May 26, 2020
Large Bailout Not Needed
For weeks since the earliest days of the Covid-19 pandemic, the U.S. Postal Service has been asking Congress for a bailout. After receiving much less than it asked for in the CARES Act of March 27, $10 billion in new borrowing authority, USPS asked for much more.
The latest request put forward by the Postal Service and supported by the House Oversight Committee was for an $89 billion package: $25 billion grant for losses; $25 billion grant for capital spending; $25 billion in additional borrowing; and forgiveness of $14 billion in existing debt. Nancy Pelosi and the leadership of the House then proposed “only” $25 billion in a grant to cover losses caused by the pandemic.
We now have our first look at the net financial impact of the pandemic on USPS, the preliminary results for April. And even the $25 billion bailout looks to be on the high side.
April 2020 Vol Rev
First Class -8.9% -8.1%
Periodicals -17.7% -18.4%
MM -45% -45.7%
Packages +34.9% +38%
Total -27.2% -3.8%
There is no surprise that market dominant mail volume is down a lot at -29.4 percent this April versus last. And it is not a surprise that competitive packages are up a lot, +35 percent.
What we didn’t know heretofore was the impact on operating revenues and expenses. Today’s release of preliminary April financial results changes that. It turns out that April operating revenue dropped only 3.8 percent versus April 2019, or by $225 million to $5.687 billion. As we all know, this was a net result of a big increase in competitive packages and a large drop in market dominant mail volume. They don’t give us the revenue breakout, but USPS does report volume changes: competitive +35 percent and market dominant -29.4 percent. Overall USPS volume was down 27.2% in April. Again, because packages have a much higher average price, the net impact on April operating revenue was only -3.8 percent.
What about the impact on costs? USPS reports a 10.1 percent increase, or $629 million, in expenses to $6.891 billion. But as we know, in the postal world, costs are not as straightforward as revenues.
The most meaningless cost on the USPS books is the monthly non-cash adjustment to workers’ compensation. This “cost” bounces up and down in the opposite direction of interest rates. That’s because it’s an estimate of future costs discounted at an ever-changing discount rate.
This April’s non-cash WC adjustment was +$215 million versus last April’s -$187 million, or a $393 million swing. So, the $629 million increase in expenses would be $236 without that non-cash adjustment for workers’ compensation. A 3.7% increase in April expenses instead of 10.1%.
$millions April 2020 April 2019
Rev 5,690 5,924 -234 -3.9%
Exp 6,891 6,262 +629 +10.1%
Net (1,201) (338) -863
Exp w/o WC 6,676 6,440 +236 +3.7%
Net w/o WC (986) (516) -470
USPS reported a loss of $1.201 billion for this April versus a loss of $338 million last April, a worse result by $863 million. When you remove the non-cash workers’ compensation adjustments, the loss for this April is $986 million versus $516 million last April, a worse result by $470 million.
Our best estimate of the net effect on USPS finances from the Covid-19 pandemic is a hit of $470 million in April.
Given our estimate of $25 billion available liquidity at the end of April, we do not foresee USPS running out of cash for the foreseeable future as some have predicted.
The real question will be how well can the Postal Service retain and continue to grow packages, while recouping some of the mail volume lost during the first two months of the pandemic. Those are the challenges facing new Postmaster General Louis DeJoy.