USPS reports a $3.3 billion net loss for the fiscal first quarter

The first quarter of the fiscal year 2012 continued where fiscal year 2011 ended for the United States Postal Service—with a significant loss.

The USPS reported earlier today that it incurred a net loss of $3.3 billion for the quarter, following a $5.1 billion fiscal year 2011 loss. USPS officials said they expect these losses to continue until the USPS implements its network redesign and downsizing, as well as restructure its healthcare program. Previous losses in recent years include $8.5 billion for fiscal year 2010 and $3.8 billion for fiscal year 2010.

The USPS has repeatedly stated that it wants to reduce operating costs by $20 billion by 2015 to get back to turning a profit. And it has said that the fiscal year 2012 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.

Among the things it has proposed to get back into the black are consolidating its network in the form of facilities, processing equipment, vehicles, and staff, which it said would result in a savings of $2.1 billion and serve as a big chunk of its network optimization initiative that it projects to save up to $3 billion by 2015.

And as part of this rationalization, the USPS said in September 2011 it would consider closing down 252 of its 487 mail processing facilities. But in December the USPS said that it has agreed to delay the closing or consolidation of any Post Office or mail processing facility until May 15, 2012. That decision was made in response to a request made by multiple U.S. senators.

A parcel industry expert told LM that it is entirely likely Congress will further delay this again in May until after the November 2012 Presidential election.

For the first quarter, the USPS reported that:
-total mail volume of 43.7 billion pieces was down 6 percent;
-operating revenue at $17.1 billion was down 1.1 percent;
-operating expenses, before prefunding of retiree health benefits and the impact of discount rate changes for worker’s compensation liability, at $17.8 billion was down 1 percent;
-transportation expenses were up 6.3 percent, or $105 million, due to higher fuel costs; and
-the USPS said it continues to decrease controllable costs, including an 8 million decrease in work hours, which is 2.8 percent of total work hours, with total compensation and benefits expenses falling 1.4 percent or by $180 million.

As reported by LM, many of the losses incurred by the USPS, especially on the First Class side, have to do with ongoing diversion to electronic alternatives, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes. According to the USPS, First Class Mail revenue was down 4.1 percent year-over-year and total First Class Mail revenue and volume have declined 15 and 25 percent, respectively, since its peak in 2006.

And since peaking at 213 billion pieces in 2006, mail volume dropped 45 billion pieces, or 21.2 percent, to 168 billion pieces in 2011, according to the USPS’s form 10-Q statement. It added that the decline in First-Class Mail volume by 25 billion pieces, or 25 percent, during that five-year period has had a significant negative impact on profitability and liquidity.

“Technology continues to have a major impact on how our customers use the mail,” said Postmaster General and CEO Patrick Donahoe in a statement. “While it has helped us grow our Shipping Services businesses, it has had a significant negative impact on some of our much larger sources of revenue, particularly First-Class Mail. Revenue from Shipping Services represents about 17 percent of total revenue and, even with continued growth, cannot fully offset the decline in First-Class Mail revenue.”  

First Class and Standard Mail saw quarterly losses of $650 million and represented 3.7 percent of total revenue, said the USPS.

But its Shipping Services group, which was spurred on by strong holiday activity, e-commerce sales, and USPS marketing efforts had $2.8 billion in revenue for a 7 percent annual increase. USPS’s Parcel Select Services, which includes Parcel Select Mail and Parcel Return Service Mail was up 24 percent at $282 million, with volume up 23 percent at 146 million pieces. Priority Mail was up 3.8 percent at $1.7 billion, with volume up 3 percent at 231 million pieces. Express Mail was down 2 percent at $202 million, and International Mail at $493 million was up 7 percent, with volumes even for Express at 10 million pieces and up 4 percent at 78 million pieces for International Mail.

USPS added in its 10-Q that its domestic products portfolio has been enhanced in recent years to take advantage of the e-commerce market, with offerings like regional rate boxes, various ground parcel services, and samples in the mail, which it said are all showing growth.

And Mailing Services revenue, excluding First Class Mail parcels, was down 2.9 percent at $14.5 billion.

Jerry Hempstead, principal of Hempstead Consulting in Orlando, Fla., told LM that one way for the USPS to regain financial solvency would be for Congress to order the USPS and the Postal Regulatory Commission to do a one-time rate increase that would cover all current operating costs, which includes pre-retiree healthcare benefits, which could help it to break even and cover its obligations for servicing its debt.

“The USPS does not lack volume; it handles millions of pieces a day,” said Hempstead. “It’s obvious from the loss that they are just not charging enough for the service it provides. The mailers are not paying enough for the service it is receiving. Granted that extraordinary postal increases may hasten the declines in certain classes of mail, but the USPS and the PRC have statistics that can figure in the anticipated decline. A bail out is not quite fair, because we don’t all use the services of the USPS equally. The burden should be carried by those that actually use those services and the fee charged should adequately cover the cost for such service.”

Regarding the Shipping Services numbers, Hempstead pointed out that the majority of the pieces handled in the quarter came from Parcel Select [a package delivery service geared towards large shippers], which are tendered mostly by FedEx SmartPost and UPS Sure Post. 

Both FedEx and UPS had explosive growth in December for the number of transactions they tendered to the USPS for the last mile delivery to the consumer, but this volume unfortunately for the USPS declines substantially after January 1, he said.

“Last mile delivery is a very inexpensive solution to get a package to a consumer’s door, so even though there are a lot of them, the revenue contribution…does not heal the shortfall from First Class mailings,” he said. “The other concern will have to be about the same quarter this year. Much of the new volume in packages to the USPS came from UPS Sure Post which grew this service offering partly from the conversion from traditional UPS ground shippers over to USPS last mile service. It was a huge financial success for UPS in doing so, but the caution is that you can cannibalize your own customer base only once in order to achieve this kind of growth.”