Will Cost-Cutting Be Enough for the USPS?

USPSFollowing early-morning reports that anticipated the news, the United States Postal Service announced on Wednesday that it would discontinue mail delivery on Saturdays. The change, which will become effective in August, has been a long time coming. Thanks to escalating costs, largely attributed to unconventional government-imposed healthcare compensation, the USPS has been hemorrhaging money, and for a few years a five-day mail delivery cycle has been floating in the ether as a possible cost-cutting plan.

To be clear, the USPS will continue package-delivery services on a six-day schedule. The service change only affects letters, which will still be shipped to P.O. boxes on Saturdays. Post offices currently open on Saturdays will remain open. All in all, the change is expected to save the USPS $2 billion annually once it is fully implemented.

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There are two major aspects of tremendous losses facing the USPS of which people should be aware. The first is that the USPS receives no support from the federal government in the form of taxpayer dollars. The institution is left to finance itself, even though it is subject to federal oversight…

Piggy Bank IOUIn line with what many expected of this sort of awkward business environment, in 2006 Congress mandated that the USPS set aside $55 billion to cover future healthcare payments for workers. This is pretty much an unprecedented move. The idea was to set aside $5.5 billion each year for 10 years, but even before the financial crisis this seemed unreasonable to some.

Cut to 2012, and the USPS posts a loss of $15.9 billion, some $11.1 billion of which is attributable to the retiree health benefits fund. Without this and other labor-related expenses, the USPS edged out an operating loss of $2.4 billion.

The second aspect, then, is that the USPS has already taken enormous cost-cutting steps worth about $15 billion per year. This includes cutting its career workforce by 28 percent, or nearly 200,000 workers, and consolidating over 200 locations. And all the while mail volume declined in the face of digitization and increased competition.

FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS) are the two main competitive forces that face the USPS outside of industry trends, and by all accounts they are doing just fine while the USPS fights for its life. Shares of UPS have climbed nearly 6 percent so far in 2013, while FedEx is up over 11 percent.

As indicated by the stock price movement, FedEx in particular is in a good spot. The company boasts an operating margin of 7.35 percent, which compares to UPS at just 2.48 percent. FedEx did post negative year-over-year earnings growth of -11.9 percent in the most-recent quarter, but with operating cash flow of $4.38 billion and climbing revenue, analysts remain bullish.

What’s more is that while USPS struggles, its competitors are investing where necessary to capitalize on industry trends. UPS recently announced that it is building out its healthcare supply distribution network, aiming to take advantage of a rapidly growing segment within the industry.

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