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Why the USPS Is Destined to Fail

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And why that could be bad news for UPS and FedEx.

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"Because the mail never stops. It just keeps coming and coming and coming. There's never a letup, it's relentless. Every day it piles up more and more, but the more you get out, the more it keeps coming. And then the bar code reader breaks. And then it's Publisher's Clearinghouse day!"
-- Newman, on Seinfeld

The mail never stops?

With an estimated 10 billion "piece" volume decrease for the United States Postal Service expected in 2010, Newman may have to start applying for a new gig.

Faced by overpowering competition in the private sector and feverishly amassing debt, the USPS yesterday announced its revamped plan to eliminate Saturday delivery, raise delivery prices, reduce national workforce by 30,000 people, and reduce overtime opportunities.

The decision by the USPS to reduce to a five-day delivery week is an attempt to prevent a repeat of 2009, when the government service recorded a $3.8 billion deficit. The Postal Service currently struggles with a $10 billion debt, and it's legally allowed to borrow only $15 billion.

However, as the USPS' troubles mount, shipping companies in the private sector are having no problem staying afloat. Despite the slowdown associated with the recession, private, non-government affiliated services FedEx (FDX) and United Parcel Service (UPS) still reaped celebratory profits last year. In 2009, FedEx saw total revenue of $35.5 billion and $98 million in profits while UPS made $45.3 billion in revenue and $2.2 billion in profits.

This success isn't entirely a result of the business decay of USPS -- FedEx and UPS are actually negatively affected by the putrefying mess USPS has become.

Companies like UPS and FedEx depend on USPS to deliver more than 400 million of their ground shipments every year. A true "I scratch your back, you scratch mine" scenario, the USPS returns the favor by contracting FedEx and UPS to deliver packages via air. With USPS suspending Saturday service, these private shippers will have to sail off route.

But they're not the only ones who'll be immediately affected by the change.

Many e-commerce businesses like Amazon (AMZN), Netflix (NFLX), and eBay (EBAY) that rely heavily on USPS ground distribution will be forced to consult with private carriers to negotiate a partner service. If the private carriers assume this role, the USPS will suffer immensely.

It's not like the USPS ever had it easy. Regulations on how the USPS can charge and handle everyday business have long crippled its ability to make a steady profit. Up against the private carriers who can charge as they please, the USPS is faltered with this governmental handicap, making it nearly impossible for it to gain an edge on its competitors.

Yesterday the USPS revealed its 10-year plan to curb its estimated $238 billion cumulative shortfall by 2020. Postmaster General John Potter expects these latest actions will amount to around $120 billion in saving throughout the present decade.

Of course, these are just the latest efforts in a series of cutbacks by the USPS. According to the Washington Post, since 2002, the USPS has cut costs by $43 billion by reducing overtime limitations, shrinking workforce, and renegotiating contracts.The USPS hasn't received any taxpayer funds to support operations since 1982, and it's responsible for covering all of its costs.

With Potter's new "10 year plan" on the table, hope seems to be restored -- for now.

However, it seems inevitable that the authority and presence of the USPS, with all its regulations and deficits, will eventually succumb to the power of the private sector. As technology and modernization has slowly eliminated the need for newspapers, magazines, and other classical businesses, the US mail system may be the next victim of the smother.

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No positions in stocks mentioned.
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