USPS announces 3Q loss of $2.4bn

USPS ended its third quarter (April 1 – June 30) with a net loss of $2.4bn, including a non-cash adjustment that increased workers’ compensation expense by $807m. Ongoing electronic diversion and the widespread economic recession continued to reduce mail volume, resulting in a $1.6bn decrease in revenue for the quarter.

Despite cost reductions against the fiscal 2009 plan of more than $6bn and actions to grow revenue, the Postal Service (USPS) projects a net loss of more than $7bn at fiscal year-end. The organisation’s financial situation is compounded by its obligation to pay $5.4bn to $5.8bn annually to prefund retiree health benefits. This requirement, established in the Postal Accountability and Enhancement Act of 2006, is an obligation that no other government agency has to pay.

The Postal Service has incurred net losses in 11 of the last 12 fiscal quarters. The fiscal 2009 year-to-date net loss is $4.7bn, compared to a loss in the same period last year of $1.1bn, in spite of comprehensive, organisation-wide cost reduction initiatives.

The organisation is working to mitigate a possible 30 September cash shortfall of up to $700m. Postmaster general John Potter noted that the Postal Service has maintained a high level of customer service while facing continuing economic challenges.

Third quarter service scores for overnight single-piece First-Class Mail remained at 96% on-time, while the score for two-day, single-piece First-Class Mail improved 1 percentage point to 94%.

“Our commitment to customer service is paramount,” Potter said. “We will continue to provide the dependable service our customers need. We also will keep a balance with our critical focus on reducing costs so that service is not diminished. “Thanks to extraordinary efforts across the entire organisation, we are well on track to achieve our 2009 target of more than $6bn in total cost reductions,” said Potter. “In the third quarter, we surpassed the targeted amount by $500m.”

Cost reductions centre on initiatives to match work hours to reduced mail volume. Other savings are coming from consolidating excess capacity in mail processing and transportation networks, realigning carrier routes, halting construction of new postal facilities, freezing Postal Service officer and executive salaries at 2008 pay levels, reducing travel budgets and similar measures. Of note is an effort launched this year to reduce the cost of more than 500 existing contracts that will result in short- and long-term savings for the Postal Service in the areas of price, scope and process improvements.

“Securing the fiscal stability of the Postal Service will require continued efforts in all of these areas, as well as further review of retiree health benefit prefunding,” said Potter. “It also will require that the Postal Service gain flexibility within the law to move toward five-day delivery, to adjust our network as needed, to develop new products the market demands, and to work with our unions to meet the challenges ahead.”

Work hours were reduced by 88m hours in the first three quarters of fiscal 2009, or 8.4% compared to the first three quarters of 2008.

“We are on pace to meet our goal of reducing work hours by more than 100m for the entire year,” said Joe Corbett, chief financial officer and executive vice president. “That’s double the rate of last year’s successful work-hour reductions and the equivalent of 57,000 full-time employees, or 8.6% of our full-time workforce.”

A significant portion of USPS losses are due to an unprecedented decline in mail volume, which has fallen by nearly 20bn pieces in 2009 compared to the first three quarters of last year. Third quarter mail volume totaled 41.6bn pieces, down 7bn pieces, or 14.3%, compared to a year ago — the largest consecutive three-quarter drop in total volume since 1971. The trend of letter mail and business transactions being replaced with electronic alternatives will also cause continued downward pressure on mail volume into coming years.

Third quarter results also show an increase in workers’ compensation expense, which increased $722m or 198% compared to the same period last year. The increase reflects a non-cash adjustment of $807m to the carrying value of the Postal Service’s workers’ compensation liability, due to a change in discount rates caused by the current low interest rate environment.