Sunday, August 31, 2008
A recent report by Morgan Stanley looked at the Postal Service's Priority and Express Mail volume numbers in drawing its conclusion that DHL, FedEx, UPS, will face increased competitive pressure from a Postal Service now that the USPS can offer both competitive service and contract terms. What Morgan Stanley missed is that the Postal Service's parcel products serve a different segment of the parcel market, specializing in lighter weight parcels, where its private sector competitors dominate in the delivery of parcels over 5 pounds, and especially smaller parcels for delivery to households. The average weight of Express Mail is under a pound, Priority Mail is under 2 pounds and Parcel Post is now just over 4 pounds. The Postal Service's advantage in delivering light weight packages is illustrated by UPS's decision to sell USPS delivery under its brand name at prices nearly twice what the Postal Service charges for the same level of service. The extent that DHL, FedEx and UPS and others have exploited the Postal Service's delivery network and Parcel Select price structure for light weight parcels can be seen in the decline in the average weight of Parcel Post (the vast majority being sold as Parcel Select) dropping from 5.17 pounds in the 3rd quarter of FY2003 to 4.1 pounds in 2008.
The Internet can deliver full sheet (8 1/2 x 11), brochures, manuals, and many other documents through attachments to e-mails, websites, and downloads of pdf files. Over the past 5 years the breadth of recipients with access to high speed Internet services has expended the Internet delivery network to include nearly all businesses and business locations and an increasing percentage of households. As such, documents that would have been sent as Priority Mail based on the weight of the item, now can be delivered electronically. The decline in the document delivery market can be seen in the increase in the average weight of Priority Mail which has seen a 7.5% in average weight (a gain of over 2 ounces) since 1993. As the volume of documents delivered via Priority Mail continues to decline until the volume reaches a new post high-speed Internet equilibrium, the Postal Service will see its Priority Mail document business contract and its Priority mail parcel business increase in prominance.
The Internet has also had an impact on how mailers use standard mail. The expansion of high speed access has allowed catalog merchants to improve the usability of their on-line presence with better color, animation, and images. As such, the need to delivery full catalogs and large format brochures has decreased as customers use the Internet to get the information that would have been delivered by mail. The Postal Service encouraged this switch through its introduction of shape based rates that increased the cost of flat-shaped mail at a greater rate than letter-shaped mail. So over the the past 5 years, the average weight of standard mail has declined by nearly 11%. (This trend may have been exacerbated by political mailings that rarely used heavy mail pieces.)
The final influence, the decline in advertising reflects more transitory changes in the economy. As the economy has shrunk, advertisers have cut back on advertising modes and mail is no exception. While some of this cut back results in fewer pieces being sent, an additional impact occurs as mailers reduce the weight of their mail pieces. In the past year, periodicals have seen a 5.7% decline in average weight reflecting a decline in advertising pages. This single-year decline is greater than the five year decline, suggesting that periodical average piece weight could increase once the advertising budgets begin to grow again.
While the declining advertising market may have had some impact on the amount of material printed and mailed per Standard Mail piece, the statistics do not show an obvious trend. Clearly catalog merchants are continuing to reduce page counts and mail piece size. However, a switch from other advertising modes to mail may be mitigating the the reported decline in average mail piece weight.
Now how does a decline in average mail piece weight affect the bottom lines of the Postal Service and mailers. Clearly, for the Postal Service, this trend means that revenue declines faster than volume (discounting for the impact of rate increases). For the future, the Postal Service will find it more difficult to determine what portion of a revenue increase should come from the lowest weight increment and what portion should come from weight related charges. Mailers may find that traditional relationships between mailing cost and piece volume verses mail piece weight will be changing as the Postal Service needs to meet its revenue needs from a new mix of lighter weight letters, flats and Parcel Post parcels and heavier weight Priority Mail.
Tuesday, August 26, 2008
2) One of the Comments to this blog suggested that the Postal Service could generate more revenue by reducing its automation discounts. As has been said on this blog before, the drop in single piece volume increases available capacity for originating mail sortation. This capacity could be used for a new product that does just that. Such a product would require only clean, trayed, metered or permit mail and would compete with presorters but would not affect the efforts of mailers that can sort and place barcodes on mail pieces during the printing process. As producers of large volumes of bills and statements are both generally able to print barcodes and sort mail during printing of mail pieces and are tempted to encourage their recipients to switch to electronic delivery, any change in their discount would have to be thought through carefully to avoid losing more revenue from volume declines than is gained from the lower discount.
3) Over the past two months, the British Press has reported a potential UPS-TNT merger twice, and a FedEx-TNT merger once. These reports have resulted in TNT stock jumping on the Friday of the report and declining on Monday when the date of the supposed merger annoucement passes without an anouncement. One starts to wonder when investors will become spooked by a business that cries wolf and misses the "real" merger story when it comes along.
4) Please keep the comments coming. I read them all and will post anything that is not offensive or defamatory. I would appreciate comments in this blog reacting to what I say, especially if you can provide information on operating or marketing changes that relate to the post and provide information that other readers may want to have. To the extent that we can develop a dialog here, I think the entire courier, express, and postal community will benefit. Different points of view are appreciated including alternative ways of interpreting the data underlying in articles that I cite. Also, I would like you to include in your comments suggestions about topics that interest you that may need more focus in my research and observations.
Tuesday, August 19, 2008
As more of these articles appear, I believe that the postal community will see an important trend in postal management that bodes well for the health of the organization. These articles suggest that the Postal Service is beginning to take greater public relations risks in finding ways to reduce costs. By making changes that will generate some vocal individuals, businesses or organizations to use old and new media to draw attention to the potential downside of the change, the Postal Service indicates now that it has little choice but to take the heat that significant cost reduction will create.
The articles also suggest that the Postal Service is giving local managers significant flexibility to choose which cost reduction options they implement. In doing so, the Postal Service will have a wide range of cost reduction options implemented with just as wide a range of efforts made to minimize service disruptions and changes in customer satisfaction for each option implemented. The Postal Service has a significant learning opportunity if it chooses to use the actions of each local manager as a teaching opportunity with a focus on one question: "what could have been done better to ensure that service changes minimize the impact on consistent service quality, labor-management relations, public perception of the Postal Service, and customer satisfaction?" Compiling answers to that question after every cost reduction effort and making that information available to the next location thinking about implementing a similar effort on an ongoing basis through a wiki or internal operations improvement blog, while the changes are being implemented, will ensure that all others implementing a similar change or about to begin implementing a similar change will be able to continuously improve the implementation of operational change.
These articles also illustrate a challenge for postal labor as they begin dealing the numerous operating changes that will come in the near term. Even though the economy is weak, the Postal Service's financial difficulties may be sufficient to counter traditional arguments and political efforts to save jobs. Labor leaders may need to look for different approaches to help their members deal with the transition that is occurring. For example:
- Given that the Postal Service will likely want to reduce head counts at a higher rate in the rust belt then in the rest of the country, unions may want to begin developing programs with management that encourage or assist workers in transferring to faster growing regions.
- Labor leaders should also talk to their Canadian colleagues in the Canadian Union of Postal Workers (CUPW) about their efforts to develop proposal to compete with management efforts to outsource activities in order to develop work rules and other contract provisions that would allow the the Postal Service to cut costs by bringing work back in house.
- Labor leaders should also use their knowledge of postal operations to look at what what types of work processes, work rules, or wage levels would be needed for the Postal Service to profitably provide services that pre-sorters and other firms collecting, preparing, and transporting currently do. Then labor should work with management to both implement those changes and support introduction of the new higher revenue products that would compete with firms now doing these activities.
If all of these stakeholders, management, labor, and mailers become active participants in the transition to a more efficient, more consistent Postal Service, all can end up as winners. A focus by all stakeholders on both costs and service consistency, could improve the Postal Service's competitive position as the premier, measurable-impact, communication method. The future of the Postal Service depends on it.
Tuesday, August 12, 2008
The Postal Service's revenue outlook is summed in this sentence: "We (the Postal Service) face a prolonged period of slow growth coupled with the threat of stagflation." The Postal Service's current volume forecast is now based on the assumption that 2008 FY GDP growth will be 2.1% and 2009 FY GDP growth will be 0.5% with a decline in GDP through the first two quarters of FY 2009.
The Postal Service expects that the 4th quarter of FY will see volume declines and revenue performance similar to what was seen in the 3rd Quarter. In that quarter volume declined by 5.5% and revenue declined by 2.4%. If a similar decline occurs in the fourth quarter, 4th quarter 2008 revenue will be $437 million below 2007 levels and volume would be $2.8 billion pieces below last year's levels. Withe these assumptions for the 4th quarter, FY 2008 revenue would total $75.265 billion, only 0.5% more than last year primarily due to the decline in volume.
The Postal Service did not provide a revenue forecast for FY 2009 but they provide some parameters that suggest that they expect that the volume declines that began in earnest in the 3rd quarter of 2008 will continue though at least the first two fiscal quarters of 2009. Furthermore, it is not clear if they see any improvement over current volume levels in the second half of FY 2009 without a robust turn around in the economy. Without completing more serious calculations, assuming that FY 2009 revenue would be no higher than what was generated in FY 2008 would seem a reasonable even if the Postal Service raises rates at the maximum levels permitted under the rate cap.
The Postal Service's comments on expenses suggests that making expense reductions neccessary to bring it back to break even will be difficult. While the Postal Service has reduced work hours in FY 2008 by 40 million work hours, increases in wage rates and fuel expenses has resulted in a 0.4% increase in expenses this year. The increase was even higher in the 3rd quarter which experienced a 0.94% increase in expenses. The Postal Service notes that COLA adjustments will raise 4th quarter expenses by $80-100 million, and even with the recent decline in fuel prices, the Postal Service will still see significantly higher expenses for fuel, electricity, and transportation services than in the 4th quarter of FY 2007. Given these headwinds, the Postal Service will do well to hold expenses to an increase just below what it experienced in the the 3rd quarter. Using a 0.8% increase over FY 2007, 4th quarter expenses would be $19.181 billion and full year expenses would be $77.534 billion.
Again the Postal Service does not provide a forecast for FY 2009 expenses but identifies that the employee COLA could increase costs by $1 billion. It is not clear whether this increase reflects the potential impact of normal attrition or the VERA. The Postal Service will also experience higher fuel, electricity, heating, and transportation costs through at least the first two quarters even if oil drops down to $100 a barrel. The Postal Service may see some relief in the third and fourth quarter as current oil price levels are below the highest levels of that period. Clearly, in order to bring its costs closer in line to revenues, the Postal Service will need to reduce work-hours in the first three quarters of FY 2009, including the impact of the VERA, by an amount exceeding the 40 million work hours that it achieved in FY 2008 along with cost savings in all other areas.
Net Income Outlook
The Postal Service did not provide a net income outlook. Through 3 quarters in 2008 its net loss is $1.1 billion. Based on the assumptions and estimates listed above, the Postal Service would appear likely to end the year was a loss of $2.269 billion. Even if the Postal Service was able to hold all expenses in the fourth quarter at FY 2007 levels, the FY loss would likely exceed $2 billion.
The outlook for net-income in FY 2009 would appear to be not much better. If revenue remains flat, the Postal Service would need to cut expenses by over $3 billion in FY2009 to break even. (The $2.3 billion loss in FY 2008 plus the increase in costs due to the COLA and difference in the fuel prices over FY 2008 in the first two quarters of FY 2009.) Such a large reduction in expenses is an ambitious goal. However, the Postal Service may have little choice but to seek to set a goal close to this amount to ensure that it will be in good shape financially when the economy improves in FY 2010.
Postage Rate Outlook
The Postal Service provides mailers with no indication of what future rate increases will be in the 10-Q. However, given the financial situation, mailers should assume that the Postal Service will raise rates by the maximum amount permitted by law for all products subject to the rate cap. At this moment the index is 3.7% but will likely be higher by the time the Postal Service proposes next year's rate increase. An average increase somewhat above 4% would seem to be a reasonable assumption for planning purposes. Given that cost of fuel is just beginning to trickle through into other prices, assuming that postage rates will rise another 4% in 2010 as well would seem to be a reasonable starting point.
While the CPI-U index provides information on the average rate increase, it does not say much about how individual products will be affected. Among the factors that may affect individual mailers are:
- The impact of the unitary postage rate for First Class single piece on the total increase from First Class mail and the automation and pre-sort discounts. The Postal Service may choose to not raise stamps 2 cents if by doing so it must raise discounts beyond what it believes is financial prudent.
- The additional ounce 1st Class rate adjustment may reflect the need to make the transition between First Class and Priority mail rates rational. If priority mail rates increase by more than the CPI-U then the additional ounce rate could be expected to rise by a larger percentage than the first ounce rate.
- Drop shipment discounts may be constrained by the CPI-U limitation. It is possible that discounts may not adequately reflect the rise in fuel costs thereby causing some drop-shipped mail to be transported by the Postal Service.
- Parcel rates under the price cap (e.g. single piece parcels, media mail, and bulk printed matter) could become a test case for exemption from the CPI-U limitation. These products have a higher transportation cost component than other mail products and the CPI-U limitation may force these rates to be below financially prudent level.
For competitive products, mailers should expect that the Postal Service will raise rates by a percentage equal or larger than what private sector carriers do in January. The Postal Service will likely take into account the impact of increases that have already been implemented by its competitors in the form of fuel surcharges when it raises rates next May. (Given that a substantial portion of the Postal Service's parcel business is first handled by FedEx or UPS, mailers may have seen the impact of the fuel surcharge on drop-shipment rates already.) The Postal Service's competitive product price increases could be constrained by the increase in rates for single piece parcels and the First Class additional ounce rates.
Legislative Changes Suggested by the Current Financial Challenges
This review of the current financial challenges facing the Postal Service suggests that it may need some relief from Congress in order to work its way through the current economic downturn. Specifically, two actions could ease the Postal Service's ability to hold rates below the cap and prevent its financial position from deteriorating over the next few years.
- Extend the period over which the Postal Service must fund its retiree health care obligations. An extension of the 10 year period to 15 or 20 years would reduce the hurdle required to ensure that revenue matches costs. This could prevent significant cuts in service or reductions in force that would otherwise be required
- Place all parcel rates under the competitive banner. By doing so, the Postal Service can ensure that its rates for all parcels remain remunerative and that rates for both individual and commercial customers remain both reasonable and competitive. This may mean that parcel rates will rise more than the cap in years when fuel and labor costs rise faster than CPI-U and will rise less than the cap in years that either competitive pressures are greater or cost pressures are less severe than they are now. Removing parcel rates from the regulated sector may be necessary to ensure that the Postal Service can offer universal access to its parcel delivery network to individual and small business customers.
Neither of these changes would require direct government outlays. The first one could have a budgetary impact that would have to be dealt with in the legislative process.
Monday, August 11, 2008
With a circulation of over 1.4 million of which 1.2 million are delivered through the mail Rolling Stone was the largest circulation magazine that did not conform with the FSS automation specifications. Clearly such a major makeover was not a small undertaking and in all likelihood was many months in the making.
The new format no longer fits the rebel image of Rolling Stone that the tabloid format did so Rolling Stone management must have seen significant economic benefits from making the change. Now they have the challenge of selling the change to their readers and advertisers. The article in the New York Times is one of the magazine's forays in talking to advertisers. It's success over the next year may indicate how well the change was accepted.
While Mr. Brutto's statement may accurately reflect UPS's current intentions, rumors of mergers between FedEx or UPS and TNT will continue to circulate given the synergies that a merger would produce both in Europe and Asia. What clearly is a stumbling block is determining a price that would be both attractive to stockholders of TNT and the acquiring firm. Any purchase of TNT would likely come at enterprise value multiple (EV/EBITDA) greater than that of the acquiring firm. In addition, European stock analysts have expressed opinions that the any acquiring price would be in excess of the $15 billion U.S. that was reported by the Sunday Telegraph.
Sunday, August 10, 2008
The Telegraph report provides significantly more detail than the earlier report on FedEx's interest in TNT. The report includes the names of the investment advisers for both TNT and UPS and indicates that A.T. Kearney has completed a study for UPS's adviser in the deal, Morgan Stanley. The report also indicates that TNT's mail operations would be sold, possibly to CVC, the European buyout firm that owns interests in both De Post-La Post and Post Danmark. (Post Danmark also has agreed to merge with Posten, the Swedish Post Office) It is unclear whether the price for the postal operations is included in the $15 billion cost of the deal. Given that some of the increase in TNT's price over its price in mid July when rumors of a possible takeover first surfaced reflect the decline in oil prices, it is possible that the value of a deal when consummated will be greater than $15 billion. Also, what is unclear is whether TNT's ground parcel business would convey to UPS or the purchaser of the postal business.
The purchase of TNT by UPS would have a significant impact on competition within Europe. Currently, the five largest express competitors are TNT (17%), DHL (16%), UPS (8%), La Poste (the French Post Office) 7%, and FedEx (6%). The remaining 46% of the market is divided the national post offices and regional operators. With the merger UPS would be the clear market leader with 25% of the intra-European market and would be in stronger position for traffic between Western Europe and the rest of the world than the remaining two other global competitors, DHL and FedEx. Most importantly, UPS would then be in a better position to fill up its growing capacity in China and the rest of Asia with express traffic going between China and Europe than carriers with a smaller market position in Europe. In addition, UPS's stronger position in Europe would give it the opportunity to take market share from DHL and FedEx in the trans-Atlantic market.
The sale of the postal operations makes sense given that mail is not part of UPS's core business.
The proposed sales of TNT's mail business raises questions about the long term financial viability of European national posts, and in particular the posts of smaller countries. A merger of the TNT mail operations with Posten (Sweden), La Post (Belgium), and Post Dankan (Denmark) creates an entity with greater heft when competing with the larger national posts in Germany, France, and Great Britain. If TNT's growing ground parcel business remains with the postal entitity then the merger would have created a significant European competitor in parcels with particular strengths in the Benelux and Nordic regions. Without TNT's European ground parcel business, it is not clear how much an outside investor would be willing to pay for just mail services.
The merger of TNT's mail services with that of the other posts could have some positive impact on service. It could result in improved coordination of cross-border mail service among the linked companies with the possibility of stronger service to Great Britain and other regions where TNT has established itself as a leader in the competitive mail business.
Finally, if this merger goes through, one would expect that other competitors in the European market to start looking at defensive moves to improve their business position. The easiest
linkage to imagine is one between FedEx and LaPoste, since they have had a business relationship since at least 2000, but less obvious mergers may occur with a focus of FedEx and/or La Poste working to strengthen their position on a country by country basis. On the mail and ground parcel side, one could see an interest in smaller posts in Eastern and central Europe exploring mergers and operating agreements. The logical leaders in this region are Deusche Post, Oesterreich Post, and Swiss Post.
Sunday, August 3, 2008
It is possible though that, at least in regards to retail access, the geographic areas that are most at risk for being under-served are those with the greatest population growth. Given the challenge that the USPS has had in closing, moving, or consolidating retail facilities in communities with little demand, it may be more cautious than it should be in opening new retail facilities in communities with rapid population growth. In the United States, there are 42 metropolitan areas which have had a population growth of greater than 100,000 since 2007, the size of small city. These cities and their growth in population are listed at the end of this post.
It is in these high growth markets that the Postal Service should be experimenting with both modifications of the exiting employee-staffed business model of providing retail services and begin to expand consumer access at less conventional locations and through contractual models that differ from what have been offered in the past. In doing so, the Postal Service could expand access to its network as fast as the population grows generating more parcel and other mail volume. Using a mix of employee and contractual models will also allow it to expand services to communities earlier in a growth cycle than just using a traditional post office model would allow.
Metropolitan Areas Growing by More Than 100,000 Since 2000
|Metropolitan Statistical Area||Increase in Population Since 2000|
|Atlanta-Sandy Springs-Marietta, GA||1,030,892|
|Dallas-Fort Worth-Arlington, TX||983,517|
|Houston-Sugar Land-Baytown, TX||912,699|
|Riverside-San Bernardino-Ontario, CA||826,554|
|Los Angeles-Long Beach-Santa Ana, CA||509,964|
|New York-Northern New Jersey-Long Island, NY-NJ-PA||492,606|
|Las Vegas-Paradise, NV||460,798|
|Miami-Fort Lauderdale-Pompano Beach, FL||405,224|
|Austin-Round Rock, TX||348,413|
|Tampa-St. Petersburg-Clearwater, FL||327,936|
|Denver-Aurora, CO /1||285,524|
|San Antonio, TX||278,954|
|Minneapolis-St. Paul-Bloomington, MN-WI||239,395|
|San Diego-Carlsbad-San Marcos, CA||161,026|
|Cape Coral-Fort Myers, FL||149,676|
|Kansas City, MO-KS||149,006|
|Salt Lake City, UT||131,090|
|Boise City-Nampa, ID||122,849|
While employees are eligible nationwide, the Postal Service has the incentive to work hard to encourage retirement in some geographic regions and discourage retirement in others. These regions can be identified by looking at U.S. Census estimates of population changes. In those metropolitan areas that have seen population declines since 2007, the Postal Service in all likelihood has the greatest need to reduce its headcount. In metropolitan areas that have experienced substantial population growth, the Postal Service may not push early retirement as hard. The following two lists identify the metropolitan areas that fall into these two categories. It should be noted that the New Orleans-Metairie-Kenner, LA and Gulfport-Biloxi,MS metropolitan areas may represent special cases due to the impact of Hurricane Katrina and may not face the same level of labor overcapacity as the other metropolitan areas with declining population.
Metropolitan areas with population declines since 2000 a higher participation rate than average in voluntary early retirement may be preferred.
|Metropolitan Statistical Area||Census 2007 Population Estimate||Population Decline Since 2000|
|New Orleans-Metairie-Kenner, |
|Buffalo-Niagara Falls, NY||1,128,183||-41,926|
|Beaumont-Port Arthur, TX||376,241||-8,849|
|Saginaw-Saginaw Township North, MI||202,268||-7,774|
|Ocean City, NJ||96,422||-5,904|
|Pine Bluff, AR||101,484||-5,861|
|Santa Cruz-Watsonville, CA||251,747||-3,853|
|Wichita Falls, TX||148,148||-3,376|
|Niles-Benton Harbor, MI||159,589||-2,866|
|Bay City, MI||107,517||-2,640|
|Lake Charles, LA||191,926||-1,639|
|Terre Haute, IN||169,346||-1,608|
|Battle Creek, MI||136,615||-1,370|
|St. Joseph, MO-KS||123,339||-481|
|Waterloo-Cedar Falls, IA||163,329||-378|
|Michigan City-La Porte, IN||109,787||-319|
|Sioux City, IA-NE-SD||142,794||-259|
|Hinesville-Fort Stewart, GA||71,803||-111|
Metropolitan areas with population growing by more than 20% since 2000 where a lower participation rate of voluntary early retirement than average may be acceptable.
|Growth Ranking||Metropolitan Statistical Area||Census 2007 Population Estimate|
|1||Palm Coast, FL||88,397|
|2||St. George, UT||133,791|
|3||Greeley, CO /1||243,750|
|4||Cape Coral-Fort Myers, FL||590,564|
|6||Las Vegas-Paradise, NV||1,836,333|
|11||Austin-Round Rock, TX||1,598,161|
|12||Myrtle Beach-Conway-North Myrtle Beach, SC||249,925|
|14||Boise City-Nampa, ID||587,689|
|15||Lake Havasu City-Kingman, |
|16||Naples-Marco Island, FL||315,839|
|19||Riverside-San Bernardino-Ontario, CA||4,081,371|
|20||Port St. Lucie, FL||400,121|
|22||Atlanta-Sandy Springs-Marietta, GA||5,278,904|
|24||Coeur d'Alene, ID||134,442|
|27||Sioux Falls, SD||227,171|
Friday, August 1, 2008
The preliminary Quarter 3, FY2008 RPW estimates, posted on the PRC website on July 31, drive home the problem faced by the Postal Service. Revenue in the Quarter 3 is down 2.6% over last year and volume is down 5.5%. What makes the decline in volume particularly troubling is that it is greatest for those products that have higher margins than average. For example, higher-margin products experiencing large declines in volume include First Class Single Piece Cards (-14.4%), Express Mail (-14.4%), First Class Presort Cards (-10.5), Regular Enhanced Carrier Route Mail (-10.2) and First Class Single Piece Letters and Parcels (-9.8%). Both First Class mail and Standard mail used by commercial customers see a decline in volume of 6.8% in the quarter. The brighter spots are all in products that have lower margins and include Periodicals, Non-Profit mail and Parcel Post. But even these products are experiencing declines.
With one quarter to go, the Postal Service faces the prospect that its actual revenue could be only $75.2 billion or $3 billion short of plan. This estimate is derived by assuming that the volume and revenue trends of quarter 3 remain constant in quarter 4. Most likely, this assumption is optimistic; given additional slowdown in the automotive sector, bankruptcies of major retailers, restaurants and banks, and comments that UPS made in its most recent earnings release and conference call indicating that business activity comparisons weakened in each succeeding month of the reported quarter.
The Postal Service recognized that it was facing trouble and has repeatedly announced that it is looking to cut an additional $1 billion in expenses this year. Even with these additional cost reductions, the decline in revenue could result in a FY loss of $2.6 billion unless even greater cost reductions occur in the next 90 days.
If the Postal Service was a private sector firm, it could take action quickly to respond to this worsening financial situation. However, it is not and introducing new products, changing the processing network, restructuring transportation contracting, realigning carrier routes, closing unprofitable Post Offices must be completed through a time consuming process that forces it to bear losses that a private sector firm could avoid. None of these changes are delicate and all face opposition from well-entrenched stake holders who have an interest in delaying change. In addition, the Postal Service must be careful that the process it uses can withstand multiple levels of oversight from the Office of the Inspector General, General Accountability Office, Postal Regulatory Commission, and Congress, which has the effect of making management more cautious at a time when caution may not be an option.
Next fiscal year, the Postal Service’s financial plan will look significantly different from what was presented this year. Unless its economic forecasters project a significant economic rebound in 2009, the Postal Service may need to include well over $3 billion in cost savings just to break even, without even taking into account the impact of larger COLA’s due to higher inflation. The recent step to offer Voluntary Early Retirement in the next fiscal year will provide some of that savings. However any savings from additional retirements will not affect postal costs until the second quarter of FY2009. Also, as the first quarter includes both the end of the 2008 election and holiday mailing seasons, all other management actions will likely need to generate a full year of cost savings in the final three quarters of FY2009.
The challenge now for the Postal Service is to be open about its financial situation. Frank discussion of the new financial and business environment is critical to ensure that the Postal Service survives this rough economic patch and continues to provide the services that its customers demand. In making the challenges public, the Postal Service can help organizations that represent stakeholders explain to their members and constituents the new limits that difficult times may require. Increased public awareness of postal finances will also ensure that all future decisions on postal policy reflect the most current understanding of the economics and business environment of mail. The time to begin was yesterday.