Who's Got Mail?

By Timothy Roche/Atlanta

In the old days, sending a thank-you note to Aunt Edna was as uncomplicated as she probably was. You wrote it, stuck a stamp on the envelope and dropped it into a mailbox. Off it went in a red-white-and-blue truck, and a couple of days later the friendly neighborhood mailman walked it--through rain, heat or gloom of night--right to Auntie's door.

Such quaint simplicity is gone forever. Now you're as likely to send her a fax, an e-mail, an instant message or one of those Internet missives with dancing balloons and digital music. Even if you cling to traditional pen and paper, it's no longer clear how it will travel. Airborne Express? Overnight? Two-Day Priority?

As it rolls into the 21st century, the mail system designed by Benjamin Franklin 225 years ago is struggling to survive in a George Jetson universe. In the past few years, the U.S. Postal Service has launched a blizzard of new services--stamps over the Internet, electronic bill payment and a service that prints and mails electronic documents. Yet revenues depleted by alternative communications (e-mail, electronic banking), combined with rising fuel and operating costs, have led this year to a daunting $350 million loss.

Meanwhile, private carriers from Atlanta to Frankfurt, Germany, are battling for a bigger piece of the delivery pie, forcing the Postal Service to contract with the likes of DHL and Emery Worldwide just to maintain its global reach. Although still delivering 40% of the world's mail, the men and women in blue just can't seem to keep pace. Says Representative John McHugh, a New York Republican, whose postal-reform bill has been stuck in congressional limbo for six years: "The postal system is heading toward a disaster of tremendous consequences."

The problem is that the U.S. hasn't come to grips with the fact that in a fast-changing world, mail delivery is better run as a competitive business than as a government monopoly. While many countries have privatized their postal systems, the USPS has a foot stuck in each world. It is a semiprivate corporation with a lumbering government bureaucracy. It is run by a board of governors made up not of crack chief executives but of a folksy blend of local politicians, small-town business leaders and federal bureaucrats. The board has no postal experience, and Postmaster General William Henderson, a 28-year USPS veteran, has no other experience in business.

Now Henderson is trying to shake up the system. Last month word leaked that he and Fred Smith, founder and CEO of Federal Express, were putting the finishing touches on a broad alliance--a striking move, since Smith has long been an outspoken critic of the USPS Although details are still sketchy, the deal would reportedly give the government carrier access to the air network of the company, which is based in Memphis, Tenn. In return, the blue-uniformed postal workers would pick FedEx packages up from your door and deliver them right to your door. In effect, that would hand FedEx the Postal Service's crown jewel: the exclusive, government-mandated right to open the mailbox at the end of every American driveway, known in the industry as "the last mile." For all their planes and trucks, none of the private carriers can match the USPS's ground-based delivery network.

The prospect of such a deal is provoking furious reactions from competitors and legislators. Last month, in separate letters, House Judiciary Committee chairman Henry Hyde and United Teamsters president Jimmy Hoffa asked the Justice Department to investigate the alliance on antitrust grounds. For years the Postal Service has been accused of using profits from its monopolistic first-class deliveries to subsidize loss-leading services such as prepaid phone cards that compete with private companies. A FedEx deal would just enlarge the monopoly. "It's not a level playing field," says McHugh, who may seek a broad antitrust review of the entire delivery industry.

Nobody is making more noise than United Parcel Service, which controls 45% of all domestic freight shipments. UPS officials charge that an alliance between FedEx and the Postal Service is like "having the Department of Agriculture partner with Burger King to the exclusion of McDonald's." Senior vice president Joe Pyne admits that the company was itself in such talks with Postal Service officials but to no end. UPS and its multimillion-dollar lobbying machine have done everything possible to keep the Postal Service from expanding its reach. Last year UPS drivers descended on Capitol Hill, delivering to legislators slick propaganda packets that included CDs titled What the Postal Service Doesn't Want You to Know.

Since it was last substantially reformed 30 years ago, the Postal Service has usually turned a tidy profit. Its government-mandated monopoly is one reason. But sheer size is another. When postage rates are increased by a single penny, as they're expected to do in the next year, another $1 billion pours into the USPS. This monopoly has plenty of padding. Letter carriers receive federal benefits and don't have to pay parking tickets. The service pays no sales or property taxes, no license fees for its mail trucks. The Postal Service also plans to increase the cost of mailing magazines 15%, a move that has raised the ire of magazine publishers, including Time Inc., who were promised by Henderson that the rate increase would be in single digits. With proper reform, the publishers say, only a 7.5% increase is necessary.

There is no shortage of critics. Newspaper headlines bemoan the "Postal Disservice" and clamor for privatization. Oklahoma legislators, echoing complaints elsewhere, have passed a resolution challenging the service's tax-exempt status. Federal studies charge the USPS with everything from mismanagement to misappropriation. According to the Federal Times, the post office's International Business Unit was given funding and a staff of 200 to create an extensive global logistics network that was supposed to generate $10 billion in revenue by 2005. The programs, known as Global Priority Mail and Global Package Link, flopped. Yet another audit found that the USPS loses more than $1 billion a year by not collecting international duties on packages. Perhaps worst of all, CNF Transportation, which owns Emery Worldwide, is suing the post office for not paying its bills on an overseas-delivery joint venture.

New alliances--like the one with FedEx--may be the USPS's best chance for survival in a digital world, where success is less about delivering envelopes than about optimizing networks and managing information. UPS and FedEx compete fiercely on the basis of technological advances. Their businesses operate like thoroughly modern auto plants, with computerized, just-in-time inventory controls and ordering systems.

Ultimately, however, the real beneficiary of a USPS-FedEx alliance will be the Memphis-based powerhouse. Besides gaining access to that "last mile" to Aunt Edna's mailbox, FedEx could leverage the arrangement by planting drop-off boxes in post-office lobbies. Even if government regulators limit the combination on antitrust grounds, FedEx is steaming ahead with other joint ventures, including a deal with the French postal agency La Poste. Fred Smith has already proved FedEx's global fortitude. Most analysts see his domestic strategy as a shrewd way to position his 29-year-old company for what many believe will be the USPS's inevitable dissolution.

Unless it undergoes radical reform soon, the days of the U.S. Postal Service are probably numbered. Even its primary market, first-class mail, is expected to shrink 27% over the next decade, representing the loss of an additional $17 billion in revenues. And some analysts warn that deals with private carriers will simply undercut USPS assets, leaving it with little more than its most rural--and least profitable--routes.

Postmaster General Henderson resists even the suggestion that the Postal Service could disappear and has vowed to shake up his mammoth organization. Yet in testimony to Congress last month, he seemed resigned to a fate that is uncertain at best. As he argued for support of the postal-reform bill that has languished in committee for so many years, the USPS veteran fell back on a sentimental plea. He cited statistics showing that 66% of all Americans believe the mail is our most private and secure form of communication. "These findings are a testament to the enduring strength and unique power of the mail," said Henderson. "People look forward to the mail, and when it arrives, they give it their undivided attention."

Of course. The problem is that these days there are plenty of more cost-effective ways to battle rain, heat or gloom of night.

--Reported by Jackson Baker/ Memphis, Tenn., Polly Forster/Washington and Greg Fulton/Atlanta

With reporting by Jackson Baker/Memphis, Tenn., Polly Forster/Washington and Greg Fulton/Atlanta