U.S. Postal Service loses $2.4 bln in quarter

* Postal Service says year-end cash shortfall likely

* Considering 5-day delivery

* On track to cut $6 bln in costs in 2009

WASHINGTON, Aug 5 (Reuters) - The U.S. Postal Service reported a quarterly net loss of $2.4 billion on Wednesday, blaming the recession for a drop in mail volume and saying it may need to cut mail delivery to five days a week from six.

The agency, which delivers nearly half the world’s mail, said it could face a year-end cash shortfall of up to $700 million despite aggressive actions to cut costs.

It has reported net losses in 11 of the last 12 quarters.

Mail volume dropped 14.3 percent to 41.6 billion pieces in the fiscal third quarter to June 30 compared with a year earlier.

The agency has struggled with falling mail volumes for years due to the increased use of email and competition from Fedex FDX.N, United Parcel Service UPS.N and other delivery services.

The recession has added to the strain, causing the largest consecutive three-quarter drop in mail volume in nearly 40 years, the Postal Service said.

Third-quarter operating expenses of $18.7 billion were down by $294 million, or 1.5 percent, from a year earlier, but the drop in mail volume caused operating revenue to slide 9 percent to $16.3 billion.

Postmaster General John Potter said the agency needed to cut delivery service to five days per week, and called for a change in U.S. law that requires it to set aside billions of dollars annually through 2016 for retiree health benefits.

The Postal Service pays $5.4 billion to $5.8 billion annually to prefund these benefits, a requirement not placed on any other government agency.

A bill in the U.S. House of Representatives would end the requirement and is among the steps needed to secure the agency’s fiscal stability, Potter said at a meeting with the Postal Service Board of Governors.

“It also will require that the Postal Service gain flexibility within the law to move toward five-day delivery,” he added.

The agency has reduced costs, cutting work hours to match the reduced mail volume, realigning carrier routes, freezing salaries and initiating other cost-cutting measures.

“Thanks to extraordinary efforts across the entire organization, we are well on track to achieve our 2009 target of more than $6 billion in total cost reductions,” Potter said.

The Postal Service began cutting costs 10 years ago along with efforts to embrace technology.

For example, in 1999 it took 70 employees to manually process 35,000 letters per hour, but it now only takes two to process the same amount using automation, the agency said.

Despite having fewer employees, post offices and processing and delivery plants than it did in 1999, the agency caters to more delivery points now than it did a decade ago when it had more resources, data from the agency shows. (Reporting by Jasmin Melvin; editing by Ted Kerr)