U.S. Post Office has $2.2 billion loss, warns of Sept insolvency

(Reuters) - The U.S. Postal Service posted a $2.2 billion net loss in its second quarter and said it might be unable to pay its debts by September.

The agency, which has been battling falling mail volumes and competition from FedEx (FDX.N) and United Parcel Service (UPS.N), said it expects to hit its borrowing limit by the September 30 end of the fiscal year, and will have to default on payments to the federal government unless Congress intervenes.

"The Postal Service continues to seek changes in the law to enable a more flexible and sustainable business model," said Chief Executive Patrick Donahoe in a statement.

The Postal Service -- which posted a net loss of $8.5 billion at the end of fiscal 2010, its fourth straight year of losses -- has asked Congress for permission to cut Saturday mail delivery.

The agency lost a bid last summer to raise rates on first-class mail beyond the pace of inflation.

The mail carrier, which delivers about 40 percent of the world's mail and does not receive tax revenue, announced in March that it would eliminate 7,500 jobs and close 2,000 post offices in an attempt to cut costs.

It said on Tuesday that it expected cost-reduction efforts to save $1.2-$1.6 billion in fiscal 2011 but that those savings could be offset by rising fuel prices. Retail gasoline prices are higher than $4 per gallon in some parts of the country.

The Postal Service said operating revenue in the second quarter, which ended March 31, fell 2.8 percent compared to the same period in 2010 to $16.2 billion. Mail volumes fell about 3 percent compared to the second quarter of 2010, the agency said.

Senator Susan Collins of Maine introduced in February legislation that would reduce the agency's payments to pension funds and improve its contracting practices.

President Barack Obama also included relief for the agency in his 2012 budget proposal, returning overpayments to pension funds and allowing the Postal Service to set aside less for future health insurance benefits than is currently required.

(Reporting by Emily Stephenson; Editing by Tim Dobbyn)