Mark McSherry: It’s always bad news on the doorstep for America’s answer to Royal Mail as every quarter brings a loss
Friday 15 August 2014
For an organisation that generates more than $65bn (£39bn) in annual revenues, the United States Postal Service (USPS) is in a perilous financial state: it has lost almost $50bn in the last 10 years.
That’s because its hands are tied by Congress in what it can do to cut its high costs and staff benefits, raise prices, or innovate with new services to compete with private sector rivals such as UPS and FedEx, which are free to make their own business decisions.
In its latest three months alone, the USPS lost almost $2bn – its 21st quarterly loss in the past 23 quarters. Analysts have said it is in a “financial death spiral” from which there is no escape due to the grip of political interference on its business model.
Some Americans are even casting an envious eye at the relatively successful flotation of Royal Mail as a possible solution for the USPS. Surprisingly, however, the political objections to an initial public offering could be louder in America than they were in Britain.
The UK Government was accused of selling shares in Royal Mail too cheaply, costing the taxpayer a potential fortune. But as far as many Americans are concerned, the bottom line is that the company went public at 330p and now trades around 440p and the British taxpayer is to a large extent off the hook for it even though the Government retains a big stake. Right now, such a solution for the USPS seems a long way off.
Its health insurance, benefits and compensation costs are out of control. For the three months to the end of June, the service had impressive operating revenues, $16.5bn, but it also had expenses – mainly compensation, healthcare costs and benefits – of $18.4bn.
This is a typical quarter for the postal system and it is a pattern that has left it close to the edge.
The USPS was set up as “independent establishment of the executive branch of the Government of the United States”, and as such the organisation is overseen by an 11-member board of governors and needs to consult its many stakeholders in the public sector if it wants to take measures to cut costs and boost profits.
While the likes of UPS and FedEx in the private sector are free to run their business to maximise profits for shareholders, the USPS has to answer to a board of governors and fulfil a legal mandate to offer a “fundamental service” to the American people “at fair and reasonable rates.” Any price increases are often capped and reviewed by those who oversee the USPS – and any changes in labour practices, compensation and benefits are political minefields.
The fate of the USPS has become trapped in Congress between Democrats beholden to unions protecting members’ benefits – USPS employs more than half a million people – and Republicans often in cahoots with the big business lobby that might not want a rival as serious as the USPS in the private sector.
The biggest problem for the service is that it has been forced to “prefund” its retirees’ healthcare benefits by a staggering $51.8bn in 10 annual instalments, which began in 2007.
Such huge obligations would kill off many big companies. The USPS has defaulted on three payments already and has warned that it does not expect to pay a $5.7bn instalment due next month. Payments further into the future are also far from certain.
If it weren’t for these huge health benefit payments, the USPS would be in better shape, but its business model would still require dramatic reform. It needs to be allowed to react to market conditions.
It says the two quarters in the last 23 where it didn’t make a loss were the two where Congress rescheduled the retiree health benefits “prefunding” payments.
Without the tight shackles of the politicians, the USPS feels it could compete well in its markets. Its shipping and package revenues were up 6.6 per cent in the recent quarter, and standard mail revenues rose 5.1 per cent. First-class mail volume was down 1.4 per cent, but an emergency price rise offset this decline, resulting in a 3.2 per cent revenue increase.
One problem is that a first-class stamp from the USPS currently costs a mere 49c (about 29p), compared with 62p in Britain. But for many American politicians who hold sway over the service, raising the price of a stamp remains a no-no.
Patrick Donahoe, the US Postmaster General and USPS chief executive, is optimistic about the organisation. “We’re seeing momentum in our package business and continued use of direct mail as an advertising medium,” he said.
“We’ve been effective in developing and marketing our products, and we’re improving how we leverage data and technology.”
Whether it is an IPO or a hybrid public-private system recommended in a recent white paper, the USPS needs quick and drastic action to survive.
The organisation can trace its roots back to 1775 when one of the founding fathers of the US, Benjamin Franklin was the first postmaster general.
Some are asking whether Mr Donahoe, one way or the other, will be the last person with that rather quaint job title.
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