The Clock is Ticking

In Washington, two clocks are ticking.   The clock associated with the debt limit will hit zero days, zero hours, zero minutes and zero seconds on August 2.  The clock associated with the Postal Service will hit the same point next year.

Earlier this year, Postal Service CFO Joseph Corbett stated that the Postal Service's zero hour will come in July 2012.  However, he noted that the date could come sooner or later depending on Congressional action, changes in economic growth, and changes in operating cost factors.

CFO Corbett's projection of a July 2012 shutdown date required the Postal Service to stop making its FERS annuity payments and default on its legal obligation to make a payment to fund its retiree health care liability.   He also assumed that the Postal Service will make changes in its retail and processing network currently under consideration as expeditiously as possible.   Finally, he assumed that the Postal Service could fully take advantage of the cost savings derived from the APWU contract, including cost savings that will affect Supervisors and Postmasters as soon as the law permitted.

What CFO Corbett, did not expect when he made his May, 2011 projection of a July, 2012 Postal Service shutdown was the slowdown in the U.S. economy.   Friday, Reuters reported that Goldman Sachs issued its second downward revision to economic growth since CFO Corbett's pronouncement.  The projection of economic growth has dropped from 4.0% to 1.5% in the quarter just ended (the 2nd quarter 2011) and its forecast for the 3rd quarter has dropped its GDP growth projects from 3.5% to 2.0%.    Goldman stated that it is currently reviewing its forecasts for the 4th quarter and beyond which suggests that it is not willing to make a projection beyond the current calendar quarter right now.   

Goldman is not optimistic regarding employment growth either as it projects that the unemployment rate will be 8.75% at the end of 2012.   The unemployment rate projection suggests minimal change in employment levels over the next 18 months.

Today, the mix of mail makes the Postal Service highly sensitive to changes in the economy and that sensitivity grows as it loses market share in the delivery of recurring bills and payments.  The dramatically lower forecasts of economic growth and higher forecast of unemployment suggest that CFO Corbett was highly optimistic in assuming the Postal Service would have sufficient cash to continue operations through July 2012.  The slower economic growth suggests that a new projected shutdown date will fall in the Spring of 2012.  CFO Corbett needs to tell postal stakeholders now what his current forecast projects.   

Will FedEx Be Stiffed?

In his testimony before the Senate Senate Committee on Homeland Security and Governmental Affairs, Postmaster General Patrick R. Donahoe testified that the Postal Service's cash shortfall could extend to operational expenses.  What he did not say was what operational expenses will not be paid.

 

 Previously, when he has testified that the Postal Service would default on the Federal retiree health care and workers compensation payments.   The escalation of the bad news suggest that all of the cost cutting efforts to date have not come fast enough to deal with declining revenue and most importantly declining revenue from First Class transaction mail.

 

When the Postmaster General previously stated that the Postal Service would default on its Federal obligations, he stated that the Postal Service would continue to deliver the mail and employees would still be paid.  So that leaves payments of postal contractor bills as the operating expenses that will not be paid.  In 2010, the Postal Service's largest contractors, and therefore the firms that face the greatest risk that the Postal Service will not pay its bills are as follows:

1. FedEx Corporation (Air Transportation)
2. Northrop Grumman (Equipment, consulting)
3. Kallita Air, Ltd. (Air Transportation)
4. Pat Salmon & Sons (Truck Transportation)
5. Siemens (Equipment, consulting)
6. Hewett Packard Co. (IT support)
7. Wheeler Brothers Transportation (Truck Transportation)
8. Campbell- Ewald (Advertising)
9. Accenture (Consulting, IT support)
10. IBM (EXFC measurement, consulting)
11. Mail Contractors of America (Truck Transportation)
12. United Parcel Service (Air Transportation)
13. Continental Airlines (Air Transportation)

Normally, the Postal Service pays its bills within 30 days of receipt.   The financial shortfall will likely force the Postal Service to delay payments for bills submitted in September and possibly August under it generates enough to cash to pay them.  For these contractors, this could mean that payments that were usually made within  30 days could take 60 to 90 days until the Postal Service has the cash to pay.  

Some contractors may stop work on contracts until payment is received.  Some may decide not to provide any more product or services after payments stop.   Given that nearly all inter-city transportation involves contractors, the greatest risk to service would come if the cash shortfall is large enough to prevent the Postal Service from paying its transportation contractors. 

The Postmaster General's testimony requires Postal contractors to assess the payment risk.  Unless the Postal Service begins talking to its contractors now about the payment risks that contractors face, they may asume that the risk is quite high. Such an assummption could create significant challenges for the Postal Service in providing the mail and parcel delivery services that are critical to the economy in the 4th quarter of 2011 and beyond.  The sooner the Postal Service can allay fears of contractors the sooner they can ensure that Postal contractors continue to act as the partners that they are.