United States Postal Service: Strategy Needed to Address Aging Delivery Fleet
Published: 2011-05-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The United States Postal Service (USPS) is in financial crisis. It also has the world's largest civilian fleet, with many of its delivery vehicles reaching the end of their expected 24- year operational lives. USPS is subject to certain legislative requirements governing the federal fleet, including a requirement that 75 percent of USPS's vehicle acquisitions be capable of operating on an alternative fuel other than gasoline. This testimony addresses (1) USPS's financial condition; (2) USPS's delivery fleet profile, including how USPS has responded to alternative fuel vehicle requirements and its experiences with these vehicles; (3) trade-offs of USPS's approach for addressing its delivery fleet needs; and (4) options to fund a major acquisition of delivery vehicles. This testimony is primarily based on GAO-11-386 , which is being released today. For that report, GAO analyzed USPS data, visited USPS facilities, and interviewed USPS and other officials. GAO recommended in that report that USPS should develop a strategy for addressing its delivery fleet needs that considers the effects of likely operational changes, legislative fleet requirements, and other factors. USPS agreed with the recommendation. For this testimony, GAO also drew upon past and ongoing work on USPS's financial condition and updated USPS financial information.
section_title: What GAO Found
paragraphs: USPS's financial condition continues to deteriorate. For the first 6 months of fiscal year 2011, USPS reported a net loss of $2.6 billion--worse than it expected--and that, absent legislative change, it will have to default on payments to the government, including a $5.5 billion payment for its retiree health benefits. GAO has reported that Congress and USPS need to reach agreement on a package of actions to move USPS toward financial viability. USPS's delivery fleet is largely composed of custom-built, right-hand-drive vehicles designed to last for 24 years, including about 141,000 gasolinepowered vehicles (16 to 23 years old) and 21,000 flex-fuel vehicles capable of running on gasoline or 85-percent ethanol (E85) (about 10 years old). Its flexfuel vehicles and many of its 22,000 left-hand-drive minivans, which are also capable of running on E85, were purchased to comply with the 75 percent acquisition requirement for alternative fuel vehicles. Delivery vehicles travel about 17 miles and use the equivalent of about 2 gallons of gasoline on average per day. USPS has a variety of limited experiences with other alternative fuel vehicles, such as compressed natural gas and plug-in electric vehicles, most of which have higher life-cycle costs than gasoline vehicles. USPS's approach for addressing its delivery fleet needs is to maintain its current fleet until it determines how to address its longer term needs. USPS has incurred small increases in direct maintenance costs over the last 4 years, which were about $2,600 per vehicle in fiscal year 2010. However, it is increasingly incurring costs for unscheduled maintenance because of breakdowns, which can disrupt operations and increase costs. In fiscal year 2010, at least 31 percent of USPS's vehicle maintenance costs were for unscheduled maintenance, 11 percentage points over USPS's 20 percent goal. USPS's financial challenges limit options to fund a major delivery vehicle replacement or refurbishment, estimated to cost $5.8 billion and (in 2005) $3.5 billion, respectively. USPS and other federal and nonfederal officials see little potential to finance a fleet replacement through grants or partnerships. If Congress and USPS reach agreement on a package of actions to move USPS toward financial viability, such an agreement could potentially enhance USPS's ability to invest in new delivery vehicles.

section_title: Letter
paragraphs: I am pleased to be here today to participate in this hearing to address the  U.S. Postal Service’s (USPS) financial crisis and the challenges it faces in  modernizing its delivery vehicle fleet. USPS operates the world’s largest  civilian vehicle fleet—comprising more than 215,000 vehicles—of which  about 192,000 are light-duty delivery vehicles used to deliver mail to about  131 million residential and business addresses, in most cases, 6 days a  week. My statement addresses (1) USPS’s financial condition; (2) the  profile of its delivery fleet, including how USPS has responded to  alternative fuel vehicle requirements and its experiences with alternative  fuel vehicles; (3) trade-offs of USPS’s approach for addressing its delivery  fleet needs; and (4) options to fund a major acquisition of delivery  vehicles.
This statement is primarily based on our report, being released today, on  USPS’s delivery fleet.  For that report, we visited USPS facilities, held  interviews with USPS and other officials, and analyzed data from USPS’s  Vehicle Management Accounting System. We determined that these data  were sufficiently reliable for the purposes of our review. This statement is  also based, in part, on our prior and ongoing work on USPS’s financial  condition and documents and a May 2011 interview with USPS officials  regarding the agency’s financial performance for the first 6 months of  fiscal year 2011. Our work for this statement was conducted in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on our objectives.  Additional information on our scope and methodology is available in our  issued products.
subsections: section_title: USPS’s Financial Condition Continues to Deteriorate, and USPS Anticipates a Substantial Cash Shortfall This Fiscal Year
paragraphs: USPS’s financial condition has deteriorated significantly since fiscal year  2006, and its financial outlook is grim in both the short and long term. In  July 2009, we added USPS’s financial condition and outlook to our high- risk list because USPS was incurring billion-dollar deficits and the amount  of debt it incurred was increasing as revenues declined and costs rose.  USPS’s financial condition has been negatively affected by decreasing mail  volumes as customers have increasingly shifted to electronic  communications and payment alternatives, a trend that is expected to  continue. USPS reported that total mail volume decreased 3 percent in the  second quarter of fiscal year 2011, while First-Class Mail declined by 7.6  percent compared with the same period last year, negatively affecting  revenue as First-Class Mail is USPS’s most profitable mail. Half way  through fiscal year 2011, USPS reported a net loss of $2.6 billion.
USPS has reported achieving some cost savings in the last 5 years—for  example, it eliminated about 137,000 full- and part-time positions.  However, USPS has had difficulty reducing its compensation and benefits  costs and has struggled to optimize its workforce and its retail, mail  processing, and delivery networks to reflect declining mail volume. USPS  has relied increasingly on debt to fund its operations and has increased its  net borrowing by nearly $12 billion over the last 5 years. USPS recently  reported that its financial performance for the first 6 months of fiscal year  2011 was worse than expected, and that, not only will it reach its $15  billion statutory debt limit by the end of the fiscal year, it now projects a  substantial cash shortfall and that it will be unable to pay all of its  financial obligations. Specifically, USPS said that absent legislative change  it will be forced to default on payments to the federal government,  including a $5.5 billion pre-funding payment for retiree health benefits due  on September 30, 2011.
While USPS’s financial condition continues to deteriorate, we and USPS  have presented options to improve the agency’s financial condition.  Specifically, we have reported that Congress and USPS need to reach  agreement on a package of actions to restore USPS’s financial viability,  which will enable USPS to align its costs with revenues, manage its  growing debt, and generate sufficient funding for capital investment.  Proposed legislation, including S. 353 and draft legislation expected to be  introduced by Senator Carper, provide a starting point for considering key  issues where congressional decisions are needed to help USPS undertake  needed reforms. As we have previously reported, to address USPS’s  viability in the short-term, Congress should consider modifying the  funding requirements for USPS’s retiree health benefits in a fiscally  responsible manner. For long-term stability, Congress should address  constraints and legal restrictions, such as those related to closing facilities,  so that USPS can take more aggressive action to reduce costs. Action is  urgently needed as mail delivery is a vital part of this nation’s economy.
The USPS Postmaster General has also presented strategies for improving  USPS’s financial viability, recently stating that the agency’s focus should  be on its core function of delivery, growing the package business, and  aggressively controlling costs and consolidating postal networks to  increase efficiency. Clearly, USPS’s delivery fleet is a vital component of a  strategy focused on delivery.
section_title: Delivery Fleet Primarily Consists of Aging Long-Life Vehicles and Alternative Fuel Vehicles Acquired to Meet Requirements, Which Have Presented Cost and Infrastructure Challenges
paragraphs: As shown in figure 1, there are three principal components of USPS’s  delivery fleet:    about 141,000 “long-life vehicles” (LLV)—custom-built, right-hand-drive,  light duty trucks with an aluminum body 16 to 23 years old, that are  approaching the end of their expected 24-year operational lives;   about 21,000 flex-fuel vehicles (FFV), also custom-built with right-hand  drive, 9 and 10 years old, that are approaching the mid-point of their  expected 24-year operational lives; and   about 22,000 commercially-available, left-hand drive minivans that range in  age from 2 to 13 years and have an expected operational life of 10 years.
According to USPS officials, right-hand-drive vehicles are necessary for  curbline delivery. In addition, USPS officials told us that the LLVs’ and  FFVs’ standardized design minimizes training requirements, increases  operational flexibility, and facilitates partnerships with parts suppliers.  Moreover, LLVs and FFVs were made to withstand harsh operating  conditions, resulting from an average of about 500 stops and starts per  delivery route per day. As a result, the LLVs and FFVs are expected to last  more than twice as long as the minivans, which were not built to  withstand these operating conditions.
USPS is subject to certain legislative requirements governing the federal  fleet. For example, under the Energy Policy Act of 1992 (EPAct 1992), 75  percent of the light-duty vehicles that USPS acquires must be capable of  using an alternative fuel such as ethanol, natural gas, propane, biodiesel,  electricity, or hydrogen. Since 2000, USPS has consistently purchased  delivery vehicles that can operate on gasoline or a mixture of gasoline and  85 percent ethanol (E85) to satisfy this requirement. These vehicles are  known as dual-fueled vehicles. USPS officials stated that E85-capable  vehicles were chosen because they were the least costly option for  meeting federal fleet acquisition requirements. In addition, officials  expected that E85 eventually would be widely available throughout the  United States. However, according to Department of Energy (DOE) data,  as of December 2009, E85 was not available at 99 percent of U.S. fueling  stations.
Subsequent legislation required that alternative fuel be used in all dual- fueled vehicles unless they have received a waiver from DOE. Because of  E85’s limited availability, USPS has sought and obtained annual waivers  from DOE—for example, in fiscal year 2010, about 54 percent of its E85- capable vehicles received waivers permitting them to be operated  exclusively on gasoline. The remaining 46 percent of its E85-capable  vehicles were expected to operate exclusively on E85. However, USPS  officials acknowledged that USPS does not always fuel these vehicles with  E85 because using E85 increases operational costs.
Apart from its experiences with E85-capable vehicles, USPS has a variety  of limited experiences with other types of alternative fuel delivery  vehicles. Collectively, these vehicles accounted for about 2 percent (3,490  vehicles) of its delivery fleet as of September 30, 2010, as shown in table 1.
According to USPS officials, to date, USPS has not invested more heavily  in alternative technologies in part because alternative fuel vehicles likely  would result in higher estimated lifecycle costs than gasoline-fueled  vehicles. This is largely because any potential fuel savings from alternative  fuel vehicles would be unlikely to offset generally higher acquisition costs  over the vehicles’ operating lives, given that USPS’s delivery vehicles on  average travel about 17 miles and its LLVs use the equivalent of about 2  gallons of gasoline per day. In addition, USPS officials told us that the  limited availability of alternative fuels and the high costs of installing  fueling infrastructure—such as on-site charging stations—have made it  difficult to elect to invest in or operate these vehicles. Finally, they noted  that USPS has experienced problems obtaining technological support and  parts for its alternative fuel vehicles.
section_title: USPS’s Approach for Addressing Its Delivery Fleet Needs Has Financial and Environmental Trade- offs
paragraphs: USPS’s current approach is to sustain operations of its delivery fleet— through continued maintenance—for the next several years, while  planning how to address its longer term delivery fleet needs. Under this  approach, USPS anticipates purchasing limited numbers of new,  commercially available minivans. According to USPS officials, this  approach was adopted in December 2005 after senior management and a  Board of Governors subcommittee decided not to initiate a major fleet  replacement or refurbishment. At that time, USPS estimated that it would  cost $5 billion to replace about 175,000 vehicles. Planning and executing a  custom-built vehicle acquisition would take 5 to 6 years from initially  identifying the vehicles’ specifications and negotiating with manufacturers  through testing and deployment, according to USPS officials. USPS also  elected not to refurbish its fleet, another option considered. According to a  USPS contractor, in 2005, the agency could have delayed purchasing new  vehicles for at least 15 years if it had refurbished its LLVs and FFVs (i.e.,  replaced nearly all parts subject to the effects of wear and aging) over a  10-year period—at a cost in 2005 of about $20,000 per vehicle—or a total  of about $3.5 billion, assuming that 175,000 vehicles were refurbished.  USPS officials said the agency chose to maintain its current delivery fleet  rather than make a major capital investment given pending operational  and financial developments and uncertainty about evolving vehicle  technologies.
We found that USPS’s maintenance program and well-established parts  supply network have enabled it to maintain its current delivery fleet while  avoiding the capital costs of a major vehicle replacement or  refurbishment. The USPS Office of Inspector General recently reported  that this approach is operationally viable and generally cost-effective,  given USPS’s financial circumstances. Our analysis of a custom query of  USPS’s vehicle database found that delivery vehicles’ direct maintenance  costs averaged about $2,450 per vehicle in fiscal year 2007 and just under  $2,600 per vehicle in fiscal year 2010 (in constant 2010 dollars). However,  these direct maintenance costs are understated, in part because, according  to USPS data, about 6 percent of total maintenance costs—all due to  maintenance performed by contractors—were not entered into its  database.
USPS’s approach has trade-offs, including relatively high costs to maintain  some delivery vehicles. Our analysis showed that while about 77 percent  of its delivery vehicles incurred less than $3,500 in direct annual  maintenance costs in fiscal year 2010, about 3 percent (5,349) of these  vehicles required more than $7,000—and 662 vehicles required more than  $10,500—in direct annual maintenance costs, or over one-third the  $31,000 per vehicle replacement cost USPS currently estimates. USPS  officials stated that in most cases, they repair an LLV or FFV rather than  replace it with a minivan because of the continuing need for right-hand- drive vehicles. One reason that some vehicles are incurring high direct  maintenance costs is that USPS has replaced—at a minimum—about 4,500  LLV frames in fiscal years 2008 through 2010 because of severe corrosion,  at a cost of about $5,000 each. None of the fleet managers for Fed-Ex  Express, United Parcel Service, or other companies we spoke with have  replaced their vehicles’ frames, and some suggested that the need to do so  is a key indication that it is time to replace—not repair—a vehicle.
Another trade off of its current strategy is that USPS is increasingly  incurring costs for unscheduled maintenance because of breakdowns.  USPS’s goal is to ensure that no more than 20 percent of its total annual  maintenance costs are for unscheduled maintenance. However, in fiscal  year 2010, at least 31 percent of its vehicle maintenance costs were for  unscheduled maintenance, 11 percentage points over its 20 percent goal.  Unscheduled maintenance can result in delays in mail delivery and  operational costs, such as overtime expenses.
USPS employees at a majority of the eight vehicle maintenance facilities  and some post offices we visited told us that they believe delivery vehicles  can continue to deliver mail without major operational interruptions for at  least several more years. At the same time, we identified some instances of  maintenance problems during our site visits (our report being released  today contains photographs and further discussion of these problems).  For example, officials at a Minnesota vehicle maintenance facility told us  that they are not following USPS’s requirements for replacing frames  whose thickness in key spots indicates weakness because they do not  have the resources to do so. Instead, they said, facility personnel replace  frames only when the frames have one or more holes through the metal. In  addition, when we visited a vehicle maintenance facility in New York state,  technicians were replacing two severely corroded LLV frames with similar  holes. The manager of this facility informed us that frames in this  condition should have been replaced during a previous preventive  maintenance inspection.
As discussed, USPS’s financial condition has declined substantially, and  although USPS issued a 10-year action plan in March 2010 for improving  its financial viability, the plan did not address its fleet of delivery vehicles.  USPS has not analyzed how operational changes proposed in its 10-year  plan, including a potential shift in delivery from 6 to 5 days a week, would  affect its delivery fleet needs, nor has it examined the consequences of its  decision to delay the fleet’s replacement or refurbishment. In addition, it  has not developed a fleet financing strategy.
During our review, USPS officials told us that the agency is in the early  stages of developing a proposal for addressing its delivery fleet needs.  These officials stated that the proposal will likely explore alternatives,  including maintaining the current fleet, refurbishing the LLVs and FFVs,  or, possibly, undertaking a major acquisition of new vehicles.  Furthermore, USPS officials stated that the proposal will discuss strategies  for incorporating additional alternative fuel capabilities into its fleet. USPS  expects to present its proposal to its Capital Investment Committee later  this fiscal year.
USPS officials said that the agency intends to examine ways to comply  with EPAct 1992’s acquisition requirements in its next large-scale  acquisition of delivery vehicles, but noted that life-cycle costs are  significantly higher for nearly all currently available alternative fuel  vehicles than for gasoline-powered vehicles. Consequently, these officials  told us a large-scale acquisition of alternative fuel vehicles (other than  E85-capable vehicles) is not likely to be financially viable. USPS officials  stated that, in their view, the best way to meet national sustainability  requirements for reduced emissions without incurring significant costs  may be to invest in highly fuel-efficient gasoline-powered vehicles. Such an  outcome could be possible given increased legislative flexibility in the  definition of what constitutes an alternative fuel vehicle. Specifically, as a  result of the National Defense Authorization Act of 2008, any vehicle  determined by the Environmental Protection Agency (EPA) to be a low- greenhouse-gas-emitting vehicle in locations that qualify for a DOE waiver  would be considered an alternative fuel vehicle. However, because EPA  evaluates only commercially available vehicles, at present, there are no  low-greenhouse-gas-emitting right-hand-drive vehicles available that have  been determined to meet EPAct 1992’s fleet acquisition requirements for  light-duty vehicles. Consequently, if USPS decides to pursue such a vehicle  in its next acquisition of custom-built delivery vehicles, it would need to  work with vehicle manufacturers, EPA, and DOE.
section_title: Without Significant Improvement in USPS’s Financial Condition, There Are No Clear Options to Fund a Major Vehicle Replacement
paragraphs: USPS’s financial condition poses a significant barrier to its ability to fund a  major acquisition of its delivery fleet. Recently, USPS estimated that it  would cost about $5.8 billion to replace about 185,000 delivery vehicles  with new gasoline-powered custom-built vehicles, at about $31,000 per  vehicle (in 2011 dollars). Further, officials from USPS, DOE, and an  environmental organization, and operators of private fleets see little  potential to finance a fleet replacement through grants or partnerships. A  primary barrier to a joint procurement is USPS’s need for customized,  right-hand-drive delivery vehicles (its competitors typically use larger  vehicles that are not right-hand-drive).  USPS and DOE officials also saw  little likelihood that USPS could help finance a major delivery fleet  acquisition through an energy savings performance contract, in which a  federal agency enters into a long-term contract with a private energy  company and shares energy-related cost savings. Given the low annual  mileage of USPS’s delivery fleet, USPS and DOE officials stated that it is  unlikely that the fuel savings generated from a more efficient fleet  (whether consisting of gasoline-only vehicles or alternative fuel vehicles)  would be sufficient, compared with the acquisition cost of the vehicles, to  interest a private investor.
If Congress and USPS reach agreement on a package of actions to move  USPS toward financial viability, depending on the specific actions  adopted, USPS’s follow-up, and the results, such an agreement could  enhance USPS’s ability to invest in new delivery vehicles. While USPS’s  efforts to maintain its current delivery fleet have worked thus far, the time  soon will come when the cost and operational consequences of this  approach will not allow further delays. When that time comes, USPS will  need to know how it can best comply with federal requirements for  acquiring alternative fuel vehicles while also meeting its operational  requirements. However, until USPS defines its strategy for a major capital  investment for its delivery vehicles, neither USPS nor Congress has  sufficient information to fully consider its options. Consequently, USPS  must develop a comprehensive strategy for dealing with this inevitability.
In the report that this testimony is based on, we recommend that USPS  develop a strategy and timeline for addressing its delivery fleet needs.  Specifically, we recommend that this strategy address such issues as the  effects of USPS’s proposed change from 6- to 5-day delivery and  consolidation of its facilities, as well as the effects of continuing changes  in its customers’ use of the mail on future delivery fleet requirements,  along with an analysis of how it can best meet federal fleet requirements,  given its budget constraints. USPS agreed with our findings and  recommendation. USPS stated that it is developing a strategy to address  the immediate and long-term needs of its delivery fleet, and that it plans to  complete the strategy and associated timeline by the end of December  2011.
Chairman Carper, Ranking Member Brown, and Members of the  Subcommittee, this concludes my prepared statement. I would be pleased  to answer any questions that you have.
section_title: Contacts and Staff Acknowledgments
paragraphs: For further information about this statement, please contact Phillip Herr at  (202) 512-2834 or herrp@gao.gov. Individuals who made key contributions  to this statement include Kathleen Turner (Assistant Director), Teresa  Anderson, Joshua Bartzen, Bess Eisenstadt, Laura Erion, Alexander  Lawrence, Margaret McDavid, Joshua Ormond, Robert Owens, Matthew  Rosenberg, Kelly Rubin, Karla Springer, Crystal Wesco, and Alwynne  Wilbur.
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