USPS' fiscal second-quarter revenues decline; package business stays strong

The U.S. Postal Service (USPS) today posted a $474 million year-over-year decline in fiscal second-quarter operating revenue, due in large part to the April 2016 expiration of a 4.3-percent emergency surcharge that went into effect in January 2014, and a $69 million increase in so-called controllable expenses stemming from higher labor costs.

For the quarter, total revenue was $17.26 million, down from $17.73 million in the year-earlier period. Volume dropped to 37 billion pieces from 38.26 billion, USPS said.

As has been the case for years, shipping and package revenue was the standout. Revenue rose about 10 percent to $4.7 billion, while volumes rose 11 percent to nearly 1.37 billion. However, the gains on the package side failed to offset secular revenue and volume declines in first-class mail, USPS' core product. Letter mail volumes declined by 3.8 percent year over year, as more volume shifted to digital platforms.

Revenues and volumes for "Marketing Mail," which had been known until last December as "Standard Mail," also slumped year over year. The fiscal second quarter covers the period immediately after the peak holiday season, and is a relatively slow quarter for USPS.

USPS faces various unique legal and operational pressures, chief among them a Congressional mandate to pre-fund 75 years of retiree health benefits over 10 years with an annual $5.5 billion payment. It continues to press Congress for postal reform legislation. USPS also maintains that it's constrained in pricing its products in an economically viable manner. For this reason, USPS highlights expenses that are within its control because it more accurately reflects its day-to-day operational performance.

USPS is required by law to serve every address in the U.S. While this can be an operational burden, it has provided an opportunity to grow its package returns business, especially in an environment where e-commerce customers increasingly order multiple types of a product because they cannot test it before buying. Generally, those customers will keep one and return the rest. USPS in many cases becomes the "first-mile" carrier for those return moves. USPS offers eight returns products.

From fiscal year 2010 to fiscal year 2016, volume for USPS' core "Parcel Return" product rose 125 percent, while revenue increased 160 percent over that time, according to data from the USPS' Office of Inspector General.