Economy and Internet challenge U.S. Postal Service

By Ayesha Rascoe

WASHINGTON (Reuters) - Despite a slowing economy and growing competition from the Internet, the U.S. Postal Service aims to break even in 2008 by increasing its package delivery business by about 10 percent, a top executive told Reuters on Wednesday.

The Postal Service will eventually be profitable, but that goal must be balanced against giving customers the best price possible, said Patrick Donahoe, the chief operating officer and deputy postmaster general.

"Given that there's a lot uncertainty in the market right now, our goal is to continue to grow and provide value, and at a same time improve quality and improve service," Donahoe said.

This year, the Service expects about 10 percent growth in Priority Mail, Express Mail and related products that compete with Fedex Corp (FDX.N: Quote, Profile, Research, Stock Buzz), United Parcel Service (UPS.N: Quote, Profile, Research, Stock Buzz) and other companies, Donahoe said. That group of products now makes up about one-tenth of the Service's business, with First-class mail and periodicals accounting for the rest, he said.

"You've got an expanding package market, especially to homes," Donahoe said in an interview. "Our idea is to grow with it, more than in the past."

To attract more business from small companies, the Service began offering price discounts to high-volume Express Mail shippers and commercial Priority Mail customers on Monday. The discounts were made possible by a 2006 law giving it more freedom to customize pricing of package delivery products.

As the Postal Service attempts to enhance its package business, the slumping economy has cut revenue below expectations.

With businesses sending less mail, the Service lost $707 million in its fiscal second quarter as mail and package volume fell 3.3 percent. During the first half of its fiscal year, the Service reported a net loss of $35 million while generating $39 billion in revenue.