Why the US Postal Service should call in the receivers

James Cartledge speaks with corporate restructuring expert Van Conway, president and co-founder of Conway MacKenzie, Inc., about how he would turnaround the troubled US Postal Service. Last week, the US Postal Service announced a $3.3bn loss in what should have been its best quarter of the year. Much of that loss stemmed from requirements set by Congress for USPS to pre-fund its healthcare liabilities for future retirees.

But a key takeaway from the results presentation was that the organisation has significant liquidity concerns, which barring action from a fractured Congress will see a highly precarious situation approaching this fall.

Joe Corbett, the USPS CFO, suggested that for an organisation of its size, with a $65bn turnover and 500,000-strong workforce, it ought to have about $7bn in cash reserves just to run as a healthy business. This October, forecasts suggest that on its present course, USPS will be $300m short of even having a reserve.

Corbett said the Postal Service will find enough money from somewhere to weather through the storm – but if the economy takes another dive, there is no safety net.

Postmaster General Patrick Donahoe says USPS needs to cut $20bn in annual operating costs over the next few years to get back to an even keel, half of which can only be achieved by Congressional action.

Experts in insolvent companies believe the Postal Service now cannot survive without major taxpayer assistance.

Van Conway, a nationally-recognised corporate restructuring guru who has been turning around failing companies for nearly 30 years, tells Post&Parcel that he does not understand why it took so long for USPS to get round to major cost-cutting initiatives.

Mail volumes have been dropping since 2006, while the USPS cash cow First Class Mail has seen its volumes reducing since 2001.

“The situation with the mail, and the way people communicate today, with the structural floorplan of the Post Office, I just wonder why when losing that kind of money, they wouldn’t have implemented significant cost-cutting initiatives already,” he says.

Conway is president and co-founder of turnaround advisory firm Conway MacKenzie, Inc. His long background in the field of insolvency has included extensive experience in the troubled auto industry, with Conway himself based in Detroit.

Downsizing

Whether or not Congress is to blame for much of the current financial problems at USPS, Conway says the figures for the Postal Service’s latest quarter suggest the need for radical change.

“Really, it appears to me that they haven’t changed the way that they are doing business – but the world around them has changed,” he says. “To lose over $3bn in your best quarter just tells you that the industry is different, smaller, their cost structure is just completely out of date.”

Ultimately, USPS has too many people, too many sites, says the restructuring expert, and he understands the political difficulties that executives face in trying to do this.

USPS is currently trying to push through plans to close up to 252 of its 461 mail processing plants, along with more than 3,000 of its 32,000 post offices.

But the regulators want to fully assess these plans before any mail plants are closed: something set to take until July. Congress wants to prevent job losses at a fragile period for the US economy while protecting the federal budget. The unions want to protect their members in the belief that pension surpluses can be returned and healthcare payment plans restructured to fill the black hole in the USPS budget.

“I get that,” says Conway. “But political power shouldn’t really matter in terms of doing the right thing. The way people are communicating today, the world has changed, and there has to be a reduction in force, there has to be a reduction in locations.

“How the unions will play out with their political connections, I get it. But we as taxpayers are underwriting a significant loss that probably can be significantly mitigated.”

Bailout

Broadly, Conway’s recommendations do fall along the lines of the Postmaster General’s current strategy, including moves to entirely rethink company healthcare benefit systems, though his belief is that all this should have been changed years ago.

But he cannot see a way out without some significant form of taxpayer-borne financial support.

“They’re going to run out of money – what are you going to do? Somebody has to fund the losses, those losses are not going to go away,” he says.

“The question is: is the money going to fix it? The answer is ‘no’, unless you have a plan. You have to fund them – they can’t go out of business. But we can’t fund them unless there’s a plan, we can’t fund a black hole.”

Referring to what happened to the major car manufacturers in the United States, in regard to the $81bn federal government bailout of GM and Chrysler in 2008-09, Conway says: “What happened is the government put in money as part of a deal to get something done.

“Government money was used in a smart way, used as part of a long-term solution, rather than just putting in the money so you can find yourself in the same situation two years down the line.”

Receivership

At the moment, there are two major bills that have passed through the committee stage of the US Congress to potentially help the US Postal Service, one bill in the Senate (S.1789), one bill in the House of Representatives (H.R. 2309).

There is some overlap between them, such as in allowing USPS more freedom to broaden its product line. Some of the major differences in approach are that the Senate bill seeks to provide an $11bn rebate from the USPS pension surplus and restructure healthcare benefit prefunding. The House bill seeks to set up a form of receivership, with a new control authority to be set up in the event that USPS cannot pay its bills, to force through major cutbacks.

Conway says judging from his experience, the House bill and its proposed receivership system offers more of a real answer to the situation.

“You should have a form of receivership where you have an empowered receiver, and that independent party would be in charge of a cost reduction plan,” he says.

When it comes down to it, Conway says, given what is happening to modern communications, downsizing is the only real answer for USPS.

“It’s a tough business to fix,” he says. “The top line will continue to erode, and we as turnaround guys looking at companies, we have to figure out where the top line will flatten. I’m not sure the top line here will ever flatten. I think it will continue to erode.”

Conway offers a stark conclusion for the USPS: “You’re going to have to do cost-cutting forever. As horrible as that sounds, or you’ll get to a point where you’re just not in business any more.”

It’s a fairly bleak view of the future for US mail, though a restructuring expert is paid to take a brutal judgement of a company’s problems and potential. Conway freely admits his thinking is from a very top-down perspective. “I’m kind of looking from 30,000 feet,” he says.

However, his believe is the Postal Service cannot shut down. In the mean time, does it have a long-term future in the digital world? Perhaps facilitating the electronic communications that are currently causing it so much damage?

“Yes,” he says. “You can see that the government has the US mail competing with FedEx, right? So why wouldn’t they have a role here? You have a good work force, right? You don’t need to get rid of them all, but you have to deploy your work force to be in the business of delivering something.”