RECONSIDERING THE POSTAL SERVICE'S BUSINESS MODEL

The following is a perspective by postal commentator Kate Muth. The views expressed are solely the author's, and are meant to serve as a means for further discussion and comment.

One of the early reasons for promoting comprehensive reform of the Postal Service was the concern that the Service's business model was outdated. In some corners, there was alarm that it was outright broken.

Five straight years of productivity growth and a reduction in workforce levels seem to have diminished worries about a broken business model. But it's becoming quite evident that the Postal Service's old business model B one based on volume and revenue growth B is outdated. In the first part of the new century, the system looks different than it did 10 or 20 years ago. The next Transformation Plan needs to consider a new business model.

In the previous century B the entire 1900s B the Postal Service experienced a year-over-year decline in mail volume only seven times. In the first five years of this century, mail volumes have declined three times, 2001, 2002 and 2003. It's a fair assumption that sustained annual volume growth is not likely.

According to data from the Postal Rate Commission, only the following years in the 20^th century had a drop in mail volume from the previous year: 1930, 1931, 1932, 1933, 1946, 1975 and 1991. The reasons for the volume declines, which were fairly small dips, were attributable to specific events or conditions. The first of those four years were during the Depression. The year 1946 marked the end of World War II and a return of soldiers, which meant less mail being sent to loved ones. In 1975 the country was suffering through a recession, and in 1991 postage rates increased 20%.

In this century, a handful of factors contributed to the decline in mail volume: the terrorist attacks of 2001 and the recession that followed; slow economic recovery in 2002; a rate increase in January 2001 (with a small modification later that year) and another increase in June 2002; and a diversion to electronic communications. All of these factors remain a threat to volume growth, and in the case of postage rates, they could be made worse by the possibility that ratepayers will have to fund an escrow account.

Further, the composition of mail is changing. The growth product is advertising mail and non-ad mail is decreasing. There are some who say the Postal Service is changing from a public utility to a more commercial enterprise.

Eventually, as Standard Mail is forced to assume greater institutional costs, it will become more expensive, which will lead to a decline in Standard Mail volumes. The old death spiral raises its ugly head. And delivery points keep on growing. The Postal Service needs to study a business model that considers a smaller Postal Service B one that is not based on volume growth. The plan should contemplate how to manage the system's costs.

Now is the time to think about a new business model. The Strategic Transformation Plan is the perfect vehicle.