Despite bright spots, financial issues remain at the forefront for USPS

After turning a fiscal third quarter operating profit, or what would have been a profit save for a change in an accounting estimate, financial hardship remains intact for the United States Postal Service (USPS).

And that comes in the form of the USPS stating earlier today it posted a Fiscal Year 2016 net loss of roughly $5.6 billion, which is steeper than a $5.1 billion net loss for Fiscal Year 2015.

As is widely known, one of the main factors of this loss comes from the organization’s $5.8 billion retiree health benefit prefunding obligation. What’s more, without this obligation, the USPS said it would have been profitable with around $200 million in 2016 net income.

Fiscal Year 2016 operating revenue came in at $70.4 billion, minus a $1.1 billion change in accounting estimate recorded during the fiscal year, which it said translates into an increase of $1.6 billion or 2.3 percent. And it said this revenue growth occurred while its exigent surcharge expired in April of this year, as per a mandate by the Postal Regulatory Commission. This, in turn, lowered revenue by around $1 billion and moving ahead USPS said that without the surcharge it is expecting revenue to decline from what it would be by around $2 billion per year.

The exigent surcharge was for for mailing products and services, and it partially alleviated its “extreme multi-year revenue declines resulting from the Great Recession, which exceeded $7 billion in 2009 alone,” said Postmaster General and CEO Megan J. Brennan earlier this year. “Removing the surcharge and reducing our prices is an irrational outcome considering the Postal Service’s precarious financial condition,” she said at the time.

And as has been noted in this space before, the USPS remains financially hamstrung, due to the ongoing decline in First Class Mail, federally mandated payment obligations, and an inflexible business model, among other issues.

One bright spot, though, continues to be its Shipping and Packages business, which saw revenue growth of 15.8 percent at $2.4 billion, which was offset by a First-Class Mail revenue decline of $925 million or 3.3 percent.

USPS explained that decline was due to the exigent surcharge going away and more consumers and businesses using electronic alternatives to First-Class Mail.

The Shipping and Packages business over the last three years has generated 24.2 percent, 21.7 percent, and 20.0 percent of the organization’s total operating revenue. And for Fiscal Year 2016, it represented 3.3 percent of total volume, while prices rose 9.5 percent.

Drivers for this growth cited by the USPS include its successful efforts to compete in the shipping services and the “last-mile” e-commerce fulfillment markets, including through Sunday deliveries.

“Volume has also experienced end-to-end growth as we have responded to customers’increased use of online shopping, which provided a surge in package volume with a record number of packages delivered during the calendar year 2015 holiday season,” it said. “To accommodate the surge in volume and to minimize service disruptions during the holiday season, we have increased Sunday delivery service and added non-career employees for the holiday season in accordance with our labor agreements.”

And growth in its Parcel Services group, which includes Parcel Select, Parcel Return, and Standard Parcels saw revenue rise 37.3 percent and volume growth of 24.1 percent for Fiscal Year 2016, with these increases paced by ongoing e-commerce growth and subsequently impacts its Parcel Select service and competitive pricing on those services, as Parcel Services, USPS said, includes some of its lowest-priced services that historically provided a relatively lower margin contribution compared to others.

While it’s true there are some bright spots for the USPS to be sure, its financial issues remain front and center.

The reasons are the same they have been in the past five years,” said Jerry Hempstead, president of Hempstead Consulting. “The requirement to prefund retiree health benefits on a schedule that’s unreasonable and that no other entity (public or private or governmental) is forced to pay. They certainly have figured out how to play their strength in last mile into a great parcel enterprise and the growth in revenue from parcels, partly fueled by price increases but mostly due to the use of the Parcel Select option was the real shining star in the past year.

The USPS is managing their business well and they are investing in improvements but the decline of first class due to electronic diversion is still their biggest challenge. It takes a lot of parcels to throw off the necessary margin to replace the lost first class revenues which is the coal that makes the steam that drives the train at the Postal Service. Domestic Package services has stepped up to the plate and is helping to stoke the fire, but as has been stated every quarter for years, the USPS needs legislative relief to have a sound balance sheet.”

But until that legislative relief comes, more of the same financial hardships are likely to remain in the cards, or in the mail.