How to Fix the Postal Service

Beyond closures and cutbacks, there is a host of other ways to boost the USPS bottom line.

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Postal closures are back in the headlines, but surprisingly, this time the news is the decision not to shutter facilities.

The U.S. Postal Service announced this week that it will suspend planned processing facility closures in the months leading up to the November election. The move comes in response to worries from state officials that the closures would disrupt voting by mail.

The closures were part of a series of cost-cutting steps planned by the USPS, which is planning to close or consolidate more than 200 centers and slash up to 35,000 jobs. According to the postal service's five-year "Plan for Profitability" released in February, the USPS has an ambitious goal of cutting annual costs by over $22 billion by 2016.

Those are sizable cuts, given the USPS's roughly 574,000 career employees and $70.6 billion operating expenses in 2011.

Closures and cutbacks generate a lot of outrage, but there are other ways to bolster the post office's finances in the long term.

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Ask Congress for Money

To achieve long-term survival, the postal service may need subsidies in the shorter run, says one expert.

"For the medium term, beyond 2016, the U.S. Postal Service offers no published plan," says John Callan, managing director of Ursa Major Associates, a consulting firm that has worked with public and private mail carriers worldwide. In his opinion, continued declines in first-class mail mean more cost-cutting. "Subsidies seem inevitable in the medium term," he says.

However, obtaining those funds while improving its business model could help the postal service stave off the need for government help in coming decades, Callan adds.

Stop Paying for Retirees Before they Retire

In 2006, Congress passed a law requiring the postal service to "pre-pay" for health benefits for future retirees. Ending that requirement is one key tenet of the Postal Service's five-year plan. Though the APWU has largely rejected the plan, ending the prefunding requirement is one area on which both union and employer agree.

Postmaster General Pat Donahoe told a National Press Club audience in November that the $5.5 billion annual payments for retiree healthcare are "effectively bankrupting" the USPS.

Sally Davidow, spokesperson from the American Postal Workers' Union, agrees. In her estimation, the cause of the Post Office's fiscal problems is not declining mail volume; rather, she says, the prefunding requirement is the chief factor "leading to the destruction of the Postal Service."

Beat the Competition on Its Own Turf

The postal service already has plenty of unique assets, like an army of trained employees and established distribution channels. By leveraging these advantages, the postal service could move in on its chief competition's territory—shipping.

Shipping currently makes up 9.5 percent of USPS revenue, compared to the declining 66.8 percent represented by first-class mail. Package delivery, in which UPS and FedEx have dominant footholds, could be a profitable market.

"The business model needs to evolve," says Brandt Leahy, managing director of new market initiatives at financial information company Sageworks. "In 10 years, [packaging] has to make up a larger percentage of that business."

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Instead of Beating 'Em, Join 'Em

The hurdles to besting the competition may be too high to overcome. Though USPS operations are not funded by taxpayer money, Congress still oversees much of its operations. Moreover, the USPS is saddled with service obligations that no private company has.

For example, the postal service delivers first-class mail, unlike FedEx and UPS, and has the unique duty of providing "universal service." This is perhaps best seen in rural areas, where residents receive daily mail with the same regularity as urban residents, but do not have the same access to private couriers. In some places, getting to the nearest FedEx or UPS store can require an hour-long drive.

If the postal service can't beat its opponents, the next best thing might be joining forces. This has already begun in a limited way. Last year, 7 percent of USPS shipping revenues came from the "parcel select" program, in which FedEx, UPS, and other couriers handle packages, with the USPS handling the "last mile" of packages' journeys to customers' doors. The post office says that the program is growing by 20 percent each year.