As Americans’ daily correspondence continues to shift from mailboxes to inboxes, the U.S. Postal Service’s (USPS) financial woes have grown more severe. The agency may report a loss as high as $10 billion this fiscal year, and Postmaster General Patrick R. Donahoe is lobbying Congress for the authority to take drastic cost-cutting measures — laying off 120,000 employees, closing up to 3,700 branches and eliminating Saturday mail service. We asked Harlan Platt, professor of finance in the College of Business Administration, to explain how the USPS arrived here and suggest steps to move forward. 

Why is the U.S. Postal Service facing such a dire financial crisis?

The difficulties at the USPS are representative of the issues confronting many businesses today. In a nutshell, there are probably two key problems. The first is that technology has greatly diminished the amount of mail services that businesses and consumers use. For example, e-mail has replaced letters, and many companies no longer mail their bills out, while consumers pay them electronically. The second problem is that the USPS built up an infrastructure anticipating further growth and signed labor contracts that did not anticipate this downturn. The solutions are not pleasant and will result in many unhappy customers, employees and communities.

The American Postal Workers Union’s president has called the proposed cost-cutting solutions “outrageous, illegal and despicable.” What steps should USPS take to fix its financial crisis?

It’s not surprising that the president of the postal workers’ union is upset. The cutbacks are extreme, but presumably are dictated by the realities. The important thing for the Postal Service going forward is to be sure that its prices are reflective of costs. When that is not true, one type of customer — perhaps those who use first-class mail — subsidizes the services provided to another type of customer, such as those who use parcel post. As long as prices reflect the cost of providing service, cutbacks are dictated by either technology or the cost structure.

What industry shifts may occur if USPS operating costs are not significantly reduced?

As the price of postal services increases, various users in the commercial sector may discover that their existing business models no longer work. This could include companies that distribute mail-order catalogs or retail companies, such as Amazon or L.L. Bean, that use USPS for shipping.