There's a Lot We Can Learn From a Rate Case

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Except for the attorneys and economists whose services are much in demand, rate cases are by definition not a happy time.


However, for those doggedly interested in poring through the reams of interrogatories and responses it can be a treasure trove of interesting information. As one who usually skims through the data, I did glance upon a number of tidbits that we all might find of interest.


In a typical rate case, the vast majority of the time is spent arguing for and against rates for the four primary classes of mail. Yet, upon analysis it would appear that more time and effort could be better spent on the so-called "Special Services." There are many charts presented during the rate case that estimate volumes, revenues and costs after the new rates are in place. In one chart in particular, the postal service estimated "revenues minus incremental costs" after the new higher rates are in place. According to the chart, this calculation of profit contribution for special services is roughly equal to the sum of the profit contributions from Periodicals, Package Services and International Mail.


So what exactly is Special Services? The primary components are: certified mail, P.O. box rental, money orders and insurance. It's not clear how much additional profit potential is available in Special Services. However, one has to wonder whether additional consumer benefits or additional advertising could add to the profit that these services provide?


We often hear about the relatively low overall attrition (retirement, resignation, separation) rates among postal employees. This is confirmed by a report presented in the rate case. The overall attrition rate among the 796,973 career employees was just 4.58 percent. The reason was split relative equally between retirement and resignation/separation. The separation rate for noncareer employees is, as expected, much higher at 45.43 percent. What's most significant about these numbers is that overall, 65,825 employees left the postal service in fiscal year 2000. Clearly, the challenge for the service is, through productivity, to not replace the majority of employees who leave each year.


Statistics presented concerning letter carrier pay rates and workload give us another clear idea of the challenges faced by the postal service.


In 2000, the average hourly wage for letter carriers was $27.74. By 2003, the hourly rate will increase 17.6 percent to $32.62, an average increase of 5.9 percent a year. Part of this increase was from the job classification upgrade decided by the arbitrator in the recent USPS/NALC wage arbitration. Including benefits (retirement, health, leave, etc.), the total hourly compensation will increase from $37.59 per hour in 2000 to $44.59 per hour in 2003, an increase of 18.6 percent. Using these statistics, we determine that, in 2000, the daily cost of a letter carrier with benefits, but without the overtime typically worked, was $301. In 2003, this will increase to $357 a day.


Two other tidbits help us understand the relationship of the carrier to postal finances. In 2000, the average number of delivery points served by letter carriers was 496. And, the average number of pieces of mail received daily by each city delivery point was 5.51. Since the average revenue per mail piece in 2000 was 30 cents, we can calculate that the postage revenue a typical city carrier was delivering each day was $820.


In other words, 36.75 percent of the postage on the mail they were delivering was going to pay the salary and benefits of the letter carrier. Given a less revenue-favorable mix of mail and what seems to be compensation increasing faster than postage rate increases, I'd guess that by 2003, letter carrier compensation will approach 40 percent of the postage on the mail that they are delivering.


I make no judgment on whether 40 percent is good or bad. However, it does indicate one challenge facing the postal service: the cost of its delivery network.


Also included in the rate case data is much information concerning delivery service. First, we begin with data that break down the volumes of First-Class mail into the categories of delivery service that the postal service was attempting to achieve. According to this data, 43.5 percent of First-Class volume was to receive one-day (overnight) delivery service, 27 percent was to receive two-day service and 29.5 percent three-day service.


Except for one-day service mail, the delivery service standards are not being met. For the past four years, the postal service has been meeting its one-day service standard 93 percent of the time. For two-day and three-day mail, which make up almost 57 percent of the mail in the system, service seems stuck at 85 percent of standard. This problem does not appear to be a recent event tied to disruptions in airline schedules, since for the past 10 years, two- and three-day service has never been above 87 percent of meeting standard. Perhaps of greater concern is the delivery service for Priority Mail. It appears from the statistics that only 90 percent of all Priority Mail is being delivered in three days.


In response to cutbacks in airline schedules the postal service said it has been making increased use of its FedEx relationship. It will be interesting to see whether FedEx movement of First Class and Priority Mail has a measurable effect on delivery service.


Odds & Ends


· At a recent meeting in Washington, deputy postmaster general John Nolan said, to no one's surprise, that the "state of business is not good, volume and revenue significantly down."


· CFO Dick Strasser indicated that the USPS is making significant budget cuts.


· The July Board of Governors meeting is scheduled for Anchorage, AK. The board does periodically hold its meetings outside of Washington, but Anchorage is not an easy place to get to. During this difficult time, are USPS resources and governors' precious time best spent on an expensive, lengthy and rigorous trip to Anchorage?


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