USPS future hangs in balance after $3.5bn loss revealed

The future of USPS is uncertain after the company ended Q3 of its fiscal year 2010 with a net loss of $3.5bn. This compares to a net loss of $2.4bn for the same period of last year (1 April to 30 June).

Liquidity remains a major concern as the end of the fiscal year approaches. Although cash flow appears to be sufficient for 2010 operations, it is uncertain whether cash flow, together with maximum available borrowing of $3bn, will be enough to fund the Congressionally-mandated $5.5bn payment to the Retiree Health Benefit Fund on September 30 and retain sufficient liquidity into 2011, according to Joseph R. Corbett, the Postal Service’s CFO.

“Given current trends, we will not be able to pay all 2011 obligations,” said Corbett. “Despite ongoing aggressive cost reductions totaling over $10bn in the last three years, it is clear that a liquidity problem is looming and must be addressed through fundamental changes requiring legislation and changes to contracts”

Mail volumes slumped even further, with statistics showing that 40.9bn pieces being delivered during the period – down approximately 700m pieces, or 1.7%, compared to a year ago.

Complete USPS third-quarter results include operating revenue of $16bn, some $294m less than the same period last year, and operating expenses of $19.5bn, an increase of $789m, or 4.2%, over the third quarter last year.

The increase in operating expenses was attributable largely to higher workers’ compensation expenses due to a non-cash fair value adjustment and higher retiree health benefits expenses.  Lower interest rates adversely affected the workers’ compensation liability, resulting in a $2bn expense for the quarter – $870m higher than the same quarter last year.

A significant portion of USPS losses in the past few years has been due to an unprecedented decline in mail volume – down by more than 20% since 2007. The replacement of letter mail and business-transactions mail by electronic alternatives continues to cause downward pressure on mail volume.

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 (PAEA), is an obligation unique to the Postal Service.

The Postal Service has incurred net losses in 14 of the last 16 fiscal quarters. The fiscal 2010 year-to-date net loss is $5.4bn, compared to a loss in the same period last year of $4.7bn.

Postmaster general John Potter noted that despite the cost-cutting, the Postal Service has continued to maintain a high level of customer service. The third-quarter service score for overnight single-piece First-Class Mail was 96.7% on-time, an improvement of 0.4% from the same period last year.

“Our dedication to customer service remains a top priority,” Potter said. “We continue to provide dependable customer service even as we focus on reducing costs. With the dedicated efforts of our entire organisation, we are well on track to achieve approximately $3bn in total cost reductions in 2010,” said Potter.

Cost reductions center on initiatives to improve efficiency and match work hours to reduced mail volume. Other savings are coming from consolidating excess capacity in mail processing and transportation networks, realigning carrier routes, delaying construction of new postal facilities and a variety of other initiatives.

Work hours were reduced by 63m in the first three quarters of fiscal 2010, or 6.6% compared to the first three quarters of 2009. That is the equivalent of about 36,000 full-time employees.

“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.”