US Postal Service 2015 Annual Report Download - page 18

2015 Report on Form 10-K United States Postal Service 16
We have focused our efforts on providing new services to enhance the value of mail, capitalizing on the growth in e-commerce
and implementing marketing campaigns to grow our Shipping and Packages business. An example of this strategy is the
Priority: You campaign, which offers day-specific delivery, improved tracking and text message alerts and up to $50 of free
insurance on most Priority Mail packages. Additionally, we continue to enhance our mail and packages services and develop
new platforms for our services, including entering into agreements with our competitors to carry more parcels. Efforts are
also underway to increase Sunday and same-day delivery to selected geographical markets and cities in the U.S.
As referenced throughout this report, we implemented a 4.3% temporary exigent surcharge on Market-Dominant services in
January 2014, which we expect to remain in effect until approximately April 2016, absent a successful appeal. For a more
detailed explanation, see Item 1. Business, Services Pricing and Classification.
On May 7, 2015, the PRC approved price increases and classifications for Standard Mail, Periodicals and Package Services.
Previously, the PRC had approved price adjustments for First-Class Mail and special services. The price adjustments applicable
to these Market-Dominant services were slightly below the CPI-U price cap of 1.966%. These price increases all became
effective May 31, 2015, and we expect them to generate approximately $750 million in annualized revenue.
On October 16, 2015 we filed a notice with the PRC of our intent to increase certain Competitive service prices by an average
of 9.5%. We estimate that this plan, if approved, would generate an additional $500 million in revenue for 2016 and $750
million per year thereafter.
First-Class Mail
The volume of First-Class Mail, our most profitable service category, continues to decline, although at a slower pace than
previous years, with decreases of 2.2% in 2015 and 2.9% in 2014. The most significant factors contributing to this decline in
volume are the continued migration toward electronic communication and electronic transaction alternatives, which was
exacerbated by the Great Recession.
First-Class Mail revenue also declined for the year ended September 30, 2015, which is consistent with the decline in volume.
Although volume declined for the year ended September 30, 2014, compared to 2013, revenue increased. The increase in our
2014 revenue compared to a reduction in volume over the past two years was primarily due to the temporary exigent surcharge
that we implemented in January 2014. The incremental revenue for First-Class Mail generated from the exigent surcharge
was an estimated $1.2 billion and $794 million for the years ended September 30, 2015, and 2014, respectively. We anticipate
the exigent surcharge to remain in place until approximately April 2016, absent a successful appeal. Should the exigent
surcharge expire, First-Class Mail revenue is expected to decline, which will adversely impact our future operating revenue.
Standard Mail
Changes in volume are reflective of the cyclical nature of Standard Mail, the extent to which customers utilize targeted sales
advertising campaigns and the strength of the U.S. economy, each of which impact demand for Standard Mail. Similar to
First-Class Mail, Standard Mail has experienced declines in volume due to the continued migration toward electronic
communication, although this trend has been leveling off in recent years. While volume decreased slightly during 2015, the
utilization of Standard Mail by our commercial customers has proven to be a resilient marketing channel, and its value to U.S.
businesses is increasing due to better data and technology integration.
Standard Mail generated approximately 52% of the total volume, but represented approximately 26% of operating revenue
for each of the three years ended September 30, 2015, 2014 and 2013. The increase in our Standard Mail revenue compared
to a reduction in volume over the past two years was primarily due to the exigent surcharge implemented in January 2014.
The incremental revenue for Standard Mail generated from the exigent price increase was an estimated $728 million and $482
million for the years ended September 30, 2015, and 2014, respectively. Standard Mail revenue increased in 2013 primarily
due to an increase in political mail volume.
Shipping and Packages
Shipping and Packages are predominantly Competitive services, which can be priced to reflect current market conditions, and
include Priority Mail and Priority Mail Express as well as business-oriented services such as Parcel Select and Parcel Return.
First-Class Parcels and certain other package delivery services are part of Shipping and Packages but are considered Market-
Dominant services and are therefore subject to price caps.