At midnight Wednesday, the U.S. Postal Service is expected to default on a multi-billion dollar payment owed to the Treasury, highlighting financial struggles that could affect not only mail service but hundreds of thousands of jobs.
The agency's failure to make good on a $5.5 billion payment toward retiree health benefits comes as no surprise, and the default won't have any immediate effects on the postal service's day-to-day operations, the agency assured in a statement. But the missed payment -- reportedly the first of its kind in the post office's history -- will no doubt ramp up the debate over how best to address the agency's growing red ink.
On Tuesday, some proponents of reform blamed not the postal service but Congress itself for the default, citing a controversial 2006 law that increased the agency's financial obligations and lawmakers' failure so far to pass legislation this session that would address the agency's problems.
"The word 'default' sounds ominous, but in reality this is a default on the part of Congress," Fredric Rolando, president of the National Association of Letter Carriers union, said in an email to HuffPost.
Under the law passed in 2006, the postal service must pay at least $5.5 billion a year into a retiree health benefit fund, a steep "prefunding" requirement that doesn’t apply to normal corporations. Although the agency has suffered a significant drop in first-class mail over the last five years, the prefunding payments have accounted for most of the postal service's losses in recent quarters.
To help the agency right itself, the postal service's postmaster general, Patrick Donahoe, has asked that Congress lighten the prefunding burden, as well as allow the agency to undergo significant cuts to address the decline in mail due to web transactions. Those cuts include the phasing out of 150,000 jobs, the elimination of Saturday delivery and the closing of roughly half the agency's mail-processing facilities -- measures largely opposed by postal unions.
In a statement issued Monday, the postal service urged Congress to get moving on legislation. "[C]omprehensive postal legislation is needed to return the Postal Service to long-term financial stability," the agency said. "We remain hopeful that such legislation can be enacted during the current Congress."
Earlier this year, the Senate passed a bill that would address the pre-funding burden, free up money for the agency to eliminate roughly 100,000 jobs and limit overnight delivery in some areas. The move to Saturday delivery, meanwhile, would be delayed for at least two years.
The House, however, has not yet produced any legislation. Rep. Darrell Issa (R-Calif.), chairman of the House Oversight and Government Reform Committee, has championed a bill more austere than the Senate's, allowing for the phasing out of around 150,000 jobs and facilitating a faster move to five-day delivery. The bill would also bar no-layoff clauses in union contracts and establish a commission tasked with cost-cutting if the postal service didn't meet its own goals. But nothing has come to the House floor for a vote.
In a statement Tuesday, Issa blamed the default on long-term mismanagement at the agency.
"The default by the Postal Service on its obligation to its own employees and retirees follows decades of mismanagement, and a willful blindness to fundamental changes in America’s use of mail," Issa said. "The Postal Service continues to fail to do all it can under current law to cut costs."
On Tuesday, the office of Sen. Tom Carper (D-Del.), a co-sponsor of the Senate bill, said the House was being "fiscally irresponsible" by dallying and holding up reform. Carper has urged Republican leaders to pass a bill so that the House and Senate can hash out any differences in conference.
"Every day Congress delays fixing this problem, the financial challenge grows more difficult and the potential solutions become more expensive," Carper said in a statement to HuffPost. "If the House has a plan to prevent the Postal Service from defaulting for the first time in its history, I think they should bring it to the floor and pass it. We shouldn’t be waiting around until the 11th hour to do the right thing and fix the serious, but solvable, financial challenges plaguing this American institution."
Congress breaks for August recess at the end of the week, meaning House leaders won't be able to take up the postal issue until September at the earliest.
5. Pacific Sunwear
Pacific Sunwear built its reputation on offering "California-style" accessories, primarily sunglasses, shoes, and swimwear. The company was started in a surf shop in Newport Beach in 1980. Recently, highly regarded corporate balance sheet and earnings research firm GMI Ratings put Pacific Sunwear of California on its list of companies at risk of going bankrupt. The results of that analysis should come as no surprise. Five years ago, the company's stock traded for $23. Recently, it dropped to $1.50. In its last reported quarter, Pacific Sunwear lost $15 million on revenue of $174 million. The retailer's cash and cash equivalents dropped to $22 million from $50 million at the end of the immediately previous quarter. Pacific Sunwear management said the company would have a non-GAAP net loss in the current quarter as well. Pacific Sunwear also disclosed it had a new line of credit with Wells Fargo. Its comments about the loan in its latest 10-Q were telling, "if we were to experience same-store sales declines similar to those which occurred in fiscal 2010 and 2009, we may be required to access most, if not all, of the New Credit Facility and potentially require other sources of financing to fund our operations, which might not be available." Why is the company in so much trouble? It is too small and is in a commoditized business. Nearly every major department store chain sells products similar to the ones that Pacific Sunwear does, and so do a large number of niche retailers. Pacific Sunwear, meanwhile, has only 729 small stores. What will happen to the retailer? It could be bought by a larger company -- its market cap is only $108 million -- or it may go out of business with its inventory sold to other retailers.
4. Research in Motion
RIM once owned the smartphone market. Its BlackBerry products were largely used by businesses. It is hardly worth repeating the story of how RIM was late to the consumer market where it has been pounded relentlessly by Apple and an army of Google Android phones from manufacturers as diverse as China's HTC, South Korea's Samsung and Motorola in the U.S. The pace at which the company fell apart once the process began was even more extraordinary than its rise. Revenue and net income jumped from $6 billion and $1.3 billion, respectively, in fiscal 2008 to $20 billion and $3.4 billion in fiscal 2011. In just the past year, however, the company has warned twice that it would miss its earnings forecast; replaced its long-time CEO; warned a third time about its first quarter loss; and disclosed plans for layoffs of thousands of employees. The company's board said it was reviewing "strategic options," which would include a sale. The best measurement of the swiftness of RIM's fall is the change of its share of the U.S. smartphone market. Research group NPD recently reported that RIM's U.S. market share was 44% in 2009 but only 10% last year. Other data from research group Comscore shows that share has fallen further this year. The net effect on RIM's stock price has been devastating, taking it down from $144 four years ago to $11 recently. RIM cannot survive as a standalone operation in the face of these trends. The Wall Street Journal recently reported "outright buyers could include Asian handset makers like HTC Corp or online retailer Amazon.com Inc. which has jumped into the tablet business."
3. Current TV
Al Gore's Current TV was on life support even before it fired its only bankable star Keith Olbermann in March following a set of battles with the host over his perks. He was replaced by serial talk show host failure Eliot Spitzer. Compared to Olbermann's March figures, Spitzer's ratings in April were down nearly 70%, according to TV audience measurement firm Nielsen. At the time, The Hollywood Reporter wrote, "Replacement Eliot Spitzer pulled an anemic 47,000 total viewers in the first outing of Viewpoint, with just 10,000 among adults 25-54. The weeks since saw an early rebound, particularly in the demo, but in its four weeks on air Viewpoint has steadily declined in both respects." Reuters recently reported that Current TV's audience had fallen enough that cable giant Time Warner Cable may have the right to discontinue carrying the channel. The closest Current TV has to a star is talk show veteran Joy Behar, a former cast member of "The View," who had her own show canceled by CNN's HLN in November. Gore does not have the pockets to keep a network with no future going.
Battered retailer The Talbots (NYSE: TLB) is supposed to be taken private by Sycamore Partners for just over $2.75 a share, or $190 million. The offer has been delayed for some reason. Sycamore has already lowered its offer once from $3.05 a share it extended to the company in December. Among all the badly damaged retailers hurt by the recession, compounded by its failure to appeal to consumers with distinctive products, The Talbots has to be near the top of the list. While its shares traded for almost $26 five years ago, the now change hands for $2.50. It is a wonder that Sycamore wants to buy the retailer at all. Even if the deal closes, Sycamore may find there is no solution to making the company viable again. When it last announced earnings, Talbots' management said it planned to close 110 stores. The company also said its would try to find a new CEO. Talbots made only $1 million last quarter on $275 million in revenue. At the same time it announced earnings, it admitted that it could be in default under its debt facilities if its financial condition deteriorated further. The Talbots has been flanked by a number of department stores that carry women's discount ware and a number of niche chains, including Ann Taylor (NYSE: ANN), Chico's and Limited Brands. The company's earnings demonstrate clearly the extent to which customers have abandoned Talbots. Its revenue was $2.3 billion in fiscal 2008, a figure on which it lost money. Annual sales are barely half that now. With the exception of a tiny profit last year, the retailer has lost money every year in the last five.
1. American Airlines
American's parent AMR filed for Chapter 11 bankruptcy in Nov. 2011. The airline itself still operates largely as it did prior to the filing, but with some of the advantages the bankruptcy of a parent brings. Labor costs will be cut, along with debt service and lease obligations for airplanes. AMR says it plans to emerge from Chapter 11 as a viable airline. But that won't happen. US Airways (NYSE: LCC) has already made it clear that it wants to buy American's assets. As soon as the rumors of a potential buyout started in April, some of American's largest unions said they backed such a plan as a way to protect jobs. Earlier this month, US Airways CEO Doug Parker announced his desire to merge the two airlines. And with US Airways probably willing to give AMR's creditors a good deal to get American's assets, the potential deal received tremendous support from bondholders and analysts. US Airways has much to gain from this transaction as its position in the carrier market has been eroded by the mergers of Northwest and Delta and the later combination of United and Continental.