends 63 percent, according to Businessweek. Why the disparity? As the magazine put it, "USPS has historically placed the interests of its unions first." For years, it has happily negotiated contracts with generous salary increases and no-layoff clauses.