The Postal Service ended Fiscal Year 2009 on September 30 with a $3.8 billion loss. The loss follows a $2.8 billion loss in Fiscal Year 2008. And looking ahead, the Postal Service projects its financial problems to continue.

In FY 2009 mail volume declined by 25.6 billion pieces which equated to a drop of about $7 billion in revenue compared to the previous year. This decline represents a 9% decrease in revenue. In its 10-K filing with the Postal Regulatory Commission, the Postal Service said the "decline in mail volume is primarily attributable to the breadth and depth of the economic recession, which has affected all sectors of the economy and all classes of mail. In fact, while electronic diversion of mail is a long-established trend that is expected to continue to depress annual mail volumes, there is some evidence that the recession has accelerated the diversion of First-Class Mail, overnight documents and direct mail advertising."

The 10-K filing goes on to say that mail volume will further decline in 2010. Acknowledging that forecasting is extremely difficult in the recession, the Postal Service says it projects mail volume to decline "by another 10-15 billion pieces from 2009 levels, and we foresee a net loss of over $7 billion. It is possible that mail volumes could decrease at a rate greater than this projection."

The Postal Service said it has experienced negative cash flow from operations in two of the past three years. With increased debt and the $4 billion of financial relief provided by Congress on September 30, the Postal Service was able to fund obligations. Debt, however, is rapidly becoming a problem with total outstanding debt at $10.2 billion on September 30. The Postal Service expects to borrow an additional $3 billion in 2010, the maximum amount permitted by law in one year. However, the Service cautions that "this may not be sufficient to fund all obligations." And in 2011 if significant losses continue, "the overall $15 billion debt limitation will likely become insufficient."

The good news is that the Postal Service expects to have sufficient cash flows to fund operations in 2010, but the bad news is that it is unlikely to be able to pay the $5.5 billion health benefit liability payment due September 30, 2010. That means groundhog day could occur on September 30, with Congress again scrambling to provide financial relief.

The Postal Service game plan for 2010 looks much like 2009. It will continue to pursue actions to increase efficiency, reduce costs and generate new revenue. Congress will again be asked to restructure the retiree health benefits payment structure and "grant the flexibility to suspend the legislative requirement that we deliver mail six days a week."

To stress the severity of its financial problem, the Postal Service 10-K filing included the following paragraph in bold print. "Expanding use of electronic communications methods and other commercial services competes with some of our principal services. Our business and results of operations will be adversely affected by electronic diversion. If we do not compete effectively with these services, or grow marketing mail, package services, or revenues from other sources, this adverse impact will be substantial over time."

An additional paragraph in bold print stated: "While the Postal Act of 2006 limited 90% of our price increases to the rate of inflation, our costs are not similarly limited. Accordingly, we may not be able to increase prices sufficiently to offset increased costs, which would adversely affect our results of operations."

The Postal Service pointed out that their costs are "heavily concentrated in wages, employee and retiree benefits, and transportation. They are significantly impacted by wage inflation, health benefit premium increases, retirement and workers' compensation program, cost of living allowances and the continuous expansion of our delivery network."

Explaining increased labor costs in the midst of the economic downturn, the Postal Service pointed out that "the contracts with our four largest unions currently include provisions granting COLAs, which are linked to the Consumer Price Index --- Urban Wage Earners and Clerical Workers (CPI-W). The COLA effective in September 2008 conferred an annual pay increase of nearly $1,500 on each career employee covered by collective bargaining agreements. The combined impact of that COLA and the carry-over from the March 2008 COLA represented an additional $1.1 billion in expenses for the Postal Service in 2009."

Pointing out the critical importance of upcoming labor negotiations, the Postal Service 10-K filing also made this statement. "Current labor agreements with the two largest unions expire in November 2010 and November 2011. The ability to negotiate fair contracts that reflect the state of the economy and current and future mail revenues is essential to maintaining our financial stability. Failure to do so, or an adverse decision by an arbitrator should we not be able to agree to terms with the unions, could have significant adverse consequences on our ability to meet our obligations."

With about 80% of Postal Service costs labor-related, the importance of new labor contracts is obvious. As of September 30, 2009, the Postal Service had "623,128 career employees and 88, 954 non-career employees. The labor force is primarily represented by the American Postal Workers Union (APWU), National Association of Letter Carriers (NALC), National Postal Mail Handlers Union (NPMHU), and National Rural Letter Carriers' Association (NRLCA). The APWU and the NRLCA contracts expire in November 2010, while the NPMHU and NALC contracts expire in November 2011. More than 85% of career employees are covered by collective bargaining agreements."

Former Deputy PMG Testifies at House Hearing
The House of Representatives' Subcommittee on Federal Workforce, Postal Service, and the District of Columbia held a hearing on November 5 entitled: "More Than Stamps, Adapting the Postal Service to a Changing World." The subcommittee, chaired by Congressman Stephen Lynch (D-MA), held this timely hearing following the Postmaster General's speech at the National Press Club in which he discussed the need for new flexibility to generate revenue.

Among the witnesses at the hearing was former Deputy Postmaster General Michael Coughlin, a highly respected executive with vast experience and perspective. Mr. Coughlin served as Deputy Postmaster General in the 1990s when the Postal Service first expressed strong interest in greater flexibility to provide new products and services. After leaving the Postal Service and joining the private sector he gained valuable knowledge of the changes taking place with postal systems around the world.

Mr. Coughlin provided an overview of foreign posts in the industrialized, developed world that "have made significant efforts over the last 20 years to expand their revenue bases beyond traditional mail services." He described efforts to generate new revenues in non-postal services from ventures into logistics services, financial services, express and parcels, electronic services, retail services, IT services and postal "value chain" expansion.

The former Deputy Postmaster General said the results "vary from post to post, but there are some real success stories." And he noted that the "more successful posts, in terms of year to year total revenue growth, profitability, consistency, and revenue and cost per employee, are those that have adopted a more aggressive Strategic competitive position."

To be successful, Mr. Coughlin noted common characteristics among the more successful ventures. He also noted the importance of the "set of conditions put in place by the government and/or the regulatory authority."
The conditions cited by Mr. Coughlin include the following:
The legal framework within which the public postal operator conducts the business, at least among the more successful foreign posts, provides the commercial freedom of action necessary in a competitive market. Usually that includes the freedom to enter and exit markets and to operate as any private entity would, provided that the Universal Service Obligation is met.
The Regulator usually has a light and supporting hand, with its focus being on Universal Service issues, the "reserved" area and competition. There are exceptions, however.
There is little political interference in basic business decisions of the post as long as they are made with the legal framework provided.

Mr. Coughlin pointed out the Postal Service's challenge of scale. "The problem USPS faces today is measured in Billions of dollars. Finding new sources of revenue for USPS is important, but a thousand revenue projects worth $1 million each, will generate $1 billion. Or make it 10 projects worth $100 million! Under the current statute, I don't think I have heard of initiatives approaching anything like that. To have a real impact, we will have to think big."
And an even bigger challenge noted by Mr. Coughlin: "Unlike most of the posts I have talked about here today, there is a very strong philosophical aversion in this country to a government entity competing in private markets, with goods and services that are already available from private sources. In the past, when USPS has attempted to offer such services, there has been very strong and noisy resistance from those who see themselves in competition with the postal offering and eventually USPS will hear from some of you on the issue. I do not see that condition changing, simply because the postal problem is bigger today."

He concluded his written statement by saying "I am not optimistic about the governmental conditions described previously for foreign posts, coming about anytime soon in this country. Therefore, a lot of what I have described about revenue generation by foreign posts is interesting, but unlikely in this country."

Responding to a question from Congressman Danny Davis (D-IL) about necessary change, Mr. Coughlin said the Postal Service will have to have a much smaller footprint to survive. He said a footprint of about 150 plants and 400,000 employees could be the appropriate size of the future.