US Postal Service 2004 Annual Report Download - page 36

financial review
34 | 2004 annual report united states postal service
of฀trends฀will฀continue฀to฀challenge฀us฀at฀least฀through฀the฀
next฀decade.฀
This฀ challenge฀ is฀ best฀ illustrated฀by฀the฀dramatic฀changes฀
in฀ the฀ business฀environment฀we฀have฀ witnessed฀in฀recent฀
years.฀From฀1997฀to฀2000,฀volume฀growth฀added฀$5.5฀billion฀
in฀annual฀revenues.฀From฀2001฀through฀2003,฀declines฀in฀
our฀volume฀reduced฀our฀revenues.฀In฀2004,฀our฀volume฀and฀
revenue฀increased฀only฀slightly.฀However,฀from฀1996฀to฀2003,฀
our฀ delivery฀ network฀ grew฀ by฀ 12.1฀ million฀ carrier฀ delivery฀
points,฀about฀1.7฀million฀a฀year.฀
Impact฀of฀Inflation฀and฀Changing฀Prices
The฀ Postal฀ Reorganization฀ Act฀ requires฀ that฀ the฀ Postal฀
Service฀ provide฀ universal฀ mail฀ service฀ and฀ operate฀ on฀ a฀
financial฀breakeven฀basis.฀Therefore,฀the฀prices฀we฀charge฀
in฀the฀form฀of฀postage฀rates฀and฀fees฀must,฀over฀time,฀reflect฀
the฀changes฀in฀the฀cost฀and฀quantity฀of฀resources฀needed฀to฀
effectively฀operate฀our฀business.฀The฀primary฀input฀resources฀
are฀labor฀and฀the฀related฀cost฀of฀benefits,฀energy฀costs฀that฀
impact฀the฀cost฀of฀transportation฀and฀utilities,฀material฀costs,฀
and฀the฀cost฀of฀maintaining,฀replacing฀and฀expanding฀our฀
distribution฀network.฀
We฀have฀maintained฀stable฀prices฀since฀the฀implementation฀
of฀the฀last฀omnibus฀rate฀case฀recommendation฀in฀the฀summer฀
of฀2002,฀and฀we฀have฀committed฀to฀maintaining฀stable฀prices฀
until฀2006.฀We฀have฀achieved฀rate฀stability฀through฀continu-
ous฀productivity฀improvement฀and฀from฀the฀benefit฀of฀reduced฀
CSRS฀retirement฀costs฀of฀P.L.108-18.฀We฀plan฀to฀continue฀miti-
gating฀inflationary฀pressure฀with฀$1.4฀billion฀of฀cost฀reductions฀
planned฀for฀2005.฀But฀these฀productivity฀improvements฀alone฀
will฀not฀offset฀the฀continuing฀upward฀cost฀pressures฀resulting฀
from฀resource฀cost฀inflation,฀the฀continuous฀expansion฀of฀our฀
delivery฀network,฀or฀the฀loss฀of฀First-Class฀Mail฀volume฀and฀its฀
high฀level฀of฀contribution฀to฀institutional฀costs.฀Also,฀we฀recog-
nize฀that฀P.L.108-18฀“savings”฀will฀be฀lost฀in฀2006.
Expense฀Growth
We฀estimate฀that฀total฀expenses฀in฀2005฀will฀be฀$68.5฀billion,฀
a฀3.9%฀increase฀over฀our฀2004฀expenses฀of฀$65.9฀billion.฀We฀
expect฀personnel฀costs,฀including฀contractual฀pay฀increases,฀
employee฀benefits,฀and฀retiree฀benefits,฀to฀increase฀by฀$1.7฀
billion,฀or฀3.2%.฀This฀increase฀will฀be฀driven฀by฀increased฀work-
load฀due฀to฀our฀expanding฀delivery฀network.This฀increase฀will฀
also฀be฀driven฀by฀higher฀cost-of-living฀pay฀adjustments฀and฀
health฀insurance฀premiums,฀coupled฀with฀an฀increase฀in฀our฀
contributions฀ to฀the฀Federal฀Employees฀ Retirement฀System฀
(FERS)฀from฀10.7%฀of฀each฀FERS฀employee’s฀salary฀to฀11.2%฀
as฀required฀by฀law.
We฀ expect฀ non-personnel฀ costs฀ excluding฀ transportation฀
expenses฀to฀increase฀approximately฀$600฀million,฀or฀6.9%,฀
because฀of฀investments฀in฀programs฀to฀promote฀use฀of฀postal฀
products,฀updates฀to฀and฀improvement฀of฀information฀tech-
nology฀capabilities,฀and฀improvements฀to฀ customer฀access฀
and฀service.฀Transportation฀costs฀will฀grow฀$150฀million,฀or฀
3.0%,฀because฀of฀higher฀fuel฀costs฀and฀the฀impact฀of฀revised฀
Department฀ of฀ Transportation฀ requirements฀ limiting฀ the฀
number฀of฀consecutive฀hours฀that฀drivers฀may฀spend฀behind฀
the฀wheel.฀
Our฀2005฀projected฀expenses฀reflect฀cost฀reductions฀of฀$1.4฀
billion฀and฀include฀our฀plan฀to฀reduce฀workhours฀by฀23฀million.฀
This฀workhour฀reduction฀is฀the฀equivalent฀of฀more฀than฀10,000฀
full-time฀positions,฀even฀as฀we฀deliver฀mail฀to฀a฀projected฀addi-
tional฀1.6฀million฀new฀addresses.฀Without฀these฀cost฀reductions,฀
our฀2005฀expenses฀would฀increase฀5.9%฀instead฀of฀3.9%.฀
From฀1971฀through฀1999฀we฀had฀annual฀expense฀growth฀of฀
less฀than฀4.0%฀only฀three฀times.฀We฀expect฀that฀2005฀will฀be฀
the฀fifth฀year฀out฀of฀the฀last฀six฀that฀expense฀growth฀will฀be฀
less฀than฀4.0%.
Item 7A. Quantitative and qualitative
disclosures about market risk
Market฀Risk฀Disclosure
In฀the฀normal฀course฀of฀business,฀we฀are฀exposed฀to฀market฀
risk฀ from฀ changes฀ in฀ commodity฀ prices,฀ certain฀ foreign฀
currency฀exchange฀rate฀fluctuations,฀and฀interest฀rates.฀With฀
the฀limited฀exception฀explained฀on฀the฀following฀page,฀we฀do฀
not฀use฀derivative฀financial฀instruments฀to฀manage฀ market฀
risks.฀Additionally,฀we฀do฀not฀purchase฀or฀hold฀derivative฀finan-
cial฀instruments฀for฀speculative฀purposes.
General฀Inflation฀Risk
Each฀of฀our฀labor฀contracts฀with฀our฀largest฀unions฀includes฀
provisions฀granting฀cost-of-living฀allowances฀(COLAs).฀COLAs฀
are฀generally฀granted฀semi-annually฀and฀are฀linked฀to฀increases฀
in฀the฀consumer฀price฀index฀(CPI).฀Nonbargaining฀employees฀do฀
not฀receive฀COLAs.฀Because฀employee฀compensation฀repre-
sents฀a฀significant฀portion฀of฀our฀annual฀expenses,฀an฀increase฀
in฀the฀CPI฀greater฀than฀had฀been฀incorporated฀into฀our฀financial฀
plans฀could฀be฀a฀significant฀risk฀to฀our฀financial฀results.฀We฀
estimate฀that฀an฀increase฀in฀the฀CPI฀of฀0.5%฀would฀cause฀an฀
annualized฀increase฀in฀our฀COLAs฀of฀about฀$100฀million.
Part II