Is USPS Turning the Corner?

Reading the tea leaves from first quarter financials.

The Postmaster General certainly seemed pleased with his agency’s first quarter financial results for fiscal year (FY) 2025. Here is a snippet of his remarks from February 6:

For this quarter we reached our highest revenue month ever, $8 billion in December, and as our new CFO Luke Grossmann will soon show you, we generated about $150 million in profit versus a $2 billion dollar loss for the same period last year. ... As we eliminate the fragmented processing, transportation, delivery, and product strategies of the past and begin the process of systems-wide integration, we can achieve increased product velocity, increased labor productivity, reduced transportation costs, increased delivery density, and broad acceptance of our affordable and reliable products.

Given that America’s mail carrier lost $9.5 billion in FY 2024 and more than $100 billion over the past fifteen years, posting net income is nothing to sneeze at (if only for the holiday season). The USPS is not out of the woods yet. According to agency projections released in December, the USPS expects to lose $6.9 billion in FY 2025:

Source: USPS FY 2025 Integrated Financial Plan.

Losses will almost certainly continue to accumulate despite the USPS repeatedly increasing postage rates and deliveries sufficiently slowing to create a bipartisan conniption and this sorry spectacle.

It’s no golden age for the USPS, but there is some hope.

A Glimmer of Sunshine

First quarter financials were a Rorschach test for agency watchers. Here is the detailed breakdown of how the USPS did:

Source: USPS Form 10-Q Quarter I FY 2025.

The USPS attributes the dramatic shift in “workers’ compensation” to discount rate changes, which reflect interest rates. Basically, high interest rates push the expected future cost of workers’ compensation claims lower; the USPS has to set aside less cash to fund these future claims.

Transportation costs are more within the agency’s control, and therefore a lot more interesting than workers’ comp. The USPS’ ~$320 million decrease in transportation expenses offers some tentative evidence that the agency’s consolidation plan is paying off. America’s mail carrier has been on a facility consolidation spree, trying to merge far-flung mail processing operations into super-sized Regional Processing and Distribution Centers (RPDC). The aim is to have fewer points in the USPS’ processing and distribution network and correspondingly lower transportation costs.

While that’s a laudable goal, rapid centralization comes with real trade-offs. As the USPS IG noted in its September analysis of Portland’s new RPDC, the agency failed to take local conditions into account. And, because the RPDC model relies on fewer and higher-stakes hauls across longer distances, planning misses can have catastrophic impacts on delivery times. Here are just a few of the big misses identified in the report:

• 70 stations and/or customers in Portland were missing from the transportation model at the core of the RPDC.

• A scheduled trip showed 30 minutes from Bingen to East Vancouver, although that trip takes about one hour and 40 minutes to travel the 65-mile distance.

• Another scheduled trip from the Portland RPDC to the McMinnville and Newberg delivery units ran late and the next trip to Oregon City was pivoted every day for six weeks.

• A scheduled trip from the Portland RPDC to the Longview delivery unit ran late or was modified daily. Rather than making necessary adjustments to the schedule permanently, management reacted to ongoing conditions daily.

Even if the USPS irons out the kinks and gets over its history of planning snafus, there’s a far-larger problem for the agency to solve.

Compensation and Benefits

Quarterly compensation and benefit costs (~$14.7 billion) are about seven times larger than transportation costs and have grown about 4 percent from the same quarter last year. The agency can consolidate mail processing, rely less on air deliveries, and degrade service standards all it wants, but the USPS still has salaries and benefits to pay. And, when revenue decreases from first quarter highs (as it always does post-holidays), labor costs plus everything else will swamp receipts.

The good news: the USPS is trying to get its worker headcount under control. In January, Federal News Network’s Jory Heckman reported,

USPS, in a memo obtained by Federal News Network, is offering lump-sum incentive payments worth up to $15,000 to eligible mail handlers who agree to a voluntary early retirement in the coming months. ... Federal and postal employees under the Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) are eligible for voluntary early retirement if they’re at least 50 years of age, with at least 20 years of service, or any age with at least 25 years of service.

The bad news is that the USPS is hell-bent on converting inexpensive temporary hires to costly career roles. Here’s the Postmaster General bragging about it:

We converted 190,000 employees to full career status over the past 4 years, increasing our total career employees by approximately 28,000 employees (accounting for general attrition) to staff our operations appropriately, recover operational control, begin our transformation, significantly reducing overtime and minimizing the need for temporary employees ...

Except, USPS temporary employees cost far less than their career counterparts. A 2021 analysis by the Government Accountability Office estimates that the compensation gap is around $25 per hour, though this total shrinks to $8 per hour when comparing similar types of workers with similar experience. Even after controlling for these factors, the USPS saves nearly $2 billion per year by retaining 115,000 non-career workers (also called “pre-career employees”). Even when turnover rates hover around 60 percent and it costs upwards of about $5,000 to hire and train new workers, the agency still nets a substantial sum of money by having temporary workers.

Long Story Short...

The USPS will not make a dent in its compensation costs — or net loss figures — unless it (a) makes targeted workforce reductions; and (b) utilizes pre-career employees to meet upticks in demand. Transportation efficiency is nice and all, but the elephant in the room is compensation. Until the USPS curtails labor costs, it will continue being the worst of times for taxpayers and consumers.