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Volume VII, No. 4 July-August 2000 Newsletter

APMU Files Testimony Opposing UPS' Proposed 40 Percent Increase

UPS testimony filed in the omnibus rate case now pending before the Postal Rate Commission (Docket No. R2000-1) seeks a 40.3 percent increase in Priority Mail rates. On August 14, 2000, APMU witness (and economic counsel) Dr. John Haldi filed rebuttal testimony demonstrating to the Commission why UPS' evidence in support of its proposed rate increase is flawed, making the rate increase unjustified.

For example, UPS testimony advanced the proposition that Priority Mail traveling on the Postal Service's Eagle and Western air networks should pay a pro rata share of the network premium now charged to Express Mail. This network premium reflects air network costs which exceed the cost of transporting mail using commercial airlines. In Docket No. R97-1, the Commission determined that the Eagle and Western networks exist to ensure that Express Mail meets its service performance standards. As a result, all network premium costs were allocated to Express Mail. In this Docket, UPS witness Neels observed that (i) the Eagle and Western networks have far greater capacity than necessary to transport Express Mail, and (ii) they actually transport more Priority Mail than Express Mail. He concluded that the networks exist to serve both Priority Mail and Express Mail, and concluded that Priority Mail should pay a pro rata share of the network premium. This would add $65 million to Priority Mail's attributable costs.

In response to witness Neels' testimony on the air network premium, Dr. Haldi explained how greater capacity of the air networks provides both for future increases in Express Mail volume, and for periodic surges in volume. Dr. Haldi further demonstrated the economies of scope and scale which result from operation of larger aircraft. In other words, if smaller aircraft were used and the networks were restricted almost exclusively to Express Mail, the attributable cost per piece could be even higher. Stated another way, using larger aircraft on the networks provides many benefits at an additional cost no greater than what the commercial airlines charge.

Since UPS has successfully refused to provide evidence of the actual (i.e., discounted) rates paid by many of its customers, Dr. Haldi performed an analysis of the increases in the revenue per piece for UPS' products competing with Priority Mail -- Second Day Air and Three-Day Select -- from 1995 to 1999. He determined that the revenue per piece for these UPS products had increased a total of 10.5 percent over this four year period, while the Postal Service is requesting an immediate 15 percent increase to Priority Mail, with UPS seeking a 40 percent increase.

Postal Service Prepares to Bring PMPC Network In-House

There continue to be additional reports confirming Postal Service preparations to assume full responsibility for the PMPC network. As APMU members have previously been informed via email, both and Donaldson, Lufkin & Jenrette have reported on a news release from Local 318 of the National Postal Mail Handlers Union ("NPMHU").

According to Local 318, the Postal Service plans to bring the 10 PMPCs in house by October 1, 2000. Local 318 states that Postal Service plans involve a massive hiring effort (Emery currently employs approximately 3800 persons in the PMPC plants), which will include offering career employment to Emery employees. Local 318 cites recently obtained Postal Service documents as the authority for the information. Sources at the Postal Service categorically deny this story, but continue to plan for a post-Emery PMPC world.

Another Postal union, the American Postal Workers Union ("APWU"), has informed the Postal Service of its willingness to modify its collective bargaining agreement to increase competitiveness vis-a-vis Emery. The APWU has expressed interest in signing an agreement with the Postal Service establishing terms for Postal employees to take over processing at the PMPCs.

According to the July 24 issue of Business Mailers Review, the APWU and NPMHU are both proceeding under a provision of their 1998 Postal Service contract that calls for the unions to staff one PMPC, pursuant to establishing a comparison between Emery's performance and that of the unions. The Postal Service Board of Governors has reportedly selected Phoenix as the site for this PMPC, which an APWU executive vice president predicted would be operational before the holiday mailing season.


It appears that Emery Worldwide's PMPC contract with the Postal Service may not be a complete loss for the company, even if its federal lawsuit proves unsuccessful. Postal Service officials recently announced a collaborative effort with Emery, called "ParcelHome," which will serve most of the country's residential addresses with overnight, two-day, or three-day delivery. ParcelHome is intended to specialize in the delivery of multiple-piece shipments.

Postal Union Negotiations Start

Deputy Postmaster General John Nolan has undertaken some PR responsibilities for the next round of postal union negotiations. Negotiations with the Mail Handlers Union began August 10, and those with the American Postal Workers' Union started August 22. Negotiations with the National Rural Letter Carriers Union began September 6.

Unsurprisingly, the head of the Mail Handlers Union stressed the need for increased wages and benefits, and strengthened job-security provisions, while Postal Service Chief Operating Officer Clarence Lewis (who has announced his retirement as of September 29) emphasized the need for "flexibility" to respond to increased competition and diversion of mail volumes to electronic competition.

Controversy over postal union negotiations has affected the pending rate case. Supplemental testimony filed by a Postal Service witness indicated that the Postal Service expects to pay wage rates reflecting the Employment Cost Index ("ECI") in Fiscal Year 2001 (starts October 1, 2000). Since 1987, the Postal Service has budgeted wage rate expenditures at 1 percent below ECI when the Commission questioned the Postal Service witness to see if the Postal Service had formally changed its negotiation posture, the witness would say only that had he been instructed to make the change in forecasted Postal Service expenditures.

On August 9, PRC Chairman Ed Gleiman wrote a letter to Postmaster General Bill Henderson asking him to clarify whether the Postal Service had changed its negotiating posture -- observing that such a change will cost the Postal Service hundreds of millions of dollars annually, and appears in direct conflict with the Postmaster General's efforts to reduce postal costs by $1 billion a year. Given the controversy in the rate case over the Postal Service's $1.7 billion request for a contingency (i.e., funds for unexpected expenses) perhaps the Postal Service will reply that these hundreds of millions in additional personnel expenditures were simply "unexpected."

Emery's Union Negotiations

So long as Emery is still running the PMPC network, its labor concerns will continue to be of interest to Priority Mail users. Published reports indicate that Emery personnel represented by the Air Line Pilots Association are prepared to strike following nearly 2½ years of fruitless contract negotiations. Over 90 percent of the affected personnel authorized the Association to declare a strike if negotiations remain stalled. The chairman of the Emery pilot's unit observed that one major concern for Emery personnel is job security and outsourcing.

Postal Service Undertakes Parcel Equipment Upgrade

The Postal Service, commenting on the importance of small parcel and bundle sorters to its processing of Priority Mail, has announced upgrades to this equipment -- both to improve "functionality" and to prepare for the addition of barcode and optical character readers. In announcing this upgrade, the Postal Service estimated that Priority Mail volume will increase another 33 percent over the next five years.

Priority Mail Keeps Growing

The Postal Service has just released its Financial & Operating Statements through Accounting Period ("A/P") 12 (which ended August 11, 2000). Year-to-date postal revenues are up $1.78 billion from last year, while expenses are up $2.14 billion. With only one accounting period remaining in the fiscal year, the Postal Service retains a year-to-date profit of $226.1 million. The Postal Service reports a loss of $212 million in A/P 12, and it could lose a comparable amount in A/P 13 and still finish the postal fiscal year at about break even - over $300 million better than the deficit it had projected for the year in the rate case in supplemental testimony. (Since the postal fiscal year this year ends in mid-September, there are some complexities in converting these data to the government fiscal year which ends on September 30.)

Meanwhile, year-to-date Priority Mail revenues exceed $4.5 billion, and are up 7.9 percent over the same period last year. Thus, Priority Mail revenues remain greater than two entire classes of mail combined -- Periodicals and Standard B.

Year-to-date Priority Mail volume is up only 3.1 percent over the same period last year, while the Priority Mail revenue per piece is up 4.7 percent. These increases in revenue reflect, in part, the first full year of implementation of the Docket R97-1 rate increases.

For FY 2000, the data through A/P 12 are (in millions):

Revenues Volume
Priority Mail $4,518 1,140
Periodicals $1,976 9,424
Standard B $1,749 1,009

2000 Calendar

Be sure to make plans to attend the APMU meetings listed below:

APMU Meetings September 12 -- Anaheim, CA
(NPF Breakfast and Briefing)
National Postal Forum
September 10-13 -- Anaheim, CA
MTAC Meetings
October 3-5 -- Washington, D.C.
USPS Board of Governors October 2 - 3 -- San Diego, CA
November 6 - 7 -- Washington, DC
December 4 - 5 -- Washington, DC

The Association of Priority Mail Users, Inc. is a nonprofit organization of Priority Mail users and suppliers to Priority Mail users which seeks to ensure that proper business and financial decisions are made by the United States Postal Service to promote and protect the cost efficiency and quality of service of Priority Mail. For information on APMU programs and membership information, please call 703-356-6913.
Association of Priority Mail Users, Inc. 8180 Greensboro Drive, Suite 1070 McLean, Virginia 22102-3823 (703) 356-6913 (phone) (703) 356-5085 (fax) (URL) (e-mail)