Parcel shipping: USPS reports $3.8 billion fiscal year 2009 loss

Market conditions, diversion to electronic alternatives impact earnings and volumes

Jeff Berman, Group News Editor -- Logistics Management, 11/17/2009

WASHINGTON-It is not a stretch to see that 2009 has been a trying year for the United States Postal Service (USPS). That has been reflected in its financials for all of this year, most recently with its recent release of fiscal year-end 2009 earnings, which revealed the USPS had a $3.8 billion net loss for the fiscal year. This loss exceeds 2008's fiscal year loss of $2.8 billion by 26.3 percent.

Despite the nearly $4 billion loss, this figure beats original expectations made by the USPS earlier this year, when it projected a net loss of more than $7 billion by the end of the fiscal year. A major factor for the roughly $3.2 billion difference is due to legislation that contained a $4 billion reduction in retiree health benefits, which was signed by President Barack Obama earlier this year.

This legislation reduced the 2009 retiree health benefit payment due from the USPS from $5.4 billion to $1.4 billion, with payment of the deferred $4 billion to commence in 2017, according to the USPS. The $1.4 billion payment for 2009 retiree health benefits has already been made. USPS officials said this reduction allow[s] the USPS to maintain fiscal solvency while continuing to provide universal, affordable service to the nation.

"We're grateful to Congress and the Administration for the necessary 2009 adjustment to our retiree health payment," said Postmaster General John Potter, in a statement. "This was a welcome and much-needed change to assure that the Postal Service was able to meet all of its obligations at the end of the fiscal year and over the course of 2010."

Even with this temporary leeway in retiree health benefits, the USPS also has a December 31, 2010 deadline to make a $5.5 billion in retiree health benefits.

Fiscal 2009 results: For fiscal 2009, the USPS had an operating revenue of $68.1 billion, down 9.1 percent from $74.9 billion in 2008. Operating expenses-at $71.8 billion-were down 7.6 percent from $77.7 billion in 2009. And total mail volume-at 177.1 billion pieces-was down 12.7 percent compared to 202.7 billion pieces in 2008. 

As LM has previously reported, a driving factor for these declines stems from a shift from traditional mail delivery to electronic communication alternatives, including e-mailing business documents and online purchase ordering, among other electronic mailing processes.

To counter these fiscal and volume declines, the USPS has been proactive in cost reduction efforts throughout 2009, with a previously-stated goal to achieve more than $6 billion in total cost reductions for the year. One of these efforts was matching work hours to reduce mail volume by 115 million hours-or 65,000 full-time employees-in 2009. Other efforts included consolidating excess capacity in mail processing and transportation networks, realigning carrier routes, halting construction of new postal facilities, freezing USPS officer and executive salaries at 2008 pay levels, and reducing travel budgets.

"This performance is clearly due to ongoing declining mail volumes," said Jerry Hempstead, president of Hempstead Consulting. "The nearly $4 billion loss after the $4 billion retiree health benefit legislation was passed means it really lost closer to $8 billion, which tops the original $7 billion loss projection the USPS made. A billion dollar variance is significant; it shows the weakness of the economy. But the USPS has taken great strides to reduce operating costs, such as the early retirement offer made in August."

When the USPS rolled out its early retirement offer, it said this move could save $500 million in labor-related costs in 2010-with up to 30,000 employees possibly accepting it. Yesterday, the USPS said 13,400 employees had applied for it, accounting for accrued incentives of $197 million.

Rate changes: In October, USPS Postmaster Potter wrote in a letter to customers that the USPS will not raise rates for its market-dominant products, including First-Class Mail, Standard Mail, periodicals, and single piece parcel post. Potter noted that while increasing prices could have generated revenue for the USPS in the short term, the long-term effect could drive additional mail out of the system.

And earlier this month, the USPS rolled out rate changes for other products, including Priority Mail (a 3.3 percent overall increase), Express Mail (a 4.5 percent overall increase), Global Express Guaranteed (a 4.1 percent increase), Express Mail International (a 4.1 percent increase), Priority Mail International (a 3.0 percent increase), Parcel Select (a 4.7 percent increase), and Parcel Return Service (a 3.0 percent increase), which will take effect January 4.

In terms of any meaningful impact the financial performance of the USPS will have on shippers, Parcel Research Principal Doug Caldwell told LM there are not likely to be any.

"Some of the good news coming out of the USPS is that for some services they are not raising rates at all," said Caldwell. "Some of the parcel categories will be flat, and the other thing that ties in to shippers is its ‘Winter Sale' for standard mail like catalogs after January 1.

Later this week, the USPS said it will file its 2010 Integrated Financial Plan, which it said will include its plans and goals for the coming year. USPS officials said that the plan estimates a revenue decline of $2.2 billion, a net loss of $7.8 billion, cost reductions of more than $3.5 billion, and a reduction in mail volume of 11 billion pieces. They added these changes are based on the assumption that there will not be changes made to the number of delivery days per week and the current retiree benefits schedule.

But reducing the number of delivery days per week from six to five is being viewed as a way to achieve "real reform," Potter said at last week's USPS Board of Governors meeting, according to a report from DM News.

Caldwell said this effort could prove to be an uphill battle for the USPS, as it has to be approved by the Postal Regulatory Commission and Congress. He added that on a comparison basis UPS and FedEx have done a good job of not cutting service while cutting costs, which is also something the USPS needs to take a look at, although there are currently no service cuts planned in regards to package delivery.

USPS officials added that reform legislation is needed to address the "impossible demands" of the pre-funding retiree health benefits at current levels of more than $5 billion annually, and provide the barriers to matching delivery frequency with declining mail volumes, and the ability to leverage the USPS' logistics distribution and retail networks to create new revenue sources.