By Caleb O. Brown
Louisville Eccentric Observer
Disclosure last year that the U.S. Postal Service and Federal Express Corp. were in talks to form what was termed a "strategic alliance" drew early fire from such powerful voices as GOP Congressman Henry Hyde and United Parcel Service Inc., FedEx's strongest competitor.
Following the announcement, Hyde - as chairman of the House Judiciary Committee - drafted a letter to Joel Klein, then head of the antitrust division of the federal Department of Justice, asking him to look into the antitrust implications of such a deal. There was one obvious problem with the request, however: The Postal Service is immune from antitrust laws. And Hyde, whose term as Judiciary Committee chairman concluded at the end of the year, still has not received a response from either Klein, who has since resigned or other DOJ officials.
The Postal Service's Board of Governors was expected to formally review the prospects of a joint venture with FedEx at a meeting scheduled for after LEO's Tuesday press deadline. Prior to the session, neither Postal Service nor FedEx officials had been forthcoming with many details. For its part, FedEx had done little more than reluctantly confirm that there had been talks. "Formally, or informally, we have been meeting," said FedEx media specialist Jim McCluskey. (See related story on Page 12.)
That such negotiations have been underway is indicative of the identity crisis at the Postal Service, which is trapped between its public mission and its government-guaranteed monopolies. The Postal Service, a tax-exempt federal agency with the mandate to provide what its leaders call "universal service," reported continued operating losses in November and badly needs a way to turn things around and generate new revenue.
One possibility is to further delve into e-commerce and its promise of increased package deliveries -- areas dominated now by UPS and FedEx. UPS spurned the overtures, but FedEx is apparently interested in exploring the idea.
There's at least one obvious problem for anyone who would compete with such an alliance: The Postal Service controls the rates all carriers can charge.
Since the idea was announced, critics have wondered about the degree to which FedEx would share the Postal Service's monopoly powers. Would FedEx be allowed to sell its products in the thousands of post offices nationwide? What kind of competitive advantage would FedEx gain by affiliating strategically with a federal agency that not only pays no taxes, but regulates its competitors as well?
Letters R Us
If you didn't know any better, you might actually think the Postal Service was a private company with an official-sounding name. A phone call to the Postmaster General's Washington, D.C. office (202-268-2500) is met with a recorded welcome to "corporate headquarters." Pointing your Web browser to usps.gov sends you to the same page as usps.com. Television spots from the Postal Service have favorably compared the agency's rates with those of UPS and FedEx, with The Steve Miller Band providing the soundtrack. In post offices throughout the country during the recent holiday season, patrons saw posters and merchandise from the Universal Films release "How the Grinch Stole Christmas." Signs wished customers "Happy Wholidays!" while USPS employees sold Grinch merchandise. The Whoville Post Office was portrayed favorably in the film.
The fact that the Postal Service looks private, however, has little to do with its monopoly power.
While the Postal Service does not receive an annual appropriation for its operations (other than reimbursement for delivering mail to the blind and nonprofit organizations at a discounted rate), it has been allowed "special privileges." For example, the agency is exempt from property and income taxes. It receives favorable interest rates when borrowing money. It charges no tax on retail items and does not pay U.S. Customs to process packages, as private carriers are required to do.
As for the Postal Service's recent foray into e-commerce and expanded package delivery, that's where the money is. The most costly portion of operation for the Postal Service is fulfilling its public obligation of universal service -- delivering to every postal address in the United States.
Doing that, however, has become increasingly less profitable. And in an age of e-mail, direct deposit and online bill payments, the Postal Service estimated that operating loses for 2000 would be $200 million and would reach $480 million this year. The 2001 losses would be lessened by the 1-cent rate hike that took effect this week, but ironically, about a third of the shortfall is attributed to the federal government delivering checks and other mail electronically rather than by post.
In other words, the post office needs to find a way to make its public mission profitable and must use its advantages to make door-to-door delivery a venture that doesn't lose money.
Enter Federal Express, second only in size to UPS among private carriers in the United States.
Critics, like UPS spokesman Steve Holmes, say an alliance between FedEx and the Postal Service "goes to the core issue of whether a private company should be able to leverage government assets."
And it appears the private business and the public entity could reap real gains from the alliance.
Louisville Postmaster Bob Lochhead says the proposed alliance would give the Postal Service access to FedEx's cargo space on shipments throughout the country. FedEx, for its part, would gain coveted "last mile" delivery for many of its packages, using mail carriers. That is, the Postal Service would use its door-to-door routes to deliver packages for FedEx in addition to regular postal letters.
There is nothing prohibiting FedEx or UPS from delivering to residences and businesses -- indeed, they now do -- but as Lochhead pointed, out the Postal Service also routinely has access to other drop points, like post office boxes, where other carriers "can't legally go."
While it seems a no-brainer about why the Postal Service would want to attach itself to a profitable private carrier, others see potentially large problems with such an alliance and the impact it would have on the marketplace and on those left out of the alliance, like UPS.
"UPS has some big plans in my district," Hyde said during a telephone interview last month. "I simply question whether this discussion between FedEx and the Postal Service is an open process."
Hyde's letter to Klein, the Justice Department's former antitrust head, said, "If the Postal Service were a private entity, any final alliance would certainly require scrutiny by the Antitrust Division." He added that the alliance shouldn't be confirmed without "a full understanding of its competitive implications."
Soon thereafter, two other Republican congressmen -- Dan Burton, R-Ind., and John McHugh, R-N.Y., -- raised similar concerns in a letter to Attorney General Janet Reno, calling attention to the fact that the Postal Service is, in fact, immune from antitrust laws. There has been no response from Reno, and presumably, the issue would be addressed by the new attorney general if Reno does not answer before the Bush administration takes over the reigns of government on Jan. 21. (Former Sen. John Ashcroft of Missouri has been nominated by President-elect Bush to succeed Reno.)
Regarding the proposed alliance, Rep. Anne Northup, a Republican who represents Louisville's 3rd District, was mum. Northup, who sits on the Treasury-Postal Appropriations subcommittee, said through a spokesman last month: "We will be questioning the Postmaster General about this proposed alliance when he appears before our subcommittee in the spring."
She may be able to do little more than question the postmaster general, however. It's unclear what authority, if any, Congress has over the Postal Service. Of Kentucky's two Republican U.S. Senators, Jim Bunning did not return phone calls, and Mitch McConnell said, though a spokesman, that he has a staffer "working on it."
Though UPS' Holmes said FedEx would be "leveraging government assets" for private benefit, a Postal Service official said in published reports that there would be "no exclusivity" in talks with FedEx. Speaking to Government Executive magazine in October, Postal Service spokesperson Azeezaly Jaffer said, "There is an open seat at the table."
Though the comment seems clearly meant to suggest the Postal Service's openness to new relationships with the private sector, it led some to ask what the Postal Service means by "strategic alliance" -- if not exclusivity.
"Most people wouldn't call that a strategic alliance," said Ed Black, president of the Computer and Communications Industry Association, a public policy group. "It may be a way to put pressure on other firms to step up to the table."
Black considers the Postal Service an inefficient monopoly that can have a pronounced negative impact on private firms, especially since it loses money on so many of its ventures, like online bill paying and even its own merchandising. "Could you imagine Ford regulating the auto industry and then competing with GM?" Black asked. "The Postal Service has regulatory power and poses as a competitor."
Postmaster Lochhead is more optimistic about the efficiency gains for consumers with such an alliance. "The Postal Service has a public mission. That mission is universal service for all deliveries throughout the United States."
Lochhead, unlike Black, considers the Postal Service something that UPS might actually want to have around, even if no strategic alliances were in the picture.
"If you look at who has the monopoly on package delivery, it's UPS," said Lochhead. "They've got it locked up. We can't touch them. But UPS needs us in a way. Without us, they might be deemed a monopoly and brought into antitrust court like Microsoft."
UPS spokesman Holmes called that idea "preposterous.
"It's no monopoly," he said. "The competitive environment for package delivery is more intense and more vibrant than it ever has been. It's the competitive environment that is a level playing field. That's where you've seen real innovation."
Holmes added that the Postal Service has an ace in the hole. "We're required by law to charge double for any products that compete with theirs," he said. "The Postal Rate commission sets their rates, and we have to charge twice that. The Postal Service's TV ads don't say that."
