Cancel Saturday mail, for a start, to cut costs

Many Americans are upset by the U.S.Postal Service’s request to discontinueSaturday deliveries. But unless we want taxpayers to finance its growing operating deficit, discontinuing Saturday delivery and other changes are necessary for to continue to meet its mandate to provide mail service.

The Postal Service’s business model is outdated. As technology, personal habits and preferences change, many communications and billing functions have moved online.

As a result, the volume of mail being delivered to the average U.S. household has been dropping — from five pieces a day in 2000 to four in 2009 and a projected three in 2020. The postage value of the mail delivered each day has declined from $1.80 in 2000 to $1.40 today, and is estimated to drop to $1 by 2020.

The financial implications of this decline leave the Postal Service short of its goal to be self-sustaining; it has been in the red since 2007. So reducing the legally required delivery schedule from six days a week to five is a reasonable step. This alone could cut projected losses over the next 10 years by $40 billion. Other changes also will be needed.

By regulation, the Postal Service is required to limit increases in first-class mail prices to the rate of inflation.

In all, about 97 percent of mail is similarly regulated. Such regulatory micromanagement is not helpful; rates should depend on market forces and operating costs. Technology has been the catalyst for a variety of the Postal Service's efficiency gains in recent years, enabling it to reduce employment by 65,000, or 10 percent, in fiscal 2009 alone.

But technology also has been responsible for eroding its market, as many of its core customers switched to the Internet.

We recently conducted research for the Postal Service on future mail volume, which included in-depth interviews with 50 of its largest customers, who represent about 14 percent of its $68 billion revenue in 2009. Based on these, we project a decline in mail volume to 150 billion pieces in 2020 from 177 billion in 2009. It's a 15 percent drop from 2009 and a 30 percent decline from a high-water mark of 213 billion pieces in 2006.

We also project a significant shift in the mix of mail, with the post office handling about 35 percent fewer pieces of first-class mail (such as personal letters, invoices and bill payments), which is highly profitable, and more standard mail (largely advertising), which enjoys lower rates. Combine these numbers with a likely 10 percent increase in the total number of homes and businesses the Postal Service must serve, and the financial prognosis is not good.

The fact that the request to end Saturday deliveries has elicited vocal opposition indicates one thing at least: Many people still value what the Postal Service does. But commercial users in particular, who account for roughly 90 percent of mail volume and revenue, aren't motivated by the friendly feelings they get when the mail carrier shows up at the door. They're driven by economics.

Compared with virtually every other country, U.S. mail is delivered more quickly, more cheaply and, in some cases, more frequently. Sending a first-class letter costs 68 cents in Britain, 78 cents in France, 86 cents in Japan and 50 cents in Canada. Weekday-only mail delivery is standard in many countries, including Canada.

The question is whether the Postal Service should run as a government service funded by appropriations, or as a business. It now is mandated to operate like a business; Congress needs to allow the flexibility for it to do so.

Though privatization may remain a long-term possibility, the current financial situation makes finding a buyer unlikely. What private sector company would want an asset saddled with about $50 billion in future obligations from retiree benefits?

The Constitution does not require Congress to dictate operational policy, delivery schedules and postal rates. It requires only that Congress "establish post offices."

As we look ahead, we should remember that.

Wolfgang is a partner of the Boston Consulting Group and lead author of the recent report, "Projecting U.S. Mail Volumes to 2020."