With its filing of its 1st Quarter 2012 10-Q, the Postal Service reported another quarter of substantial losses. While the report clearly indicated that the Postal Service’s financial position is unsustainable, the decline in volume and revenue is substantially less than projected in the Postal Service’s 2012 Integrated Financial Plan. In the First quarter of fiscal year of 2012, the Postal Service has handled nearly 2 billion more pieces and generated $745 million more revenue than the forecast that the the Postal Service filed on January 20, 2012 with the Postal Regulatory Commission that the Postal Service more than likely used in its 2012 Integrated Financial Plan.
Comparison of 1st Quarter 2012 Volume Between Forecast and Actual Results
The Postal Service appears to have significantly underestimated both First Class and Standard Mail Volume. The forecast for Periodicals appears relatively accurate. Forecasting regulated parcel volumes is difficult due to competition with Priority Mail for single-piece Parcel Post volumes.
Comparison of 1st Quarter 2012 Volume Trend Between Forecast and Actual Results
First Class Mail’s expected decline is less than half of what was forecast. It is unclear if the error is due to the forecast of single piece of bulk First Class mail. The smaller standard Mail volume decline compared to forecast suggests that Standard Mail is stronger than expected especially as noted below, 2011 1st quarter volume may have been unusually high.
Comparison of 1st Quarter 2012 Revenue Between Forecast and Actual Results
Using average revenue per piece estimated from data reported in the Postal Service’s 10-Q, it is possible to estimate how much more revenue the Postal Service generated in the quarter was than forecast. Most of the revenue difference was in First Class Mail. Standard Mail revenue was also higher than forecast. In its 10-Q, the Postal Service stated that, The Postal Service indicated in its 10-q that the decline in Mailing Service parcel volume and revenue reflected “shifts to the more profitable Priority Mail Flat Rate Box in Shipping Service negatively impacted Package Services in the Mailing Services Category but improved total revenue overall.”
Trends in First Class and Standard Mail
In its 2012 1st Quarter 10-Q, the Postal Service presented a chart illustrating volume trends since 2008. While the long term trends are negative,looking at the results for the 2012 First Quarter results combined with the results from the 3rd and 4th quarters of 2011 suggest that the Postal Service is finally feeling the impact of the economic recovery, While First Class Mail is down from a year ago, the quarter-to-quarter trends of the last three quarters suggest that the rate of decline may be slowing compared to what the Postal Service saw in 2008 through 2010. Standard Mail volume trends now appear to have bounced off volume nadir of two years ago.
The Standard Mail volume in the 4th quarter of FY 2010 and 1st quarter of FY 2011 appear to be much greater than normal trends. It would appear that advertisers may have overestimated the economic recovery in the final two quarters of calendar year 2010 and underestimated the recovery in the second half of calendar year 2011.
Implications for the Rest of FY 2012
The Postal Service’s publicly available volume and revenue forecasts are likely to underestimate mail volume and revenue for the rest of 2012 for two reasons.
First, the forecast was generated in the fall of 2012, forecasts made at that time, including the forecast in President Obama’s budget, have underestimated the economic recovery and in particular the growth of jobs in the private sector. Increases in tax revenue at the federal, state, and local level in 2012 will likely reduce calls for further budget cuts, reductions in the number of public employees, and cuts in the compensation of public employees that could further boost the economy in the Postal Service’s 4th quarter in fiscal year 2012.
Second, the Postal Service’s current forecast used a new method of estimating the impact of electronic diversion of First Class and Standard Mail. The new method uses a trend variable to measure the impact of electronic diversion. It appears that the new method overestimated the impact of the trend and underestimated the impact of the economy. This error would result in the underestimation of volume that was seen in the First Quarter of FY 2012. Similar problems caused by this misspecification of parameters in the forecast model could cause problems in its forecast for the remaining three quarters of the year.
Implications for the Exigent Rate Case
The exigent rate case is currently on hold. While the Postal Service could file new information and bring the case back to life, the volume and revenue results in the First Quarter suggest that improving results, as well as a questionable forecast model make that increasingly unlikely. Most importantly, the Postal Service is now generating nearly 5% more revenue than forecast. This is more revenue than an exigent rate case would generate and creates a powerful argument for opponents of the exigent rate case.
Implications for Postal Reform
While the 1st quarter 2012 10-Q presents a picture of a Postal Service on the ropes, the revenue and volume data, especially as compared to forecast, suggests that fixing the Postal Service’s current financial problems is a solvable problem. The immediate financial problem relates to:
- the over-funding of both the FERS and CSRS accounts of the Postal Service,
- the payment schedule for the Postal Service Retiree Health Benefit; and
- the need to modify the operating network to reflect the current mix of mail handled by the Postal Service or adjust prices on single piece mail to cover the cost of maintaining a network designed to provide overnight single-piece First Class mail service.
The longer term challenge is creating a business model for the Postal Service that allows it to fully provide the range of services that maximize the value of its physical, human and intellectual property assets to meet its customer’s needs. The key questions here, which have not been addressed in either S.1789 or H.R. 2309 are 1) whether the Postal Service can do this as a quasi-governmental entity, where decisions are made in a way that are more similar to an entity funded with tax dollars than with customer generated revenue and service offerings are limited due to cultural aversion to government entities competing with the private sector, and 2) what is the level of Congressional and regulatory oversight that is needed to protect universal service and individual and corporate customers from potential abuse of the Postal Service’s market position.