Tuesday, November 23, 2010

New Integrated Financial Plan Needed

Why would the Postal Service need a new Integrated Financial Plan less than a month after it was presented to the Postal Regulatory Commission?  A new plan is needed to reflect changes in economic trends and costs of key inputs and operating plans.
The problem of changing economic trends, input trends and operating plan changes exists because by the time a plan is produced approved by the board of governors nearly all of the economic and cost assumptions used in the plan are out of date.   The older economic forecasts most likely underestimate both revenue and costs

Revenue - Revenue estimates are driven by  forecasts of GDP, retail sales, and other economic indicates.   The revision announced today of third quarter GDP growth upward to 2.5% combined with data already published early this year indicates that the 2010 data used in the Postal Service's revenue and volume forecast most likely underestimates the health of the economy and mail volume.   The underestimation of mail volume has a bigger impact on the most economically sensitive products used to deliver advertising (Standard Mail and Periodicals) and to a lesser extent the Postal Service's parcel product.   The revision of economic factors as a lesser effect on bulk First Class mail and a minimal impact on single piece mail volumes and revenue.   The resultant shift in mix toward lower margin mail products will boost the Postal Service's total revenue at a rate somewhat below the increase in total mail volume.  A revised Integrated Financial Plan will show that.

Cost -  The impact of the economic changes on costs relate to the resources the Postal Service requires to provide its retail, processing, transportation and delivery portions of its service as well as the cost of major inputs to its service.   A more rapid growth in advertising mail increases demands on delivery networks at a somewhat higher rate than processing networks.   However, given that much of the delivery network costs are fixed, the resulting increase in volumes should not have as large of an impact on costs as the increase in advertising-oriented mail volume.  

The shift in the mix of mail continues to put pressure on mail processing and transportation costs as the need for labor and transportation resources needed to handle single-piece and minimally pre-sorted First Class mail continues to shrink at the same time resources needed to handle sortation of mail to carrier route and walk sequence increases.    This shift makes its easier for the Postal Service to shrink its processing network without reducing service quality and should result in management doing everything in its power to accelerate consolidation proposal that have already been announced and announcing additional ones to be investigated for implementation in the first half of fiscal year 2012.  The shift may justify more extensive use of early-retirement incentives to deal with the reduced workload in mail prep, manual sortation, and automated originating sortation in order to accelerate work-hour reductions in fiscal year 2011. 

Finally, changes in the value in the dollar and the improving economy puts pressure on the price of diesel fuel.   As the Postal Service notes in the risk section of its 10-K, "a 1% increase in fuel costs would result in a $23 million increase in expense."  According to the Department of Energy, the retail price of diesel fuel at the beginning of fiscal year 2011 is up by $0.418 or 16.19% above the level from the beginning of fiscal year 2010.  The increase in diesel prices increases the Postal Service's transportation costs by  $372 million dollars.  As diesel prices have risen an additional 0.6% since then, transportation and other costs liked to the cost of oil are likely to be higher than what was projected in the 2011 Integrated Financial Plan.

Integrated Plan(s) for Financial Self Sufficiency

The plan illustrates the best estimate the Postal Service's finances based on the assumptions employed when the plan was developed including assuming no change in the current business model or regulatory framework.   Alternative plans are needed reflecting what could be accomplished under different business models and regulatory frameworks.  These plans have to look beyond marginal changes in the business model that the Postal Service proposed last March in its Action Plan.    Those changes all assumed maintenance of the current business model and a regulatory framework that is not much different than the one that currently exists.  These plans should include financial plans that would allow the Postal Service to shrink to its "public service" obligations as well as financial plans that would allow the Postal Service to prepare for corporatization or privatization.

A second failing of the plan for examining what is needed to ensure that a vibrant postal market exists in 2020 is its time frame.   The plan is a one-year plan, a time frame that is sufficient for budgeting purposes, but insufficient for either the Board of Governors of Congress to understand the best course for the future of the Postal Service.    For instance, a one year plan is insufficient for illustrating the financial and operating changes necessary to ensure a self sufficient Postal Service.   At a minimum, the financial plan should illustrate financial forecasts for three to five years in order to illustrate the impact of management decisions that take more than a single year to complete. 

A third failing of the plan relates to Capital Plan included on pages 5 and 6.    The Capital Plan suggests that capital spending, with few exceptions is not limited to fixing a deteriorating physical plant, vehicle fleet, and replacing an information infrastructure that cannot meet the needs of the Postal Service or its customers.  The Capital Plan clearly suggests that the Board of Governors and Congress need an independent evaluation of the physical plant, vehicle fleet and information infrastructure in order to see if the plans in place are sufficient for the transition to the infrastructure required to ensure that a viable delivery network exists for 150 billion pieces of mail and parcel that the Postal Service will still be delivering in 2020 including the expectations of postal customers in regards to the information that the Postal Service provides about the real-time progress of mail delivery.

A multi-year capital plan is critical as without it a key question in fixing the Postal Service's business model and regulatory framework.   Does the current business model and regulatory framework allow the Postal Service to generate sufficient cash from operations and debt to cover the capital needs required to serve the needs of the postal market?   If the answer is no, then there are four choices, raise rates, cut labor costs even further, reduce service, or restructure the Postal Service's retiree obligations as part of a process of transitioning the Postal Service towards a business model that would allow it to attract private capital.

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