USPS reports $3.5B loss for fiscal third quarter

Ongoing fiscal woes continue to threaten the financial viability of the United States Postal Service, as evidenced by its recently released fiscal year third quarter earnings.

For the quarter, the USPS incurred a net loss of $3.5 billion compared to $2.4 billion for the same timeframe last year, with operating revenue at $16 billion, a $294 million annual decline. Operating expenses—at $19.5 billion—were up $789 million year-over-year. This is the 14th net loss in the last 16 quarters for the USPS, with its fiscal 2010 year-to-date net loss at $5.4 billion compared to $4.7 billion at this point in 2009.

USPS officials said the increase in operating expenses was mainly due to higher workers’ compensation expenses because of a non-cash fair value adjustment and higher retiree health benefits expenses.

Mal volume for the quarter—at 40.9 billion pieces—was down roughly 700 million pieces of 1.7 percent.

Due largely to an ongoing diversion to electronic alternatives, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes, the USPS has been under difficult circumstances for more than three years. What’s more, it is faced with the possibility of a projected $7 billion shortfall for Fiscal Year 2011.

And the USPS also is working to restructure retiree health benefits for as many as 800,000 retirees, even though it only has an active work force of 596,000 career employees. It currently has an obligation to pay $5.4-to-$5.8 billion annually to prefund retiree health benefits.

As LM has previously reported, a major financial sinkhole for the USPS is the $70 billion it is required to spend between now and 2016 for retiree health benefits as mandated by the Postal Accountability and Enhancement Act of 2006, which USPS Postmaster General John Potter said “has placed an unbearable strain” on its finances and will lead to the USPS exhausting its cash resources. The combination of a payment to cover the share of benefits USPS employees get when they retire, as well as a $2 billion payment for the employer’s share of benefit premiums for current retirees, represents more than 10 percent of USPS operating revenue and is cost-prohibitive considering the current and anticipated revenue declines.

Perhaps the most worrisome part of this earnings announcement, though, is the current liquidity situation for the USPS. Officials said that cash flow appears to be sufficient for 2010 operations, but they are not sure whether cash flow—in conjunction with the maximum available borrowing of $3 billion—will suffice in making its $5.5 billion payment to the Retiree Health Benefit fund on September 30 and retain sufficient liquidity into 2011.

“Given current trends, we will not be able to pay all 2011 obligations,” said Joseph R. Corbett, USPS Chief Financial Officer, in a statement. “Despite ongoing aggressive cost reductions totaling over $10 billion in the last three years, it is clear that a liquidity problem is looming and must be addressed through fundamental changes requiring legislation and changes to contracts.”

In an effort to stem the losses as much as possible, the USPS has taken various cost-cutting steps to counter its fiscal and volume declines. These efforts focused on various initiatives, including: improving efficiency and matching work hours to reduced mail volume, consolidating excess capacity in mail processing and transportation networks, realigning carrier routes, and delaying construction of new postal facilities, among others.

In July, the USPS announced it is proposing price increases to get on better financial footing.
In a filing with the Postal Regulatory Commission, the USPS is proposing four-to-six percent price increases for various products, including its 18 Market Dominant products.
These changes, if approved by the PRC, would take effect on January 2, 2011. The PRC’s decision is due in early October.
Among the proposed USPS rate changes are:
-raising First Class Stamps to 46 cents, with a new Forever Stamp available in October;
-an 8 percent increase for Periodicals;
-a 5.6 percent increase for Standard Mail;
-6.7 percent increase for Package Services;
-a 5.2 percent increase for Special Services;
-a recommended increase for catalogs of 5.1 percent; and
-Standard Mail parcels increasing by about 23 percent. 
The USPS said these prices changes would generate $2.3 billion for the last three quarters of Fiscal Year 2011 and an estimated $3 billion for the full 12 months of Fiscal Year 2012.
“We are facing this problem because of a massive drop in mail volume and the fact that the bulk of our costs are fixed by laws, contracts, or regulations. Our operating flexibility is severely limited right now,” said Stephen M. Kearney, senior vice president, Customer Relations. “Our network is expanding by a million delivery points every year, and we are subject to a lot of legal requirements that limit our ability to reduce service commensurate with the decline in demand.”