Economy and Internet Challenge U.S. Postal Service

By Reuters -  |  Posted 2008-05-14 Print this article Print

The U.S. Postal Service is not another bureaucracy. It wants to turn a profit.

WASHINGTON (Reuters) - Despite a slowing economy and growing competition from the Internet, the U.S. Postal Service aims to break even in 2008 by increasing its package delivery business by about 10 percent, a top executive told Reuters on Wednesday.

The Postal Service will eventually be profitable, but that goal must be balanced against giving customers the best price possible, said Patrick Donahoe, the chief operating officer and deputy postmaster general.

"Given that there's a lot uncertainty in the market right now, our goal is to continue to grow and provide value, and at a same time improve quality and improve service," Donahoe said.

This year, the Service expects about 10 percent growth in Priority Mail, Express Mail and related products that compete with Fedex Corp (FDX.N: Quote, Profile, Research), United Parcel Service (UPS.N: Quote, Profile, Research) and other companies, Donahoe said. That group of products now makes up about one-tenth of the Service's business, with First-class mail and periodicals accounting for the rest, he said.

"You've got an expanding package market, especially to homes," Donahoe said in an interview. "Our idea is to grow with it, more than in the past."

To attract more business from small companies, the Service began offering price discounts to high-volume Express Mail shippers and commercial Priority Mail customers on Monday. The discounts were made possible by a 2006 law giving it more freedom to customize pricing of package delivery products.

As the Postal Service attempts to enhance its package business, the slumping economy has cut revenue below expectations.

With businesses sending less mail, the Service lost $707 million in its fiscal second quarter as mail and package volume fell 3.3 percent. During the first half of its fiscal year, the Service reported a net loss of $35 million while generating $39 billion in revenue.

Donahoe said the Postal Service should break even in 2008, despite the steep loss in the first half of the year.

The Service also has to contend with consumers increasingly using the Internet, instead of the Postal Service, to pay bills and send correspondence. That has forced it to cut costs by $8 billion since 2001, mostly through automation.

Despite the Service's efforts, one former senior official said it still faces crippling payments for retiree benefits.

The 2006 law requires the Service to fund retiree health benefits through a 10-year schedule of payments ranging from $5.4 to $5.8 billion annually through 2016.

"There is no obvious way they can raise that money," said Charles Guy, a senior fellow at Lexington Institute and former director of office of economics in strategic planning at Postal Service for more than 20 years.

Although the law gave the Service more flexibility in pricing and creating competitive products, Guy said with its history of failed products, the Service can not realistically expect any great financial windfall from package delivery.

"That's just not what they do," Guy said.

With limited borrowing power and limited revenue, Guy said the Service may be unable to make its annual payment to the retirement fund as soon as next year. Congress will eventually have to modify the law or give the Service a subsidy, he said.

Donahoe acknowledged money is tight, but said the Service would meet its obligations.

"If we make a commitment that's part of a law, we will do it," Donahoe said. "We have been very successful with revenue generation, service improvement, and costs over past few years and I can't see that we're going to fall off course."

(Reporting by Ayesha Rascoe)


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