USPS Price Reduction Sets Stage for another $2 Billion in Annual Losses

The United States Postal Service (USPS) made its financial issues clear last Thursday, explaining that without Congressional or court action to extend, or make permanent, its current exigent surcharge for mailing products and services, it will be required to decrease certain prices, effective April 10, 2016.

USPS officials said this situation will further hinder its financial outlook by reducing revenue and increasing its net losses by roughly $2 billion annually.

“The exigent surcharge granted to the Postal Service last year only partially alleviated our 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 in a statement. “Removing the surcharge and reducing our prices is an irrational outcome considering the Postal Service’s precarious financial condition.”

And an order from the Postal Regulatory Commission (PRC) requires the 4.3 percent exigent surcharge to be reversed after the Postal Service has collected surcharges totaling $4.6 billion, which the PRC said is expected to be reached by April 10.

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. And its exigent rate increase in the form of a 4.3 percent surcharge is set to expire in April.

A major obstacle in the form of the Postal Accountability Enforcement Act’s mandated Postal Service Retiree Health Benefits Fund continues to hinder the USPS’s financial viability, with $28.1 billion of prefunding payments that were due but unpaid from 2012-2015, along with the USPS accruing expenses of $1.5 billion for the fiscal first quarter and its required prefunding payment of $5.8 billion which is due by September 30. The USPS said it expects to default on this payment.

While the USPS explained that prices for its Mailing services are capped by law at the rate of inflation as per the Consumer Price Index for all urban customers (CPI-U), the law does permit exigent pricing (price increases beyond the CPI-U cap) due to extraordinary or exceptional circumstances.

But it explained the “PRC did not accept the views of the Postal Service concerning the extent of the harm resulting from the Great Recession, and the PRC strictly limited the period of time that the Postal Service could continue to collect the exigent surcharge.”

And it added that while the Postal Service has experienced rapid growth in package volume over the past few years, it still is not enough to offset the decline in revenues from Market-Dominant products, especially First-Class Mail.

What’s more, Brennan said the USPS’s current pricing system, where products that generate roughly 76 percent of its revenues fall under the statutory price cap, is fundamentally unsuited to the Postal Service’s current business environment in which First-Class Mail volume continues to decline and the network costs required to provide universal service continue to rise.

“The healthiest offering of the USPS for the last few years has been the growth in their parcel business,” said Jerry Hempstead, president of Hempstead Consulting.

“Their most recent quarter exceeded their expectations for volumes. Their big issue is, of course, financial, but absent of issues that require a legislated solution from our elected officials, the USPS is doing fine. The USPS is focused on the costs it can control and its service and on revenue generation.”

“The sad reality is that the revenue for the core services like First Class Mail and Standard Mail is declining and declining at a faster rate than can be replaced by parcels and parcels come with a lower margin than the traditional mail products. Ergo Postal rates need to go up to cover the gaps between costs and revenues. Of course there is legislation that limits how much the USPS can raise pricing in the core businesses.”

Related: Parcel Shippers: The Good, The Bad and The Ugly