Will Lowering the Bar Enable Success?

On April 21, the USPS filed its Request for an Advisory Opinion on Changes in the Nature of Postal Services, seeking the Postal Regulatory Commission’s input on changes to the service standards for First-Class Mail and time-sensitive Periodicals. The fifteen-page filing was accompanied by direct testimony from five witnesses and eight “library references” containing supporting data.

Proposal

As the Postal Service had publicized already, it will not change the very limited standard for overnight service, but other existing standards will be reduced significantly. The current 3-to-5 day standard, for example, will become four separate standards extending as far as six days.

Generally speaking, the distance to which the current two-day standard would apply would be reduced from 279 miles/six hours to only 139 miles/three hours (Houston to Beaumont, TX, for example). Beyond that, from New York to Albany, or Tampa to Fort Myers, for example, up to twenty hours’ drive time, a three-day standard would apply. A four-day standard would apply to distances that are over twenty, but not more than 41 hours’ drive-time apart, like from Boston to Denver. Beyond that, any further distances in the lower 48 would have a five-day standard. Connecting to or between Alaska, Hawaii, Puerto Rico, Guam, and the US Virgin Islands would have a six-day standard.

The change would apply primarily to First-Class Mail (there are no service standards, only “performance targets,” for other classes), though it would also impact some Periodicals. As the USPS stated, “a three-to-six-day service standard would be applied to Periodicals merged with First-Class Mail pieces for surface transportation, with the standard specifically equaling the sum of one day plus the applicable First-Class Mail service standard.”

The Postal Service’s justification for the changes include that “the current service standards do not reflect the declines in mail volume” and that trying to achieve them “results in high costs and inefficiencies in the transportation network.” Some of that cost and inefficiency, the USPS claims, “is characterized by an over-reliance on air transportation and low utilization of truck capacity in long-haul surface transportation.”

In turn, the USPS asserts, “allowing for additional transport time for the affected mail classes ... will improve the Postal Service’s consistency and reliability from a service performance perspective, as well as increase the efficiencies of the transportation network.”

The agency’s filing included a list of benefits that it claims will result from the service standard changes, such as that they would “better align its service standards with operational capabilities,” “provide much more consistent and reliable service,” “create a more efficient transportation network,” and “reasonably assure customers of delivery speed.” Somehow, the USPS has interpreted all of this to mean that “the adjusted standards would enhance the value of postal services for both senders and recipients,” as if people will be pleased getting their mail late if they are sure it will be late, and if, sure enough, it’s as late as predicted.

Witnesses

The five witnesses’ written statements were intended to reinforce the Postal Service’s case.

One of them was by Thomas Thress, an economist hired by the USPS to estimate of the potential loss of First-Class Mail and Periodicals Mail volumes because of the changes in service standards being proposed. After explaining all the higher math, Thress concluded that “the expected losses to First-Class Mail if average days to delivery increased by 18% would be 497.9 million pieces of mail, $241.4 million in gross revenue, and $105.6 million in lost contribution.” Thress’ testimony didn’t discuss the potential volume and revenue impact if commercial senders, like credit card and insurance companies, to mitigate their own revenue impacts from longer remittance cycles were to accelerate their efforts to switch their customers to paperless transactions.

Another witness, Curtis Whiteman, presented financial testimony “to furnish financial context” for the Postal Service’s proposed changes. Whiteman noted that the Postal Service’s 2021 Integrated Financial Plan, prepared in 2020, “projects a net loss of $9.7 billion, absent legislative or regulatory reform,” but he didn’t update the FY 2021 projection to reflect that the Postal Service’s actual financial condition at mid-year is much better than forecasted.

His testimony repeated well-known figures about volume and revenue declines and financial losses since 2007 and reiterated the measures the Postal Service claims it has taken over the period to reduce costs (the value and results of which he did not mention). He also noted that, last year, competitive products constituted 39% of operating revenues, compared to 11% in 2007. That may be true, but competitive products “are subject to market forces” and Whiteman’s financial projections did not include estimates of how those could alter USPS expectations.

Reducing air transportation and improving usage of surface transportation, Whiteman stated, would yield “savings of $196.1 million per year” and “ $83.5 million,” respectively. Given that it was estimated that the USPS would lose annual contribution (“profit”) of $104.8 million, “subtracting this figure from the $279.6 million in estimated annual net cost savings yields an estimated overall improvement in net income of $174.8 million.”

Before anyone thinks this is an awesome figure, please note that, using FY 2020 total revenue of $73.133 billion, the total financial benefit from the proposed service standard changes would represent an addition of only 0.24% of revenue – in exchange for poorer service.

A third witness, Stephen Hagenstein, USPS Director, Logistics Modeling and Analytics, provided an overview of “the modeling methodology used to evaluate the effects of the Postal Service’s First-Class Mail and Periodicals Service Standard Changes to accommodate greater use of surface transportation in the network.” [Emphasis added, to note that his assignment apparently was to take a predetermined condition – less air transportation – and figure out the consequences.]

“... Adding one to two days to the service standard between certain [pairs of facilities] will enable the percentage of First-Class Mail volume transported via surface to increase from approximately 79% to 88%. ... Maximum volume per 53-foot trailers was modeled as 1,575 cubic feet. This reflects 42 APCs at 75% capacity (37.5 cu-ft) per trailer.” However, according to an industry standard, a 53-foot trailer has an interior capacity of 3,489 cubic feet, which means the more “efficient” use of surface transportation projected by the USPS was modeled on actually using only 45.1% of available trailer capacity, hardly a stunning improvement.

Interestingly, the assumptions in the USPS model allowed for up to two stops in a trip. Origin facilities were allowed 90 minutes to prepare and load dispatches, and surface transfer centers were allowed two hours to cross-dock containers. However, the USPS has previously cited the time taken by intermediate handlings as a reason to reduce the use of air transportation, while making little mention of the number of intermediate handlings it expects to require with greater surface transportation.

In conclusion, Hagenstein included a noteworthy caveat that a model “is not dispositive and should accordingly be considered a decision-support tool, rather than a decision-making tool.” This suggests that the USPS used its transportation model to describe the results of its decision rather than as an indicator of the best decision out of several options.

Perhaps the cornerstone witness for the USPS was USPS Logistics VP Robert Cintron. His most arguable statement may have been that, in developing the service standards proposal, “the Postal Service conferred with industry representatives, the Mailer Technical Advisory Committee, and the public through a pre-filing conference.” Virtually without exception, the industry disputed that claim – made initially by the PMG. Later, the Postal Service explained that it believed discussions with industry earlier, in a variety of venues and on a variety of topics, constituted “input,” even though few if any conversations were about The Plan. It’s also never been mentioned whether the USPS will or won’t adjust its plans based on what it’s been told, particularly what it HAS heard about The Plan.

Cintron acknowledged that achievement of current service standards is sub-par, stating that “There is substantial room for improvement in service performance vis-à-vis the goals that the Postal Service has set for itself” but he didn’t explain what the USPS has done to remedy that condition.

In noting that “current average utilization of surface transportation capacity is 42%,” he added that it “has ample existing capacity to absorb volume from air transportation” and that “improved surface transportation capacity utilization and consolidation” will translate into “fewer surface transportation trips over a given period than we currently require.”

Despite noting transportation issues, Cintron did not explain why steps have not been taken to improve current air transportation performance and surface capacity utilization, or why the model used (see above) was built on using only 45.1% of available trailer capacity, barely more than current usage.

Stuck in a footnote was an interesting disclaimer: “The Postal Service is not seeking an advisory opinion with respect to service performance targets through this proceeding, and our service standards do not, themselves, specify performance targets. That being said, we expect to set service performance targets at 95% once the new service standards are in place, and we expect to meet or exceed them consistently upon implementation of our proposed service standard changes during all times of the year.” Cintron did not explain, nor has the USPS explained elsewhere, either how the current or proposed “service standards” relate to “performance targets” – to the layperson a distinction without a difference – or what future “performance targets” would be.

Much of the remainder of Cintron’s testimony went into the details of the time and distance parameters of the current and proposed service standards, and of the logistics employed to move mail among the processing facilities that form the postal network. He also repeated the indictment of current service standards: “In practice, the two-day service standard has proven to be impracticable, and the three-day service standard is achievable in theory only by forcing the Postal Service to prioritize air transportation, which is both more costly and less reliable than surface transportation. The end result is that the Postal Service is incapable of meeting its service performance targets, and hence providing reliable and consistent service, under the current standards.”

Cintron neither acknowledged nor explained the irony of changing service standards to reflect performance, rather than the reverse.

The result

Despite the Postal Service’s self-serving justifications, the appearance remains that senior USPS leadership, notably the Postmaster General, concluded that it’s easier to reduce service standards than impose the operational discipline necessary to enable achievement of the current standards.

The opportunity to recoup about ¼% of revenue by moving more mail by surface seems equally unpersuasive as a reason to delay a significant portion of First-Class Mail by one or two more days (at least). The PMG’s bias toward trucking, vs flying mail, is obvious, as is his myopic determination to sacrifice mail volume to save an insignificant amount of cost.

Moreover, given that the same facilities, management, and personnel still will be in place, the USPS is unconvincing that those resources will do any better than they do now, and won’t simply underperform against a lower standard.

Regardless, despite stakeholder input, and despite what the PRC will advise, and despite any arguments against changing service standards, it’s clear the USPS will do what it wants anyway.

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