Filling in the Gaps

At the Board of Governor’s meeting on Wednesday, September 24, Postal Service’s CFO Harold Glen Walker provided only a limited picture of the Postal Service’s current and near term and financial condition. He did not present as expected either a forecast of a projected loss for the remainder of the fiscal year, nor did he present an integrated financial plan for FY 2009 as was expected from the agenda e-mailed to the press. His only clear statement on finances was that the “4^th quarter decline has occurred at an accelerating rate.” The postal community needs more information than that, and this post will provide an analysis that hopes to fill in the gap in public information that was left behind at the conclusion of the meeting.

In particular this post and the ones that will follow, I will provide:

• an updated forecast of the Postal Service’s loss for FY 2008;
• an examination of the economic and business trends that will drive revenue and costs in the remainder of the fiscal year and next fiscal year;
• the challenge of doing any forecasting in today's economic environment;
  
• some thoughts on strategic planning; and
  
• a preliminary forecast for FY 2009.

The fourth quarter is clearly one of the most difficult periods that the Postal Service has faced in its history. The release of the Postal Service's revenue and expenses accounts through August shows that the Postal Service's loss so far this year is how challenging this period is. So far this quarter, revenue is$11.850 billion and expenses are $13.025 billion, producing a two month loss of $1.176 billion.

The loss so far in the fourth quarter is driven by a 4.7% decline in revenue, a 1.3% increase in expenses, and a $329 million workers compensation adjustment. Extrapolating this trend through September would result in a quarterly loss of $2.168 billion and a fiscal year loss of $3.326 billion.

The increase in expenses in these two months appear likely to continue through the remainder of the quarter. During the 4th quarter, COLA payments raised labor costs. Changes in energy prices raised expenses by over $140 million as noted in transportation, gasoline, natural gas, heating oil, and electricity accounts. Given that much of the increase in energy prices happened after the beginning of 2008, this increase in cost will clearly continue through the remainder of the quarter. The Postal Service will be able to cut the projected deficit on the expense side only if they can make substantial reductions in work hours, reduce contracted and postal transportation, or have accounting adjustments that affect final expense totals.

The decline in revenue raises some serious questions about the near term business prospects of the Postal Service, particularly since it raised rates just a few months ago. The decline in revenue potentially reflects two trends that were not present previous. First, the decline in revenue most likely reflects a volume decline that is greater than the 4.7% decline in revenue given the increase in rates. Second, the decline in revenue most likely indicates that both long term trends and the economic downturn are having a greater impact on the Postal Service's products that generate more revenue-per-piece than others.

Looking at the revenue figures in more detail does provide some hints as to which products are driving the revenue decline. In particular the revenue data shows that:

• Revenue from those payment categories most likely to represent single-piece First Class mail declined by 6.75% or $158 million. This includes revenue from stamps, other than precanceled stamps, PC Postage, and low speed meters. The decline in revenue here is only marginally larger than the decline in single piece revenue in the third quarter (5.6%). During that quarter, single piece mail volume declined by 9.8%. This fourth quarter will likely show the first double-digit decline in single piece mail volume. As the downward trend in single-piece mail volume, that presents a faster decline in each subsequent year, began almost a decade ago, the decline in First Class Single Class mail is unlikely to return when the economy returns.
  
  
• The 7.3% or $242 million decline in revenue in Standard Mail permit and pre-cancelled stamp revenue in the 4th quarter shows the intense impact of of the economy on revenue sources linked to advertising. Regular Standard Mail permit revenue declined by 7.4% and Non-profit Standard Mail permit revenue declined by 5.9%. Both of these products saw declines in permit revenue greater than that experienced by the Postal Service as whole. In the 3rd quarter, standard regular mail volumes were down by 6.8% and non-profit volumes rose by 2.9%. In the 4th quarter, the Postal Service may be seeing large single-digit or double-digit declines in regular Standard mail volume and single-digit declines in non-profit mail volumes. The Postal Service will get a small bump in non-profit mail in September from the election but much of the election effect will occur in the next fiscal year.
  
  
• All other postal products do not appear to be as adversely affected by the economy or long-term secular trends. However, the impact of the economy on periodical revenue may be delayed due to advertising page commitments for July and August may have been made before the depth of the downturn was as clear. The Postal Service may be seeing problems in periodical revenue in the next fiscal year.

Given that the economy has slowed further in September, with the greatest impact occurring in the mail intensive financial service businesses, the Postal Service is unlikely to report better revenue trends in its 4th quarter RPW report based on one additional month of data. Therefore, extrapolating the year-to-year change in revenue feels like a reasonable assumpt ion without further data.

If the Postal Service's projected loss is even close to the $3.3 billion that an extrapolation would suggest, then the sooner the Postal Service begins to prepare its stakeholders for the end-of-the-year reports the better. Holding back on bad news is unlikely to make life any stakeholder including Postal unions and their leaders, employees, mailers, Congress, and Postal Regulatory Commission.
Service

Oct 1, 2008 Correction: Since this observation was posted, I have learned that the Postal Service has told its unions, and management associations that it expects its losses for the year will be $2.3 billion, $1 billion less than what is projected in the observation above. I take the Postal Service's statement to be authoritative and all future observations will use this figure. The difference most likely represents one time expenses or accounting adjustments to either revenue or expenses that I did not account for. I should have noted that possibility in the original post.

The APWU reported that the Postal Service has stated that mail volume decline by 12%, most likely in the 4th quarter. This would match the revenue decline identified above. Combining the volume decline with the revenue decline really highlights that the slowdown in the economy is hitting the Postal Service particularly hard.