Package service growth fails to keep USPS losses from spiraling

The US Postal Service has recorded a net loss of $3.2bn for the first quarter of the year, bringing the fiscal year’s total loss so far to $6.5bn.
The figure was a billion dollars worse than the overall loss seen in the same quarter last year, with the six months so far 150% worse than the first half of the 2011 fiscal year, down to a $6.5bn loss.

However, with much of the losses stemming from pension and healthcare arrangements USPS is looking for Congress to reform, executives said that operational losses during this first quarter of 2012 were actually 35% lower than the same quarter last year.

The year to date sees operating loss of $200m, compared to $100m the same period last year, with retiree health benefits and workers’ compensation adjustments taking the full net loss up to $6.5bn for the six months.

Chief Financial Officer Joseph Corbett said yesterday that discounting the prepayment requirements for future retiree healthcare liabilities, there were some positive aspects of USPS performances as the company takes action to cut its costs and grow revenues.

“Without the impact of non-controllable costs,” he said, referring to federally-mandated retiree health benefit pre-funding payments and workers compensation adjustments, “our net loss for the second quarter of this year was $726m – nearly 35% lower than the $1.1bn loss in the second quarter of last year on the same basis.”

Operationally, record levels of productivity and good growth in package services have been somewhat countered by increased costs from aspects like fuel prices, but Postmaster General Patrick Donahoe told reporters this week that so far this year, Postal Service operations are slightly ahead of the year’s forecasts.

Mail performance

Mail volumes are continuing to drop steadily at USPS, mail volumes were down 4% this quarter, and 5% in the year so far, with 83.2bn mailpieces flowing through the USPS network in the six months to the end of March, compared to 87.7 this time last year.

Expectations are for the decline to continue as Americans find alternative ways to communicate.

Both First Class Mail and Standard Mail, representing 70% of USPS revenue, are currently seeing sale decline, with First Class Mail down 3% in the quarter and Standard Mail declining a “disappointing” 5% year-on-year.

“That’s why we need the ability to modify our network and our footprint,” said Corbett.

Shipping and package services, representing around 20% of revenue, saw a 13% increase in the second quarter to $3.5bn, with more than 10% growth in Priority Mail and more than 30% growth in the last mile Parcel Select and Return services revenue. Volumes grew 9% or by 74m pieces.

Corbett said the rate of growth in package volumes at USPS was double that reported by FedEx and UPS.

Other improvements have come from reducing labour costs by cutting out 5.4m work hours during the quarter, bringing the year to date’s efforts to the equivalent of reducing the work force by nearly 8,000 full-time employees.

“We’re doing what we can to become more efficient every day,” said Corbett.

The way the year’s results are turning out, Corbett said there was “no way” the Postal Service would be able to pay its $11.1bn bill to the federal government this autumn, to cover this year’s – and last year’s – obligation to pre-pay future retiree healthcare liabilities.

Need for reform

But Corbett said yesterday that losses would continue until the Postal Service’s full five-year transformation plan – including much requiring Congressional action to change – moves forward.

He repeated the warning that the Senate bill passed last month to reform pension and healthcare payment arrangements “doesn’t go far enough” in helping to fix USPS financial problems.

“In the long term, we need additional initiatives passed, as we’ve laid out in our comprehensive plan,” he said.

USPS needs to cut its annual operating costs by $22.5bn by 2016 to get back to a
sound financial footing.

Corbett said the company could save $7bn a year if it was allowed to take its healthcare funding programme independent from the federal programme, integrating it with full state benefits through the Medicare programme.

Meanwhile, $11bn in federal pension surplus money should “rightly” be given back to USPS, Corbett said.

USPS is also looking to make an immediate move to five-day delivery weeks, and seeking additional pricing freedom on its regulated postal products to help close the hole in its budgets.

After the Senate passed its reform bill last month, Congress is now waiting for the House of Representatives to give its version a floor debate, before the two measures can go into conference to have a joint committee hammer out a compromise that could be voted through then signed by the President.

Liquidity

Not including payments into the retiree prepayments schedule, which Corbett said USPS has no ability to pay, the Postal Service looks set to effectively run out of cash this autumn.

It will require the peak season boom in mail volumes in the run-up to Christmas to keep the business going, said Corbett.

The CFO said: “In October 2012 we will be in a low point somewhere around zero cash. We also expect if we’re on plan that we will be able to weather that, and continue up during our busy quarter to accumulate enough cash to take us into the middle of next year.”

USPS now has a little less than $2bn in borrowing authority remaining from its full $15bn government borrowing limit, Corbett said.

He warned that if this situation of running on no cash reserves were to continue, any fluctuation in the US economy could prevent the business from operating.