Despite earnings losses, USPS has some things to be excited about

While its top-line losses remain intact, with last week’s announcement that it had a $5.1 billion fiscal year 2015 net loss, there are some bright spots mixed in with last week’s fiscal year 2015 earnings announcement from the United States Postal Service (USPS).

One bright spot is the fact that the USPS had $68.9 billion in total revenue in FY 2015, which marked a $1.1 billion annual increase.

Given what the USPS is up against in terms of being negatively impacted by its retiree health benefits prefunding payments, which it has been unable to meet, due to a lack of capital, coupled with continuing to call on Congress to draft and sign legislation into law to not only reduce the payments, which it has been unable to meet, and also includes a smarter delivery schedule, greater control over its personnel and benefit costs, and more flexibility in pricing and products to provide the necessary cash flows, seeing an increase in total annual revenue is no small feat.

And those challenges will still remain for the foreseeable future, too, with the USPS noting that as its large net losses remain, its controllable operating expenses headed up $1.3 billion in FY 2015, due to many factors, it sad, including higher compensation costs due to increased benefits expenses and additional work hours partly associated with growth in its more labor-intensive Shipping and Package business.

That business has been and continues to serve as a position of strength for the USPS, with volume for that group up 14.1 percent annually. That type of increase does not really come as a huge surprise as the group’s revenue and volume gains have been paced by growth in Priority Mail, Parcel Select, Parcel Return, and Standard Parcels, and First Class Packages.

USPS said in a Form 10-Q statement that Shipping and Packages revenue continues to show solid volume growth, due to its successful efforts to compete in ground shipping services and last-mile e-commerce fulfillment markets, which includes Sunday delivery growth. It also said that volume for the group saw strong end-to-end growth, with the USPS responding to customers increased usage of online shopping that led to a surge in package volume with a record number of packages delivered during the FY 2015 holiday season. That surge, coupled with minimizing service disruptions during the holiday season and beyond is what USPS said drove it to roll out Sunday package delivery service in limited U.S. markets.

Shipping and Package accounts for more than 20 percent of USPS revenue but less than 3 percent of total volume. The USPS said that the costs it incurs to provide these services are substantially higher than its costs related to First Class Mail, with the USPS needing to earn roughly $2.50 in Shipping and Package revenue to replace the contribution lost from each $1 of First Class Mail revenue.

That situation definitely makes things challenging from a financial perspective for the USPS, even with Shipping and Package operations trending in the right direction.

Things are looking like they are going to get busier, too, with an announcement earlier this month that over the course of the holiday season it expects to deliver roughly 15.5 billion cards, letters, flats, and packages, adding that it expects to deliver around 600 million packages alone between Thanksgiving and New Year’s Eve, which would represent a 10.5 percent annual increase. What’s more, Monday, December 21 is being pegged by the USPS as its busiest day for holiday packages, cards, and letters, with USPS expecting more than 30 million packages to be delivered on that day.

In our annual Parcel Roundtable earlier this year, Jerry Hempstead, president of Hempstead Consulting, said that if you remove the financial obligation for the pre-funding of retiree healthcare benefits, the USPS runs at a profit.

“They need to continue to drive down costs, and they need to finish the rationalization of the network design that they began several years ago,” he said. “With automation, the USPS does not need all the plants it has, and they don’t need all of the post offices that they have.”

And Stifel analyst Dave Ross added that USPS is the biggest carrier of residential B2C deliveries in the U.S. by a wide margin, adding that it is well positioned to continue growing its delivery volumes and capacity. The problem for the USPS, he said, is government involvement, which has resulted in a “molasses-pace for any change and saddled the USPS with pension debt.”

One way to alleviate that at some point, noted Ross, would be if the USPS were allowed to raise First Class Mail rates more and become a more profitable entity that can then invest in more equipment and technology to improve service.

The top-line financial numbers still are in the red, but there are also things to like about the future for the USPS if it were able to get some help from Congress to help right the ship. They did ask for the pre-funding of pre-retiree health benefits in the Postal Accountability and Enforcement Act a while back and now have to live by that, like it or not. But with e-commerce only getting bigger and more widespread all the time, the USPS is showing it has the tools to compete and perhaps one day it will have the financial numbers to back it up, too.