APMU Incorporates

APMU lives! It was incorporated in the Commonwealth of Virginia on February 2, 1994.

Priority Mail Leads Revenue, Volume Increases For New Fiscal Year

The Postal Service reported double-digit increases in Priority Mail volume and revenues. Between December 11, 1993 and January 7, 1994, Priority Mail volume was up 21.3 percent over the comparable reporting period during Fiscal Year 1993, while Priority Mail revenue was up 21.4 percent. Priorit>

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New Postal Service Air Contract

The Postal Service expects that by the middle of February the commercial air carriers will have signed a new two-year contract, with an option to extend. The contract will take effect March 12. For Priority Mail users, preliminary indications are good: lower rates and better service. Under the existing contract, the Postal Service pays the airlines almost $1.0 billion a year. The Postal Service is reportedly negotiating for new rates that are about 9 percent below existing rates. Proposed terms will also allow the Postal Service, for the first time, to measure airline performance and shift mail to those airlines that consistently perform better than others. This should give the airlines a big incentive to improve service. Commercial carriers fly about 90 percent of all Priority Mail that goes by air (the Eagle Network carries the other 10 percent), so lower rates with commercial air carriers should be instrumental in holding down rate increases for Priority Mail. (The cost of sending mail on the Eagle Network is about three times the rate charged by commercial airlines.)

Two-day Delivery? Priority Mail Performance Down Over Christmas

According to Business Mailers Review, unpublished ODIS (Origin-Destination Information System) data show a decline in Priority Mail service during the December 12 to January 7 reporting period. Significantly, 71 percent of the pieces that paid Priority Mail postage ($2.90 or more), but were not identified as Priority Mail arrived on time, while only 60 percent of the pieces marked with the official colors and logo arrived on time. No explanation yet by the Postal Service on this peculiar phenomenon.

Rate Case Outlook

Postal Governors are expected to approve the filing of a rate case at their regular meeting on March 7th. One widely rumored possibility is to have an across-the-board increase of approximately 10.3 percent for all mail categories. This would mean a 3 cent increase in the First Class stamp.

A 10.3 percent rate hike would be below the increase in the consumer price index (CPI) for the four years since the previous rate hike. Many mailer groups are lobbying the Governors for approval of the 10.3 percent increase, and Postmaster General Runyon is said to favor the proposal. It calls for a "simplified" rate case, to be conducted with the least discord possible and to end as quickly as feasible. This scenario would facilitate the filing of what some observers describe as "the mother of all reclassification cases." Priority Mail, however, would not be affected by any reclassification proposal that has been discussed to date.

The alternative proposal reportedly under consideration, said to be favored by some key Governors, is a rate increase of about 13.8 percent (a 4 cent increase in the First Class stamp), with other increases not necessarily tailored to an across-the-board approach. This would result in a "business as usual" rate case, which would take the full 10-month statutory limit, with complete discovery, mailer-sponsored testimony, and rebuttal testimony by the Postal Service.

Analysis: How the Postal Service Plans to Hold Down the Rate Increase

By law, in any rate case which the Postal Service files, revenues must equal attributable costs during the projected Test Year. A good question, then, is: How can the Postal Service justify a rate increase of only 10.3 percent, or even 13.8 percent? At least one part of the answer is already known. In the next rate case, the Postal Service plans to use Fiscal Year 1995 as the Test Year. FY 1995 starts September 1994, which means that the Test Year will be almost half over before new rates take effect. Had the Postal Service followed its customary procedure, FY 1996 would have been used as the Test Year, and proposed rates would need to be higher by another 3 percent or so to allow for projected inflation.

Another part of the answer, yet to be discovered, will depend upon how the Postal Service will elect to treat two large items that do not, or may not, involve cash outlays, namely:

1. the contingency allowance, and
2. recovery of prior years' losses.

Historically, the Postal Service has asked for a contingency allowance of 3 to 4 percent of total revenues. A few percent for contingency adds a lot of money to the request when annual revenues are about $48 billion. Some cynical postal observers consider the contingency allowance to be little more than a slush fund which the Governors have used to stretch out the time between rate cases.

The second item, recovery of prior years' losses, is a real budget item, but the Postal Service could elect to stretch out the number of years over which prior year losses are to be recovered. That would reduce the amount of revenues required during the Test Year.

The various steps by which the Postal Service may reduce its rate request are not exactly accounting gimmicks. They will, however, accelerate the filing of the subsequent rate case. The only non-gimmicky way to hold down the size of rate requests is to increase productivity -- and that has not been happening. Billions of dollars have been spent on automation equipment, but to date the returns have not been nearly as spectacular as hoped or expected.

Priority Mail Issues for the Next Rate Case

For Priority Mail users, the markup over attributable cost is expected to be a key issue in the next rate case. In the last rate case, the markup was set at 85 percent. For 1992, the last year for which data are available, the actual markup was 99 percent. This is far above First Class mail, with an actual 75 percent markup, and Express Mail, with only a 67 percent markup.

Parcel post rates represent a potentially important issue for Priority Mail users. The Postal Rate Commission reckons that Priority Mail, which receives expedited handling and air transportation to more distant locations, should have a higher rate than ordinary parcel post. Thus, rates for parcel post act as a floor under Priority Mail rates. How close are the rates? In some cases, very close. For packages weighing between 1 and 16 pounds, for example, parcel post rates to zone 8 are only five cents less than Priority Mail rates. This situation means that if the United Parcel Service can find a way to force up rates for parcel post, then Priority Mail rates will rise in tandem, even if the costing for Priority Mail does not justify the higher rates.

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