Postal Service Sets Major Operational Restructuring

The U.S. Postal Service plans a significant restructuring of its business, the quasi-governmental agency said Tuesday.

The Postal Service provided no details or a specific timetable in its announcement, which was included in its fiscal 2021 first-quarter results that included the peak holiday shipping season. The Washington Post reported Monday that a restructuring announcement could come as soon as next week.

Postmaster General Louis DeJoy, whose background is in private-sector logistics and not in the postal world, has been hinting at a restructuring for some time. The revamp will likely include cost reductions, price increases and efforts to streamline what many consider a bloated organization. Kevin R. Kosar, who follows the Postal Service at the American Enterprise Institute, said the agency's operating costs have risen from $65 billion in fiscal year 2015 to about $77.5 billion in FY 2020. Those figures exclude the financial impact of the pre-funding of employees' health-care costs into retirement, Kosar said. 

The culprit, according to Kosar, appeared to have been compensation costs, which increased about $11.5 billion over the past 10 fiscal years.

Price increases in so-called competitive products, which are mostly shipping and package- related, have already been baked into the 2021 cake. Effective Jan. 24, the Postal Service unveiled high single-digit rate increases across a large chunk of its shipping and package portfolio, though headline increases for several of the competitive products were in the low single-digit range.

The quarterly numbers had no surprises given that package-delivery volumes were expected to surge as consumers worried about the COVID-19 pandemic spent more time placing e-commerce orders and less time shopping in stores. Shipping and package revenue hit $9.3 billion, up from $6.6 billion in the fiscal 2020 first quarter. Volume rose to 2.1 billion pieces from just under 1.74 billion.

The shipping and package business accounted for nearly 44% of the Postal Service's first-quarter revenue of $21.5 billion, a ratio that would have been incomprehensible a decade ago. Shipping volume accounted for about 5.5% of the Postal Service's total volume of 36.8 billion pieces.

The strong package-delivery results helped the Postal Service generate net income of $318 million in the quarter, compared with a net loss of $748 million in the year-earlier period. Another tailwind, albeit temporary and finite, was the surge in the processing and delivery of mail-in ballots and the increase in political advertising mailings leading up to Election Day. The package and shipping segment was the only one of the Postal Service's five categories to show volume and revenue increases quarter-over-quarter.

Operating expenses rose by $1.6 billion as the Postal Service spent more on labor and equipment to accommodate the surge in parcel volumes. The growth in parcel traffic is a double-edged sword for the Postal Service because it is a far more labor-intensive business than the highly automated movements of first-class and marketing mail. 

The latter two segments, long the Postal Service's bread and butter, continued to report declines in revenue and volume in the first quarter as the pandemic accelerated the multiyear secular shift to digitization that has siphoned off large amounts of first-class and marketing mail.

In addition, the Postal Service said it does not expect its package revenue growth over the medium to long term to offset losses in mail service revenue caused by COVID-19.

Last year was probably the most difficult in the Postal Service's 246-year history. The pandemic sent the agency's costs spiraling. Its work was regularly derided by President Donald Trump. Trump threatened to refuse to sign the $2.2 trillion CARES Act if it contained direct funding for the Postal Service; the agency eventually received a $10 billion, strings-attached loan from the Treasury Department.

In the fall, the pandemic forced the Postal Service to process exponentially more mail-in election ballots than ever before, and its efforts were widely praised. It then absorbed massive amounts of holiday parcels from shippers that had been turned away by UPS Inc. UPS and FedEx Corp. FDX because their volumes had exceeded per-allotted levels. Toward the end of the peak season, a combination of bad weather, staffing shortages due to COVID and heavier-than-expected parcel traffic led to service delays that took weeks to resolve.