USPS' December - Better But Still on the Precipice

USPS finances marked steady improvement on a month-by-month basis in its first fiscal quarter.  These improvements allowed it to earn a small operating profit in the December and a smaller than forecast loss for the quarter.   The improvements while promising do not suggest that within the foreseeable future the Postal Service can earn a sufficient operating profit to sustain the enterprise even if its retiree obligations are removed.


What does the data tell us?

Revenue and Volume

In general, the trends in revenue and volume suggest that the Postal Service's business is now recovering at about the same pace as other advertising and parcel delivery modes.  The economic recovery is tempered by increasing preference of consumers for documents in digital form. 

First Class Mail: The declines in volume in First Class mail in November and December represent a return to the trend in 2007 and 2008.    Single piece First Class most likely declined at high single digit rates (6-9% decline Y-to-Y).  Bulk first Class volumes likely saw volumes decline at a rate similar to what was seen for Standard mail (1-2% decline Y-to-Y).  First Class bulk volumes may have benefited from financial mailers ending advertising budget cuts and some tentative increases by some mailers.

Periodicals: Periodical mail is a troubled product.   There is not indication that recovery in the general economy or advertising markets are having an immediate impact on periodical volumes.   This market faces new competition beginning in 2010 from the iPad and other tablet computers that should shift even more content to digital delivery.    The Postal Service faces the real possibility that by 2020, periodical volumes will be much less than half of the volume now handled.

Standard Mail: Standard mail may have bottomed out in Postal Service's first quarter.   The declines reflect the cautious spending by retailers on advertising.  Going forward, the Postal Service should experience slightly better than normal seasonal patterns as economic tailwinds should loosen advertising budgets.   The Postal Service would benefit if it could develop programs targeted for geographic markets with the most limited real estate inventory. 

Package Services and Shipping Services: These two segments represent the regulated and unregulated parcel products that the Postal Service offers.   Combined, the 1st quarter trends are not promising as the declines in the regulated package services more than offset significant growth in unregulated shipping services.   However, because two-thirds of the regulated products volume in 2009 was from bulk printed matter the Postal Service's success in attracting parcel shippers will not be clear until the 1st quarter RPW figures come out.

Comparing the revenue and volume trends to those of UPS and FedEx is difficult because 1) a portion of the USPS volumes are counted as volume by the Postal Service and either FedEx or UPS; and 2) the Postal Service's revenue for single piece parcels is set under a price cap while competitive services offered in the private sector saw their prices rise.  The trends experienced by the Postal Service's shipping services alone at least equaled the experience of UPS and FedEx.   It will be worth keeping an eye on the monthly statistics in the next few quarters to see if the Postal Service's marketing and operating changes have resulted in market share growth.

Summary: Revenue and volume trends suggest that FY 2010 revenue and volume will be significantly better than the projection made in September and included in its budget.   This means that instead of having percentage declines in revenue in the mid to high single digits in 2010, the Postal Service could see a revenue decline of between zero and four percent, with the decline determined whether the recovery in advertising spending can sufficiently counter digital diversion of printed documents.

   

Year-To-Year Change in Volume
	October 2009	November 2009	December 2009
First Class	-11.5%	-3.3%	-3.9%
Periodicals	-14.5%	-6.3%	-11.5%
Standard Mail	-22.2%	-4.6%	-1.2%
Package Services	-9.9%	-16.2%	-23.8%
Shipping Services	-5.0%	3.1%	8.6%

Year-To-Year Change in Revenue
	October 2009	November 2009	December 2009
First Class	-9.1%	1.3%	-1.8%
Periodicals	-15.5%	-10.5%	-12.2%
Standard Mail	-19.0%	-14.0%	-1.4%
Package Services	-15.6%	-10.9%	-23.9%
Shipping Services	-1.7%	6.7%	12.0%

Costs and Operating Margins

Costs throughout the first quarter were generally on plan and 3.9% below last year.   Excluding the retiree health obligation expenses are 5.8% below comparable figures for FY 2009.  This is an admirable reduction in costs but not sufficient for the Postal Service to be financially self sufficient.

A self sufficient Postal Service would have an annual EBIDA margin of between 12.5% and 17.5%.   [The EBIDA margin equals (revenue minus operating expenses excluding interest, depreciation and amortization) divided by revenue.]  As the Postal Service cannot adjust its labor or other expenses much on a quarterly basis, it must earn EBIDA margin much greater than the annual figure in the first quarter in order to meet an annual target.

In the first quarter of FY 2010 the Postal Service had an EBIDA margin of 3.5%.  This improves to 13.6% if the retiree health benefit obligation is removed.  Comparable margins for the first quarter of 2009 were 3.0% and 12.2%.   While margins are better this year, the Postal Service does not even reach the low end of the target range in the first quarter until the retiree health obligations are removed.   For it to come close to the target range for the year it will have to break traditional financial patterns and find a way to adjust costs as volume and revenue changes on a seasonal basis.

 

Looking toward the future


The three months worth of data reviewed raise certain issues that those trying to envision postal policy for 2015 and beyond should think about:

• The current Postal Service's revenue and net income plan are clearly no longer relevant.   The economic recovery is stronger than the Postal Service forecast in September and volumes of economically sensitive First Class bulk, Standard, and Shipping Services products are above plan and will likely remain better than plan all year as the economy continues to recover.  This is consistent with what both customers of the Postal Service and its competitors are saying about their businesses.
• The Postal Service by the middle of this decade will handle significantly less single-piece First Class and Periodical mail than today.  Volumes and revenue from these products will continue to decline regardless of economic growth.
• The growth of all other products will depend upon the tug-of-war between economic growth and digital diversion.
• The Postal Service cannot become self sustaining without relief from the retiree health payments.
• The Postal Service needs to incorporate real financial goals other than break-even in order to ensure that it remains a viable enterprise, otherwise stakeholders will not understand the severity of the financial challenge ahead.  
• Announcements of new operating strategies should indicate how they will allow the Postal Service to meet relevant financial goals.
• Decline in single piece mail will require continuing contraction of the network of facilities sorting originating mail at a rate faster than normal employee attrition and existing work rules can accommodate.   The pace of this consolidation will likely depend upon the ability of the Postal Service to locate facilities in logistically optimal locations and fund the capital, employee redundancy and other transition costs associated with consolidations.
• The trends in flats volumes across all products may require a new processing strategy with fewer sortation facilities than the network processing letters. Given the time it takes to plan, allow public input, and implement new operating strategies, a new coherent strategy for flats should be introduced soon.
• Meeting required operating margins will require putting all revenue and cost cutting options on the table.   Obstacles in the law and regulatory policy to rational pricing and management decision making need to be clearly identified and their impact quantified.  Obstacles in the law and regulatory policy that delay rational pricing and management decision making need to also be clearly identified and their impact quantified.
• Postal Service labor contracts will need to reflect the new business reality of real financial targets, lower volumes and a smaller operating footprint.  In order to maximize the number of full time jobs in the new environment, new job classifications are needed that include characteristics of the work now performed by clerks or mailhandlers and letter or rural carriers.