mounting losses. The 2006 Postal Accountability
and Enhancement Act was intended to modernise
postal regulation that had been in place since
1971, reassessing the pricing of postal services
and setting clearer barriers to entry for USPS in
non-postal services. Given USPS’s monopoly
over non-express letters and its strong profits
pre-2006, the concern was that USPS might use
its monopoly profits from letters to unfairly
subsidise its entry into new areas. Congress
wants USPS to maintain a universal service and
has continually blocked cost-cutting measures
like stopping Saturday deliveries. Once the lower
for longer trend set in after 2007, USPS had
limited responses and had accumulated losses of
$10.6 billion by 2016.
In 2006, letter volumes had yet to fall appreciably and with USPS posting profits in four
consecutive years, there were over-optimistic
expectations about the future of letter volumes
and the payoff from inaction. The timing of the
2006 Postal Accountability and Enhancement
Act was unfortunate in that it preceded the onset
of falling letter volumes. It seems apparent that in
2006 expectations for the potential severity of the
lower for longer trend were not accurately
formed. This led to an overestimation of the
potential payoff from adopting a strategy of
inaction. The historical evidence suggested a
mild lower for longer trend at the time (later
forecasts in 2009 have proved more accurate in
predicting letter volume falls). There was,
therefore, little motivation to shift to a new
strategy.
After the 2006 Postal Act, diversification was
effectively no longer open to USPS—a prohibition that was criticised by USPS’s management
—limiting its strategy response options to either
inaction or divestment.
The US government promises a universal
service and responds strictly towards any action
that may disrupt or threaten it. The government
places a high value on security of service and
benefits to employees, both of which contribute
to USPS adopting a strategy of inaction. This
resulted in Congress vetoing many cost-cutting
measures, forcing USPS towards inaction by
default. The large postal infrastructure system
that USPS operates requires economies of scale
to be efficient—small falls in volume can quickly
reduce margins and create large losses.
Once the lower for longer trend had taken
hold after 2006, USPS had to accept its limited
ability to respond strategically. Given the
restrictions placed on it entering new non-postal
services and the heavy competition it faces from
other companies that specialise in parcel and
express delivery, USPS has been limited to cutting costs and making efficiency improvements
that address the decline of its main market.
Some cost-saving measures were implemented, mainly by reducing head count,
although mandatory pre-payments of pension
and security benefits for workers added huge
liabilities. From 2006–14, the number of
full-time employees at USPS fell by 30%, as it
pursued efficiency gains to offset the sharp fall in
letter volumes. However, these gains are small in
comparison to pension pre-funding payments of
more than $5 billion per year that USPS was
forced to make between 2007 and 2016. While
other postal companies have often had their
pension obligations split off to make them solvent, USPS has had to bear the full cost. Once
the pre-funding payments are separated from
expenses, slight but persistent falls in operating
expenses since 2007 are visible, despite a
growing number of delivery points.
Other cost-cutting and divestment measures
have been prevented by Congress to avoid
potential disruptions to the universal service.
USPS has pushed to stop Saturday deliveries
since 2009, but Congress has vetoed it, most
recently in 2013. Similarly, Congress vetoed a
plan to close the 3,600 least busy post offices in
2012. There is also tight regulation around the
pricing of letters, which closes another potential
avenue to boost falling revenues. A price
decrease of 5% was implemented in 2016, cutting deeper into margins already squeezed.
The result of this has been large cumulative
losses by USPS over the past decade: $10.6
billion in total from 2007–16, excluding pension
pre-funding payments. The case of USPS shows
that if mandatory rules prevent a government
agency from adjusting to long-term declines in
72
W. Xiaoming et al.
and Enhancement Act was intended to modernise
postal regulation that had been in place since
1971, reassessing the pricing of postal services
and setting clearer barriers to entry for USPS in
non-postal services. Given USPS’s monopoly
over non-express letters and its strong profits
pre-2006, the concern was that USPS might use
its monopoly profits from letters to unfairly
subsidise its entry into new areas. Congress
wants USPS to maintain a universal service and
has continually blocked cost-cutting measures
like stopping Saturday deliveries. Once the lower
for longer trend set in after 2007, USPS had
limited responses and had accumulated losses of
$10.6 billion by 2016.
In 2006, letter volumes had yet to fall appreciably and with USPS posting profits in four
consecutive years, there were over-optimistic
expectations about the future of letter volumes
and the payoff from inaction. The timing of the
2006 Postal Accountability and Enhancement
Act was unfortunate in that it preceded the onset
of falling letter volumes. It seems apparent that in
2006 expectations for the potential severity of the
lower for longer trend were not accurately
formed. This led to an overestimation of the
potential payoff from adopting a strategy of
inaction. The historical evidence suggested a
mild lower for longer trend at the time (later
forecasts in 2009 have proved more accurate in
predicting letter volume falls). There was,
therefore, little motivation to shift to a new
strategy.
After the 2006 Postal Act, diversification was
effectively no longer open to USPS—a prohibition that was criticised by USPS’s management
—limiting its strategy response options to either
inaction or divestment.
The US government promises a universal
service and responds strictly towards any action
that may disrupt or threaten it. The government
places a high value on security of service and
benefits to employees, both of which contribute
to USPS adopting a strategy of inaction. This
resulted in Congress vetoing many cost-cutting
measures, forcing USPS towards inaction by
default. The large postal infrastructure system
that USPS operates requires economies of scale
to be efficient—small falls in volume can quickly
reduce margins and create large losses.
Once the lower for longer trend had taken
hold after 2006, USPS had to accept its limited
ability to respond strategically. Given the
restrictions placed on it entering new non-postal
services and the heavy competition it faces from
other companies that specialise in parcel and
express delivery, USPS has been limited to cutting costs and making efficiency improvements
that address the decline of its main market.
Some cost-saving measures were implemented, mainly by reducing head count,
although mandatory pre-payments of pension
and security benefits for workers added huge
liabilities. From 2006–14, the number of
full-time employees at USPS fell by 30%, as it
pursued efficiency gains to offset the sharp fall in
letter volumes. However, these gains are small in
comparison to pension pre-funding payments of
more than $5 billion per year that USPS was
forced to make between 2007 and 2016. While
other postal companies have often had their
pension obligations split off to make them solvent, USPS has had to bear the full cost. Once
the pre-funding payments are separated from
expenses, slight but persistent falls in operating
expenses since 2007 are visible, despite a
growing number of delivery points.
Other cost-cutting and divestment measures
have been prevented by Congress to avoid
potential disruptions to the universal service.
USPS has pushed to stop Saturday deliveries
since 2009, but Congress has vetoed it, most
recently in 2013. Similarly, Congress vetoed a
plan to close the 3,600 least busy post offices in
2012. There is also tight regulation around the
pricing of letters, which closes another potential
avenue to boost falling revenues. A price
decrease of 5% was implemented in 2016, cutting deeper into margins already squeezed.
The result of this has been large cumulative
losses by USPS over the past decade: $10.6
billion in total from 2007–16, excluding pension
pre-funding payments. The case of USPS shows
that if mandatory rules prevent a government
agency from adjusting to long-term declines in
72
W. Xiaoming et al.