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First Class volume is slip-sliding away

The U.S. Postal Service’s 2006 fiscal year ended Sept. 30, though final numbers were unavailable as of this writing. What is available is the postal service’s FY 2007 integrated financial plan, which projects income of $1.7 billion. Much of that income is due to the rate increase expected to occur in May.

The mail volume element of that plan is a concern. The USPS projects that First Class volume will decline 2.8 percent from a 2006 estimate of 97.546 billion pieces to 94.775 billion in 2007. That decline of 2.771 billion pieces would cost the USPS $1 billion in revenue.

The USPS also projects a 1.9 percent rise in Standard Mail volume, from an estimated 102.763 billion in 2006 to 104.721 billion in 2007. That amounts to a revenue increase of $400 million. And, according to the projection, Standard would expand its volume edge over First Class to almost 10 billion pieces.

As an aside, given the lack of progress on postal reform, one has to wonder how this trend away from First Class toward ad mail will affect future reform efforts in Congress.

But back to the issue of First Class volume. What is the USPS doing to stop First Class Mail from continuing to slip-slide away? Not much, from my perspective. Sure, the USPS has added negotiated service agreements with a few large First Class users. But that’s like putting a finger in a dike. It won’t change the big picture.

It is surprising and disappointing how little the USPS is doing to try to maintain First Class volume. Other than modest changes to the address correction rate structure, not much new is proposed in this rate case for First Class.

What really calls into question the USPS passivity on this issue is that the Office of the Consumer Advocate of the Postal Rate Commission has proposed a simplified rate design for First Class. OCA proposes a flat First Class rate for pieces weighing up to 4 ounces. I would have to take a close look at the economics of this proposal before expressing an opinion. But at least it shows fresh thinking on the issue. Where is the USPS on the future of First Class, its most important product financially and politically? It needs some attention, and fast.

Let me make two suggestions. First, the postal service needs to establish a joint industry/USPS product redesign task force to look specifically at First Class Mail. This task force should have minimal postal operations representation. The last product redesign effort flopped because of too much operations involvement and control. This effort needs to be marketing driven and led by a very senior USPS executive to demonstrate its importance.

I also suggest that the group look at the $2 billion being spent on incorrectly addressed mail, mainly First Class. It seems that the USPS is trying to improve address quality through regulation, thus far unsuccessfully, instead of through incentive. The agency might find more success and volume retention by reducing the rate for automated-rated mail and adding a charge for any of that mail requiring forwarding.

On another subject, a cover story on click fraud appeared in the Oct. 2 BusinessWeek. The article discusses the belief that 10 percent to 15 percent of clicks on online ads are fake, and that the fraudulent site visits represent about $1 billion in ad billings. I noticed that a cyber-crime unit led by the FBI and the Postal Inspection Service was investigating to determine whether federal laws were being violated.

Though it’s probably not a big expense, it strikes me as ridiculous that the USPS is spending time and resources investigating something unrelated to the delivery of physical mail. Perhaps Congress should hold hearings to determine what the Postal Inspection Service’s role should be, and who should pay for it.

Finally, the USPS Board of Governors has gained several new members in the past few months. Though they bring various backgrounds, they exhibit little experience in dealing with an organization of the postal service’s size and business environment. It will be interesting to see whether, or how, they affect the agency’s direction.

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