The (Reality) Check's in the Mail for Postal Service as Doomsday Approaches

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The news broke over the weekend ... but you probably wouldn't hear about it till Wednesday if you had to get the story by regular mail.

In a last-ditch effort to save itself from bankruptcy, the U.S. Postal Service is forging ahead with plans to close half of its 500 mail processing centers and roughly 3,700 of America's post offices. As a direct result of these moves, "one-day delivery" of first-class letters sent via USPS will become a thing of the past. For now on, two-to-three-day delivery will be the norm.

The Numbers Behind the Closures

Here's how the numbers work: Across the nation, 500 processing facilities currently work to service and distribute the 170.6 billion pieces of mail that move through the system annually. The more facilities there are, the closer each one is to a mail sender, and the closer another is to a mail recipient. But as facilities close, the distance from each remaining facility to sender/recipient increases -- and the amount of time it takes to cover that distance likewise increases.

The post office will still be able to achieve its stated goal of getting a letter across the country in no more than three days, but with growing distances, one-day delivery of first-class mail will become physically impossible.

Even in the best-case scenario, USPS says that cutting 250 processing facilities will only save it $3 billion a year. Add in 3,700 post office closures and perhaps 100,000 layoffs of postal employees -- and the savings rise to $6.5 billion. And that still isn't enough.

In fact, the post office has warned that without cutting costs, it would be running $20 billion a year in the red by 2015. So even a whopping $6.5 billion worth of cuts leaves your friendly postal carrier still stuck in a $13.5 billion-deep ditch.

A Sluggish Delivery Scenario

In order to finish closing the gap, USPS has put additional cost-cutting measures up on the whiteboard. One of the money-saving scenarios is eliminating Saturday deliveries.

Say you run out of stamps Monday, miss the pickup Tuesday, and as a result, don't get around to mailing Grandma's postcard until Wednesday. Send that postcard over the mountains and through the woods for two days out of a potential three, and it still won't reach Grandma's house when USPS closes its doors Friday. With Saturday delivery now out of the picture, and Sunday, too, you're probably looking at a Monday delivery -- five full days after you dropped that postcard in the mailbox.

The scenario's even uglier for Netflix (NFLX) users, who could find themselves hit both coming and going on their rent-DVDs-by-mail plans. We're talking potential 10-day round trip service here, folks. (And by the way, how smart was Reed Hastings to try and exit the DVDs-by-mail game?) Yet according to USPS data, this scenario will be occurring more and more frequently in the future, as the 42% of first-class mail that's currently delivered in a single day morphs into more and more two-, three-, and perhaps even five-day deliveries.

Forget Rain, Sleet or Snow -- It's Congress to Blame

If USPS' plans seem tailor-made to boost business at private parcel posts UPS (UPS) and FedEx (FDX), well, they are. But it's not entirely USPS's fault.

In a lament included in the service's 2010 Annual Report, USPS cries out against the Postal Act of 2006, which imposes "pricing constraints" that "have severely hampered our ability to remain financially solvent." As USPS explains, by imposing caps on the prices it can charge for service, Congress has deprived the post office of the "financial flexibility we need to remain viable into the future."

And much as it galls me to admit it, USPS is right. Yes, the post office needs to pick up the pace of "service" that it provides customers at its branches. Yes, it must operate more efficiently, and cut costs -- which rose 5% last year even as the amount of mail it was asked to deliver declined 3.5%. But the real solution here is elegantly simple: USPS must be allowed to charge enough for its services to cover the cost of providing them.

Consider: USPS' most alarmist warnings predict a $20 billion revenue shortfall in 2015. That's a big chunk of change, but here's the real surprise. USPS collected $67 billion in revenue last year. Seems to me, making up the $20 billion revenue gap could be easily accomplished by simply upping the price of a postage stamp by a third.

So, $0.45 per first-class stamp becomes $0.60 each, and... problem solved!

This oversimplifies the solution, of course. Postage stamps don't account for all of USPS revenues, and first-class mail doesn't comprise all of its deliveries. (Speaking of which, USPS might also consider charging bulk mailers the same rates it charges the rest of us.) But you get the point. Raise the price of a postage stamp and hike the rates on everything else proportionally, and USPS should, in theory, be back in the black.

And all it takes is an act of Congress.

Motley Fool contributor Rich Smith does not own shares of any companies named above. The Motley Fool owns shares of United Parcel Service and FedEx. Motley Fool newsletter services have recommended buying shares of Netflix and FedEx.


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