A Bailout for the U.S. Postal Service?

Imagine a company that reported losses in 14 of the past 16 quarters, has too many retail outlets by its own admission, and relies heavily on work done for its two biggest competitors for revenue. Any management consultant would recommend the obvious: Close unnecessary offices, lay off workers, expand into new lines of business, and raise prices.

But this is the U.S. Postal Service. It's expected to show a profit without a government subsidy, yet Congress, powerful labor unions, and even its own regulators are preventing it from making hard-nosed business decisions. The result could be a painful restructuring or a government bailout before the fiscal year ends next Sept. 30.

Patrick R. Donahoe is charged with fixing the mess. A 35-year postal veteran, he became Postmaster General on Dec. 4. Donahoe told bulk mail customers on Nov. 18 that the service's costs will exceed revenue by $2.7 billion, even after borrowing $3 billion from the U.S. Treasury, the annual legal limit. Total debt, now $12 billion, by law can't exceed $15 billion. Revenues in fiscal 2010 were $67 billion.

The USPS now faces the prospect of tougher scrutiny when Republicans take control of the House in January. Representative Jason Chaffetz (R-Utah), in line to chair the House subcommittee that oversees the service, could try to impose a restructuring by shutting some of the 32,000 post offices. "We have too many post offices," he says. He suggests bypassing congressional opposition by using a federal commission, similar to the kind used to close military bases, to identify which post offices to shut.

The USPS's problems are well known: More customers are paying bills online and choosing FedEx (FDX) and United Parcel Service (UPS) to send overnight packages. Labor and retiree health-care costs are exploding: The service has a $50 billion obligation to its retiree health fund and is in a dispute with Congress about who should pay that balance. When the USPS reported a record annual loss of $8.5 billion last month, Representative Darrell Issa (R-Calif.), who will chair the House Oversight and Government Reform Committee, warned that the Postal Service must trim costs to match revenues so "taxpayers don't get stuck paying for a bailout."

The USPS in March released a McKinsey & Co. study that recommended slashing delivery to as few as three days a week, expanding into other business lines, and shutting post offices. Congressional Democrats and labor unions have blocked an end to Saturday delivery to prevent constituent uprisings and job losses. Despite Chaffetz's warning, even some Republican lawmakers are loath to shut facilities that are named for local VIPs—and often are the social fulcrum of small towns. The Postal Regulatory Commission, the service's overseer, on Sept. 30 denied a request to raise rates an average of 5.6 percent because that would exceed the inflation rate. The USPS is appealing. "The key issue for us," Donahoe says, "is either reducing cost per delivery or increasing revenue per delivery." The service makes $1.40 per delivery now, down from $1.80 in 2000. The last time mail volume increased was in the first quarter of fiscal 2007.

The service spends 78 percent of its budget on salaries and benefits, higher than either FedEx's 43 percent or UPS's 61 percent. The American Postal Workers Union, the larger of the postal unions, is resisting further cutbacks and instead wants to "restore work that has been outsourced or given to supervisory personnel," union President Cliff Guffey said in a Dec. 1 statement. The best hope may be that volume climbs for the USPS's two biggest customers, FedEx and UPS, which use the service for last-mile delivery, since mail carriers go to all 151 million U.S. addresses six days a week—at least for now.

The bottom line: The U.S. Postal Service, blocked by Congress, unions, and regulators from making tough business decisions, may need a bailout next year.

    Before it's here, it's on the Bloomberg Terminal.