USPS remains financially hampered by retiree health benefits in fiscal first quarter results

The financial outlook for the United States Postal Service (USPS) remains murky based on fiscal first quarter earnings results, which were announced today.

For the quarter, the USPS posted a net loss of roughly $200 million, a figure which it said excludes the effects of a $1.7 billion change in its workers compensation liability triggered by interest rate fluctuations. And it added that controllable income came in at $522 million, which was down $735 million compared to $1.3 billion a year ago, with operating revenue down $155 million or 0.8 percent

As has been the case for several quarters, the USPS remains financially hamstrung, due to its $33.9 billion retiree health benefit prefunding obligation, which it defaulted on from 2012-2016. USPS added it also remains saddled by its exigent surcharge, which expired in April 2016, adding that had that surcharge, which was for mailing products and services, and partially alleviated its “extreme multi-year revenue declines resulting from the Great Recession, remained in place, would have resulted in roughly $570 million in additional revenue.

Despite remaining in the red, one part of the USPS continues to shine, with the fiscal first quarter performance from its Shipping and Packages Group, which saw revenue grow 14.7 percent annually, or $701 million, to $5.456 billion.

Total volume for the group rose ten percent to 1.6 billion packages for the quarter, paced by volume gains for parcel services up 15.5 percent (revenue up 22 percent), First Class Packages up 11 percent (revenue up 19 percent), and Package Services up 2.3 percent (revenue dropped 4.9 percent).

USPS said that its Shipping and Packages business “has continued to show solid revenue and volume growth as a result of our successful efforts to compete in the ground shipping services and ‘last mile’ e-commerce fulfillment markets, including Sunday delivery. Volume also experienced end-to-end growth as consumers continued to utilize online shopping, which provided a surge in package volume with a record number of packages delivered during the calendar year 2016 holiday season. To accommodate this surge in volume and avoid service disruptions during the holiday season, we increased Sunday delivery service for some of our customers in limited U.S. markets and added non-career employees for the season in accordance with our labor agreements.”

But while the Shipping and Packages business flourished, First Class Mail revenue was off 7.5 percent, or $568 million, due mainly to the expiration of the exigent surcharge, as well as the ongoing migration to electronic alternatives.  

“Our current financial situation is serious, but solvable,” said Postmaster General and CEO Megan J. Brennan in a statement. “With legislation that contains broadly supported provisions to improve our business model, the Postal Service can generate total savings of $26 billion over the next five years.  When combined with a favorable outcome of the recently initiated 10-year pricing system review by the Postal Regulatory Commission and continued aggressive management actions, the Postal Service would return to financial stability.”

Despite its financial challenges, the USPS is in better shape than what the general consensus is, according to industry observers.

The reason being that it has a good value product and is critical to the e-commerce supply chain. 

“They just need to work out their pension issues and raise the stamp price a bit, and they’ll be fine,” Stifel analyst Dave Ross said.

And according to Rob Martinez, president & CEO, Shipware Systems Corp.,with the continued growth in eCommerce, the Postal Service is well positioned to flourish in the years ahead.

“I don't think shippers have anything to worry about, especially if the Post is able to achieve legislative relief on the onerous prefunding obligations,” he explained.