Surprise mail slump means USPS facing shut-down in 2012

The US Postal Service has been rocked by a surprising slump in mail volumes in the last few months, and is now on track for a full shut-down in 2012 – a Presidential election year. The three months up to March 2011 saw a 7.6% drop in overall US mail volumes – double the expected drop – with April and May continuing the “disappointing” run.

The slump has forced USPS to revise its predictions for its current financial crisis to an $8.3bn loss in 2011, leaving expectations that with a legally-imposed limit on government borrowing, the Postal Service now has prospects of a $4.3bn black hole in its accounts.

Speaking to the Mailers’ Technical Advisory Committee meeting yesterday at USPS headquarters in Washington DC, USPS chief financial officer Corbett said there was now “no question” that the Postal Service would refuse to pay the federal government a required $5.5bn installment for its retiree health benefits fund this September.

Yet even refusing the payment, he said the Postal Service will reach its legally-imposed $15bn borrowing limit on October 15, 2011.

While festive season income and a postal rate increase in January would then help the Postal Service limp on into the New Year, he suggested that on present course, without Congress stepping in to help, “we run out of cash July of 2012”.

Mailers in the audience took this statement to mean a full shut-down of the Postal Service, an interpretation that was not challenged by Corbett yesterday.

Corbett said: “The Postal Service can’t achieve a profitable situation without legislative change.”

“No cushion”

The USPS is funded by its customers, rather than taxpayers, other than its government borrowing, but now faces the prospect of that independence being undermined. Last year, it posted an $8.5bn loss and in the first half of this year losses have increased even further.

Corbett said yesterday that in the event that cash reserves do dry up, the Postal Service will prioritise payment of its employees, then suppliers, but that other contractors might not be paid.

Furthermore, he said the Postal Service has “absolutely no cushion” in the event of another economic slowdown, at a time when economists are now warning of a slowdown this year.

Corbett said: “If anything remotely bad happens – the cost of fuel goes up, the cost of living goes up, the mail volume declines further – then we run out sooner.”

Revised forecast

The Postal Service reported a $2.6bn loss for the first six months of its 2011 fiscal year (up to March 2011), compared to $1.9bn the year before. “We lost over a billion more than what we had anticipated losing,” Corbett said yesterday.

“We did not expect to have a 7.6% decline this quarter – that’s huge. The bottom fell out in the second quarter, April and May have also been disappointing.”

Corbett added that his team was still “trying to get our heads around” possible reasons for the surprise slump in volumes.

Mailers suggested to Post&Parcel that a late Easter and weather disruptions may have made the situation difficult, but Corbett also suggested the Postal Service was struggling to compete with increased digital competition with physical mail channels.

USPS executives have now revised their forecast for the rest of 2011 and 2012, and now believe that instead of their overall debt reaching 17.7bn in the remainder of this fiscal year (up to September 2011), it will be $19.3bn.

They believe that rather than volumes reaching 173bn pieces this year, only 167bn pieces will be mailed in 2011, and only 165bn will be mailed in 2012. Revenue projections for this year have been similarly downgraded from $67.7bn to $65.5bn.

Next year, the Postal Service would hypothetically reach an overall debt level of $26.6bn. This debt level would be hypothetical, because under the present law the Postal Service is not allowed to borrow more than $15bn.

Corbett said USPS was currently doing everything it could to cut costs. Thousands of facilities and post offices were being closed, 7,500 administrative staff and postmasters were being laid off, union contracts were offering new cost savings.

But, the volume decline has outpaced cutbacks.

The Postal Service CFO said: “The decline in volume was over 7% (during the second quarter), but total hours we took out was about 2.7% – we are still taking hours out in the plants, and we are starting to get to the point where there aren’t able to find many more hours to take out.”

Congress

The Postal Service is now heavily dependent on Congress stepping in to help resolve the situation through pension and healthcare financing reforms and by allowing USPS to drop Saturday deliveries.

Bills have come from both Republicans and Democrats in the US Senate this year, and from Democrats in the House of Representatives, seeking to restructure pension and healthcare obligations, and provide access to more than $50bn of overpayments paid into civil and federal pension funds to help alleviate USPS debts.

However, key Republicans in the House have objected to providing assistance – labeling such an action as a “bailout” – with House oversight subcommittee chairman Dennis Ross even going so far as to deny on Facebook that there has been any overpayment of USPS pension funds at all.

Mail industry experts have warned that Congress may have too many distractions from the overall federall deficit to worry about the situation at the Postal Service. Art Sackler, Coordinator at Coalition for a 21st Century Postal Service, said it was a “reasonable assumption” that Congress would not manage to do anything at all to assist the Postal Service this year.

Corbett said yesterday: “We are hoping Congress sees the light – but they have even bigger fish to fry right now than just the Postal Service.”

Mailers who spoke to Post&Parcel yesterday suggested that next year the Postal Service would be unlikely to close down its entire network, but merely closing down parts could send a strong enough message to Congress for it to take emergency action.

Industry commentators pointed out that the impact on the economy from a Postal Service shut-down would reach far beyond the Postal Service itself and its 574,000 employees.

Cheryl Chapman, chairman of the Envelope Manufacturers Association’s Institute for Postal Studies, said today that the industries dependent on a fully-functional US Postal Service account for 8.7m jobs in America – more jobs than the oil and gas industry – and some $1.1 trillion, around 7% of GDP.

“Whatever happens to the Postal Service will be reverberating throughout the entire US economy,” she said.