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USPS’s “flawed business model” persists even with growth in packages

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The U.S. Postal Service has lost $65 billion over the last 11 fiscal years, and things aren’t trending any better. The USPS’s package business is the one segment experiencing strong and steady growth. Its sales grew by $445 million, a revenue growth of 9.5 percent. Ironically enough, this is part of the much-maligned Amazon agreement, the terms of which are confidential, but which USPS calls “mutually beneficial.”

Overall, USPS’s losses continue to mount.

Today, they reported a total revenue of $17.5 billion for the second quarter of FY 2018 (January 1, 2018 – March 31, 2018), an increase of $235 million, or 1.4 percent, compared to the same quarter last year. First-Class and “Marketing Mail” revenue fell by a combined $181 million.

In February, regarding the Q1 losses, Postmaster General Megan Brennan said, “Although we continue to win customers and grow our package business, these gains are not sufficient to offset continuing declines in our mail business.”

“We have not ignored the economic realities facing our business. To the contrary, we’ve dealt with our challenges head-on. Where we have the authority, we have taken actions to proactively adapt to changing market forces,” Brennan said.

Given the decline in mail, Brennan said USPS reduced the size of its workforce by 152,000 workers and reduced its overall real estate footprint by consolidating operations at more than 350 facilities, or 56 percent of its total real estate holdings.

The USPS’s results for the quarter continued to reflect multi-year trends of growth in Shipping and Packages volume and declining letter volumes, as package volume grew by 69 million pieces, or 5.0 percent, while mail volumes declined by 700 million pieces, or 2.1 percent, compared to the same quarter last year.

“Despite growth in our package business, our financial results reflect systemic trends in the marketplace and the effects of an inflexible, legislatively mandated business model that limits our ability to generate sufficient revenue and imposes costs upon us that we cannot afford,” said Brennan. “America needs a financially strong Postal Service that can invest in its future and can continue to fulfill the needs of American businesses and consumers. With continued aggressive management and greater legal authority to respond to changes in our marketplace and to control our costs, the Postal Service can return to financial sustainability.”

The controllable loss for the quarter was $656 million, compared to controllable income of $12 million for the same quarter last year. This change to controllable loss was driven by a $236 million increase in the controllable portion of the normal cost of retiree health benefits due to changes in actuarial assumptions and a $364 million increase in compensation expenses due to additional hours incurred to support the labor-intensive package business as well as contractual wage adjustments. Additionally, transportation expense grew by $155 million due to highway contract rate inflation as well as higher fuel costs.

Total operating expenses were $18.8 billion for the quarter, an increase of $1.0 billion, or 5.7 percent, compared to the same quarter last year. In addition to the controllable expenses referenced above, unfunded retirement and retiree health benefits grew by a combined $766 million due to changes in actuarial assumptions. Workers’ compensation expense declined by $658 million compared to the same quarter last year, resulting primarily from changes in interest rates.

Net loss for the second quarter totaled $1.3 billion, compared to a net loss of $562 million for the same period last year.

“The continued secular decline in First Class mail, rising costs and legislative and regulatory constraints resulted in larger losses this quarter,” said Chief Financial Officer Joseph Corbett.

As FreightWaves previously reported, the core issues USPS faces revolves around structural changes in the economy and large institutional costs. For years, the post office relied on traditional first class mail and mailed advertisements to generate much of its revenue. But as people switched from letters and envelopes to email, and businesses switched from “marketing mail” to email spam, volumes have plummeted. This remained an issue throughout 2017. Despite the decline in mail volumes, USPS is still mandated by law to visit every address daily.

Also, they continue to struggle with high pension costs the likes of which no company would ever willingly tolerate. By law, the USPS is mandated to pre-fund their pensions, accounting for a large share of the losses over the past decade.

“No one is overseeing the postal system. It is a rudderless ship,” said former chairman of the Postal Service Board of Governors, S. David Fineman in a statement yesterday. Fineman served on the board from 1995-2005.

The Senate has not approved any nomination to the board in eight years, Fineman noted. The last appointed member stepped down in December 2016 after his term expired. The board needs a quorum to make major business decisions like approving postal rate increases.

The Postal Service “was profitable and can still be profitable,” he said. “It should not be a political football. We should move ahead with providing needed oversight of the system.”

Postmaster General Brennan had expected the Senate to confirm President Donald Trump’s three nominees for the nine-member Postal Board of Governors before the next financial quarter call in April. Despite a year of inactivity on the legislation, Brennan remains optimistic on the chances of postal reform legislation getting passed by Congress.

She also called on Congress to pass its Postal Service Reform Act, which would require postal retirees in the Federal Employees Health Benefits Program to enroll in Medicare parts A and B, and would largely reduce the burden USPS currently has prefunding health benefits for future retirees.

“The root cause of our financial instability is a flawed business model, which cannot be fixed without congressional action. Under current law, a large percentage of our costs are imposed on us, and these costs are growing,” Brennan said.

The bill passed the House Oversight and Government Reform Committee last February, but has yet to receive a House floor vote.

“The process is moving forward, it can be a protracted timeline, just given some of the process steps, but we’re encouraged that in talking to some of our key public officials, that they understand the urgency of this,” she said.

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