PMG Potter Says Reducing Delivery From Six to Five Days Could Save USPS $3.5 Billion Annually

 Excerpts of Postmaster General John Potter’s testimony to House Subcommittee examining the US Postal service.

 As the nation’s economy stabilizes, our business will stabilize along with it. But stability, by itself, cannot be our goal. A stability based on today’s conditions simply means that we have halted the slide. Success demands more than that. It requires that we create an environment that allows us to move forward from a position of financial security when economic conditions do improve, prepared to grow, prepared to make up lost ground, prepared to pay down our debt, and prepared to meet the renewed needs of our customers. I am confident that we can do that.

Assuming that we achieve our planned $5.9 billion in savings, the Postal Service is still projecting a loss of $6 billion in 2010. This follows last year’s loss of $2.8 billion, and, in 2007, a loss of $5.1 billion. Mail volume is expected to plunge to only 180 billion pieces by the time we close our books on 2009 at the end of September. Declines are possible beyond that point. Looking ahead, and considering projections for the overall economy, we do not expect any near-term improvement. We anticipate continued volume decline and a loss of more than $6 billion for next year, based on the latest forecasts from Global Insight.

The Postal Service is taking strong and focused actions to remove $5.9 billion from our cost base in 2009. Our plans call for reducing an additional $3.8 billion in 2010. These actions follow reductions of more than $2 billion from our base costs in 2008, and over $1 billion each year beginning in 2002.

Despite the scale of these reductions, they are simply not suffiCient to close the expanding gap between a declining revenue base and the costs of financing a network that was designed to deliver mail to America’s 150 million families and businesses six days each week. Even in an extremely soft housing market, our delivery network must continue to expand to reach more than a million new addresses each year, adding to our fixed costs as revenue continues to decline. By taking the right actions now, we can make it possible for the Postal Service to effectively manage through today’s dire economic environment and emerge on a firm financial footing. As I mentioned, the Postal Service’s efforts — despite their unprecedented scale — will be insufficient, by themselves, for us to simply break even. They must be accompanied by changes in the laws that govern our operations.

Adjusting the number of delivery days from six to five would have the net effect of returning to an average daily volume of six pieces per delivery. With the same volume spread over a five-day service week, our fixed network costs could be reduced by almost 17 percent. This level of potential savings is not possible within today’s constraints. Through January, we have made tremendous progress in aligning our resources with a reduced workload. With mail volume down 11 percent, we reduced mail processing workhours by 13 percent. We have reduced retail workhours by 11 percent — and we have done that without the need for across-the board reductions in retail service hours.

We have not been nearly as successful in the delivery area, where workhours have been reduced by only 5 percent. That is because delivery workhours, unlike those of other operations, are predominantly fixed. Carrier travel time — from the Post Office to the route, between addresses on the route, and back to the Post Office — does not change in relation to mail volume. In fact, with most mail placed into delivery sequence before the carrier leaves the Post Office, the time spent making a particular delivery may vary little based on the number of pieces delivered to an individual address.

Delivery is one of our most labor-intensive activities. Unlike mail processing, it does not lend itself to technological substitution. Nor does it lend itself to staffing adjustments based on mail flow peaks and valleys or to fluctuating levels of customer demand during the course of a single day, a single week, seasonally, or over longer periods of time. Delivery remains our largest, single cost center. And with revenue per delivery continuing to decline — due to fewer pieces per address and a change in the mail mix to lower-cost products — our overall delivery costs grow proportionately larger. In effect, we are financing a level of service that exceeds a declining demand.

Recent independent polling suggests that our customers are generally amenable to a five-day delivery week. A USA Today/Gallup survey found that 57 percent of respondents see this as a preferred solution to the Postal Service’s financial difficulties. Similarly, a Rasmussen Reports survey found that 69 percent of Americans indicated that they would prefer five-day-a-week service to other alternatives. The Postal Service is the only carrier that offers regular Saturday service — and at regular prices.

Reducing delivery by one day per week could reduce costs by $3.5 billion annually. This offers a significantly higher cost benefit than any other single option for operational cost reductions. If we reject this approach, we rule out our largest cost-management opportunity at this time when we are facing such staggering financial pressures.

The demographics of our employee base also underline the importance of pursuing this option. Today, 162,000 of our employees are eligible to retire under regular rules. Within the next four years, that number will grow to 291,000. After that time, the number of employees becoming retirement-eligible will fall dramatically. There is no better time to reconfigure our service offerings and avoid a situation in which new workforce growth — and its associated costs -exceed current and anticipated future system needs.

Although the financial situation of the Postal Service is grave, it would have been even more untenable if it were not for the aggressive actions we have taken to protect the organization’s viability. We recognize that, despite the sources of our financial distress, the Postal Service itself has the primary obligation to bring costs in line with revenue to the extent possible. We have been doing that and we will continue to do that. Those actions began long before we began to see the effects of today’s economic distress.