USPS reports fiscal first quarter loss

While the pattern of a quarterly net loss remained intact, not all the news was negative for the United States Postal service (USPS) in its fiscal first quarter earnings announcement today.

USPS reported a $754 million net loss for the quarter, following a $5.5 billion net loss for all of fiscal 2014. Included in this net loss is a $1.4 billion expense accrued for the mandated prepayment towards the Postal Service Health Benefits Fund. As previously reported, the USPS remains hamstrung by its retiree health benefits prefunding payments, which it has been unable to meet, due to a lack of capital. What’s more, it continues to ring the bell for Congress to draft and sign legislation into law to not only reduce the payments, which it has been unable to meet, but also includes a smarter delivery schedule, greater control over its personnel and benefit costs, and more flexibility in pricing and products to provide the necessary cash flows

But its fiscal first quarter operating revenue saw a 4.3 percent–or nearly $800 million-gain to $18.7 billion, which USPS officials said was spurred by a “record number of holiday season packages delivered with high reliability during our busiest time of the year.

“Our employees delivered double-digit growth in packages this holiday season, which shows our growing ability to compete for and win new package delivery customers,” said Postmaster General and Chief Executive Officer Megan Brennan in a statement. “To keep the momentum going—and to ensure we are the shipper of choice for our residential and business customers—we will continue to expand customized delivery solutions and package capacity while delivering high levels of service. The Postal Service performed well with regard to revenue generation and cost control during the holiday season.”

Among the operational metrics and financials for the USPS’s fiscal first quarter performance include:
-total volume of 42.6 billion pieces, which was up 1.4 percent annually;
-a 12.8 percent annual gain in Shipping and Package volume to 1.256 billion pieces, with revenue up 9.5 percent to $4.269 billion;
-First-Class mail, the USPS’ most profitable service line, saw volume drop 1.1 percent to 16.679 million pieces;
-Standard Mail volume (which represents 53 percent of total USPS volume) was up 3.4 percent to 22.767 million pieces; and
-Parcel Services revenue rose 27.2 percent, with Parcel Select revenue at $908 million, Parcel Returns revenue at $38 million, and Standard Mail Parcels revenue at $18 million

Even though Shipping and Package volume saw a decent annual gain, USPS noted it only accounts for 23 percent of total quarterly revenue and 3 percent of total volume, while First Class represents 40 percent of revenue and 39 percent of volume. And it added that the costs to process and deliver Shipping and Package units is “substantially higher than for First Class mail,” with revenues from Shipping and Packages needing to grow at a higher rate than the decline in First Class Mail revenues in order to replace the lost profit margin of First Class Mail.

The decline in First Class Mail can be largely attributed to the ongoing migration toward electronic communication and electronic transaction alternatives, according to the USPS. And the revenue gains for the segment, said the USPS, is mainly due to the January 2014 price increase, with prices for all First Class services generally capped at the rate if inflation as those services are classified by law as Market-Dominant.

Jerry Hempstead, president of Hempstead Consulting, said that the USPS’s financial shortfall stems from the money it owes the U.S. Treasury for the prepayment of retiree health which they have not actually been writing the check for.

“It’s not like the US Government is going to foreclose on the Postal Service,” he said. “As best I can determine though, it appears that Congress continues to spend the money the USPS is not depositing. And so the circle dance in DC continues.”

Stifel Nicolaus analyst David Ross recently observed in the LM Parcel Roundtable that the USPS is the biggest carrier of residential B2C deliveries in the U.S. by a wide margin.

“We believe the organization is well positioned to continue growing its delivery volumes and capacity,” he said. “The problem is the government involvement, which has resulted in a molasses-pace for any change and saddled the USPS with pension debt.  At some point, we hope the USPS is allowed to raise First Class Mail rates more and become a more profitable entity that can then invest in more equipment and technology to improve service, but we’re not there yet.”