USPS dependent on Congress to avert impending doom

The US Postal Service saw a slight year-on-year reduction in its huge losses during the three months up to the end of June 2011, but it is still quickly running out of cash. Executives said this morning that a default on government payments is now “unavoidable” without action from the US Congress, which is currently on its summer recess.

Reporting on its latest results today, USPS said it made a net loss of $3.1bn in the third quarter of its fiscal year, compared to the $3.4bn lost in the same period last year.

Adding in weaker performances in the first half of the financial year, however, still sees USPS losses $300m worse off than a year ago, with a $5.7bn loss for the first nine months of the USPS 2011 financial year, which ends in September.

Revenues for the third quarter dropped from $16.1bn in the same period last year to $15.8bn this year, while the USPS actually increased its operating costs by $300m, partly because of an increase in fuel costs, with fuel prices 30% up on last year.

Mail volumes overall declined by 2.6% to 39.8bn pieces in the third quarter, following on from the 3% decline in the second quarter’s volumes.

Despite a 1.7% improvement in Standard Mail, 3.2% growth in package services and 7% uptick in shipping services, mail service revenues dropped by 1.7% for the third quarter, with the Postal Service pointing to continuing erosion from the growth in internet communications as well as an “anaemic” US economy as factors.

Shift to Standard Mail

The latest figures from USPS continued to chart a shift from First Class Mail towards Standard Mail.

First Class Mail has seen its revenues drop $1.9bn to $24.4bn in 2011 so far, while revenues from periodicals has remained the same in the first three quarters as last year, as have revenues from package services.

However, in the first nine months of this fiscal year, the Postal Service has made an extra $400m from Standard Mail, much through an increase in advertising mail. It has also enjoyed an extra $500m income from shipping services – which includes competitive services like Express Mail and Priority Mail.

The slight improvement in the overall net loss in the third quarter came mainly thanks to a reduction in workers’ compensation costs.

As a cash conservation measure to help prop up its liquidity, the USPS froze its $230m-per-month employer’s contributions into its federal pension fund, effectively trying to force its way into accessing a $6.9bn overpayment into the fund. The move is still being reviewed by the Department of Justice to see if it is legal.

Action required

Speaking to reporters this morning, USPS chief executive and Postmaster General Patrick Donahoe said Congressional action was urgently required to prevent USPS going into default on government payments expected this fall.

Key actions required, he said, was an elimination of annual Retiree Health Benefits pre-funding payments of $5.5bn a year; allowing USPS access to overpayments made into its pension funds, thought to be as much as $75bn; and new powers for USPS to drop Saturday deliveries.

“Current predictions are that we will not be able to make the $5.5bn Retiree Health Benefits prefunding payment at the end of September when it is due,” he said.

“We would hope for legislation to move that payment, but whether there is legislation or not, we will not be in a position to make that payment.”

Meanwhile, USPS chief financial officer Joe Corbett explained that the Postal Service’s total access to cash is currently running at about $2bn, but would turn negative if the federal benefits payment went through, requiring USPS to find an extra $1.5bn in October to maintain liquidity.

In Congress, the Democrat Senator Tom Carper and his Republican counterpart Senator Susan Collins are currently working on a compromise bill that would aim to help USPS with its pension and benefit payment issues.

Senator Carper has said he is hopeful a bill could be introduced in early September. However, Republicans who have the majority in the House of Representatives oppose federal assistance for USPS pension and benefit difficulties, with Californian Representative Darrell Issa offering a bill that would effectively place USPS in receivership.

Donahoe said today: “If we are not successful in with the law changes this year, we would have to take additional action on cash conservation measures and there will be additional pull-backs.”

However, the Postmaster General added that executives were talking to legislators about the possibility of more “breathing room” with the Postal Service’s legally-imposed $15bn government borrowing limit.

Cost-cutting

Balancing the need for Congressional action, Donahoe and Corbett emphasised ongoing “aggressive” efforts by USPS itself to trim costs in this morning’s press conference, and in the year to date compensation costs have been reduced from $28.3bn to $27.7bn compared to last year.

Going forward, costs will be further reduced as nearly 2,000 voluntary retirements of administrative staff were made in June, part of efforts to reduce mid-level positions by 7,500 over the coming months, which executives believe will save $750m a year.

Further jobs will go among supervisory staff in the next few months, while postmaster positions will be reduced once the review of 3,700 potential post office closures in completed in the spring of 2012, Corbett told reporters today.

Mail processing infrastructure is also being consolidated, while costs are also being saved from more flexible work arrangements, including use of more part-time workers, through new collective bargaining agreements with the unions.

In the year to date up to June 2011, USPS has reduced its workhours by more than the drop in mail volumes, Corbett said.

Much of the overall 2.8% reduction in workhours has come in mail processing (a 4.5% reduction in workhours) and customer services (a 6.5% reduction).

Reducing workhours from delivery activities has been achieved in urban areas with a consolidation of delivery routes, but would be improved if Congress allows USPS to move to a five-day delivery week.

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