Saturday, March 26, 2011

Self-sufficiency is a Long Way Away

The Postal Service released its monthly financials for February that showed an operating loss of $230.   For the year to date operating income was $18 million, meaning that February will be the last month that the Postal Service shows an operating profit this year.

While the February numbers look bad, they do not fully explain how difficult the Postal Service's financial situation really is.  For example:
  • Financial self-sufficiency would require that the Postal Service earn an operating profit of over $530 million per month.   ( i.e. an operating margin of 12%)    Only with an operating margin of this size would the Postal Service have the capital to invest in its infrastructure, cover the costs of downsizing, and cover its workers compensation expenses, pay its debt.  It is not clear if even an operating margin of that size would allow it to make the contribution for retiree healthcare obligations without cutting spending that would allow it to remain self self sufficent.
  • The Postal Service's incentives for early retirement that were announced on March 15th were pushed back into fiscal years 2012 and 2013.  A self-sufficient Postal Service would have offered the $20,000 lump sum incentive for early retirement as payment upon retirement, increasing the value of the incentive to employees and most likely incresing the number of employees taking advantage of early retirement.  The cash squeeze prevented the Postal Service from offering the incentive that would cut the layer of management that it wants to cut quickly.
  • Depreciation as an expense is decreasing over last year and plan.   Declining depreciation suggests that the Postal Service is not upgrading or replacing its physical assets.   Right now the Postal Service is falling behind both foreign postal operators and its customers in upgrading the information technology infrastructure, and using the most efficient mail and parcel sortation and material handling equipment.  The lack of capital also makes consolidating the processing network more difficult as the Postal Service is unable to adjust its network by replacing multiple  plants with one in a new location that could more efficiently and effectively provide the service customers demand.
  • Vehicle maintenance expenses are up 11.9% over plan and 13.7% over last year.  The Postal Service operates 215,000 delivery vehicles.  Without the cash to replace this fleet, vehicle maintenance expenses will continue to grow at double digit rates.
  • Fuel costs are growing much faster than inflation and the rates on products that require significant transportation expenses.  Besides fuel used by its delivery fleet, contract carriers that move mail by air and truck between facilities all have fuel surcharge provisions in contracts that raise Postal Service expenses as fuel prices rise.  Fuel increases of 1 cent raise Postal Service costs by $6.5 million.   Given current prices of gasoline and diesel fuel and expected trends through the summer driving season, the Postal Service will spend between $500 and $600 more on vehicle fuel costs this year than plan nearly wiping out all of the savings from the management restructuring announced this week. 
On April 5th, the House Oversight and Government Reform Committee will be looking at issues relating to the labor relations and employment law that governs the Postal Service.   These issues are important as compensation costs represent 72% of the Postal Service's total costs this year.  Cutting compensation costs will have some effect in lowering this percentage and requires looking at pay schedules, work hours, and the pay schedule that applies to the employee doing needed work, including whether the work is performed by a non-uinion or unionized employee.   To the extent that the APWU contract allows the Postal Service to reduce total compensation costs then it will help improve the Postal Service's bottom line and have some effect on reducing employee compensation's share of total costs.  

However, as the bullet points above show, many of the red flags associated with the long-term prospects of the Postal Service focus on the lack of capital spending.   The lack of cash has the effect of depressing non-compensation expenses artificially inflating the share of total costs related to compensation buth now but more importantly long term as they reduce the ability of the Postal Service to reduce the labor required to handle the mail it will be expected to deliver.

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