February A Record Month For USPS Consolidations

February may be a short month, but it's already a record breaker for one type of downsizing at the U.S. Postal Service.

USPS has launched Area Mail Processing studies this month that could lead to the closing or significant downsizing of 20 processing and distribution centers. The previous record month for such new AMP studies was September 2010, with 13.

The Postal Service has also approved six AMP consolidations this month, deciding to move work from facilities in Daytona Beach, FL; Lufkin, TX; Muncie, IN; Wichita Falls, TX; and Zanesville, OH to those in nearby cities.

Some AMP consolidations in major metropolitan areas affect hundreds of employees and generate millions of dollars in projected annual savings.

But the latest studies are mostly smaller-scale efforts focused on moving work from non-metro buildings to those in larger cities. For example, the Muncie move (shifting originating mail to Kokomo, IN) and the Zanesville plan (all mail processing to Columbus) are each worth about a half million dollars in annual savings.

With a few exceptions like the Bronx, NY P&DC, most of the new studies are also unlikely to yield million-dollar savings. Four of the new studies will focus on facilities in Wyoming towns -- Gillette, Riverton, Sheridan, and Worland -- that have a combined population of only about 50,000.

The other studies launched in February involve facilities in Augusta, GA; Bluefield, WV; Frederick, MD; Gainesville, FL; Gary, IN; Glenwood Springs, CO; Hattiesburg, MS; Hickory, NC; Kinston, NC; Lancaster, PA; Las Cruces, NM; Meridian, MS; Portsmouth, NH; Rockford, IL; and Wareham, MA.

Both the Government Accounting Office and many mailers have urged the Postal Service to shrink its network of approximately 260 P&DCs.

The consolidation efforts usually stir up opposition from postal unions because the affected employees are typically reassigned to jobs in other towns, sometimes more than 100 miles from their current locations. But the pain might be eased for many if, as widely reported, the Postal Service is working on another round of early-retirement incentives.

Related articles:

• Printer Praises Postal Plant Consolidations 
• Postal Service 'AMPs' Up Facility Consolidations

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Is Apple's 30-Percent Solution Really So Bad?

The new iPad subscription model certainly has its flaws, but for the American magazine industry to complain about Apple's 30% take is the height of hypocrisy.

In the print world, the vast majority of consumer magazine publishers would give their eye teeth for subscription contracts where the agent only keeps 30%.

A dirty little secret of the U.S. magazine industry is the "negative remit" subscription, where the publisher actually pays an agent for a new subscriber to help it meet ratebase (the circulation level promised to advertisers). Because the renewal rates on such subscriptions are usually low, they're an almost-certain money loser -- except for their impact on ad revenue.

Some big publishers have banned negative-remit subscriptions, but they still have plenty of deals where the agent gets most or all of the take. To most magazine circulators, a 70% remit (what Apple is offering) sounds like heaven.

Publishers' legitimate concerns about the iPad subscription model have to do with being cut off from the subscriber. Publishers are not able to provide demographic data to advertisers about their iPad subscribers or to renew or cross-sell those subscribers.

But even those complaints look silly to some people on the Web side of the publishing business. Many publishers are making plenty of money with their Web sites without having any data on the sites' readers.

Advertisers judge the sites not based on number or type of eyeballs but rather on consumers' actions -- such as click-throughs, purchases, and sales leads. Will they end up using those same measurements for in-app ads?

Other recent commentary on the magazine industry includes:

• How Two Words Can Lick What's Ailing Publishers: I'm working on a follow-up, I promise. Readers have submitted some great suggestions for magazines that want to join the Bite Me Bandwagon.
• Stuck at the Borders: Magazine Publishers Have Failed to Explore the Amazon
• The View From The Tree : iPadded Profits?: My recent article for Publishing Executive magazine.

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For Most Publishers, Snail-Mail Editions Still Beat Apps

Though we publishers fret about rising postage rates and drool over the iPad, our financial statements tell another story: So far, digital editions have not lived up to the promise of bringing us more profits or even of saving us money.

Greed is not the main reason publishers often charge more for e-books, iPad magazines and other electronic formats than they do for the dead-tree versions, as I explain in iPadded Profits?, an article I wrote for Publishing Executive. It was posted on the magazine's Web site today.

The article shows how, despite common assumptions to the contrary, digital publications often cost more to produce and have a less favorable business model than their printed counterparts.

The article is significant in three ways:

1) Plenty of Web sites and publications have wanted to use my articles for free, but finally someone paid real money for an article. My roommate/partner is happy that we’re seeing some return -- beyond the usual AdSense nickels and dimes -- on my huge investment of time in this hobby.

2) The article strays from traditional Dead Tree Edition fare – paper, printing, postage, and the like – into such 21st Century topics as apps and e-books. Moral of the story: Pay an old print dinosaur a few bucks and suddenly he thinks he’s a new-media maven.

3) An actual expert reached much the same conclusion I did in my article. I submitted the article to Publishing Executive shortly before I saw this statement from John Squires, a former Time Inc. bigwig who helped found Next Issue Media:

"Despite the problems of the U.S. Postal Service, the cost of printing and distribution represents a relatively low percentage of publisher expenses–somewhere on the order of 20 to 25 percent today. Of course there are significant creative and technical costs in publishing a beautiful new magazine in tablet form. Just adapting to the variety of screen sizes, screen resolutions and operating systems requires significant new investments. These costs . . .  more than eclipse the savings from eliminating paper and postage."

Not only do publishers have to adapt to the various e-publishing formats, we know from experience that some of those formats will soon be obsolete. Sure, inefficiency at USPS and in the newsstand system annoy us, but we know we'll still be mailing and selling printed magazines two years from now.

Related articles:

• Smackdown: Printed Editions vs. Digital Editions
• App-oplexy: Magazines on the iPad

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Stuck at the Borders: Magazine Publishers Have Failed to Explore the Amazon

Magazine publishers’ inability to sell their products in online bookstores makes them especially vulnerable to the demise of Borders and other traditional booksellers.

The bankruptcy reorganization and downsizing of Borders, announced today, may hit some magazine publishers harder than book publishers. As more and more book buyers took to the Web, book publishers followed, becoming less reliant on brick-and-mortar booksellers. Not so with magazine publishers, at least not in the U.S.

Walk into any Barnes & Noble store and you’ll see an entire section offering the current issue of hundreds of magazines. But good luck finding those same magazines at barnesandnoble.com; a search of the titles will mostly turn up subscription offers.

Single copies of magazines are sold at Amazon.com, but only as second-class citizens. The giant Internet merchant doesn’t sell single copies itself -- not even iconic special items like the Sports Illustrated Swimsuit Issue that was released this week. Only independent merchants with “storefronts” on Amazon offer magazines.

Single copies of most of the major U.S. consumer titles, including the 10 most circulated magazines, are not consistently available for sale on Amazon. (I’m not counting Kindle editions, which are generally awful bastardizations of real magazines.)

To get even the most recent print issues of popular magazines via Amazon, you’ll have to rely on such independent storefronts as “soxfan44883”, “lolita30”, and “Power of 2 minds” – which typically operate and ship from someone’s home.

And if you find the issue you want, which is not a certainty, you’ll probably pay $3.99 per magazine for shipping because Amazon only offers free shipping on items it sells or fulfills.

Dead Tree Edition could find only two publishers that seemed to be actively marketing their print magazines on Amazon, and neither is a typical magazine publisher.

The Old Farmer’s Almanac is considered a magazine by brick-and-mortar retailers because it has a magazine UPC code, is distributed and displayed with other magazines, and has a specific on-sale period. But Amazon treats each of the annual editions as a book, keeping it on sale for at least several years.

U.S. News & World Report abandoned the print magazine business last year, but its well-known Best Colleges and America’s Best Graduate Schools annuals are still considered magazines by retailers. The company has its own storefront on Amazon (with a Seller Rating of “Just Launched”) that offers the most recent edition of the two products, using “Fulfillment by Amazon” to make them eligible for free shipping.

Magazines and books have always been merchandised separately and differently, even when sold in the same stores. Although “bookazines” and rapidly produced books are blurring the line between the two types of products in the consumer’s mind, the merchandising distinctions between the two have carried over from the brick-and-mortar world to the Internet world.

Amazon, for example, will sell single copies of magazines, but only if each one has “an ISBN or EAN that is printed on the book and a scannable bar code printed on the back of the book.” Putting a barcode on the most lucrative advertising space in the publication is a problem for most magazines.

But publishers are also to blame for their no-show on Amazon. It’s a problem of mindset.

The departments that used to be called “Circulation” are now known as “Audience Development” or “Consumer Marketing” in acknowledgement of their role in bringing customers to Web sites, e-newsletters, and other non-magazine products.

But the “newsstand” people are still “newsstand” people, which means Amazon is not on their radar. Their focus is on marketing impulse buys to people who are actually looking for something else.

The idea that someone might intentionally look for a specific issue of a printed magazine to buy is foreign to the American magazine industry.

A note about the Amazon ads and links: I included ads for three magazines so that my readers could easily see how they are marketed on Amazon. It was also an easy way to illustrate the article without worrying about copyright violations. Yeah, I might make a few bucks from the ads (and from the links to the independent Amazon storefronts), but based on my experience with Amazon ads it will be a pittance.

Other recent commentary about the magazine industry includes:

• How Two Words Can Lick What's Ailing Publishers 
• App-oplexy: Magazines on the iPad
• USPS Is Wasting Money on Unwanted Services, Publishing Executive Says

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Obama Hints At Changes To Postal Service Workforce

The proposed budget released today by the Obama Administration would "promote an adaptive, 21st Century workforce" in the Postal Service but also make it a potential political football next year.

Postal executives' vision for a more adaptive workforce is to use more temporary and part-time employees so that USPS can efficiently adjust to usual fluctuations in mail volume. But that's hard to do when in many postal facilities there is no longer enough work for all of the full-timers.

The FY2012 budget proposal provides no details on how the Administration would promote "an adaptive, 21st Century workforce," but I can't see that happening without a significant number of retirements. And that might mean aggressive efforts to incent or induce retirements. (There's also what Dead Tree Edition has suggested -- bonuses for career employees who switch to part-time status.)

With USPS on track to go broke on Sept. 30, this budget has an unusual focus on postal issues rather than the usual not-so-benign neglect. It would give (or, rather, return) to the Postal Service just enough money to stay afloat for another year, which means USPS is now slated to go broke about five weeks before next year's presidential election.

The financial relief would provide the Postal Service "the breathing room necessary to continue restructuring its operations without severe disruptions" but must be "coupled with meaningful reforms to its business model to make USPS viable."

One "meaningful reform" on the minds of postal executives is ending Saturday delivery, but the budget includes the usual language about maintaining six-day delivery.

Another major goal for the Postal Service in the budget is to "realign its infrastructure, facilities, processing and delivery systems to continuously improve efficiency." But that had better not mean small post offices: The budget proposal includes the usual language stating that no federal funds can be used "to consolidate or close small rural and other small post offices in fiscal year 2012."

In other words, it's politicians' usual message to the Postal Service: Cut to the bone as long as it doesn't affect anyone who might vote for me.

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Congress Hears the Truth About Postal Service Finances

A Congressional panel heard the blunt truth today about how Congress' budget games have put the U.S. Postal Service on track to run out of money in September.

"Burdensome and flawed benefit payments have contributed to almost 90 percent of the $20 billion loss in the past 4 years," David C. Williams, Inspector General of the Postal Service, told the House Subcommittee on Financial Services and General Government. "This has raised the cost of the infrastructure, postage rates, and forced the Postal Service to incur debt."

Williams' get-to-the-heart-of-the-matter testimony was a refreshing change from the bone-headed pundits complaining about the Postal Service wasting taxpayers' money. It's worth quoting extensively:

"My office has produced a series of reports highlighting the exaggerated estimates, enormous overcharges, and excessive prefunding levels that plague the retiree pension and health care systems. To continue contributing to funds that now appear to exceed the 100 percent funding levels is even more egregious when compared against benchmarks in the public and private sector and OPM [Office of Personnel Management]’s levels.

"I agree with Senator Susan Collins’ call in September 2010 for the OPM to change, under current law, its calculation of Postal Service CSRS pension fund payments."

"In the near term, the Postal Service and Congress should consider halting further payments to benefit funds until the surplus is used, funds restructured, and mistakes corrected. The Postal Service can use this time to learn how to live below or within the Consumer Price Index, shed its debt, and find its role in the digital age.

"The Postal Accountability and Enhancement Act incentivizes the Postal Service to adopt a leaner volume driven infrastructure to assure readiness for the 21st century. This will require:

• Optimization of the network of post offices and plants;
• Conversion to evaluated letter carrier routes to allow effective management; 
• Flexible work rules to match the ebb and flow of mail; 
• A comprehensive delivery point strategy that maximizes curb side delivery and cluster boxes; 
• Simplification of mail acceptance and pricing; and 
• Evaluating the need for 74 districts, 7 Areas, and two law enforcement agencies.

"Federal financial raids on the Postal Service have to be halted; and the Postal Service should be taken back off-budget as originally designed, and the benefit funds restructured. We will need strong collaborative efforts to enable the Postal Service to serve Americans in the 21st Century."

Williams' office has a habit of cutting through the Beltway BS to reveal the truth about postal finances.

The Capitol Hill crowd politely argues about prepaid or overfunded health benefits for Postal Service retirees. But in a 2009 report, the OIG correctly characterized the accounting scam as using “Postal Service funds to make the president’s budget seem smaller” to the tune of $5 billion-plus each year.

Four months later, another OIG report charged that the federal government had overcharged USPS $75 billion for pensions.

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5-Day Delivery: Maybe the PRC's Decision Is In the Mail

Wondering what happened to the idea of five-day mail delivery? You're not alone.

The Association for Postal Commerce, commonly called Postcom, posted this little item on its Web site this week:

"Oh I heard it -- Heard It -- Yes, I heard it through the grapevine. . . ." ♫♪

Hey PRC, have you got your ears on? Key sectors on Capitol Hill are very unhappy with the fact the the Commission's long-awaited report on 5-Day Delivery has yet to be delivered. People are questioning the wisdom of providing the Commission with any further regulatory discretion. You got to move it move it.

The message is directed to the Postal Regulatory Commission, which is still weighing the U.S. Postal Service's request last March for an advisory opinion on ending Saturday delivery. Such a change would require Congressional approval, but Congressional leaders have indicated the proposal will go nowhere without (and perhaps even with) the PRC's blessing.

The PRC held months of hearings, received thousands of comments and then heard final arguments from lawyers in October. The PRC received elaborate projections regarding the billions of dollars that dropping Saturday delivery would save, but it seemed troubled by uncertainty regarding how much revenue would be lost.

The PRC originally indicated it wanted to issue an opinion by the end of November, but it got swamped by other issues, including the USPS appeal of the PRC's rejection of exigent rate increases and a need to interpret how to calculate the price cap for most postage rates in light of deflation.

There's also a question of relevance, given PRC Chairman Ruth Goldway's recent comment that the budget proposal President Obama will unveil next week addresses "major financial concerns in the Postal Service."

The Postal Service would not need to end Saturday delivery if the budget lifts the two anchors weighing down USPS's finances -- what are euphemistically referred to as prepaid retiree benefits and overpayments for pensions. If those two Postal Service subsidies of the federal government (that's right, the Postal Service has been bailing out the federal government, not vice-versa) were corrected, the Postal Service would be profitable.

Related articles:

• USPS Said No To White House on 5-Day Test
• How USPS Could Bypass Congress on Saturday Delivery   
• Postal Relief? How About No More Congressional Thievery? 
• Here's How the Postal Service Can Get Back Its Pension and Benefits Overpayments

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NewPage-Verso Merger Unlikely, 2 Experts Say

Apollo Management might have NewPage by the proverbial short hairs, but two paper-industry analysts think a merger between NewPage and Apollo-controlled Verso is highly unlikely.

Recent talks between Apollo and Cerberus, which owns NewPage, about the papermaker’s debt were characterized in some media outlets as merger talks. Apollo has bought up a majority of a NewPage debt issue, giving it significant leverage over the largest maker of coated and supercalendered papers in the U.S.

“There are reports that Verso and NewPage have discussed combining is some way. I would be very surprised if this happened anytime soon,” Verle Sutton wrote in the February issue of The Reel Time Report (available only through subscription from Forestweb), published yesterday. “Combining a debt-laden company with a super-debt-laden company does not make sense for the debt-laden company. Verso needs to try to stay out of bankruptcy, not duplicate the results of the Abitibi and Bowater merger.”

Verle said Dead Tree Edition could quote him on the subject as long as his comments weren’t edited. I'm happy to oblige:

“Any agreement that Apollo and Cerberus might find attractive would almost certainly not be a good deal for other holders of NewPage and Verso debt. For example, if Apollo tries to convert its debt in NewPage to equity, it would strive for an equity position that would be disproportionate to the percentage of debt it controls; otherwise, it would not make sense for them. Why would the other lenders agree to that?”

“I always wish only the best for all of the paper companies and their customers, but I am not optimistic. Companies don’t usually get out from under such heavy debt — except through bankruptcy. The lenders may eventually agree to some kind of reorganization, but why should they…and why now? The lenders are receiving high interest payments, and, when the payments stop or the debt matures, they will own the company. Why trade some debt for equity now when they can have it all later?

“If NewPage does eventually move through Chapter 11, the company coming out of bankruptcy will be very powerful, and unburdened of significant debt. At that point, why would it agree to merge with Verso and get stuck with the latter’s debt? It would be like the current, nearly debt-free AbitibiBowater buying Catalyst and assuming another $700 million in debt. That is not going to happen.”

In late January, merger speculation was also pooh-poohed by securities analyst Phillip Wirtz of Odeon Capital Group LLC in comments to The Chronicle Herald of Halifax, NS for an article that is no longer available online. (Verso operates entirely in the U.S., and NewPage is mostly in the U.S., but as far as I can tell The Chronicle Herald is the only daily newspaper to have written about this story. Are there no newspapers in Dayton, Memphis, Wisconsin, or Maine?)

“I wouldn’t read too far into that,” Wirtz said of speculation about the supposed Apollo-Cerberus meeting.

For more information on NewPage's debt problems and the relationship, or lack thereof, between North America’s two largest producers of coated paper, see:

• NewPage Gets Some Breathing Room explains why the terms of a NewPage debt issue give Apollo so much leverage over the company.
• NewPage, Verso Owners Reportedly Discussing a Deal 
• Is Bankruptcy Inevitable for NewPage? Still a valid question.

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Black Liquor Tax Credits: The Gift That Keeps on Giving To Paper Mills -- and Taking From Taxpayers

Six months after questioning whether it would benefit from "Son of Black Liquor", International Paper announced Thursday it got $40 million of the bogus eco-fuel tax credits.

The giant papermaker received the Cellulosic Biofuel Producer Credits in the 4th Quarter of 2010 for burning black liquor, a pulp byproduct, to power its pulp mills in 2009. As with the original black liquor credits -- the Alternative Fuel Mixture Credits program that gave more than $2 billion in taxpayers' money to IP during 2009 -- CBPC (Son of Black Liquor) was intended to spur development of new bio-fuels but mostly rewarded pulp mills for doing what they would have done anyway.

The Son of Black Liquor credits IP claimed were "just the benefit on black liquor gallons that we ran in 2009 but did not mix" with diesel fuel, Timothy Nicholls, the company's CFO, said Thursday during a conference call with stock analysts. Black liquor had to be mixed with diesel to qualify for the original black liquor credits but not for Son of Black Liquor.

"IP cannot quantify the value of additional CBPC because it depends on future taxable earnings, but it could be significant," a company presentation said.

Less than a year ago, IP was apparently not bothering to seek CBPC money because it believed -- as did Dead Tree Edition -- that black liquor would not qualify. And even after an odd IRS ruling that opened the door, Nicholls told analysts this past summer "We don't see a huge benefit for the company."

Even now, Nicholls is unsure about the future benefits from Son of Black Liquor. IP would have to return some of the AFMC money to receive the more lucrative CBPC credits. Though it's been more than a year since pulp mills could earn credits under either program, the tax status of the AFM money is still unclear.

"There's some reason to believe that the proper conclusion maybe non-taxable," Nichols said. "If we come to that conclusion, then economically it just doesn't make sense to refund or payback the credit that we've already received and apply for the CB credit."

Rock-Tenn sees things differently. The packaging manufacturer's most recent annual report says AFMC "is not taxable for federal or state income tax purposes." But it estimates it will eventually net $112 million by paying back the original black liquor credits to get the more lucrative Son of Black Liquor money.

Packaging Corporation of America, which has about one-eighth of IP's pulp capacity, recorded $135.5 million in Son of Black Liquor credits last year. Domtar, which is also the #1 beneficiary of Canada's black-liquor program, reported $127 million in Son of Black Liquor credits last quarter.

Those earnings reports are news to Congress' Joint Committee on Taxation, which in December estimated that the government's cost for all "credits for alcohol fuels", including CBPC, for fiscal years 2010-2014 would only be $100 million.

For more information on the black liquor boondoggles, please see:

• Son of Black Liquor Money Starts Rolling In For U.S. Pulp Makers 
• How Democrats Helped Finance the Tea Party With Black Liquor
• U.S. Taxpayers' Black Liquor Tab Surpasses $30 Billion
• All 45 (and counting) Dead Tree Edition articles on black liquor

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Printer Praises Postal Plant Consolidations

The U.S. Postal Service's stepped-up efforts to consolidate its mail-processing facilities is good news for printers that handle dropshipped mail, according to a printing executive.

"There is a definite need to rightsize. Therefore we are in complete support of the USPS efforts in this area," wrote Joe Schick, Director of Postal Affairs at Quad/Graphics, in a company publication that was released Thursday. Quad is the country's #2 printer and a major shipper of catalogs, direct mail, and magazines to postal facilities.

"Total mail volume is expected to be about 170 billion pieces in 2011 while the current postal processing network has the capacity to support more than 300 billion pieces."

More than 40 processing and distribution centers are the subject of Area Mail Processing studies to decide whether some or all of their work should be moved to nearby P&DCs. In a recent one-week period, seven new AMPs studies were announced, as described in Postal Service 'AMPs' Up Facility Consolidations.

"It is an opportunity to reduce Postal Service costs while at the same time provide efficiencies to our distribution and drop-ship process," Schick wrote. "As facilities are consolidated and mail is processed in fewer facilities, we're able to build loads that have fewer stops, which should help us manage our transportation costs and make it easier for our drivers to get in and out of postal facilities."

"Unfortunately, local communities and Congress are making this difficult for the Postal Service. It's one example where the USPS is trying to do the right thing, but politics gets in the way."

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Postal Service 'AMPs' Up Facility Consolidations

In the past seven days, the U.S. Postal Service has announced it is considering the closing or downsizing of seven distribution centers as it steps up efforts to shrink its mail-processing network.

The latest announcements mean that more than 15% of the country's approximately 260 processing and distribution centers are the subject of Area Mail Processing studies, which can lead to work being shifted to facilities in other cities. While the media pay attention to the recent announcement that 2,000 small post offices might close, the less publicized AMPS process could be equally significant for the USPS's workforce, cost savings, and customers.

Last month, the Postal Service decided to shift mail processing from Houston to the North Houston, Texas facility, eliminating about 335 positions and saving $32 million annually. Even the more moderate move of outgoing mail from Cape Cod, MA to Brockton, MA meant 17 positions and nearly $2 million in annual savings.

The Government Accounting Office urged the Postal Service last year to accelerate the closure of excess mail-processing facilities. noting that the pace of closures had slowed to less than one per year. 

The seven newest AMP studies involve August, GA; Bronx, NY; Champaign, IL; Frederick, MD; Gainesville, FL; Portsmouth, NH; and Wareham, MA. Frederick and Portsmouth have already stopped handling originating mail; the new AMP studies will examine whether they should also stop handling destinating mail -- that is, mail that is dropshipped at the facility or that is shipped from other P&DCs.

Such consolidation of destinating mail helps mailers get better dropship discounts. For example, Houston mail entered at North Texas used to qualify only for ADC discounts but now gets the better SCF discounts. The consolidations also enable mailers to create larger pallets and fewer sacks of mail, which reduces the Postal Service's handling costs.

Related articles:

• GAO Suggests Plant Closings, Two-Tiered Wage Structure for USPS 
• USPS 'Honors' Sen. Byrd With Plant Consolidations 
• USPS Steps Up Mail-Processing Consolidation

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