Association for Postal Commerce
"Representing those who use or support the use of mail for Business Communication and Commerce"
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FINDING THE USPS' WAY TO A YELLOW BRICK (GOLD) ROAD

The following is a postal perspective by  Jessica Dauer Lowrance, Vice President, Association for Postal Commerce and Gene Del Polito President, Association of Postal Commerce, for the PostCom Bulletin. The views expressed are solely the authors'

For anyone who's been paying attention, it should be clear by now that the U.S. Postal Service (USPS) is among the many other businesses that are suffering a world of hurt as a result of the nation's economic doldrums. The Postal Service, in its own inimitable way, has always tried to reassure its lords and masters that despite what happens elsewhere steps have been and are being taken to insulate the nation from any postal fiscal woes. Until today, that is.

Unless you've been asleep at the switch, are not a PostCom member, or are a member of Congress, the real state of the Postal Service's finances cannot have escaped you. Mail volume and mail revenue have been plummeting along with the stock market. Companies that have been able to make a living despite successive rounds of postal rate increases are now finding it almost impossible not to cut back on their use of mail for business transactional purposes and not to scale back on their workforce and business development plans.

Folks. It's ugly out there. It's ugly not only for those who depend on a viable, universal mail delivery system for the conduct of business, but also for the federal agency that's charged by law to ensure that the nation's postal system functions effectively as a part of the U.S.' economic infrastructure.

As part of its routine way of doing business, the USPS has produced an FY 2009 Integrated Financial Plan. This plan calls for the Postal Service to appreciate a revenue increase of $1.2 billion from a 4.8% price increase that is scheduled to be implemented in May 2009 and from the shipping services price increases that were put into effect in January of this year. In the plan, the Postal Service calls for an expense increase of only $1.6 billion, which is supposed to yield an operating income of $2.4 billion.

Well, you can take that plan and chuck it. The inflation index which governs the maximum allowance increase in its prices rose not by 4.8% but by a more modest 3.8%. That puts the USPS revenue expectations a whole percentage point below where it thought it would be. There are consequences to realities such as these, but not all of them are (or need to be) catastrophic--as long as Congress puts its thinking cap on and resolves itself to do the right thing.

For instance, 2008 is the first year the Postal Service had to operate fully under its new postal law. If you look at the USPS FY 2008 Annual Report, you'll note that the Postal Service had a 9.5 billion piece loss which failed to yield any appreciable financial increase despite the 2.9% CPI price increase in May 2008. In other words, the mail volume loss totally wiped out any real gains in revenue. All the 2.9% average increase did was to provide sufficient revenue for the USPS to break-even--before, of course, any payments for postal retiree obligations had been deducted.  The table below shows the breakeven volume loss per one percent CPI price increase. This figure is specific to 2008, but can be used in forecasting potential results for 2009. 

For FY 2009, the USPS had planned a 4.8% price increase that was expected to yield an additional $1.2 billion in revenue. If you accept that a 2.9% inflation factor represented ground zero in 2008 in the face of 9.5 billion piece volume loss, then the two additional percentage points expected from an anticipated 4.8% inflation rate would equate roughly to an anticipated real revenue gain of some $600 million for each percentage point of CPI. 

As noted above, though, inflation was not as great as the USPS had anticipated, and it did not get the amount of new revenue it had baked into its integrated plan. Using the assumptions noted above, then, the 3.8% increase in average prices probably will yield the USPS with no more than $600 million in any real revenue gain. Of course, this conclusion assumes there will be no greater decrease in mail volume than the USPS had assumed in its plan, and that no payments would be made to cover its postal retiree health obligation.

Unfortunately, the Postal Service has had to revise its projected volume loss from the original eight billion pieces it expected in 2009 to 12 to 15 billion pieces. Using the information from the example above, one could conclude that the USPS can afford to withstand a loss of some 12.5 billion pieces of mail and still break-even in FY 2009 with the 3.8% average increase in postal prices. (Refer to the table below.)

In the table that follows, you'll see laid out revised anticipated revenues and expenses from the  USPS' FY 2009 plan. The plan now shows a planned operating income of $2.4 billion, but if revised to reflect the change in CPI, it could diminish to a more modest $1.8 billion--and this is before any adjustment is made for the Retiree Health Benefit Fund (RHBF) $5.4 billion payment due in September 2009.. Even this $1.8 billion revenue estimate, however, is unlikely to occur due present economic circumstances. Indeed, it is much more likely that the USPS will lose money in FY09. Consequently, the FY 09 Scenario 1 (noted below) is a more plausible estimate.

What would a loss of more than $3.0 billion mean for the USPS? Quite a bit. The USPS already has nearly depleted its annual borrowing authority. Consequently, it might need to take a hard look at doing something else, which could have an impact on its ability to satisfy the nation's demand for a six-day universal mail delivery service. Here are some of the options it might be forced to consider:

• Cutting 1 day delivery
• Closing facilities
• Large reduction in staff of 100,000 people or more
• Filing an exigency rate case

This last option is considered the most unpalatable, and for good reason. For instance, if the USPS needs additional income within the range of $3.6 to $6.2 billion dollars for 2009, that would translate into an exigency request that could raise prices an additional 1% to 5.3% on average. As stated earlier each 1% price increase equates to $600 million additional postal revenue. For the single-piece First-Class Mail stamp, that could mean a stamp price of over $0.50!

The net loss figures do take into account the Postal Service's need to make that retiree payment required by the new law of some $5.4 billion. Clearly, Congress needs to act before the Postal Service's financial realities set it up for liquidation.

The Postal Service is not without hope, and there are some initiatives underway that would make Congress' forebearance a reasonable policy and investment risk. As of this writing, the USPS is only some 18 months away from putting into place a system-wide reorganization of its entire network and distribution system. (You can find a podcast on the PostCom web site in which USPS operations Sr. V.P. Bill Galligan sets out the details of this system-wide reorganization.) The Postal Service also has begun to move on some new postal product development ideas that not only could generate some new postal revenue, but also could buttress the Obama Administration's plans to jump start key sectors of the economy (most particularly within the small business sector and financial industry). Finally, any economic turnaround brought about the Administration's and Congress' economic stimulus efforts could brighten the Postal Service's volume and revenue horizons. Even though mail is a leading economic indicator there will be time before businesses turn back to advertising and the mail.

Granting the Postal Service--and it's customers--the breathing room that's needed to actualize these key changes is essential. In fact, it not only would make good policy, it would make good business.

Editor's Note: Quite obviously, the above article was based on Postal Service mail volumes and revenues as they either were known or were projected to be at the time of writing. Given the Postal Service's revised mail volume estimate of an FY 2009 loss of 30 billion pieces, the conclusions expressed by the authors must change. In a way...all bets are off. Now it's up to Congress. If Congress fails to act on the Postal Service's retiree health benefit funding request, the USPS will go the way of the gooney bird.