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Volume III, No. 3 Summer 1996 Newsletter



New Anti-Bomb Restrictions Hit Priority Mail

The Postal Service, reacting to growing concern about mail bombs, will no longer accept stamped non-local pieces that weigh more than 16 ounces which are deposited in collection boxes. Apprehension is about mail bombs generally, such as those sent by the Unabomber, but most especially with bombs in packages that travel on commercial aircraft.

Under the new regulations, which became effective August 16, all non-local Priority Mail packages with postage stamps and weighing more than one pound must be entered with retail postal clerks at post offices (local mail does not require air transport). The regulations will not affect Priority Mail users who plant load, use postage meters, or enter their mail in bulk.

Competitors of the Postal Service, such as Airborne, DHL, FedEx and UPS, are not affected. Having to stand in line at a post office with one's package is an obvious inconvenience, which will reduce the value of Priority Mail to individual users. How much Priority Mail volume will actually be diverted to competitors because of the convenience factor is unknown.

Packages over one pound found in collection boxes will be returned to sender, if the addressee is outside the local, overnight First-Class Mail delivery area. Packages returned to senders will bear an accompanying explanation advising them in the future to deposit that type of mail at the post office. Previously applied postage may be used when the item is re-mailed at a post office.

Whether the Postal Service plans to weigh all flat-rate 2-lb Priority Mail envelopes is not known. What the effect of any such procedure would be on service and cost is also undetermined at this time.

Abolish the Monopoly over Priority Mail, Says Congressman McHugh

On June 25, Congressman John McHugh (R-NY), Chairman of the House Subcommittee on Postal Service, introduced his long-awaited Postal Reform Act of 1996, H.R. 3717. McHugh's bill represents the first serious effort to revamp the Postal Reorganization Act since it became law in 1971.

The bill contains one provision that, if ultimately enacted, could be extremely significant for Priority Mail users. Section 703 of the bill would exempt mail from the Postal Service monopoly "when the amount paid for private carriage of the letter is at least $2." The current limit is $6, which is computed as twice the minimum $3 rate for Priority Mail.

Thus, the present postal monopoly covers all unzoned Priority Mail under 5 pounds (which costs $6), about 95 percent of total Priority Mail volume. But, if the proposed language were to be adopted in its present form, all Priority Mail would be exempt from the Private Express Statutes, and would be open to competition from Airborne, DHL, FedEx, UPS and any other firm that wanted to compete. Such competition would offer users of lighter-weight Priority Mail more choices with respect to rates, tracing, reliability and guarantees, billing options, etc. That should help keep rates in check while putting pressure on the Postal Service to implement universal track-and-trace and improve service reliability.

Congressman's McHugh's subcommittee held two full days of hearings in July, with two more days scheduled for September. In its present form, the bill generally is perceived to be a trial balloon respecting certain of its more sweeping proposals. Historically, the Postal Service has opposed all attempts to narrow its monopoly and, with elections looming in November, no action is expected this term. Before any bill is approved by the Subcommittee and the full House, substantial changes could occur.

Outlook for Next Rate Case

The Governors recently adopted a policy to the effect that (i) it would retain any operating surpluses and apply them to a reduction of the $9 billion in accumulated deficit from prior years' losses, and (ii) when a deficit situation was foreseen, it would file for higher rates promptly so as to avoid the incurrence of any major deficit before higher rates take effect. Thus, the next omnibus rate case will presumably be filed when the Postal Service forecasts that it will operate at a continuing deficit. The major factor creating a "continuing deficit" is growth of labor-related costs, which are driven principally by an increase in the number of possible deliveries (which requires more carriers), and by inflation.

The current figures on employment, productivity and mail volume indicate a deficit (absent an unprecedented increase in labor productivity and mail volume) perhaps in FY 1997, and certainly by FY 1998. This view was reinforced by William Henderson, Chief Operating Officer of the Postal Service, who spoke of a $12.4 billion "gap" by the next decade, at the recent Postal Forum in Anaheim, California. Assuming the Board of Governors adheres to its new anti-deficit policy, the Postal Service would be expected to file a rate case in 1997, probably in the Spring. Higher rates would become effective in 1998.

Whether the Board of Governors will actually follow through, and act in accordance with its new policy, remains to be seen. PMG Marvin Runyon is desperately searching for additional revenues in order to avoid an omnibus rate case before 1998. He may try to persuade the Board of Governors to operate at a deficit for an extended period of time (e.g., up to a year) and use prior surpluses to fund the deficit or incur more debt.

APMU To Meet During National Postal Forum

Mark your calendars now. APMU will host a breakfast briefing and meeting for Priority Mail Users at the August National Postal Forum Please call (703) 356-6913 for details, as seating is limited. The agenda features Postal Service experts on matters of concern to Priority Mail users. George Hurst will discuss recent changes in Priority Mail collection practices; Dave Shinnebarger will discuss the future outlook for Priority Mail; Tony Pajunas will update us on what's happening with respect to reengineering and reclassification; and Julie Rios will report on progress with the pilot track-and-trace system being implemented throughout Florida.

Special Service Reclassification Case Seeks Higher Revenue

On June 7, 1996, the Postal Service filed with the Postal Rate Commission a request to change classification provisions and rates for the following special services: post office boxes, registered mail, insurance and indemnity, certified mail and certificates of mailing, return receipt, stamped cards, and special delivery. For Priority Mail users, the proposed classification changes have only modest implications (e.g., higher insurance coverage would be available for Priority Mail).

An unusual feature of the special services reclassification case is that the request would increase the Postal Service's net revenues by some $340 million a year, while leaving all other rates unchanged. In prior reclassification cases that dealt with First, second- and third-class mail (both regular rate and nonprofit), the Postal Service's proposals were described as "revenue neutral." In this case, however, the Service moved the test year forward to FY 1996 and adopted an approach that it describes as "demand-based pricing." Reclassification has now become a means to obtain piecemeal increases in rates and revenues. Of potential concern is what such moves bode for the pending "Expedited/Parcels" reclassification case (see next item).

Priority Mail Reclassification Update

As reported in previous newsletters, the Postal Service continues to prepare a reclassification case described as "Expedited/Parcels." [Editors note: at press time it could not be ascertained whether the Postal Service considers Priority Mail to fall within the "expedited" category or the "parcels" category.] Possible changes for Priority Mail include an 8-ounce flat rate, rezoning of 3- to 5-pound pieces (to compete with UPS zoned rates), and a cubic surcharge for bulky light-weight parcels. It has been confirmed that this case will not be filed until fall, and the expedited/parcels reclassification case will not be on the agenda for the Governors' September meeting.

When asked about the prospective time table, the Postal Service spokesperson declined further comment. The longer the filing is delayed, the more likely it is that the Postal Service will use FY 1997, which starts next October 1, as the test year. That would forbode a rate increase for some of the parcel subclasses, especially zone-rated parcel post and library rate.

Whether the Postal Service will use reclassification to extract more revenues from Priority Mail remains to be seen. APMU members should be alert to this possibility, though, since PMG Runyon is hungry for additional income and revenue neutrality is no longer any part of the foundation for reclassification cases.

Priority Mail is Big Business

Priority Mail is a truly major product for the Postal Service. Final data for fiscal year 1995, just released in June, show that Priority Mail revenues, at $3.1 billion, exceeded all revenues derived from each of the following classes: (i) all categories of second-class mail (publications) combined, (ii) all categories of fourth-class mail (parcels), and (iii) Express Mail (see column 1 below). Here are the numbers (in millions):

                    (1)         (2)         (3)             (4)     (5)
                                Attribu-    Contribution
                                table       to Institutional
                    Revenues    Cost        Costs           Volume  Pounds

    Priority Mail   $3,075      $1,359      $1,716          869     1,484

    Second-class    1,972       1,765       207             10,194  4,211

    Fourth-class    1,524       1,261       263             936     2,709

    Express Mail    711         523         188             57      63

In terms of volume and weight, Priority Mail is relatively small potatoes when compared with publications and parcels (see columns 4 and 5). However, in terms of contribution to the Postal Service's institutional costs (overhead), or "operating profit," Priority Mail comes in as a heavyweight. In 1995 the operating profit from Priority Mail amounted to $1.716 billion (see column 3 above). This was 2.6 times greater than the operating profit of $658 million from all second-class, fourth-class and Express Mail combined. The $1.716 billion operating profit was equal to 126 percent of attributable costs, the highest profit margin of any subclass.

The growth trend continues in FY 1996. Through accounting period 10 of this fiscal year, Priority Mail revenues are up 8.1 percent over the same period last year.


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)

 

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