USPS focused on five-year plan to reduce financial pain

Regaining its financial footing has long been a chief objective for the United States Postal Service.

That statement almost goes without saying, considering that the USPS in May said it had a $1.9 billion net loss in the fiscal second quarter on the heels of a $1.3 billion net loss of $1.3 billion in the fiscal first quarter and a fiscal year 2012 loss of $15.9 billion.

There are many reasons behind the financial travails of the USPS, but perhaps two of the biggest ones are the decline of First Class Mail, which has traditionally been its most profitable offering. For the fiscal second quarter, the USPS said that First Class revenue fell 3.1 percent—or $237 million, adding that the 4.5 percent volume decline of 854 million pieces was due in large part to an ongoing diversion from paper to electronic communications, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes.

The second reason has to do with mandated prefunding health retiree benefits which are part of a Congressionally-mandated 10-year payment schedule at an average of about $5.5 billion per year to create a fund to pay future retiree health benefit premium, among others.  Last summer, the USPS announced it could not make $5.5 billion in mandated prefunding health retiree benefits to the Treasury, which was due August 1, as well as a $5.6 billion payment that was due on September 30.

In order for the USPS to recoup its significant losses in recent years, it maintains that it needs to accelerate the implementation of its USPS five-year business plan, which it said would reduce annual costs by at least $20 billion by 2015. And along with its goal of $20 billion in annual reductions by 2015, the USPS would like to see annual savings rise to $22 billion by 2016. The plan’s goals include:
-eliminating the fund to pay future retiree health benefit premiums and is proposing to provide employee health benefits independent of federal programs, which it said would save the USPS $7.1 billion annually;
- moving from six days per week delivery to five days per week, which would result in an annual cost reduction of $2.7 billion; and
- pursuing the realignment of its mail processing, retail, and delivery operations, which would result in a savings of $8.1 billion annually and also seek other significant cost reductions to grow or retain revenues within its current business model.

Of the $20 billion in targeted savings within the next five years, the USPS said about $10 billion requires legislative action

In a Webcast yesterday, USPS Chief Financial Officer and Executive Vice President Joseph Corbett explained that the financial outlook at the USPS has “created a crisis of confidence” for the Postal Service in the eyes of the marketplace, adding that the USPS “needs to as quickly as possible resolve the issues underlying these losses and move forward from a position of financial strength and continue to deliver mail in a quality way and gain the confidence of our customers and employees.”

He explained that the five-year plan, which was rolled out in 2012, is not stagnant by any stretch and that USPS’ efforts to become more efficient and customer-focused are accelerating.

As an example, he pointed out that during the first six months of the fiscal year 2013 USPS has outperformed its two largest competitors (UPS and FedEx, whom were not mentioned by name) in terms of package growth, signed 29 national customer contracts, grew its Every Door Direct Mail product by 80 percent, and delivered 4.2 million packages with a near-perfect scanner rate through a next-day delivery pilot with a major retailer, among others.

But despite these signs of progress, Corbett said the losses continue to mount, in turn driving the need for the five-year plan to be executed, which requires Congress to act and make the needed legislative changes.

An ongoing bright spot for the USPS has been its Shipping and Package Group, Corbett stated. And he added it has outgrown its biggest competitors in terms of package growth over the last 12 months.

“We need to continue that,” he said. “We have grown packages by 14 percent over the last two years and we are going to continue working on that to close competitive gaps to level the playing field between us and our competitors. We are going to make sure we continue to have competitive pricing.”

Corbett highlighted a recent USPS announcement which noted that the USPS is switching its new Priority Mail features so that it has day-certain delivery. So rather than have, for example 2-3 day delivery it will have 1-day, 2-day, and 3-day delivery so customers will have a clear expectation of when to expect their packages. And the USPS is also honing its e-commerce delivery capabilities with a focus on speedier service and improved access.

While package growth at the USPS is growing, the lion’s share of it comes from its Parcel Select, its package delivery service geared towards large shippers, which represents more than 75 percent annual growth for Shipping and Package group over the last six months, according to Jerry Hempstead, president of Orlando-based Hempstead Consulting.

And while Corbett pointed out that the USPS is outperforming UPS and FedEx, he said it comes with this caveat.

“This [Parcel Select] category is larger than all the other USPS parcel services by a long shot,” he said. “The vast majority of the Parcel Select packages come from UPS (Sure Post) and FedEx (Smartpost) The growth of parcels the Postal Service enjoys today is because FedEx and UPS are out there making the magic happen for the USPS.”

Hempstead also pointed out that UPS has already agreed with its bargaining unit to not tender to the USPS pieces over 10 pounds and oversize pieces, and they have agreed not to proactively sell the Sure Post Product to existing UPS customers.

This means that it is likely the USPS is not going to see the growth of Parcel select from UPS that they have seen in the past, with Hempstead adding it would not take much of a price increase to get UPS to consider having its own drivers deliver some or all those packages it now entrusts to the USPS for last mile delivery.

As for Congress stepping in to help alleviate some of the USPS’ fiscal issues, he said that 2014 is a Congressional election year, and neither side of the aisle wants to antagonize the Letter Carriers Union, which has 350,000 members.

“So closing plants, closing post offices, going to 5 day delivery (which means 50,000 fewer letter carriers) changing retirement plans or healthcare benefits are just not going to get the ear of any politician,” he said.

More than anything, what Congress needs to tell the USPS in order to get back into the black, said Hempstead, is to tell the USPS to raise all of its prices to cover all its budgeted expenses and to also have the cash to pay down the debt and make good on the payments the USPS defaulted on.

“The USPS does not charge enough for the service it provides,” he said. “They need to act like a business and charge enough for its services to cover its costs.”