USPS finishes Fiscal Year 2011 with a $5.1 billion loss

Financial issues for the United States Postal Service (USPS) remain front and center, with this week’s announcement that for Fiscal Year 20111 the USPS had a net loss of $5.1 billion. USPS officials said this loss would have been more than doubled—at $10.6 billion—were it not for passed legislation that postponed a congressionally-mandated payment of $5.5 billion to pre-fund retiree health benefits.

For the entire Fiscal Year, USPS mail volume was down by 3 billion pieces—or 1.7 percent—annually, with First Class Mail down 5.8 percent from $34.2 billion to $32.2 billion. As LM has reported, First Class volume declines have been due in large part to ongoing diversion to electronic alternatives, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes.

Fiscal Year 2011 operating revenue dropped to $65.7 billion from $67.1 billion, and operating expenses dropped to $70.6 billion from $75.4 billion. USPS officials said that the retiree health benefit pre-funding payment, which was postponed by Congress, is now due on November 18, and if additional legislation is not enacted, they said that the USPS will be forced to default on its payment.

“The Postal Service can become profitable again if Congress passes comprehensive legislation to provide us with a more flexible business model so we can respond better to a changing marketplace,” said Postmaster General and CEO Patrick Donahoe in a statement. “To return to profitability we must reduce our annual costs by $20 billion by the end of 2015. We continue to take aggressive cost-cutting actions in areas under our control and urgently need Congress to do its part to get us the rest of the way there.”

On a more positive note, USPS Shipping Services was up $530 million—or 6 percent—in 2011 and was spurred by growth in its Parcel Select and Parcel Return Services. Both of these offerings saw increased activity, due to increased e-commerce activity. USPS Standard Mail was up $495 million—or 2.9 percent on a 2.6 percent volume increase of 2 billion pieces.

In an interview with LM earlier this year, USPS Vice President, Domestic Services Gary Reblin said USPS has seen a 2 percent gain in market share for its Shipping Services segment, which he described as huge growth in a [multi-billion] dollar market.

“The USPS is making great strides in this area, partly with everything we have done from Priority Mail to Parcel Select, and the growth we are now seeing in the under 1-pound First Class Mail parcels…and we are also having a resurgence in Parcel Post,” said Reblin. “These are probably our fastest growing products this year, and we are demonstrating across the board what we can do on the parcel side but we need fixes on the First Class side, whose decline is directly related to digital diversion. If we get some freedom and relief from the retiree pre-payments, we can manage this like we have done in other segments.”

The financial plight of the USPS is well-documented. In mid-September, it announced proposed changes to its network that it said would deliver $3 billion in annual savings.

Among the network changes proposed by the USPS were to:
-consolidate or close 250 mail processing facilities;
-reduce mail processing equipment by up to 50 percent;
-dramatically decreasing its nationwide transportation network;
-adjusting its network size by as much as 35,000 positions from its current total of 151,000 mail processing employees; and
-changing its First Class Mail service standard from a 1-3 day window to a 2-3 day window, with customers no longer receiving mail the day after it was mailed.
If enacted, USPS officials said these changes would result in: fewer facilities, greater utilization, and efficiency; earlier mail availability driving more efficient local delivery; and more retail partners and kiosks, as well as fewer brick and mortar Post Offices.

The USPS will file these proposed changes with the Postal Regulatory Commission later this year—and an Advance Notice of Rulemaking which was sent to the Federal Register last month. The USPS is eyeing $20 billion in cost reductions by 2015, coming from $6.5 billion in network changes for sorting and transport, retail, and delivery, $5.0 billion in compensation and benefits; and $8.5 billion in legislative changes.

Among the chief legislative changes are going from a 6-day to 5-day delivery schedule, receiving $6.9 billion in overpayments to the Federal Employee Retirement System in the form of a refund, and resolving the mandate to pre-fund retiree health benefits by $5.5 billion annually and manage the legacy cost going forward and allow the USPS to restructure its healthcare system to make it independent of federal programs, among others.

On November 9, the Senate Homeland Security and Governmental Affairs Committee voted by a 9-1 margin to move forward the 21st Century Postal Service Act, S.1789, which HSGAC said would provide USPS with the flexibility it needs to restructure itself in an effort to save billions of dollars and return to financial viability. Among the key components of this legislation are: buyouts and retirement incentives; health care savings; workers’ compensation reforms; arbitration standards; limitations on five-day delivery; streamlining delivery; retail service standards; processing facilities; and new products and services.

“The USPS is losing billions of dollars, but the bulk of these losses stem from an unusual pre-funding of retiree benefits for workers who have not yet even been hired by the USPS,” said David Ross, Stifel Nicolaus analyst. “Also, the organization’s inability to appropriately size its business is causing the remainder of the financial strain.  The U.S. government will not let the USPS become insolvent, so while a first glance at its bottom line leads to an ‘on the ropes’ characterization, it should also lead to some governmental action (even if not near-term) to allow the USPS to remain a viable part of the parcel industry.”