USPS posts improved FY 2022 Q3 earnings results

Fiscal year (FY) 2022 third quarter earnings for the United States Postal Service (USPS) saw total revenue post a 1.4% annual increase, to $18.741 billion, the organization reported late yesterday. And it had an adjusted quarterly loss of $459 million compared to an adjusted loss of $41 million, for the same quarter last year, while posting $59.7 billion in net income, compared to a $3.0 billion FY 2021 second quarter loss.

The net income gain was due to the enactment of the Postal Service Reform Act, which was passed earlier this year and focused on augmenting the financial health of the long-beleaguered USPS. A key component of this legislation was to repeal the previously longstanding USPS requirement to annually prepay future retiree health benefits, as well as cancel all past due prefunding obligations.

The Postal Service Reform Act (PSRA) is a key part of the USPS’s “Delivering for America 10-Year Strategic Plan” that was rolled out in March 2021 and focused on achieving financial sustainability and service excellence, in order to meet customer and business needs. The plan takes an ambitious approach focused on helping the USPS get on solid financial footing, as the organization has been in the red for more than 15 years.

Total quarterly volume was essentially flat, falling by 0.7%, or 201 million pieces annually, including: marketing mail down 3.5%, or 545 million pieces, with revenue up 9.4%, or $324 million; First Class Mail volume down 5.1%, or 620 million pieces, with revenue flat; and Shipping and Packaging volume down 5.0%, or 92 million pieces, with revenue down 1.1%, or $85 million.

USPS officials said that a key objective of the Delivering for America plan focuses on meeting or exceeding 95% on-time service for all mail and shipping products “once all elements of the plan are implemented.” And it said that on average it took 2.5 days to deliver a mailpiece or package during the quarter, a 7% improvement over 2.7 days a year ago, with 93.3% of First Class mailpieces delivered on time, for a 5.4% improvement.

Other key deliverables it highlighted from the plan included: expanding its package processing capacity, improvements in operating precision; and the introduction of USPS Connect, an offering is comprised of four separate features that offer various options to help shippers meet high consumer demand for affordable, fast local, regional and national deliveries, and returns.

“Our strong on-time delivery results and revenue growth this quarter demonstrate that we are making appreciable progress in implementing our Delivering for America plan and becoming the high performing organization the public expects and deserves,” said Postmaster General and CEO Louis DeJoy in a statement. “The one-time, non-cash benefit we recorded due to the enactment of postal reform legislation was significant, but also distortive. The fact of the matter is that we have a long road and a lot of hard work ahead in our 10-year transformation to ensure the long-term financial sustainability of the Postal Service, but we are confident that we will achieve what we have set out to accomplish.”

Shipping and Packages focus: In its Form 10-Q statement, UPS said that the segment’s volume remains higher than compared to pre-pandemic levels despite the annual decline in volume, due to the prior year pandemic-driven e-commerce surge.

“We believe consumer behavior has evolved during the pandemic, and our Shipping and Packages volume is not expected to return to pre-pandemic levels, as the nation has increasingly relied on the safety and convenience or e-commerce,” said USPS. “However, the surge in e-commerce has continued to abate as the economy recovers. Furthermore, competition in the overall market has increased as certain major customers have returned to delivering their volume from our network and aggressively pricing their products and services to fill their networks and grow package density.”

Quarterly Parcel Services revenue, at $2.334 billion, was down 1.1% annually, with volume essentially flat, at 874 million pieces.

USPS said that these tallies reflect the elevated package volumes seen in the last year related to the pandemic and also growing market competition. The USPS describes this segment as mainly a last-mile business that bypasses much of its infrastructure and is one of its lowest-priced package services.

Jerry Hempstead, president of Hempstead Consulting addressed how in looking at package counts, for all of the major package carriers, the most consistent theme is that packages are declining, due to the fact that the pricing environment has emboldened the carriers, due to a lack of competition, which has resulted in revenue gains.

“Fewer packages at higher revenue translates to higher costs for the shippers,” he said. “The parcel services in the most recent USPS filing demonstrates this. Of particular note is the decline in Parcel Select packages which is the service used by Amazon, UPS SurePost, DHL ecommerce, and others. My feeling is that this is a signal the retail consumer economy is slowing. In the most recent filing by UPS, we saw a decline in every service category for both domestic and international.”

Gordon Glazer, senior consultant for San Diego-based parcel consultancy Shipware LLC, said that the USPS is riding a wave of mostly good news.

“Congressional passage of the PSRA, while late in coming, has fundamentally corrected fiscal imbalance from the previous PAEA legislation passed by the lame duck Congress of 2006,” he said. “The ink was not even dry on that legislation when those in the know began advocating for changes.

Looking at USPS volumes, Glazer said that they have been in overall decline for the last two decades, with the more profitable First-Class Mail having declined faster than other services while Marketing Mail [formerly Standard] and Packages have provided less contribution to overhead.

“So, there are less pieces of mail per drop and plus 1.5 million new delivery points that the USPS must grow to accommodate every year, he said. “More good news is the additional $3 billion for more electric replacement vehicles. This was the right move at the right time. The Post Office is performing at a great pace, mail and packages are moving swiftly with a new goal of 95% on-time transit.”

Addressing the Delivery For America plan, Glazer explained that if it is allowed to be completed this time, it will result in more efficient processing in fewer larger plants with less intra hub transportation expenses. 

“When you look at pricing there is two key areas to cut costs: operations and labor,” he said. “While the focus has been on improving operational efficiency, there is more that needs to be reduced, reducing labor costs through attrition is low hanging fruit.”

While the USPS is poised to have a great (calendar) fourth quarter, Glazer said that rumors are circulating of a new peak surcharge that may stay in place through next January, coupled with an anticipated 2023 general rate increase. 

“FedEx has already announced very high fourth quarter peak surcharges for their Ground Economy service and PMG DeJoy has indicated a desire to raise USPS pricing whenever he can,” said Glazer.

“I remain optimistic that any peak surcharge will be proportional to the actual added expenses like they did the last two years.  This penetration type pricing will help grow volumes year-round, as shippers would prefer not to make changes mid-season.  Offsetting this price increase pressure-are more than a dozen new Carrier competitors that will be looking for any opportunity to grab market share along with the more established Regional Carriers and the Postal Consolidators.”