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Abram Brown

Abram Brown, Forbes Staff

I write about businesses that merit attention, for better or worse.

7/10/2013 @ 12:16PM |128 views

Don't Expect The U.S. Post Office To Copy Britain's Royal Mail IPO

A Royal Mail logo is pictured on a postal box ...

(Image credit: AFP/Getty Images via @daylife)

The iconic red delivery vans, the ones complete with the Royal Warrant, that speed off everyday in service of Britain’s Royal Mail are soon to become the property of public shareholders. The long-awaited privitisation, er, IPO of Royal Mail is officially set to happen within the next nine months.

Investors across the pond in America might be asking an inevitable question: could USPS ever go public, too? Given that things at the U.S. Post Office are as black as Newgate’s knocker, it’s highly unlikely it could anytime soon.

Sensibly realizing that investors aren’t keen on deeply indebted, money-losing enterprises, the British government worked hard at readying Royal Mail for privatization. Lawmakers whipped away its massive debt, agreeing last March to pay off Royal Mail’s $6.9 billion pension-fund deficit. Fast forward 14 months later, to earlier this May, and the pension fund has a surplus of $3.3 billion–that’s right, no deficit.

At the same time, Royal Mail’s operating profit nearly tripled in its latest fiscal year ended March 31. Profit soared to $600.5 million, from $226.5 million a year earlier. Parcel deliveries increased 13%, leading Royal Mail’s chief executive Moya Greene to brag, “The transformation of Royal Mail is well underway.”

By contrast, USPS is considering falling to five-day service, cutting Saturday deliveries, all to save $2 billion annually, an effort likely as effective as rearranging deck chairs on the Titanic. Projections show USPS could be facing $20 billion in annual deficits–much of that the result of burdensome health benefits. The Post Office must put away $5.5 billion a year for future retirees, and as a result, the Post Office has collected about $44 billion to pay out to future pensioners. Post Office officials argue the pension fund is straining coffers to an unfair extent, and that Congress must draft new legislation to remove the requirement. For perspective, the Post Office is more than 100% funded in its pension accounts, while the average large-cap company is funded at 80%–and just a fraction are 100% funded.

2012 was the first year that USPS defaulted on the $5.5 billion payment, and a closer examination of USPS’s balance sheet shows a still more gloomy picture. USPS, despite concerted efforts to become more efficient, lost $15.7 million in 2012, more than triple the loss of a year earlier. Postal workers shipped less than 170 billion pieces of mail, down 18%  from more than 200 billion just five years ago. The woes continued into the first quarter of this year, when USPS lost $1.3 billion.

And in stark contrast to the optimism voiced by Royal Mail chief Greene, U.S. Postmaster General Patrick Donahoe sounded positively distraught in remarks last February: “We urgently need Congress to do its part and pass legislation that allows us to better manage our costs and gives us the commercial flexibility needed to operate more like a business does.” Donahoe was quick to note that the USPS would’ve turned a profit had it not needed to subtract $1.4 billion for its retirement fund.

Taken together, USPS is miles–thousands and thousands of miles–removed from the success seen today at Royal Mail, which sorts and delivers letters and is a separate entity from the U.K. Post Office, the network of branches that provide different mail, government and financial services. The IPO is likely to put a $3 billion to $4.5 billion price tag on Royal Mail, a business with roots back nearly 500 years to Henry VIII. Some 10% of shares will be reserved for free for postal workers, and mail carriers will receive first crack at buying into the remaining float.

Worried about what competition with other for-profit shipping-and-logistics companies like FedEx FedEx, United Parcel Service United Parcel Service, Deutsche Post Deutsche Post‘s DHL Express Express and TNT, Royal Mail’s labor unions are unhappy about the turn of events. They’ve threatened a strike and raised concerns that needing to appease public shareholders could jeopardize six-day-a-week delivery and the staff’s working conditions. Unions previously scuttled attempts to privatize Royal Mail in 1994 and 2009, efforts led by both Conservatives and Labour policymakers.

Still, just as football’s a game of two halves, perhaps there’s still a chance that USPS can change its fortunes–and we’ll talk about iconic whites vans becoming private property rather than Royal Mail’s red ones.

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  • Norma Nieto Norma Nieto 45 minutes ago

    Without Congressional action that unties their hands, the U.S. Postal Service will not be able to accomplish any sort of major financial turnaround in the near future. In addition to the large burden of the pre-funded pension liability, the Postal Service faces both political and regulatory resistance in its efforts to rightsize its network to reflect the level and nature of the volume it handles today – be that a network optimization that includes facility closures or 5-day a Week Delivery. The unions and members of Congress who block and oppose closures of unprofitable facilities or Post Offices are in denial about the realities of electronic substitution and the inevitable declines in First-Class Mail and the need for certain services. In addition, the most recent Postal Accountability and Enhancement Act of 2006 (PAEA) severely limited the Postal Service’s ability to make up some of the shortfall through new ventures — unlike many of the European postal operators, including Royal Mail, who have expanded into logistics services, for example. The PAEA also introduced a price cap that is tied to CPI at a time in which the economy was growing, not in recession, limiting the current ability of the Postal Service to increase the stamp price adequately to reflect the always rising nature of USPS labor and fuel costs. Quite simply – Congress cannot have it both ways – they either need to give the Postal Service the legislative and political freedom to transform itself to reflect the realities of paper-based communications in the 21st century, or be willing to pony express up the cash needed to keep the Postal Service providing 19th century levels of service that a limited number of Americans need or want.

    (Note: This comment reflects my individual opinions as a citizen.)

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