The fiscal 2010 year-to-date net loss is $5.4 billion

Cash Shortfall Likely in 2011; Customer Service Scores Remain High

WASHINGTON — The U.S. Postal Service ended the third quarter of fiscal year 2010 (April 1 – June 30) with a net loss of $3.5 billion, compared with a net loss of $2.4 billion for the same quarter last year. Third-quarter mail volume totaled 40.9 billion pieces – down approximately 700 million pieces, or 1.7 percent, compared to a year ago.

Complete USPS third-quarter results include operating revenue of $16 billion, some $294 million less than the same period last year, and operating expenses of $19.5 billion, an increase of $789 million, or 4.2 percent, over the third quarter last year.

The increase in operating expenses was attributable largely to higher workers’ compensation expenses due to a non-cash fair value adjustment and higher retiree health benefits expenses. Lower interest rates adversely affected the workers’ compensation liability, resulting in a $2 billion expense for the quarter – $870 million higher than the same quarter last year.

A significant portion of USPS losses in the past few years has been due to an unprecedented decline in mail volume – down by more than 20 percent since 2007. The replacement of letter mail and business-transactions mail by electronic alternatives continues to cause downward pressure on mail volume.

The organization’s financial situation is compounded by its obligation to pay $5.4 billion to $5.8 billion annually to prefund retiree health benefits. This requirement, established in the Postal Accountability and Enhancement Act of 2006 (PAEA), is an obligation unique to the Postal Service.

Liquidity remains a major concern as the end of the fiscal year approaches. Although cash flow appears to be sufficient for 2010 operations, it is uncertain whether cash flow, together with maximum available borrowing of $3 billion, will be enough to fund the Congressionally-mandated $5.5 billion payment to the Retiree Health Benefit Fund on September 30 and retain sufficient liquidity into 2011, according to Joseph R. Corbett, the Postal Service’s Chief Financial Officer.

“Given current trends, we will not be able to pay all 2011 obligations,” said Corbett. “Despite ongoing aggressive cost reductions totaling over $10 billion in the last three years, it is clear that a liquidity problem is looming and must be addressed through fundamental changes requiring legislation and changes to contracts”

The Postal Service has incurred net losses in 14 of the last 16 fiscal quarters. The fiscal 2010 year-to-date net loss is $5.4 billion, compared to a loss in the same period last year of $4.7 billion.

Postmaster General John Potter noted that despite the cost-cutting, the Postal Service has continued to maintain a high level of customer service. The third-quarter service score for overnight single-piece First-Class Mail was 96.7 percent on-time, an improvement of 0.4 percent from the same period last year.

“Our dedication to customer service remains a top priority,” Potter said. “We continue to provide dependable customer service even as we focus on reducing costs. With the dedicated efforts of our entire organization, we are well on track to achieve approximately $3 billion in total cost reductions in 2010,” said Potter.

Cost reductions center on initiatives to improve efficiency and match work hours to reduced mail volume. Other savings are coming from consolidating excess capacity in mail processing and transportation networks, realigning carrier routes, delaying construction of new postal facilities and a variety of other initiatives.

Work hours were reduced by 63 million in the first three quarters of fiscal 2010, or 6.6 percent compared to the first three quarters of 2009. That is the equivalent of about 36,000 full-time employees.

“Securing the fiscal stability of the Postal Service will require continued efforts in all of these areas, as well as further review of retiree health benefit prefunding,” said Potter. “It also will require that the Postal Service gain flexibility within the law to move toward five-day delivery, to adjust our network as needed, to develop new products the market demands, and to work with our unions to meet the challenges ahead.”

Details are contained in the Postal Service Form 10-Q report that will be available Aug. 9, 2010, at http://www.usps.com/financials/ (click Form 10-Q under Quarter Reports).