US Postal Service 2007 Annual Report Download - page 27

2007 Annual Report United States Postal Service | 27
Financial Section Part II
at $7,771 million, a decrease of $92 million or 1.2% from 2006. In 2006
our liability increased $342 million or 4.5% from 2005.
In 2007, we experienced a 4.6% decrease in the number of paid medical
claims and a 0.2% decrease in the number of paid compensation claims.
Although the number of paid claims decreased, the actual cost of claims
increased $41 million over 2006. A factor in this increase was the 2.4%
March 2007 COLA, which raised the payments to all compensation
claimants on the rolls.
As discussed in detail in Note 11, Workers’ compensation, in the Notes
to the Financial Statements, we utilized a calculation performed by an
independent actuary to estimate our liability for 2007. This calculation
combined two generally accepted actuarial valuation techniques: the paid
loss development method and the incremental frequency/severity method.
Both of these methods were used to separately estimate a liability for
compensation and medical claims. Adoption of this new approach required
that we reconsider all the assumptions that go into estimating liability for
both claim types. We changed a number of assumption changes that were
individually insignificant, but that were, in our judgment, necessary to
produce the most realistic estimate in the new model.
We also engaged a separate independent actuary to evaluate the discount
and inflation rates used in estimating our liability and made changes
to these rates in 2007 as well. As discussed in more detail in Note 11,
Workers’ compensation, in the Notes to the Financial Statements, the
actuarial model used in 2007 uses separate inflation and discount rates for
compensation and medical claims, while the model used in 2006 and prior
years used net discount rates for both claim types.
The net effect of the adoption of new actuarial valuation techniques and
new inflation and discount rates was a reduction in 2007 expenses of
$685 million.
In 2006, the number of paid medical claims and the number of paid
compensation claims decreased 2.3% and 1.7% respectively. Although
the number of paid claims decreased, the actual cost of claims increased
$45 million over 2005, again influenced by the annual March COLA, which
raised the payments to all compensation claimants on the rolls 3.5%. The
$45 million increase in the cost of claims also was the driver behind the
$342 million increase in our total liability.
The lower number of claims in 2007 and 2006 is a result of our efforts to
prevent workplace injuries and our joint initiative with OWCP to increase
the number of injured employees returned to work. In the final year of a
five-year program, we successfully met and exceeded our goal to outplace
1,000 employees from workers’ compensation rolls. There have been a
total of 1,029 successful outplacements and rehabilitations. This program
has long-term effects on the cost of workers’ compensation by reducing
the base costs.
Transportation Expenses
Transportation expenses for 2007 were $6,502 million, an increase of
$457 million, or 7.6%, compared to 2006. Transportation costs are largely
made up of air and highway transportation.
Transportation Expense 2007 2006 2005
(Dollars in millions)
Air Transportation $ 2,990 $ 2,771 $ 2,445
Highway Transportation 3,150 2,977 2,658
Other Transportation 362 297 334
Total Transportation Expense $ 6,502 $ 6,045 $ 5,437
AIR TRANSPORTATION
Air transportation expenses for 2007 were $2,990 million, an increase of
$219 million, or 7.9% compared to the same period last year. The increase
was driven by a growth in mail volume on our cargo carriers and the
expansion of peak season operations, which provided improved service to
our customers. Additional contributing factors were increases in contract
rates for the offshore networks and an increase in fuel expenditures. With
the five percent growth in international volume, we also saw a correspond-
ing increase in international air expense compared to 2006.
Air transportation expenses for 2006 were $2,771 million, an increase
of $326 million, or 13.3% from 2005. In 2006 the increase was due to
increased fuel charges and increased mail volume on our cargo carriers.
HIGHWAY TRANSPORTATION
Highway transportation expenses for 2007 were $3,150 million, an in-
crease of $173 million, or 5.8% over 2006. This was driven by an increase
in the number of miles driven, contractual rate increases for the contract
drivers, and delivery growth. The increase in fuel prices was somewhat
neutralized through leveraging our buying power to obtain favorable pricing
by consolidating fueling points and bulk purchasing.
In 2006, our highway transportation expenses were $2,977 million, an
increase of $319 million, or 12.0% over 2005. These increases were
primarily driven by diesel fuel prices and contractual rate increases.
OTHER TRANSPORTATION
Other transportation expenses for 2007 were $362 million, an increase
of $65 million, or 21.9% mainly driven by international terminal dues
settlements to foreign postal administrations and Expedited Mail delivery
transactions compared to 2006. Terminal dues settlements are the fees we
pay to foreign postal administrations for the outbound international mail that
they deliver for us.
In 2006, other transportation expenses were $297 million, a decrease of
$37 million, or 11.1%, primarily as a result of our decision to reduce the
use of rail to transport mail and shift this mail onto highway routes.