Tuesday, September 6, 2011

NYT: Postal Office Nearing Default as Losses Mount

TweetThis
I thought this issue would come to a head a few years ago but like almost everything on this globe the ability to kick the can is amazing. [Mar 26, 2009: Postal Office in Need of Bailout?]  Well now it's really serious as a $5.5 Billion payment due this month has no source of funding.

After I read the background situation of the post office it reminded me a lot of the auto industry a few years back - declining market share, too high of a cost basis for labor, too many locations (in the auto world akin to plants), and an excessive benefit structure compares to the 'regular world'.  Essentially an infrastructure built for a different time - 80% of costs are labor, simply unfeasible.  We know what happened in that industry a few years ago to force a 'right size', so let's see how it plays out here.

Via NYT:

  • The United States Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances.  “Our situation is extremely serious,” the postmaster general, Patrick R. Donahoe, said in an interview. “If Congress doesn’t act, we will default.”
  • In recent weeks, Mr. Donahoe has been pushing a series of painful cost-cutting measures to erase the agency’s deficit, which will reach $9.2 billion this fiscal year. They include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers — nearly one-fifth of the agency’s work force — despite a no-layoffs clause in the unions’ contracts.
  • The post office’s problems stem from one hard reality: it is being squeezed on both revenue and costs. As any computer user knows, the Internet revolution has led to people and businesses sending far less conventional mail.  At the same time, decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs. Labor represents 80 percent of the agency’s expenses, compared with 53 percent at United Parcel Service and 32 percent at FedEx, its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.
  • So far, feuding Democrats and Republicans in Congress, still smarting from the brawl over the federal debt ceiling, have failed to agree on any solutions. It doesn’t help that many of the options for saving the postal service are politically unpalatable. 
[click to enlarge]




  • Missing the $5.5 billion payment due on Sept. 30, intended to finance retirees’ future health care, won’t cause immediate disaster. But sometime early next year, the agency will run out of money to pay its employees and gas up its trucks, officials warn, forcing it to stop delivering the roughly three billion pieces of mail it handles weekly.
  • Mail volume has plummeted with the rise of e-mail, electronic bill-paying and a Web that makes everything from fashion catalogs to news instantly available. The system will handle an estimated 167 billion pieces of mail this fiscal year, down 22 percent from five years ago.
  • The law also prevents the post office from raising postage fees faster than inflation.
  • Meanwhile, the agency has had a tough time cutting its costs to match the revenue drop, with a history of labor contracts offering good health and pension benefits, underused post offices, and laws that restrict its ability to make basic business decisions, like reducing the frequency of deliveries.
Here is one 'fix' - do what many states have done and stop contributing to healthcare or pension obligations ... and by 'fix' my tongue is firmly in cheek.
  • They add that a major factor for the post office’s $20 billion in losses over the past four years is a 2006 law requiring the postal service to pay an average of $5.5 billion annually for 10 years to finance retiree health costs for the next 75 years.



Here are some interesting revenue ideas:
  • ....the agency is considering ideas, like gaining the right to deliver wine and beer, (seriously how awesome would that be? junk mail and merlot together!) allowing commercial advertisements on postal trucks and in post offices, doing more “last-mile” deliveries for FedEx and U.P.S. and offering special hand-delivery services for correspondence and transactions for which e-mail is not considered secure enough.  
Ideas on the expense side:
  • Mr. Donahoe’s hope is to cut $20 billion of the $75 billion in annual costs by 2015. To do that, he wants to close many post offices and slash the number of sorting facilities to 200 from 500 and trim the agency’s work force by 220,000 people, from its current 653,000. (A decade ago, the agency employed nearly 900,000.)


But it's not so easy...
  • The agency’s labor contracts have long guaranteed no layoffs to the vast majority of its workers, and management agreed to a new no layoff-clause in a major union contract last May.
  • But now, faced with what postal officials call “the equivalent of Chapter 11 bankruptcy,” the agency is asking Congress to enact legislation that would overturn the job protections and let it lay off 120,000 workers in addition to trimming 100,000 jobs through attrition.
  • The postal service is also asking Congress for permission to end Saturday delivery.

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012 FundMyMutualFund.com