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Episode 38 – Industry Corner Podcast

IN THIS EPISODE: A review of the USPS Q2 fiscal results, I share information from a recent GAO report on the Postal Service's business model, and comments about the 75th Postmaster General, Louis DeJoy

Links to the resources mentioned in the podcast.

USPS Universal Service Obligation

USPS Louis DeJoy Press Release

U.S. Postal Service’s GAO Financial Viability Report

Transcript

Chris Lien (00:00):
Hi everyone, I’m Chris Lien. Welcome to Industry Corner, a podcast where I discuss postal industry news to help you stay informed.

Chris Lien (00:10):
On today’s podcast, I review the USPS® fiscal Quarter Two results, share information from a recent GAO report on the Postal Service’s business model, and we now know who the 75th Postmaster General will be.

Chris Lien (00:24):
Welcome to the podcast, everyone. I’m going to begin with the USPS fiscal Quarter Two results and I’m sure we can all agree that COVID-19 has severely impacted the US economy and also the United States Postal Service in terms of declining mail volume. And even though the Postal Service began experiencing the impacts of the pandemic in mid-March, which didn’t really reflect fully the impact in the second quarter results, they are expecting that there are going to be significant impacts as we continue through the months ahead as a result of this COVID- 19 situation. But if I look at just the Q2 results versus Q2 of the same period last year, here’s how it looks.

Chris Lien (01:00):
First-Class Mail® revenue increased by $89 million, or about 1.4%, despite a volume decline of 29 million pieces or 2%. So that might be a little bit confusing, but really the primary reason for why there was an increase in revenue even though there was a decline in volume, has to do with the US Census mailing. And that’s what really helped with the revenue increase. When we look at Marketing Mail, the revenue declined by $94 million or about a 2.5% with a volume decline of over 600 million pieces for that second quarter. That’s a 3.4% decline, so a real concern with that, and we anticipated there was going to be an impact and we’re now starting to see that. This is expected worse than due to the numerous retail and restaurant closures that have occurred during this pandemic. Now the bright spot is the shipping and packages. The revenue for that increased by $386 million or 7.1%, with 12 million more pieces or about a 0.8%. Now the Postal Service continues to remain bullish that their package business will grow as more people purchase online for delivery to their quarantine environments and their work from home situations.

Chris Lien (02:06):
Unfortunately the operating expenses were up as well though. It was 14.2% compared to same quarter last year. And so when it all comes together, there was a net loss for the quarter of $4.5 billion. Now if I look at last year, you know in the Q2 of last year, they had a net loss of 2.1 billion. So this is more than twice what they saw a year ago. And it’s important to remember that mail is an essential service and that the Postal Service is required to provide universal service to all 160 million delivery points, at least six or sometimes seven days a week. So a real challenge for the Postal Service. They have this mandate, they have to continue with this, but we certainly are concerned with the mail volume and certainly hope that once this COVID pandemic begins to wane, and I know a lot of States are beginning to reopen, that we’ll start to see more of that Marketing Mail return.

Chris Lien (02:53):
Now I’d like to turn to the Government Accountability Office report. This is a report that was filed for May of 2020, and the GAO is sort of an oversight for the different government entities and the Postal Service of course is one of them. And so what the GAO recently said is that since the GAO’s 2009 high-risk designation, the United States Postal Service’s financial viability has progressively worsened due to declining mail volume, increased employee compensation benefits costs, and increased unfunded liabilities and debt. First-Class Mail volume as a reminder for our listeners has declined 44% since fiscal year 2006, so a precipitous drop. And, you know I’ve often heard that it takes three pieces of Marketing Mail to equal one piece of First-Class Mail in terms of revenue contribution, and we certainly haven’t seen three times of marketing mail in terms of the First-Class Mail erosion.

Chris Lien (03:47):
Quite simply the Postal Service’s current business model is just not financially sustainable due to declining mail volumes, increased competition and benefits cost and the increase unfunded liabilities and debt. Postal Service’s costs continue to rise faster than its revenues and although the Postal Service has made changes over the years to address these challenges, its efforts have been limited by stakeholder opposition and statutory requirements. Now the stakeholders that I’m talking about included a number of entities including USPS labor unions, they have a large voice in the matter. USPS contractors for mail transportation, the companies that are transporting the mail and you see a lot of those when you’re out driving around. If you are driving around in these days. Of course the federal government… Congress, they control Title 39 the law which controls how the Postal Service is supposed to operate as well as the federal benefits. And then you’ve got the private couriers that compete against the United States Postal Service.

Chris Lien (04:39):
UPS® has a very loud voice in terms of where they want the Postal Service to stay within their swim lanes and not encroach into their package delivery industry. And then you’ve got households, of course, you know the consumer, the public that rely upon the Postal Service to deliver the essential items. I mean they rely on the Postal Service, but you attempt to close a post office and you’re going to hear from those people. And then of course there’s the business mailers, there are customers of BCC Software, and the entire ecosystem that has been built around that foundation of the Postal Service. So we’re all these stakeholders together that help to provide input for the Postal Service. Now in 2009 and again in 2011 where it was really formalized, the Postal Service attempted to right size their network as part of a network rationalization initiative.

Chris Lien (05:24):
But there was pushback against this. I mean they began doing this and then held off because a lot of the stakeholders that I talked about said, “Hey, we don’t really want you closing some of these facilities.” Labor unions in particular were very vocal against this. And if you recall, even Senator Sanders at the time during the Obama administration seemed to be responding as a result of this network rationalization initiative, putting on hold some of the governor appointments at that particular time. This whole GAO report is 85 pages in length and contains a lot of this same kind of conversation in that the Postal Service is quite simply in a financially dire situation. And by the way, that’s the same position that the Postal Regulatory Commission also stated in their FY2019 analysis that they published on May 7th.

Chris Lien (06:07):
The GAO has three recommendations for Congress to assist the Postal Service. First, Congress should consider reassessing and determining the level of universal service for the Postal Service that the nation requires. This  USO obligation is something that has been talked about quite a bit and really needs to be clarified. We need to very clearly explain what do we mean when we say “Universal Service Obligation,” and what is the requirement by the Postal Service in terms of where do they need to go and how often do they need to go there. The second Congress should consider determining the extent to which the US Postal Service should be financially self-sustaining and what changes to the law would be appropriate to enable the Postal Service to meet this goal. You know, I’ve talked about this a number of different times. There was a point of course when the Postal Service was fully taxpayer funded, that changed in 1970 with the Postal Reorganization Act. But a lot of what the Postal Service delivers is for the betterment of the nation as a whole. I mean, it binds the nation together.

Chris Lien (07:05):
So there’s an argument to be made that maybe Congress and by way you know, the taxpayers should be subsidizing to a degree, some of the Postal Service’s obligation as outlined in the Constitution. In fact, the Postal Service is the only service from the government that is very specifically outlined in the Constitution – Article One, Section Eight. A lot of the things that we understand that and expect the government to provide for us, that was never identified in the Constitution, but the Postal Service is. And so that’s something that we really need to be looking at. The third is Congress should consider determining the most appropriate institutional structure for the Postal Service. Boy, this has been talked about quite a bit. In fact, the President formed a task force on this, you know, should parts of the Postal Service be, we’ll call it privatized. And I would argue that some of it already is in the terms of destination entry and how the Postal Service and in that stakeholder of the business mailers work together to be able to make that happen.

Chris Lien (08:00):
But the entire structure of the Postal Service in a lot of ways is really dated back to the sixties and seventies is not necessarily structured for today’s environment. So those are the three recommendations and all of those require buy-in from the key stakeholders in the newly appointed governors as well as the newly selected Postmaster General. And that sort of brings me to my third topic today. You know, we do now know that the 75th Postmaster General of the United States Postal Service will be Louis DeJoy. Now Louis DeJoy, according to the USPS press release, is an accomplished business executive with more than 35 years of experience as chairman and CEO of New Breed Logistics. DeJoy spent decades in collaboration with the US Postal Service, Boeing, Verizon, Disney, United Technologies, and other public and private companies to provide supply chain logistics, program management and transportation support.

Chris Lien (08:51):
He’s expected to begin serving in his new role, effective June 15th. Now, Mr. DeJoy is certainly a very successful businessman, based on the internet, having taken New Breed Logistics from 10 employees to over 9,000 and he eventually sold New Breed Logistics to XPO logistics for $615 million. So very successful in terms of the entrepreneurial spirit of creating a company, having a vision, building that, selling it, and doing quite well with it. Of course from a logistics aspect, the Postal Service is a whole different situation, much, much larger, tens of billions of dollars that are involved and that Universal Service Obligation that I talked about as well as congressional oversight. So something that can certainly be a real challenge for the new Postmaster General. Now, one of the concerns that you’re probably seeing in the media is that Mr. DeJoy has contributed more than $1.2 million to the Trump Victory Fund and millions more to the Republican party organization and candidates, and unfortunately this is starting to lead to some media outlets to speculate that this appointment is more political in nature than necessarily finding what would say the right person with the right experience and helping the Postal Service move forward.

Chris Lien (10:01):
Now in response to this speculation, the Board of Governors explained the candidate selection process. During their May 8th briefing. They stated that 53 candidates were actively vetted as part of an initial selection group. 14 of those were interviewed by all five governors. Seven candidates were invited to a second round interview of three hours each, and finally four finalists, including the final candidate was unanimously selected. What’s interesting to know with this entire selection process though is that the Vice Chair of the Board of Governors, David Williams, resigned effective April 30th. Now, I don’t want to get too deep into the speculation on that, but it is a move that is causing some to wonder if maybe there were politics involved here. Mr. Williams is a Democrat and according to the Washington Post, his departure now results in an imbalanced board in terms of political affiliation, even though it’s still retains its quorum.

Chris Lien (10:54):
As a reminder for our listeners, you have to have a balance in terms of political affiliation. You can have one more. For example, on a fully seated Board of Governors of nine, you can have five from one party, four from another. So with Mr. Williams now leaving the Board of Governors, that creates kind of an imbalance with that. It also means that we’ve lost a lot of knowledge on that Board of Governors. Mr. Williams had quite a bit of knowledge in the industry and serving as one of the Inspector Generals of the Office of the Inspector General, the Chief on that. So he had quite a bit of knowledge and I always enjoyed listening to him speak. But now because he’s left, it really means that you’ve only got about four years of combined knowledge on the Board of Governors because these were all relatively new governors to the mailing industry, having recently been appointed by the President, confirmed by the Senate for the Board of Governors.

Chris Lien (11:43):
It should also be noted that there are two nominees that are pending, a Democrat and a Republican. However, given the fact that it’s currently an imbalance, it’s very likely that Senator Schumer is going to push for both of those nominees to be Democrats, or maybe add an additional one. We’ll have to wait and see what will happen. Obviously, Congress has got a lot more that they’re, that they’re working on right now, but in the meantime, it’s, it’s good to know that there’s at least a quorum for the Board of Governors to be able to continue to conduct the business of the US Postal Service. And look, I think everyone pretty much knew that the next PMG was going to be from the private sector. So I’m personally not too surprised by this announcement. And I can see the optics in terms of the politics involved your life.

Chris Lien (12:21): I get that, but I do want to say that I appreciate that the next PMG has vast experience in logistics and distribution and especially a prior relationship with the Postal Service. You know, Mr. DeJoy had been working with the Postal Service in terms of a contractor for over 25 years, so he’s familiar with our industry, he’s familiar with the Postal Service and I’m hoping that he’ll now quickly become familiar with a lot of the governance and the oversight and the fact that we’ve got these six key stakeholders that I mentioned before that all need to be coming together to be successful. And Mr. DeJoy, as a reminder for our listeners, he’s the first PMG from the private sector since Marvin Runyon, the Postmaster General who led the USPS through the mid-1990s. Now, for those of you that have been in the mailing industry as long as I have, you’ll likely remember that the 1996 reclassification was a huge initiative and that was actually instigated by Postmaster General Runyon.

Chris Lien (13:15):
It was a pretty significant change to the industry with a complete reshuffling the deck of everything that we understand to be mail preparation and the class names and everything around that including service. And especially for software vendors it was a big, big change, so you can be assured BCC Software is going to be watching what happens in the coming weeks, months and even year ahead. And look, the success of the Postal Service is going to depend very much on the industry all working together through this COVID pandemic and continuing to seek new and creative ways to expand the use of the mail and the tremendous value it provides.

Chris Lien (13:48):
I look forward to meeting Mr. DeJoy at hopefully at the next August meeting at MTAC, if not sooner. And I remain optimistic that anytime you have change or challenges like this, it means an opportunity – change is not necessarily a bad thing, folks. It means an opportunity to re-look at things to, to reconsider things. In fact, I’m hearing that in many ways this current pandemic situation with COVID-19 is sort of an opportunity pause. Pause to reconsider new opportunities to leverage the technology investments you’ve made, improve automation capabilities, maybe add on something different with your software. Revisit why you didn’t get that print job last time and make the necessary changes in technology, people, processes to be able to be more responsive in the future. So, hopefully we’ll take a look at this new PMG is a great opportunity to hear from somebody outside the industry, somebody that brings a lot of logistics knowledge to the table, and some fresh ideas. It’s been quite awhile since we had Postmaster General Marvin Runyon, but it’s an opportunity that I look forward to meeting and hopefully you all will continue to work as well.

Chris Lien (14:53):
Now as a final note before wrapping up the podcast today, I just want to once again extend a tremendous thank you to PMG Megan Brennan, our 74th Postmaster General. Megan faced a lot of challenges during her tenure, but also if you think about it, she helped to usher in some of the most transformative technological changes for the Postal Service and the mailing industry. Stop and think about Informed Visibility®, Informed Delivery®, all the different technological changes. I saw a lot of that while participating at MTAC, and as Chair at my meetings at MTAC when she was the Postmaster General, knowing that she always had the opportunity to have a candid conversation. I didn’t always agree with her at times. Most of the times I did, but I didn’t always agree with her at some times, but I always had such a deep admiration and respect for her because we could always have a productive conversation regardless of the positions that we were taking on something.

Chris Lien (15:45):
So I sincerely wish her very well in her retirement. She’s absolutely earned it and I’m just really thrilled to have had the opportunity to be involved with MTAC and the mailing industry while she was the Postmaster General. I look forward to working with the new PMG. I wish the current one very well on her retirement and I wish you all a pleasant and healthy, safe, and happy day. Please stay safe, stay healthy, and let us know if there’s any questions that you have. Visit our website at bccsoftware.com or give us a call. As always, we’d like to know — how can we help? Have a great day everyone, and thank you for listening.

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