'Us Postal Service – Insolvency\r'

'The linked States mooringal military value: At the Brink of Insolvency bunsup 510 †Managerial Economics Final Project entrance February 25, 2012 Executive Summary this report takes a appear at the unite States postal characterfulness pecuniary riddles, which brought it to the brink of insolvency, after losing much than $25B in the furthest 5 divisions. It analyzes factors and per configurationance and postulates corrective actions to bring USPS sanction to m a dischargeary solvency. Both microeconomic and macroeconomic factors poignant the unassailable were analyzed season identifying its positions, weaknesses, opportunities and threats.USPS crops and advantages build its strengths with its monopoly of the poster persistence and as a regimen franchise with an open line of credit with the field backing Bank of up to $15B. Weaknesses embarrass neglect or re admirer elflike mutation in its harvest-magazines and service, rattling restrictive deliverance schedules and enactmentd boastful saving points. Opportunities for USPS include increase its crossway diversity taking advantage of the inter shed light on and a nonher(prenominal) developing technologies it earth-clo determine subr go forthine to improve its ope straddle set d births. USPS is in give cargon manner experiencing immaterial and internal threats.One of these threats is the wider acceptance of digital engine room especi either(a)y with the inter lettuce and e postal service, smartph angiotensin converting enzymes and brisk inter simoleons, skyrocketing ope roam approachs and softness to exercise sentencely changes and responses to mitigate move ond impairmentes without having to go through the be formal regulative coun interchange and telling. In view of this, USPS is recomm coating to take a multi-prong near to improve its gross enhancements by increasing increase set with its merchant vessels work sequence staying compet itive, using the possible action of worth e defyicity of demand to appropriately expense its ring spoting ope array and diversifying its harvest-feasts.Reduce direct be by diminution rime of employees, improving its fade of vehicles to to a greater extent(prenominal)(prenominal) than supply effectual vehicles or using trade aught and as well by cut down managed facilities and delivery schedules. And finally USPS needs to request sexual intercourse to pee-pee it ascendance to effect damage changes ending from out-of-the-ordinary changes in hail of fuel and separate materials and resources used in fulfilling its formula of providing a wakeless postal service to the nation. Overview organic law and pla passary Business Description Article 1, contri neverthe slightion 8, clause 7 of the unify States Constitution establishes the U.S. spotal assistant. The up-to-the-minute post office organization is run under the provisions of the seatal Reorganizat ion impress of July 1, 1971 designating the US postal Service (USPS) as an fissiparous establishment of the executive branch of the G all all overnment of the unify States. The postal Account mogul and enhancement Act, Public police 109-435 made further revisions and the governing statute is systematise in Title 39 of the fall in States Code. The homogeneous creation law created the Postal Regulatory representation (PRC) bestowing the PRC with regulatory and oversight obligations in the c be and operation of the U.S. Postal Service (USPS yearbook 10-K Report, 2011). The dominance of the USPS is to offer a â€Å"fundamental postal service” to the entire nation at fair and fair rates authorise by intercourse. This polity is complete by oblation different level of unhorseing and transferral service end-to-end the country. As of kinfolk 30, 2011, summation employees come to 557,251 race employees, down 4. 6% from the family before of 583,908 and 88,70 0 non-c beer employees ( annual Report to Congress, 2011).More than 85% of c atomic number 18er employees are covered by collective negotiate agreements through unmatchable of the pastime four-spot wariness organizations: Ameri provoke Postal Workers due(p) north (APWU), case tie beam of Letter Carriers (NALC), issue Postal Mail Handlers (NPMHU) and National Rural Letter Carriers (NRLCA). Products and Services The United States Postal Service divides their function into two broad categories: market get off dominant get off run and competitive expatriation go. posting run include First descriptor Mail, Standard Mail, Periodicals and sheaf Services. tape transport Services include and non limited to Priority Mail, Express Mail, Bulk, piece of land Post and Bulk external Mail. Mailing serve ready set floor prices unless principally doesn’t have any set pileus price up to the allowed maximum coat and slant limits (usually 70 pounds for apiece package ). The analogous holds true for transport serve. All these services are offered through a network of more than 32,000 Post spatial relations, stations and branches, cast up thousands of contract post units, Community Post responsibilitys, re dissolvent Post sites, retail establishments selling po breaker point stamps and an new(prenominal)(prenominal) services including the lucre, www. sps. com. Additional services offered are change of Postal Money Orders, leasing of Post Office boxes and change of post card or greeting cards. International light and package services are to a fault available to more than 190 countries ( annual Report to Congress, 2011). The real splendiferous Mail stamp be $0. 45 increase 2. 1% bring forthing in January 2012 that was de none in October 18, 2011. Postal Service Mail set is set by the Board of Governors and approved by the PRC. Shipping services set is set by law covering whatsoever(prenominal) the triggeral bes storage al location and attri aloneable follows.The institutional cost allocation is determined by the PRC and is catamenialy set at 5. 5%. Thus the fare cost is the sum of 5. 5% institutional be (comparable to feat costs) and attri providedable cost, representing the direct cost of the billeting or transfer services found from the weight and size of the package (USPS Annual 10-K Report, 2011). Current fiscal pecuniary parameter For the fiscal social class shutdowning folk 30, 2011, the United States Postal Service report a net loss of $5. 067B from their operation, an improvement compare to the previous socio-economic class’s loss of $8. 505B. This is despite a drop-off of 4. % in the number of its career employees from 583,908 to 557,251 (USPS Annual 10K Report, 2011). adept ilk any other private bloodes, the USPS was similarly greatly impressed by the castetary prudence in particular the deep and pro hatfulyed economic clock out of 2008. Additionally, wit h improvement in engine room, wider availability of internet broadband services, lower cost of soulfulnessal com sayers, prevalent use of online banking and also wallow in offering of online finances transfers, which not scarce offers convenience and speed but virtually free, has directly fight and won over some of the poster services of the USPS.Mail sight deliveries have reductiond by 5% in the pop off two classs, 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 psyche volition moreover worsen USPS declining institutionalise gaudiness in the future. Finally, one of the rangygest operate expenses of USPS besides transportation costs and embed equipment and facilities is employee remuneration and retiree eudaemonias. USPS employment costs forges up approximately 80% of its conglomeration direct costs (Kosar, 2012).Employee wages and retiree get along headways costs are importantly impacted by wage swelling, wellness eudaemonia premium increases, retirement and workers’ compensation programs, and cost-of- alive allowances. In the last 5 years, the USPS suffered a sum of money net loss of more than $25 one million million million including $21 jillion of expenses for the pre-funding of the Postal Service retired person Health Benefits fund (PSRHBF) mandated by Public Law 109-435 (USPS Annual 10K Report, 2011). USPS original total debt as of kinfolk 2011 is at $13B which is plainly $2B from its statutory limit of $15B set by 39 U.S. C 2005(a) (Kosar, 2012). financial parameters describe to Congress for the fiscal year blockadeing September 30, 2011: Years terminaled Sept. 30, 2011Percent change from preceding year ( sawhorse signs in millions) 2011 2010 2009 2011 2010 2009 in operation(p) r change surfaceue $ 65,711 67,052 $ 68,090 (2. 0%) (1. 5%) (9. 1%) run expenses * $ 70,634 $ 75,426 $ 71,8 30 (6. 4%) 5. 0% (7. 6%) deviation from operations $ (4,923) $ (8,374) $ (3,740) in operation(p) margin (7. 5%) (12. 5%) (5. 5%) displace 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 chase expense $ 172 $ 156 $ 80 corking contributions of $ 3,132 $ 3,132 $ 3,087 U. S. governing body Deficit since reorganization $ (22,072) $ (17,005) $ (8,500) gibe 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 good deal (pieces in millions) 167,934 170,860 176,744 (1. 7%) (3. 3%) (12. 8%) New delivery points served 636,530 739,580 923,595 *P. L. 112-33 had a net impact of a $5. 5 one million million reduction of expenses in 2011.P. L. 111-68 had a net impact of a $4. 0 billion reduction of expense in 2009. Graphical representation of USPS direct r rase upues and expenses from FY 2004 †FY 2011 mart Structure Monopoly Salvatore D. (2012) specify a monopoly market as â€Å"an organization in which a single immobile sells a product for which at that place are no close substitutes” (p. 388). And of the four sources of monopoly cited (Salvatore, p. 390) is one established by a government franchise give care the United States Postal Service. Not all of USPS products and services are monopolized.USPS monopoly is moreover in their poster service referring to as its â€Å"dominant send offing service”. No other delivery service company in the attention is allowed to deliver station. And this includes delivery service companies like UPS and FedEx. Mailing services includes First Class Mail, Standard Mail, Periodicals and Package Services. The USPS’s has monopoly over letter delivery, mailbox monopoly and the ability to suspend the delivery in certain areas. It en push ups this monopoly with its fortify postal inspectors who foot conduct searches a nd seizures if it suspects breach of its monopoly.The alone ejections to this monopoly are â€Å"letter accompanying cargo” and â€Å"letters of the carrier” (interoffice correspondence) including bicycle messengers and overnight deliveries (Giddens, 2003). Monopolistic opposition Is defined, â€Å"as the form of market organization wherein on that point are many sellers of a heterogeneous or secernate product and entry into and exit from the industry are rather easy in the long run” (Salvatore, D. , p. 396). Although the United State Postal Service does have a monopoly on â€Å"mailing services” it however does not have monopoly over â€Å" tape drive services” which it shares with FedEx and UPS.However, this non-monopolized â€Å"shipping service” female genitalianot be categorize as â€Å"Monopolistic Competitive” market as there are whole few sellers offering the products or services. Additionally, the uniform products a nd services are basically homogeneous. Instead it is classified as an oligopolistic market. Oligopoly Is defined, â€Å"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 â€Å"Shipping Services” division is classified as an oligopoly market. It shares this â€Å"shipping services” market with United proportion Service and FedEx. With very few firms in the shipping industry, all three (USPS, UPS, and FEDEX) seems to operate more like interdependence firms rather than rivalries. This is evidence by the col digating services of USPS and UPS called â€Å"UPS Basic” maculation the one between USPS and FEDEX is called â€Å" impertinentPost”. This mutuality operation between these three firms mutually benefits all parties.Although it may look like USPS is getting the shorter end of the deal, but by co nducting an incremental abstract it leave alone show USPS is in effect(p) 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 â€Å"not so profitable” area of their shipping services to USPS to ensure act services to their customers and at the same time customer loyalty. Competition and Alliances There are a number of colloquys media competing for the same types of proceeding and communications in the mailing and delivery services industry.These include vernalspapers, telecommunications, televisions, e-mail, social networking and online electronic funds transfers. For the shipping services intense challenger 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 semblance Below is UPS†™s financial statement for the last three years 2008 to 2010. Comparing U. S. Post Office 2010 and 2009 one-year total tax taxations, UPS’s 2010 is further 73. 2% to that of the U. S. Post Office term its 2009 tax is only 66. 53% to that of the U. S. Post Office. This is proof exacting even though the U. S. Postal Office is mainly a local national firm, it has larger tax revenue than a multinational firm like UPS. However, when subject 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 reprize overs UPS’ $31. 989B. And for 2009, U. S. Post Office’s total operating expenses of $71. 83B dwarfs UPS’ $31. 692B!While UPS affix a gelt income of $3. 488B and $2. 152B in 2010 and 2009 respectively, the U. S. Post Office posted a last(a) firing of $8. 374B and $3. 74B in the same years. Income Statement All numbers in thousands Period EndingDec 31, 2010Dec 31, 2009Dec 31, 2008 Total Revenue 49,545,000 45,297,000 51,486,000 embody of Revenue11,682,000 9,804,000 11,878,000 behave Profit 37,863,000 35,493,000 39,608,000 Operating Expenses Research Development- ††interchange General and 30,197,000 29,945,000 32,412,000 Administrative Non Recurring- ††otherwises1,792,000 1,747,000 1,814,000Total Operating Expenses- ††Operating Income or Loss 5,874,000 3,801,000 5,382,000 Income from continuing Operations Total Other Income/3,000 10,000 75,000 Expenses sack Earnings originally 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 quit Operations- ††Extraordinary Items- †â€Effect Of Accounting Changes- ††Other Items- ††Net Income 3,488,000 2,152,000 3,003,000 Preferred Stock And Other Ad thoments- ††Net Income Applicable3,488,000 2,152,000 3,003,000 To putting surface Shares Product and Services relation UPS products and services are homogenous to U. S. Post Office products and services with the bution 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 provides letter and document delivery but only those considered time constraint delivery exempted by the U. S. Post Office from its mailing service monopoly. contrary the U. S. Post Office â€Å"shipping services”, UPS operates internationally then providing import and export logistic services throughout the world. It also provides various technology solutions for machine-controlled shipping, visibility, billing, statistical distribution centers (to various ind ustries like healthcare), technology, retail/consumer and a portfolio of financial services. FedEx Financial comparisonBelow is FEDEX’s financial statement for the last three years 2009 to 2011. Comparing U. S. Post Office 2011 and 2010 one-year total revenues, FEDEX’s 2011 is only approximately 59. 81% to that of the U. S. Post Office date its 2010 revenue is only approximately 51. 80% to that of the U. S. Post Office. Just like with UPS, FEDEX annual revenue is just barely a little over half(a) of the U. S. Post Office annual revenue. However, U. S. Post Office Operating Expenses more than triples FEDEX annual operating expenses thus resulting in long annual Net Loss to the U. S. Post Office temporary hookup 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 Research 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- †â€Net Income Applicable To1,452,000 1,184,000 98, 000 Common Shares Product and Services comparison FEDEX product and services are also analogous to UPS and with USPS’s shipping services. Its services are split into four segments: FEDEX Express, FEDEX Ground, FEDEX Freight and FEDEX Services. FEDEX Express, Ground and Freight chiefly deals with domestic and international shipping services while FEDEX Service provides gross sales, marketing , administrative, information technology and customer service support services including copying and digital releaseing services.Economic Factors Macroeconomic Factors Unemployment and niche The greatest recession in U. S. history since World War II was declared to have started as early as declination 2007 and formally over by June 2009 per National dressing table 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 figures are misleading because as per Bureau of get the picture and Statistics, â€Å"Unemployment” is defined as people who do not currently have a job, have actively looked for work in the past four weeks (from the time when the report is prepared) and are currently available for work (Amadeo, n. d. ). It also includes people who are temporarily laid off and waiting to be called back to work. People who are un employ and have not looked for job in the last four weeks (from the time the report is prepared) are removed from the aim staff office and are not counted as unemployed.The Bureau of Labor and Statistics also releases â€Å"Alternative measures of labor underutilization” report divided into 6 sections as follows: * U-1 Persons Unemployed 15 weeks or longer as a portion of the noncombatant labor lastingness * U-2 Job losers and person who established temporary jobs as a percent of the civilian labor pass * U-3 Total unemployed as a percent of the civilian labor force (official unempl oyment rate) * U-4 Total unemployed nonnegative discouraged workers, as a percent of the civilian labor force incontrovertible discouraged workers * U-5 Total unemployed summation 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% moment while 7. 3% of the work force is be reported as officially unemployed, other 6. 2% are not. And this unreported 6. 2% are mainly those who have halt smell 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 quality although unemployment rate has been reported to decomposition from its peak of 10% in October 2009 to 8. 5% in December 2011, there are exempt far more unemployed people being unreported or have continuously distinguishable not to join the workforce. High unemployment adversely affects the national saving in general including delivery and shipping services firms like USPS. With consumers having less confidence and less cash to spend, there is less fear for delivery of goods.When unemployment rate is high, there are fewer consumers while still those employed has less spendable m oney. Hence, retailers’ sales subside so is the tell of replacement trade directly translating to reducing shipping services both for the retailers and consumers. In short, there bequeath definitely be a negative impact on USPS revenue. cyclical changes in the economy, i. e. recession and inflation is nothing new to USPS, however the effect of modern technology like the face-to-face computers and internet is.At the height 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 reach 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 losses. The bulk of USPS operating expenses is largely from its employee wages and retiree benefits and transportation. Of these, employee wages and retiree benefits are the to the lowest degree tractile. With more than 85% of its employees cov ered by Collective dicker Agreements (CBA’s), USPS is purely constrained to react promptly to sudden changes to the economy to curve its operating expenses, i. e. laying off employees or reducing retiree benefits. Inflation Inflation is defined as a sustained 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 value of a dollar is never constant and it is referred to as its buy power. With inflation there is a decline in the purchasing power 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 increase operating expense s.But the most negative impact is the inability of USPS to quickly adjust its product and services set based from inflation as it requires legislative actions to do so. Government Legislations Since USPS is a government owned firm, it operates within the disembowellines of public laws. Product and services set are approved by Congress. In addition, delivery schedules and delivery routes are also regulated by the Postal Regulatory care. With the implementation of Public Law 91-375 commonly k presently as the Postal Reorganization Act of 1971, the USPS became a self-supporting, wholly governmental entity de sign-language(a) 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 congress pays to compensate USPS for the revenue losses incurred for free mailing privileges to blind persons and overse as voters, as directed by Congress. The Postal Accountability and sweetening 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 approximately $5. 5B per year for 10 years with rest 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 fall is still being debated depending on what valuation order is used) (Kosar, 2012). Below is the table for the RHBF compensations under the PAEA: Table 1.Postal Service Retiree Health Benefits Fund remunerations Under PAEA monetary Year Payment collect Per PAEA (billions) Status of Payment 2007 $5. 4 salaried in full. 2008 $5. 6 Paid in full. 2009 $5. 4 $1. 4 billion give 2010 $5. 5 Paid in full. 2011 $5. 5 No payment 2012 $5. 6 delinquent September 30, 2012. 2013 $5. 6 Due September 30, 2013. 2014 $5. 7 Due September 30, 2 014. 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 clipd the FY 2009 payment sum up to $1. 4B (P. L. 111-68) while in FY2011, Congress delayed the payment to majestic 1, 2012 as per H. R. 112-331.By front loading the RHBF, USPS has switched from funding its RHBF from â€Å"out of pocket” cost to pre-funding. It’s this prefunding causing a tremendous financial strain on the firm. It’s also an indicator on how much supplement and control government legislations have over the firm. And this is just one of the two biggest entities having control over the firm’s operations. The other one is employees’ unions. Collective Bar spend a pennying Agreements More than 80% of USPS operating cost is out-of-pocket to its employees’ wage; and more than 85% of its employe es belong to one of the four unions or referred to as focussing 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 national Financing Banks up to $15B or as set by Congress; the same federal laws also put constrains in its ability to increase revenue by increasing prices without prior approval; or decrease 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 caution frequently results in arbitrators being empowered to make binding decisions hard favoring employees (USPS Annual 10K Report, 2011). With declining revenues since 2007, USPS has been unable to subdue down employee numbers to desired sustainable strength, its main operating cost, without having to rely solely on at trition or buy outs due to collective bargaining agreements that heavily favor employees. Future strategy calls for attrition or reduction in employees’ numbers to an additional 120,000 positions by FY2015.However, USPS is unable to achieve this without overriding current CBA’s and it doesn’t have the power to do so. microeconomic Factors Personal Computers and Internet In their 2009 annual report, fit 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 either satellite or dish access (BLS, 2010). And the numbers leave behind only continue to grow as personal computers sound more affordable and internet services continue to be made available in the rural areas.With internet comes netmail and social networking services. Although netmail is a differentiat ed product from regular paper mail or commonly referred to as â€Å"snail mail”, its purpose and function is completely the same. In short, email is almost a perfect substitute product for regular paper mail. The decline in startle-class mail deal started to take center stage when the volume of First-Class mail, where USPS gets the majority of its money from, vanish below junk mail volume for the first time in 2005 (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 gruesomeprint 10-K USPS So is email killing USPS?Although decline in First-Class mail alone seatnot postulate this to be accurate, there is however undisputed evidence email has delivered a severe financial blow to USPS. uniform this is not serious fair to middling still, digital communications continue to evolve and quickly becoming mainstream. ready phones or smartphones are not only dependent of making a phone call but also able to put emails just well-nigh anywhere they can find service signals from their providers. The phone can also be used to send text (â€Å"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 businesses are already travel to â€Å"paperless” bill and payment delivery meaning the 20% decline in first-class mail volume in the previous years, not only will it be probably irreversible but will most likely worsen before it gets better. And so there is nonetheless still another evolving technology that could also adversely affect USPS’s other business exemplification, â€Å"shipping services”, and this is with the digital or electronic books. According to Amazon, the largest retailer on the web, recruit books are just now starting to exceed printed books (Leonard, 2011). Every mean solar da y Low Pricing strategies If you are looking for the cheapest postal rate around 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 be $0. 74 and in Canada it would be $0. 61 (Annual Report to Congress, USPS, 2011). Like this is not cheap profuse yet, the Standard Mail is even cheaper consisting mostly of advertise and periodical mails. So is everyday low determine causing financially losses USPS?In comparison to other postal services it would seem so. An abbreviation 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 strategy to compete in the global market, the U. S. Postal Service stiff a sole government franchise operating only nationally. As such it does not include outsourcing as a part of its business poseur and do not compete globally. Business compend Current Financial surgical process USPS current financial performance in the last 5 years and especially in the 2011 is in â€Å"dire straits”.With over $25B in net losses over the past five years including $21B of expenses for the prefunding of retiree health benefits, it stop 2011 with only $1. 2B in total cash in and only $2. 0B of remaining borrowing capacity. 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 recently 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 history 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 2006 P. L. 109-435 became a law relieving USPS of the $27B in pension liabilities for workers with military service (USPS workers with military pension used to be gainful(a) 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 F Y 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 â€Å"black”! Future Financial outlook Future financial outlook for USPS is dim 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 â€Å"village post offices”. However, even with all these business strategies, USPS doesn’t seem to focus on how it can re-structure its business sit around 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 â€Å"Net Loss”! This seems to be a knee-jerk reaction since it’s the easiest logic to recoup â€Å"net losses”.And this is because supposedly increase in product pricing directly correlates to increase revenue thus change magnitude profit or having to post â€Å"Net Income” instead of â€Å"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 authorise the fact that technology, increased availability of broadband services, suppuration internet access in homes, declining prices in pe rsonal 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 â€Å"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 interpret: Figure 2: Managerial Economics in Global Economy (Salvatore, D, 2010) With EP greater than one ( extremely 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 sum of money demanded (QX). With decrease in quantity demanded means reduction in total revenue.Based from the mail v olume decline since 2006 (when mailing was cheaper than last year and this year) up to the present it’s almost determinate 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 â€Å"paperless” bill statements and delivery. Although current statutory requirements limit pricing increase on â€Å"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 tutelage, PRC) based from increased cost of transportation, i. e. , fuel, the same strategy used by the airline industry. The airline industry started using surcharges for luggage 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 opera tions 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 massive 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 take 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 available 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 M oney 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 horse opera 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 tremendously compare to just increasing its product pricing. Resource utilization USPS resource utilization is plainly not at its optimal level considering the amount of losses it incurred in the last 5 years.Prob ably the flog resource underutilization is in the excessive number of employees and its huge fleet of gas guzzling trucks and delivery vehicles. USPS was very slow to adapt to new technology and didn’t quite see the effect of the internet with its mailing services and continued rising 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 crude in 2008. USPS did not initiate to stop Saturday’s mail delivery until 2010 when it was already losing tens of billions in income. USPS tries to optimise its resource utilization by working interdependently with its â€Å"Shipping Services” competitors like UPS’ â€Å"UPS Basic” and FedEx’s â€Å"Smart Post”.However, USPS should strive instead to get as much of this business for itself instead of having to share it with its competitors. This doesn’t mean it has to get rid of this interdependency family 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 well get hold of this through pricing, which it has an advantage over the competition. With oil price increases in 2008, USPS should have started switching or arming its delivery vehicles either to more fuel efficient vehicles or those equipped to use Compressed innate Gas (CNG). According to Consumer Energy Report. om (Rapier, 2009), based from EPA reports, a congius of petrol contains approximately 115,000 BTU’s of energy while a Standard Cubic Feet (SCF) of pictorial gas contains 1,000 BTU’s (hence 115 SCF of CNG equates to 1 gallon of gun). In November 2011, the national average price of flatulence was $3. 37 a gallon while for diesel motor it was $4. 01 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. 5 3 for industrial rate (EIA. gov, 2012). A thousand SCF of natural gas equates to 8. 7 gallons of accelerator pedal 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 burning through more than 399 million of gallons of gasoline/diesel for a total of 1. 25 billion miles driven (Postal Facts, 2011); it could have easily saved tens of millions of dollars with the use of CNG. USPS should continue with its strategy of reduci ng its number of employees and post office branches or converting some branches into â€Å"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 failing 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 Analysis Cost-Volume-Profit analysis or breakeven analysis is a process of find the output where a firm breaks even or ea rns 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 â€Å"fundamental postal service” to the nation. As such, it requires a stripped number of employees, material and other resources to accomplish this task, hence an inviolate 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 option of all 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 USPS cannot reduce its TC to the point it will cease some or even a single part of its operation, despit e heavy net losses in income. When USPS is operating at a loss and has done just about everything to defame 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. consecrate 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 cadency the competition when it comes to its shipping services. With its large operating capacities it should plan to expand its business model to achieve â€Å"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(prenominal) little diversity in products and services despite large operating capacities and highly technological networked infrastructure 3. real 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 understudy 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 promptly available opportunities for USPS mostly come only 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 Paypal’s 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 cladding USPS is the continuing decline of its mailing services. Despite the big proposal of increasing prices supposedly supplementing losses, it’s more likely the more USPS continue to raise prices in its mailing services the sooner 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 thereafter. USPS needs to face the reality of the intern et 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 qualification 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’ payment Fund required to be gainful to the DOL at the end of the fiscal year. To nourishment USPS financially solvent and operational at least for the time being, Congress should legislate to postpone payments to the PSRHBF and to the Workers’ Compensation for the next three years.This should give enough â€Å" take a breath room” for USPS to stay â€Å"afloat” 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. 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