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Volume VII, No. 3 May-June 2000 Newsletter

UPS Proposes 40 Percent Increase to Priority Mail Rates

United Parcel Service has filed testimony in the rate case now pending before the Postal Rate Commission, Docket No. R2000-1, seeking a 40.3 percent increase to Priority Mail rates. By its own estimate, UPS expects its proposed rates would cause Priority Mail volume to drop more than 21 percent -- back to FY 1997 levels. However, UPS asserts that Priority Mail could handle such a dramatic increase in rates, basing its assertion on certain "evidence," including: (i) Priority Mail's sustained volume and revenue growth in recent years; (ii) new improvements to Priority Mail features (e.g., delivery confirmation); and (iii) Priority Mail's substantial market share.

The estimated 21 percent reduction in Priority Mail volume is not mentioned in UPS testimony; it was hidden in UPS workpapers. UPS acknowledges that the rate of increase in Priority Mail volume dropped sharply in 1999 (under 1.3 percent) following years of substantial volume increases (16 percent in 1994, 13 percent in 1995, 8 percent in 1996, 14 percent in 1997, and 10 percent in 1998). However, it claims that 1999 volumes would have increased by 9 percent if the maximum weight of First-Class Mail had not increased from 11 to 13 ounces.

Besides its failure to discuss the dramatic drop in Priority Mail volume under its proposed rates, UPS' testimony also does not compare features of Priority Mail with its own offerings. Nor does it discuss Priority Mail's loss of market share over the past decade.

The foundation underlying UPS' proposed rate increase is its assertion that hundreds of millions of dollars should be added to the test year after rates costs attributed to Priority Mail. This change in attributable costs reflects the following changes to the Postal Service's proposal:

According to UPS, this reallocation of costs would reduce Priority Mail's cost coverage by 12 percent. UPS then proposes a 24 percent increase over the Postal Service's proposed cost coverage, which would require a 40 percent rate increase.

UPS observes that Priority Mail's attributed costs increased 72.6 percent between Docket Nos. R94-1 and R97-1. UPS states that, in this docket, the attributed costs would only increase another 35.9 percent if its cost attributions were accepted by the Commission. This number is deceiving, however, since according to UPS calculations, Priority Mail total attributable costs would be lower than Postal Service estimates, because of the dramatically reduced Priority Mail volume resulting from a 40 percent increase in rates.

New APMU Members

APMU members in attendance at the July 10 meeting should give a hearty welcome to the new APMU members. They are (in alphabetical order):, Distribution Fulfillment Services/Spiegel, Dropship Express,, and Northrup Grumman.

These well-known companies join an already impressive APMU membership, including some of the most exciting and successful firms in America today. APMU is seeking continued growth of its membership roster in an ongoing effort to have a louder and more effective voice in making Priority Mail an even better postal product.

APMU Seeks Reductions to Postal Service's Proposed Priority Mail Rates

Testimony was also filed in Docket No. R2000-1 on behalf of APMU. Dr. John Haldi, Economic Counsel for APMU, submitted testimony which proposed rates significantly lower than the rates proposed by the Postal Service.

In that testimony, Dr. Haldi notes that Priority Mail currently contributes more to the Postal Service's operating profit than all domestic and international classes of mail and special services (excepting only First-Class and Standard A commercial mail). He observes that Priority Mail has contributed more than $1.5 billion annually in operational profits to the Postal Service since 1995.

Dr. Haldi estimates that Priority Mail's attributable costs per piece will have increased 39 percent since the prior docket. This increase in costs is being driven by the PMPC contract, including the "mutually beneficial" (but apparently non-contractual and gratuitous) supplemental payments of $21 million to Emery in 1998 and $43 million in 1999.

The Haldi testimony discusses how the deterioration in Priority Mail service since the prior omnibus rate case supports a lower Priority Mail cost coverage. He also observes that the delivery performance of Priority Mail is substantially inferior in comparison with its competition. Both factors bring into question the wisdom of the Postal Service's rate increases (averaging 15 percent, but ranging from 10 to 20 percent).

Dr. Haldi proposes that the Commission reduce the Postal Service's proposed cost coverage for Priority Mail by nearly 13 percent, observing that the imposition of a high cost coverage on top of Priority Mail's out-of-control costs could kill off Priority Mail as a profitable product (just as Express Mail was killed off). Dr. Haldi's markup would result in rate increases averaging 2.6 percent, yet because volume would not be chased off, would result in operational profits of over $2.3 billion.

The Haldi testimony also explains how the competitive pressures on Priority Mail act to limit the Postal Service's ability to squeeze ever-increasing profits from it (and how zoned Priority Mail volume is in the process of shifting to competitors). He observes that Priority Mail's most competitive feature is its price -- yet the Postal Service's current rates are only marginally competitive with competitors' published rates. The Postal Service's proposed rates would be far less competitive.

An even greater concern is raised by a comparison of FedEx's government rates (perhaps the only publicly-available set of negotiated rates) to current and proposed Priority Mail rates. Under the current rates, Priority Mail is not competitive over 2 pounds, while the proposed rates would not be competitive over 1 pound -- even when competing with FedEx Priority Overnight.

Dr. Haldi observes that, should Priority Mail rates continue to grow higher than competitors' rates, the Postal Service will lose its most competitive feature. This could result in a dramatic loss in Priority Mail's market share, instead of the Postal Service's perhaps overly-sanguine projections of record-breaking Priority Mail profits.

Dr. Haldi proposes that the maximum weight of First-Class Mail be reduced from 13 to 11 ounces. He proposed the following rates for unzoned Priority Mail:

APMU Rate Postal Service Rate

1 pound $3.00 $3.45

2 pound $3.75 $3.85

3 pound $4.75 $5.10

4 pound $5.75 $6.35

5 pound $6.75 $7.60

Dr. Haldi's proposed zoned rates are also appreciably lower than the Postal Service's proposed rates.

Dr. Haldi proposes a discount for Priority Mail which is mailed to destinating SCFs (known as Priority Mail dropship). This discount, which was calculated using Parcel Post DDU cost data, would run from $1.50 for mailpieces between 6 and 10 pounds, to $3.35 for mailpieces between 61 and 70 pounds.

PMPC Update

The ongoing conflict between Emery and the Postal Service on pricing issues may preclude renewal of the PMPC contract. The Postal Service states that pending claims filed by Emery total more than $685 million. Kate Muth of Business Mailers Review reports that in May 2000, Nicholas Barranca, the Postal Service's Vice President for Operations Planning, distributed a memorandum to area vice presidents directing them to develop a strategy to transition the PMPC network back in house within a 90-day period. The transition plans must identify: facilities which will handle the new mail flows (by 3-digit ZIP Code); workforce requirements; prospective employee mix; volumes (by 3-digit ZIP Code); transportation needs; and estimated costs. The development of these transition plans may be driven by Emery's lawsuit (filed in the Court of Federal Claims). Emery has asked the court to determine whether it may terminate the PMPC contract unilaterally. There are reports that the Postal Service is also interested in terminating the contract.

2000 Calendar

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

APMU Meetings July 10 -- Washington, DC
September 12 -- Anaheim, CA
(NPF Breakfast and Briefing)
October 2 -- Washington, DC
National Postal Forum
September 10-13 -- Anaheim, CA
MTAC Meetings
July 11-13 -- Washington, D.C.
October 3-5 -- Washington, D.C.
MailCom 2000 August 20-23 -- Las Vegas, NV
USPS Board of Governors July 10 - 11 -- Washington, DC
August 7 - 8 -- Reno, NV
August 28 - 29 -- Washington, DC
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)