Pre-funding is a burden that other government-linked firms don’t have to face, notably defense companies. Lockheed Martin Corporation (NYSE:LMT)‘s pension was underfunded by $13.3 billion as of Aug. 2012 — nearly half of its market cap. Raytheon Company (NYSE:RTN)‘s was underfunded by $6 billion, more than one-third of its market cap, and The Boeing Company (NYSE:BA)‘s by $16.6 billion, almost 30%. They have the luxury of profitability and time to fund their obligations. Another advantage: They can invest in a wide range of securities, while the USPS is forced to invest in only government bonds. Yeah, those bonds that, in some cases, pay less than 1% interest. So USPS has to save a lot more money now for the same payout later.
The cuts USPS is being forced to make are like eating dog food when you have a million bucks in the bank. The pre-funding mandate is completely ridiculous for a business that is mandated to break even. Where is the surplus cash going to come from, since it’s not from profits? In addition, this mandate forces USPS to cut investments in technology that would increase productivity and competitiveness, making USPS viable longer term. Even Congress is not so dense as not to see that its law creates a crushing burden.
Myth 2. Everyone knows that snail mail is dead, so USPS can’t survive
Now, none of this denies that the USPS faces legitimate business challenges. Revenue declined 3% from 2010 to last year, though USPS did hold the line on overall costs. While mail volume has declined with the rise of email, it’s still way more than 20 years a go, and certain segments, such as parcels, are actually growing. That fits with anecdotal evidence: Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY), to name just two, are dead without efficient parcel delivery, but I now receive my bank statements via email.
One potential solution is to raise revenue. Currently, almost all revenue comes from the sale of postage. Why isn’t the USPS raising postal rates? Consumers already receive a fabulous deal: Send a letter anywhere in the U.S. for a mere 46 cents. Compare that to European rates near $1 to deliver on the Continent. A back-of-the-envelope (ha!) calculation suggests that to break even USPS would have to raise rates 7% — not quite 50 cents to send that letter to Hawaii in a few days. Hardly drastic.
Now, admittedly just raising postage is an overly simplistic solution, but it gets to a basic truth: lack of sales. Rates are overseen by the Postal Regulatory Commission (PRC), and prices must not rise faster than inflation. A postage stamp has increased just 12% in six years. That’s another way that the USPS’s mandate to operate like a business is stymied by overseers. Another major type of mail, bulk rate (ads), receives big discounts in exchange for pre-sorting mail, and could withstand higher postage, since they receive much more value than what USPS saves from pre-sorting. Fix: Allow USPS to price correctly.
Proper pricing is important for a business mandated to deliver everywhere for a fixed price, a burden not faced by private services. Of necessity, many locations, such as rural ones, lose money — part of the price of a national postal service. Private services can simply leave a location if it’s not profitable. In fact, private services rely on USPS to deliver to unprofitable locations for them.
Anything short of a massive rate hike would still give USPS cheaper service than FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS). Finding a postage price on their websites is byzantine and opaque. Try it if you’ve got a half-hour. And if traditional mail is dead, why are FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS) continuing to do so well?
