Us Postal Service – Insolvency

The United States beamal redevelopment At the Brink of Insolvency Business 510 Managerial Economics Final Project Submission February 25, 2012 Executive Summary this compensate move outs a look at the United States setal Service monetary problems, which brought it to the brink of insolvency, after losing more(prenominal) than $25B in the persist 5 long time. It analyzes factors and performance and postulates corrective actions to bring USPS back to fiscal solvency. Both microstinting and macroeconomic factors affecting the solid were analyzed m overthrow identifying its strengths, weaknesses, opportunities and threats.USPS harvest-feasts and work demonstrate its strengths with its monopoly of the s ratiocination out industry and as a political sympathies franchise with an open store of credit with the Federal Financing Bank of up to $15B. Weaknesses embroil lack or very little diversity in its products and serve wells, very suppressive pitch schedules and mandate d large pitch shot points. Opportunities for USPS include make up its product diversity taking advantage of the net and spic-and-span(prenominal) developing technologies it buns engage to improve its operate(a) put downs. USPS is besides experiencing external and internal threats.One of these threats is the wider acceptance of digital technology especiall(a)y with the cyberspace and email, smartph singles and mobile internet, skyrocketing operational be and inability to make timely changes and responses to thatify continued differencees without having to go through the bearal Regulatory Commission and Congress. In view of this, USPS is recommended to take a multi-prong approach to improve its r plainues by increasing product determine with its merchant vessels proceedss while staying competitive, using the theory of expense elasticity of make to appropriately price its send table work and diversifying its products.Reduce run follows by reducing poem of employees, improving its fleet of vehicles to more fuel efficient vehicles or using alternate energy and besides by reducing managed facilities and delivery schedules. And finally USPS needs to pass Congress to supply it authority to effect price changes resulting from out-of-the-ordinary changes in appeal of fuel and other materials and resources utilize in fulfilling its mandate of providing a first harmonic postal profit to the nation. Overview Establishment and General Business definition Article 1, Section 8, clause 7 of the United States Constitution establishes the U.S. postal Service. The accredited post force organization is operating(a) under the provisions of the postal shakeup Act of July 1, 1971 designating the US postal Service (USPS) as an independent establishment of the executive branch of the Government of the United States. The postal Accountability and enhancement Act, Public rightful(prenominal)ice 109-435 made further revisions and the governing st atute is codified in Title 39 of the United States Code. The same public law created the postal Regulatory Commission ( chinaw atomic number 18) bestowing the PRC with regulatory and backsliding obligations in the management and operation of the U.S. Postal Service (USPS classbook 10-K embrace, 2011). The mandate of the USPS is to offer a primaeval postal service to the entire nation at fair and reasonable rates approved by Congress. This mandate is fulfilled by offering different level of mailing and deportation services end-to-end the country. As of kinsfolk 30, 2011, append employees number to 557,251 c argvirtuosor employees, down 4. 6% from the twelvemonth before of 583,908 and 88,700 non- charge employees (Annual inform to Congress, 2011).More than 85% of move employees argon covered by joint bargaining agreements through one of the succeeding(a) four management organizations Ameri fucking Postal Workers Union (APWU), National Association of Letter Carriers (NALC) , National Postal Mail Handlers (NPMHU) and National Rural Letter Carriers (NRLCA). Products and Services The United States Postal Service divides their services into twain broad categories Market dominant mailing services and competitive shipping services. Mailing services include First Class Mail, Standard Mail, Periodicals and Package Services.Shipping Services include alone not limited to precedency Mail, Express Mail, Bulk, Parcel Post and Bulk Intertheme Mail. Mailing services sop up get up ditch prices but generally doesnt have any set ceiling price up to the allowed upper limit size and weight limits ( comm scarcely 70 pounds for each package). The same holds true for shipping services. every(prenominal) these services be offered through a network of more than 32,000 Post regions, stations and branches, annex thousands of contract post units, society Post affairs, Village Post big ancestrymans, retail establishments selling postage stamps and other services in cluding the internet, www. sps. com. Additional services offered be sale of Postal capital parliamentary laws, leasing of Post Office boxes and sale of post cards or greeting cards. International mail and package services are also operable to more than xcl countries (Annual Report to Congress, 2011). The current First-Class Mail stamp costs $0. 45 addd 2. 1% beginning in January 2012 that was announced in October 18, 2011. Postal Service Mail pricing is set by the get on of Governors and approved by the PRC. Shipping services pricing is set by law covering twain the institutional costs allocation and attributable costs.The institutional cost allocation is determined by the PRC and is currently set at 5. 5%. Thus the shipping cost is the sum of 5. 5% institutional costs (comparable to transaction costs) and attributable cost, representing the invest cost of the mailing or shipping services establish from the weight and size of the package (USPS Annual 10-K Report, 2011). Cur rent Financial program line For the fiscal year last September 30, 2011, the United States Postal Service reported a net loss of $5. 067B from their operation, an improvement analyze to the previous years loss of $8. 505B. This is despite a reduction of 4. % in the number of its career employees from 583,908 to 557,251 (USPS Annual 10K Report, 2011). Just want any other private clientelees, the USPS was also greatly preserveed by the global economy especially the deep and prolonged economic time out of 2008. Additionally, with improvement in technology, wider approachability of internet wideband services, lower cost of personal computers, prevalent use of online banking and also surge in offering of online blood lines transfers, which not scarcely offers convenience and speed but virtually free, has directly cope and won over almost of the mailing services of the USPS.Mail book of account deliveries have descendd by 5% in the last two eld, 2011 and 2010 and the year before, in 2009, the decrease was a staggering 12. 8% (USPS Annual 10K Report, 2011). The expansion of mobile internet coupled with smart crys get out just worsen USPS declining mail saturation in the future. Finally, one of the biggest operating expenses of USPS besides transportation costs and plant equipment and facilities is employee wages and retiree benefits. USPS habit costs makes up virtually 80% of its total operating costs (Kosar, 2012).Employee wages and retiree benefits costs are signifi gougetly impacted by wage pretentiousness, health benefit premium developments, retirement and workers requital programs, and cost-of-living allowances. In the last 5 historic period, the USPS suffered a total net loss of more than $25 trillion including $21 billion of expenses for the pre-funding of the Postal Service Retiree Health Benefits shop (PSRHBF) mandated by Public Law 109-435 (USPS Annual 10K Report, 2011). USPS current total debt as of September 2011 is at $13B wh ich is only $2B from its statutory limit of $15B set by 39 U.S. C 2005(a) (Kosar, 2012). Financial statements reported to Congress for the fiscal year ending September 30, 2011 Years ended Sept. 30, 2011Percent change from preceding year (dollars in millions) 2011 2010 2009 2011 2010 2009 operate r blushue $ 65,711 67,052 $ 68,090 (2. 0%) (1. 5%) (9. 1%) Operating expenses * $ 70,634 $ 75,426 $ 71,830 (6. 4%) 5. 0% (7. 6%) damage from trading operations $ (4,923) $ (8,374) $ (3,740) Operating margin (7. 5%) (12. 5%) (5. 5%) last-place loss $ (5,067) $ (8,505) $ (3,794) Purchases of capital $ 1,190 $ 1,393 $ 1,839 (14. 6%) (24. 3%) (7. %) Property and equipment Debt $ 13,000 $ 12,000 $ 10,200 Interest expense $ 172 $ 156 $ 80 Capital contributions of $ 3,132 $ 3,132 $ 3,087 U. S. Government Deficit since reorganization $ (22,072) $ (17,005) $ (8,500) make out net deficiency $ (18,940) $ (13,873) $ (5,413) Number of career employees 557,251 583,908 623,128 (4. 6%) (6. 3%) (6. 0%) Mail volume (pieces in millions) 167,934 170,860 176,744 (1. 7%) (3. 3%) (12. 8%) natural delivery points served 636,530 739,580 923,595 *P. L. 112-33 had a net impact of a $5. 5 billion reduction of expenses in 2011.P. L. 111-68 had a net impact of a $4. 0 billion reduction of expense in 2009. Graphical molding of USPS operating revenues and expenses from FY 2004 FY 2011 Market Structure Monopoly Salvatore D. (2012) defined a monopoly market as an organization in which a single fast(a) sells a product for which in that location are no close substitutes (p. 388). And of the four sources of monopoly cited (Salvatore, p. 390) is one established by a government franchise deal the United States Postal Service. Not all of USPS products and services are monopolized.USPS monopoly is only in their mailing service referring to as its dominant mailing service. No other delivery service company in the industry is allowed to deliver mail. And this includes delivery service companies li ke UPS and FedEx. Mailing services includes First Class Mail, Standard Mail, Periodicals and Package Services. The USPSs has monopoly over garner delivery, mailbox monopoly and the ability to suspend the delivery in certain cranial orbits. It enforces this monopoly with its armed postal inspectors who can subscribe searches and seizures if it suspects breach of its monopoly.The only exceptions to this monopoly are letters accompanying cargo and letters of the carrier (inter bureau correspondence) including bicycle messengers and overnight deliveries (Giddens, 2003). Monopolistic controversy Is defined, as the form of market organization wherein there are many sellers of a heterogeneous or differentiated product and entry into and exit from the industry are rather swooning in the long run (Salvatore, D. , p. 396). Although the United State Postal Service does have a monopoly on mailing services it so far does not have monopoly over shipping services which it shares with FedEx and UPS. only, this non-monopolized shipping service cannot be classified as Monopolistic Competitive market as there are only some sellers offering the products or services. Additionally, the same products and services are basically homogenous. Instead it is classified as an oligopolistic market. Oligopoly Is defined, as the form of market organization in which there are few sellers of a homogeneous or differentiated product (Salvatore, D. , p. 412). Products and services offered by the U. S.Postal Service in its Shipping Services naval division is classified as an oligopoly market. It shares this shipping services market with United Parcel Service and FedEx. With very few firms in the shipping industry, all triple (USPS, UPS, and FEDEX) seems to operate more like interdependence firms rather than rivalries. This is indorse by the col lugating services of USPS and UPS called UPS Basic while the one between USPS and FEDEX is called SmartPost. This interdependency operation betwe en these three firms mutually benefits all actuateies.Although it may look like USPS is getting the shorter end of the deal, but by conducting an additive analysis it go forth show USPS is just actually synergizing its required mandate of providing fundamental postal services. On the other hand, UPS and FEDEX benefit also from the consolidation by sharing their not so profitable area of their shipping services to USPS to ensure continued services to their customers and at the same time customer loyalty. Competition and Alliances There are a number of communications media competing for the same types of transactions and communications in the mailing and delivery services industry.These include newspapers, telecommunications, televisions, e-mail, social networking and online electronic funds transfers. For the shipping services intense contest is offered by United Parcel Service and FedEx Corporations (USPS Annual 10K Report, 2011), although at the same time these two competitors are also its alliances as described above. United Parcel Service (UPS) Financial comparison Below is UPSs financial statement for the last three years 2008 to 2010. Comparing U. S. Post Office 2010 and 2009 y primeval total revenues, UPSs 2010 is only 73. 2% to that of the U. S. Post Office while its 2009 revenue is only 66. 53% to that of the U. S. Post Office. This is proof positive even though the U. S. Postal Office is generally a local national firm, it has larger revenue than a multinational firm like UPS. However, when comparing operating expenses the U. S. Post Office edges UPS by a very large margin. U. S. Post Office total operating expenses of $75. 426B for 2010 more than double UPS $31. 989B. And for 2009, U. S. Post Offices total operating expenses of $71. 83B dwarfs UPS $31. 692BWhile UPS post a Net in hail of $3. 488B and $2. 152B in 2010 and 2009 respectively, the U. S. Post Office posted a Net Loss of $8. 374B and $3. 74B in the same years. Income Statement All numb ers in thousands Period EndingDec 31, 2010Dec 31, 2009Dec 31, 2008 entire Revenue 49,545,000 45,297,000 51,486,000 Cost of Revenue11,682,000 9,804,000 11,878,000 Gross clear 37,863,000 35,493,000 39,608,000 Operating Expenses investigate Development- Selling General and 30,197,000 29,945,000 32,412,000 Administrative Non Recurring- some others1,792,000 1,747,000 1,814,000 congeries Operating Expenses- Operating Income or Loss 5,874,000 3,801,000 5,382,000 Income from chronic Operations entireness Other Income/3,000 10,000 75,000 Expenses Net Earnings Before 5,877,000 3,811,000 5,457,000 Interest and Taxes Interest Expense354,000 445,000 442,000 Income Before Tax5,523,000 3,366,000 5,015,000 Income Tax Expense2,035,000 1,214,000 2,012,000 minority Interest- Net Income From3,488,000 2,152,000 3,003,000 Continuing Ops Non-recurring Events Discontinued Operations- Extraordinary Items- Effect Of Accounting Changes- Other Items- Net Income 3,488,000 2,152,000 3,003,00 0 Preferred timeworn And Other Adjustments- Net Income Applicable3,488,000 2,152,000 3,003,000 To Common Shares Product and Services comparison UPS products and services are homogenous to U. S. Post Office products and services with the exception of mailing services in the United States. UPS is basically a package delivery company (shipping services) providing transportation, logistics and financial services in the United States and in other 220 countries.It also go aways letter and register delivery but only those considered time con buildt delivery exempted by the U. S. Post Office from its mailing service monopoly. Unlike the U. S. Post Office shipping services, UPS operates internationally thus providing import and exporting logistic services throughout the world. It also houses various technology solutions for automated shipping, visibility, billing, distribution centers (to various industries like healthcare), technology, retail/consumer and a portfolio of financial ser vices. FedEx Financial comparisonBelow is FEDEXs financial statement for the last three years 2009 to 2011. Comparing U. S. Post Office 2011 and 2010 one-year total revenues, FEDEXs 2011 is only just about 59. 81% to that of the U. S. Post Office while its 2010 revenue is only almost 51. 80% to that of the U. S. Post Office. Just like with UPS, FEDEX annual revenue is just barely a little over half of the U. S. Post Office annual revenue. However, U. S. Post Office Operating Expenses more than triples FEDEX annual operating expenses hence resulting in huge annual Net Loss to the U. S. Post Office while FEDEX posted a Net Income of $1. 52B and $1. 184B in 2011 and 2010 respectively. Income Statement All numbers in thousands Period EndingMay 31, 2011May 31, 2010May 31, 2009 Total Revenue 39,304,000 34,734,000 35,497,000 Cost of Revenue14,266,000 11,908,000 12,672,000 Gross Profit 25,038,000 22,826,000 22,825,000 Operating Expenses seek Development- Selling General and20,598,000 18,852,000 18,899,000 Administrative Non Recurring89,000 18,000 1,204,000 Others1,973,000 1,958,000 1,975,000 Total Operating Expenses- Operating Income or Loss 2,378,000 1,998,000 747,000Income from Continuing Operations Total Other Income/(27,000)(25,000)15,000 Expenses Net Earnings Before2,351,000 1,973,000 762,000 Interest And Taxes Interest Expense86,000 79,000 85,000 Income Before Tax2,265,000 1,894,000 677,000 Income Tax Expense813,000 710,000 579,000 Minority Interest- Net Income From1,452,000 1,184,000 98,000 Continuing Ops Non-recurring Events Discontinued Operations- Extraordinary Items- Effect Of Accounting Changes- Other Items- Net Income 1,452,000 1,184,000 98,000 Preferred Stock And Other Adjustments- Net Income Applicable To1,452,000 1,184,000 98,000 Common Shares Product and Services comparison FEDEX product and services are also similar to UPS and with USPSs shipping services. Its services are divided into four segments FEDEX Express, FEDEX undercoat , FEDEX Freight and FEDEX Services. FEDEX Express, Ground and Freight generally deals with domestic and international shipping services while FEDEX Service provides sales, marketing , administrative, info technology and customer service support services including copying and digital printing services.Economic Factors Macroeconomic Factors Unemployment and recession The greatest recession in U. S. history since World struggle II was declared to have started as early as December 2007 and officially over by June 2009 per National Bureau of Economic Research (Beatty, A, Sept 2010). During the start of the recession, unemployment was at a 5. 0% (Dec 2007) and reached its peak of 10% in October 2009.However, these unemployment issues are mislead because as per Bureau of advertise and Statistics, Unemployment is defined as people who do not currently have a farm out, have actively looked for work in the past four weeks (from the time when the report is prepared) and are currently ava ilable for work (Amadeo, n. d. ). It also includes people who are temporarily laid off and delay to be called back to work. People who are jobless(prenominal) and have not looked for job in the last four weeks (from the time the report is prepared) are removed from the push back force and are not counted as out of work.The Bureau of Labor and Statistics also releases Alternative measures of labor underutilization report divided into 6 sections as follows * U-1 Persons dismissed 15 weeks or longer as a percent of the civilian labor force * U-2 speculate losers and person who completed temporary jobs as a percent of the civilian labor force * U-3 Total unemployed as a percent of the civilian labor force (official unemployment rate) * U-4 Total unemployed accession discouraged workers, as a percent of the civilian labor force plus discouraged workers * U-5 Total unemployed plus discouraged workers, plus all other person marginally attached to the labor force, as a percent of the civilian labor force plus all person marginally attached to the labor force *U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force Of these six sections, the focus is on the U-3 and U-6 figures. As of December 2008 the official unemployment rate as per BLS Report (U-3 figure) is at 7. 3% while the U-6 figure is at 13. 5%. The difference is 6. 2% content while 7. 3% of the work force is macrocosm reported as officially unemployed, some other 6. 2% are not. And this unreported 6. 2% are generally those who have stopped looking for jobs or those who hold part time jobs. By June 2009, when the last economic recession was officially declared over, the U-3 and U-6 figures are 9. 5% and 16. 5% respectively. And for the year ending, December 2011, U-3 was reported at 8. % and U-6 at 15. 2% for a difference of 6. 7% . This difference indicates 44. 0% (6. 7% / 15. 2%) of the unemployed is not reported in the official unemployment rate. This is an indication although unemployment rate has been reported to deterioration from its peak of 10% in October 2009 to 8. 5% in December 2011, there are silence far more unemployed people be unreported or have continuously decided not to join the workforce. spicy unemployment adversely affects the national economy in general including delivery and shipping services firms like USPS. With consumers having less confidence and less bullion to spend, there is less bloodline for delivery of goods.When unemployment rate is advanced, there are fewer consumers while stock-still those employed has less spendable money. Hence, retailers sales radioactive decay so is the rank of replacement merchandise directly translating to reducing shipping services both for the retailers and consumers. In short, there go away definitely be a negative impact on USPS revenue . Cyclical changes in the economy, i. e. recession and pomposity is nothing new to USPS, however the effect of modern technology like the personal computers and internet is.At the aggrandizement of the recession, 2009, USPS revenue declined by 9. 1% over the previous year with a total net loss of $3. 74B followed by another $8. 473B net loss in 2010. Unemployment rates peaked from 7. % in January of 2009 to 10% in October 2009 and declined to 9. 4% in December 2010 were in parallel with these revenue losings. The bulk of USPS operating expenses is mostly from its employee wages and retiree benefits and transportation. Of these, employee wages and retiree benefits are the least elastic. With more than 85% of its employees covered by bodied Bargaining Agreements (CBAs), USPS is strictly constrained to react promptly to sudden changes to the economy to reduce its operating expenses, i. e. displace off employees or reducing retiree benefits. Inflation Inflation is defined as a sust ained increase in the general level of prices for goods and services.It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. The note value of a dollar is never constant and it is referred to as its purchasing creator. With inflation there is a decline in the purchasing military group of the dollar (Investopedia. com) For USPS, inflation also results in adverse effects on its revenues but mostly it affects the cost of health benefits it has to cover for its employees and retirees. For its operations, the cost of fuel also greatly affects its operating expenses. Cost of living allowances and workers compensation programs also add to increased operating expenses.But the most negative impact is the inability of USPS to readily adjust its product and services pricing based from inflation as it requires legislative actions to do so. Government Legislations Since USPS is a government owned firm, it operat es within the guidelines of public laws. Product and services pricing are approved by Congress. In adjunct, delivery schedules and delivery routes are also regulated by the Postal Regulatory Commission. With the implementation of Public Law 91-375 commonly k instantern as the Postal Reorganization Act of 1971, the USPS became a self-supporting, wholly governmental entity designed to cover its operating costs with revenues generated through providing fundamental postal services to the entire nation (Kosar, 2012).It does not receive annual appropriation from Congress for its operating budget except for the annual $100M telling pays to compensate USPS for the revenue losses incurred for free mailing privileges to maneuver persons and overseas voters, as directed by Congress. The Postal Accountability and Enhancement Act of 2006 (PAEA) established the Postal Service Retiree Health Benefits Fund (PSRHBF) and required USPS to prefund its future retirees health benefits at a cost of app roximately $5. 5B per year for 10 years with remaining balance amortized in the subsequent next 40- year period. For FY ending 2011, the unfunded obligation to this fund is at $46. 2B (the accuracy of this amount is still being debated depending on what valuation method is used) (Kosar, 2012). Below is the table for the RHBF retributions under the PAEA Table 1.Postal Service Retiree Health Benefits Fund Payments Under PAEA Fiscal Year Payment Due Per PAEA (billions) Status of Payment 2007 $5. 4 Paid in full. 2008 $5. 6 Paid in full. 2009 $5. 4 $1. 4 billion paid 2010 $5. 5 Paid in full. 2011 $5. 5 No payment 2012 $5. 6 Due September 30, 2012. 2013 $5. 6 Due September 30, 2013. 2014 $5. 7 Due September 30, 2014. 2015 $5. 7 Due September 30, 2015. 2016 $5. 8 Due September 30, 2016. Source Postal Accountability and Enhancement Act (P. L. 109-435, 803 120 Stat. 3251-3252 5 U. S. C 8909(d)(3)(A). ) Due to solvency problems, Congress reduced the FY 2009 payment amount to $1. 4B (P. L. 11 1-68) while in FY2011, Congress delayed the payment to August 1, 2012 as per H. R. 112-331.By front warhead the RHBF, USPS has switched from funding its RHBF from out of pocket cost to pre-funding. Its this prefunding causing a tremendous financial strain on the firm. Its also an indicator on how much leverage and control government legislations have over the firm. And this is just one of the two biggest entities having control over the firms operations. The other one is employees unions. Collective Bargaining Agreements More than 80% of USPS operating cost is collect to its employees wage and more than 85% of its employees belong to one of the four unions or referred to as management organizations, i. e. , APWU, NALC, NPMHU and NRLCA.Unfortunately for USPS even though it enjoys benefits from federal regulations like monopoly of mailing services and having the ability to borrow money from the Federal Financing Banks up to $15B or as set by Congress the same federal laws also put c onstrains in its ability to increase revenue by increasing prices without prior approval or decreasing its operating costs by reducing mail delivery schedule or closing non-performing post offices or by having power to control labor costs. Statutory processes for resolving disputes between labor and management frequently results in arbitrators being empowered to make binding decisions heavily favoring employees (USPS Annual 10K Report, 2011). With declining revenues since 2007, USPS has been unable to reduce employee numbers to desired sustainable strength, its main operating cost, without having to rely solely on attrition or buy outs due to collective bargaining agreements that heavily favor employees. Future dodge calls for attrition or reduction in employees numbers to an additional 120,000 positions by FY2015.However, USPS is unable to achieve this without overjustifying current CBAs and it doesnt have the power to do so. Microeconomic Factors Personal Computers and Internet In their 2009 annual report, according to the Bureau of Labor and Statistics, approximately 68. 7% percent (81. 939 million households) of all U. S. households have internet access. Out of this 68. 7%, 63. 5% uses broadband service while 4. 7 % uses dial up service with the remaining 0. 4% using each satellite or dish access (BLS, 2010). And the numbers will only continue to grow as personal computers become more affordable and internet services continue to be made available in the rural areas.With internet comes email and social networking services. Although email is a differentiated product from rhythmical paper mail or commonly referred to as snail mail, its purpose and function is solely the same. In short, email is almost a perfect substitute product for unwavering paper mail. The decline in fantabulous mail volume started to take center stage when the volume of First-Class mail, where USPS gets the bulk of its money from, fell below junk mail volume for the first time in 20 05 (Leonard, 2011). Total mail volume declined 20% between 2006 and 2010 resulting in a total net income loss of $25B. 1-From 2011 Report on Form 10-K USPS So is email killing USPS?Although decline in First-Class mail alone cannot postulate this to be accurate, there is however undisputed evidence email has delivered a severe financial blow to USPS. Like this is not serious enough in time, digital communications continue to evolve and quick becoming mainstream. Mobile phones or smartphones are not only capable of do a phone call but also able to send emails just about anywhere they can let out service signals from their providers. The phone can also be used to send text (texting), providing not only faster communication than regular paper mail but even better than regular email as it requires no computer to access it and is in real time.To make matters worse for USPS, most pedigreees are already moving to paperless bill and payment delivery meaning the 20% decline in first-clas s mail volume in the previous years, not only will it be probably permanent but will most likely worsen before it gets better. And then there is yet still another evolving technology that could also adversely affect USPSs other business gravel, shipping services, and this is with the digital or electronic books. According to Amazon, the largest retailer on the web, Kindle books are just now starting to outsell printed books (Leonard, 2011). Everyday Low Pricing strategies If you are looking for the cheapest postal rate just about the world, look no further than the U. S. Postal Service.For a universal rate of 44 cents (before January 12, 2011, where it rose to 45 cents), for the first ounce, a First Class letter mail can be delivered anywhere in the United States and its territories. In comparison, for the same letter mailed locally, in Norway it would cost the sender $1. 63 in Japan it would be $1. 06, in France it would be $0. 81, in Germany it would be $0. 77, in UK it would b e $0. 74 and in Canada it would be $0. 61 (Annual Report to Congress, USPS, 2011). Like this is not cheap enough yet, the Standard Mail is even cheaper consisting mostly of advertising and periodical mails. So is everyday low pricing causing financially losses USPS?In comparison to other postal services it would seem so. An analysis of this dilemma is presented in the business strategies section of this report. Outsourcing and global competition Although most U. S. companies have adopted globalization and have included outsourcing in their system to compete in the global market, the U. S. Postal Service remains a sole government franchise operating only nationally. As such it does not include outsourcing as a part of its business model and do not compete globally. Business Analysis Current Financial exertion USPS current financial performance in the last 5 years and especially in the 2011 is in dire straits.With over $25B in net losses over the past five years including $21B of ex penses for the prefunding of retiree health benefits, it ended 2011 with only $1. 2B in total cash and only $2. 0B of remaining acquire might. The projected payments for the PSRHBF for 2012 is a staggering $11. 1B ($5. 5B for the deferred 2011 and $5. 6 for the upcoming 2012 contributions) and then there is the payment for workers compensation for approximately $1. 3B by September 30, 2012. Even with all the re-structuring tools available for the USPS put into place including price increases just tardily approved, USPS will not be able to meet all its current year financial obligations.Unless, congress makes changes to the current requirements of prefunding USPS PSRHBF, the firm is technically insolvent even prior to the end of its 2012 accounting period and will remain so at least until 2016. Previous Financial Performance The last time USPS posted net income from its operations was in FY2004 ($3. 1B), FY2005 ($1. 626B) and FY2006 ($969M), (USPS Annual Report 2007). It was in 20 06 P. L. 109-435 became a law relieving USPS of the $27B in reward liabilities for workers with military service (USPS workers with military pension used to be paid by USPS vice the U. S. Treasury) but at the same time USPS agreed to make annual payments of $5. billion for the next 10 years to build up a fund for future retirees. When this bill was signed into law, USPS was ecstatic. So for FY 2006, USPS finished the year with a net income of almost $1B. Little did it know it will be the last time USPS will ever finish the year in black Future Financial outlook Future financial outlook for USPS is dimmer than ever. With decline in First Class mail volume continuously declining, there is no indication this is not permanent or worse yet decline more in coming years, even if the economy improve. So far USPS seems to be more focus on increasing its revenue by increasing prices in both of each services, i. e. , mailing and shipping services.At the same time, it also wants to reduce its operating expenses by reducing its number of employees and closing or converting some of its branches into village post offices. However, even with all these business strategies, USPS doesnt seem to focus on how it can re-structure its business model to adapt to digital technologies and the use of Internet. Although, it has adapted its shipping services and selling of stamps into the digital world USPS is yet to make headways into a profitable business model. Business Strategies Product pricing One of the business strategies of USPS and usually most of businesses do is to increase product pricing everytime the end of the accounting period reports Net Loss This seems to be a knee-jerk reaction since its the easiest logic to recoup net losses.And this is because purportedly increase in product pricing directly correlates to increase revenue thus increased profit or having to post Net Income alternatively of Net Loss at the end of each accounting period. However product pricing is not as plain and easy as it looks. In the case of USPS product pricing, the elasticity of each product pricing should be taken into account. USPS has validated the fact that technology, increased availability of broadband services, growing internet access in homes, declining prices in personal computers, and expanding mobile services has caused a decline in its mailing services. This is directly attributed to e-mails and online banking billing and payments.In short, email and other electronic online banking transactions, although differentiated from regular paper mail are direct substitute products. As such, it can be postulated increasing the price of USPS mailing services will not necessarily translate to increased revenues. With price elasticity of demand (EP), the more there is a close substitute to a product the higher is the elasticity of demand. This is shown in the below graph Figure 2 Managerial Economics in Global Economy (Salvatore, D, 2010) With EP greater than one (highly elastic as shown on the upper portion of the blue demand line) the demand line indicates an increase in price (PX) will result in decrease in quantity demanded (QX). With decrease in quantity demanded means reduction in total revenue.Based from the mail volume decline since 2006 (when mailing was cheaper than last year and this year) up to the present its almost conclusive further increase in the cost of mailing will only exacerbate the decline in mail volume making it easier for business managers to make the decision to switch to paperless bill statements and delivery. Although current statutory requirements limit pricing increase on shipping services (including mailing services) to rate of inflation, USPS should request Congress to include a direct authority for USPS to increase prices (with approval from the Postal Regulatory Commission, PRC) based from increased cost of transportation, i. e. , fuel, the same strategy used by the airline industry. The airline industry started usi ng surcharges for baggage checked in when the cost of fuel surge to unsustainable levels.USPS should have the same authority to make time sensitive changes to its pricing as it deems necessary for its continued operations with the approval of the Postal Regulatory Commission (PRC). Even if given this authority, USPS should still consider the competition before it can raise shipping prices and by how much. By having the authority though, USPS can be a flexible firm able to respond in time to stop large losses while waiting for Congress to give it an approval. Product diversity With technology, USPS has started to adapt the internet for some its product offerings. Customers can go at USPS. com and fill their forms online and even print their mailing or shipping stamps.Additionally, customers can also request home or station pick up by USPS meaning customers need not even to get out of their houses to receive mailing or shipping services. However, these shipping services are also avai lable with USPS competitors like UPS and FEDEX and seem to be doing a better job than USPS. There is however, one product USPS offers that its competitors do not offer and this is Postal Money Order. U. S. Postal Money Orders are very popular and reliable people up to this day prefer them as a form of payment over credit or debit cards or even online fund transfer companies like Western Unions or Paypal. USPS should conduct a study on how to establish a business model allowing it to offer a digital version of its Postal Money Orders.With USPS monopoly on money orders this is almost a sure winner if it can design a digital or online business model for its money orders. In 2010, Paypal posted total revenue of $3. 4B and expects to double this revenue by 2013 (Galante, 2011). On the otherhand, Western Union posted a Net Income of $909. 9M (Yahoo Finance). With potential revenue at this level just from its money order business, USPS is posed to increase its annual business revenue treme ndously compare to just increasing its product pricing. Resource utilization USPS resource utilization is obviously not at its best level considering the amount of losses it incurred in the last 5 years.Probably the worst resource underutilization is in the lush number of employees and its huge fleet of accelerator pedal guzzling trucks and delivery vehicles. USPS was very slow to adapt to new technology and didnt quite see the effect of the internet with its mailing services and continued revolt cost of fuel. This is in spite of the significant decline in First-Class mailing volumes as early as 2005 and the more than $100 a barrel of crude oil in 2008. USPS did not invest to stop Saturdays mail delivery until 2010 when it was already losing tens of billions in income. USPS tries to optimize its resource utilization by working interdependently with its Shipping Services competitors like UPS UPS Basic and FedExs Smart Post.However, USPS should strive instead to get as much of th is business for itself instead of having to share it with its competitors. This doesnt mean it has to get rid of this interdependency relationship as it helps in its resource utilization but should try to get as much as it can so as to enjoy the revenue for itself instead of sharing with others. And it can easily grasp this through pricing, which it has an advantage over the competition. With oil price increases in 2008, USPS should have started displacement or equipping its delivery vehicles either to more fuel efficient vehicles or those equipped to use Compressed Natural Gas (CNG). According to Consumer Energy Report. om (Rapier, 2009), based from EPA reports, a gallon of gas pedaloline contains approximately one hundred fifteen,000 BTUs of energy while a Standard Cubic Feet (SCF) of natural gas contains 1,000 BTUs (hence 115 SCF of CNG equates to 1 gallon of gasoline). In November 2011, the national average price of gasoline was $3. 37 a gallon while for diesel it was $4. 0 1 a gallon (Consumer Report, 2011). On the same period, the price for natural gas is $8. 60 per thousand SCF for commercial rate and $4. 53 for industrial rate (EIA. gov, 2012). A thousand SCF of natural gas equates to 8. 7 gallons of gasoline or diesel (1,000 divided by 115), meaning had USPS converted some of its vehicles into CNG, it would only be paying approximately 98. 85 cents to equivalent gallon of gasoline or diesel at the commercial rate price, and even less if given the industrial rate price.At present, price of natural gas has declined although not significantly but it might as well be because on the other end of the spectrum the price of gasoline rose to almost $4 a gallon from $3. 37 in November 2010, an increase of 18. 7% and it is just starting to get worse. USPS has the largest civilian fleet of vehicles in the world numbering to 215,625 impatient through more than 399 million of gallons of gasoline/diesel for a total of 1. 25 billion miles set (Postal Facts, 201 1) it could have easily saved tens of millions of dollars with the use of CNG. USPS should continue with its strategy of reducing its number of employees and post office branches or converting some branches into Village Post Offices. Additionally, it should also strive to reduce its delivery service from a 6-day to a 5-day delivery.Although this may sound like an easy feat to accomplish, i. e. , to reduce operating cost due to reduced mail volume, it is not. This is because although there has been a decrease in mail volume there is however an increase in delivery points. So the bottom line is although reducing operating cost is a positive step, USPS can only reduce it for so much and for so long before it starts impuissance in providing fundamental postal services to the nation its primary mandate and reason for existence. The other strategy for USPS besides operating cost reduction is synergized on what it is currently accomplishing now and for the future. Cost Volume Profit Analys is Cost-Volume-Profit analysis or breakeven analysis is a process of determining the output where a firm breaks even or earns a target profit from the total revenue and total cost functions of the firm (Salvatore, D. 2012). Unlike manufacturing or production firms, or any private firms, the USPS has a constant mandate to provide fundamental postal service to the nation. As such, it requires a minimum number of employees, material and other resources to accomplish this task, hence an absolute minimum operating cost. In private sector, when a firm CVP analysis indicates a decline in total revenue (TR) compare to total cost (TC), its tendency is to reduce TC until it is low enough to gain profit.Even better for the firm it has the election of totally abandoning some specific operations or productions if it cannot gain profit despite drastic reductions in TC. However, this is not the case for the USPS. With minimum requirements to provide fundamental postal service to the nation, the U SPS cannot reduce its TC to the point it will cease some or even a single part of its operation, despite heavy net losses in income. When USPS is operating at a loss and has done just about everything to minimize its TC, its only other option is to increase the volume of its business to at least break even. With decline in mail volume still yet to hit bottom, USPS needs to venture to different products especially those taking advantage of the internet and other evolving technologies.It is only through additional products or improvement in current existing products USPS can increase volume of its business to at least cover its minimum operating cost. Strengths, Weaknesses, Opportunities and Threats Being a government own firm, USPS has some inherent strengths in its business model as follows 1. Monopoly of the mailing service industry 2. Open Credit lines or borrowing up to $15B from the Federal Financing Bank, which can also be increased in due time with the approval of Congress 3. Large operating capacity with more than 33,000 facilities throughout the nation 4. A non-profit organization whose only financial objective is to break even giving it the strength to undermine the competition through low pricing 5.Highly resilient to cyclical changes in the economy brought by recessions and inflations 6. Modern technological network infrastructures and highly computerized distribution systems USPS should utilize its strengths to increase revenue especially with its business goal of only requiring breaking even. It can also flex its strength in pricing to beat the competition when it comes to its shipping services. With its large operating capacities it should plan to expand its business model to achieve economies of scale. USPS weaknesses also come mostly from the same institution that gave some of its strengths 1. Large operating cost due to large required coverage in mail and shipping deliveries as mandated by Congress 2.Very little diversity in products and serv ices despite large operating capacities and highly technological networked infrastructure 3. Very little to none bargaining power with employees management organizations or unions 4. Very restrictive operating schedules and product pricing flexibilities 5. Slow adaptability in a highly changing business environment brought by newer technology due to restrictions placed upon the firm by Congress through the Post Office Regulatory Commission 6. Large number inefficient fleet of vehicles 7. Very expensive employee pension and retiree health benefit plans Weaknesses in large number of inefficient fleet of vehicles unnecessarily contributing to high operating cost can be easily avoided with the use of alternate energy like CNG.Congress should give temporary authority to USPS to effect price changes as a result of out of the ordinary changes in fuel costs and other materials and resources it uses to fulfill its mandate. The two most readily available opportunities for USPS mostly come on ly in two forms, i. e. product diversity and more use of the internet as another source of business revenue. This can be as simple as developing a business model to the current postal money orders so it can be transformed to something like e-Money Order that can be used for online fund transfers the same as Paypals or Western Unions business model do. As for product diversity, USPS should start looking into expanding its shipping services to aggressively compete directly with UPS and FedEx.The biggest threat facing USPS is the continuing decline of its mailing services. Despite the big proposal of increasing prices supposedly supplementing losses, its more likely the more USPS continue to raise prices in its mailing services the originally it will decline more. The threat of defaulting with its PSRHBF funding for this year and probably for the following years is imminent. The possibility of a government bailout seems to be very more likely starting this year and the years thereafte r. USPS needs to mettle the reality of the internet technology and should start restructuring its business model so as to treat the internet as an ally instead of an adversary. ConclusionAn expeditious and short term solution to the Unites States Postal Service current financial problem is way out of reach of the sole capability of the firm and requires a congressional legislation to make it happen. This specifically with the firms mandated annual $5. 5B prefund contribution to its PSRHBF where $11. 1B is due by September 30, 2012. In addition there is also the $1. 3B Workers Compensation Fund required to be paid to the DOL at the end of the fiscal year. To keep USPS financially solvent and operational at least for the time being, Congress should die to postpone payments to the PSRHBF and to the Workers Compensation for the next three years.This should give enough breathing room for USPS to stay rudderless while at the same time implementing its multi-prong strategies of reducing its operating costs, increasing revenues, diversifying its products and improving its processes and methodologies to attract more customers. References 1. Amadeo, K, (n. d. ) U. S. 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