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BRIEFING

for the
PRESIDENT’S COMMISSION
on the
UNITED STATES POSTAL SERVICE

January 8, 2003

1
Outline

 Background
 Current Overview
 Transformation Plan

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Postal Reorganization Act of 1970

Universal Service Mandate:


Access and delivery to virtually everyone,
everywhere, everyday.

Statutory Requirement:
“ [The Postal Service] shall provide prompt,
reliable, and efficient services to patrons in all
areas and shall render postal services to all
communities.”

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Postal Reorganization Act of 1970

Universal Service Mandate:


Access and delivery to virtually everyone,
everywhere, everyday.

Business Model Premise:


Moderate volume growth and postage rate
increases at or below the economy’s rate of
inflation would finance universal service and
the ever-expanding delivery network.

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Universal Delivery Service

3,400 New Carrier


Routes

4,800
80 New Delivery New
Facilities at $5.0 Million Carrier
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1971 – 2002 Comparisons

1971 2002 %Change

Delivery Points (Millions) 81 139 72%


Volume (Billions) 87 203 133%
Employees (Thousands) 731 854 17%

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CPI vs. First-Class Postage Rates
400

350
Cumulative % Change

First-Class Postage
300
CPI
250

200

150

100

50

0
May71 Mar74 Dec75 May78Mar81Nov81 Feb85 Apr88 Feb91Jan95 Jan99 Jan01 Jun02
8¢ 10¢ 13¢ 15¢ 18¢ 20¢ 22¢ 25¢ 29¢ 32¢ 33¢ 34¢ 37¢

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Post Office Department and Postal Service
Post Office United States
Financial Results Department Postal Service
(Cumulative) 1942-1971 1972-2002
Revenue $90 $1,108

Expense 109 1,114

Deficit ($19) ($6)

Revenue/Expense 82.6% 99.5%

$Billions
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Summary Statistics

210 140
208 B
208 207B 139
206 139M 138
204 138M 137
202 B 203B
202 136
200 136M 135
198 197 B 134
134M
196 133M 133
194 132
792 K 798K 788 K
192 776 K 131
753K
190 130
1998 1999 2000 2001 2002
Career Complement
Mail Volume Delivery Points 9
Annual Net Margin
10%
9%
8%
7%
6%
5%
4%
3%
2% 0.9% 0.6%
1%
0%
­1% ­0.3%
­2% ­1.0%
­3%
­4% ­2.6%
­5%
1998 1999 2000 2001 2002
Net Margin = Net Income (or Loss) / Revenue
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Growth in Revenue Per Delivery Point

3.0%

1.9% 1.7%

0.5%

­0.7%
FY 1998 1999 2000 2001 2002
Rate Increase: 3% 15% 11
Revenue Composition - FY 2002
Priority 7%
Package Services 3%

First-Class
Standard 24%
55% (Mostly Advertising)

Other 11%
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Expense Composition - FY 2002
Other 13%

Transportation 8%

Compensation/Benefits 79%
13
FY 2001 Expenses

43% 57%

"Fixed" $29B Volume Variable $38B


$38.4B
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“Fixed”vs Volume-Variable Costs FY 2001
FY 2001 Expenses

43% 57%

"Fixed" $29B Volume-Variable $38B


“Fixed” Costs include: Volume-Variable Costs Include:
- 38,000 Post Office, Station, and - Transportation
Branch Operations − Mail Distribution Work Hours
− Del. Rte. Coverage - 240,000 Delivery Rts. − Mail Containers
− 215,000 Vehicles − Fuel
− Retirement Costs − Retail Transactions
− Overhead − Delivery Carrier Prep in Office
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First-Class Mail
Major Contribution to “Fixed” Costs
Contribution to
Volume Revenue “Fixed” Costs

First- First- First-


Class Other Class Other Class
Other
50% 50% 54% 46% 66%
34%

FY 2001 16
First-Class Single Piece Letters

54.3
53.8
(Billions Pieces)

52.4

50.9

49.3

1998 1999 2000 2001 2002


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First-Class Mail-Sector Analysis
Source: Household Diary Study
1987
2001 52%

41%
37%

26%

13% 15%
9% 7%

Household to Household to Nonhousehold to Nonhousehold to


Household Nonhousehold Nonhousehold Household 18
Standard Mail Volume 1987 and 2001
90B
15B
60B
15 B
75 B
45 B

1987 2001
To Households To Nonhouseholds
19
Standard Mail Volume
90.1 89.9

87.2
Billions of Pieces

85.7

82.5

FY 1998 1999 2000 2001 2002

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Standard Mail Volume
Market Share 1972- 2002

14.7%
14.7% 17.3%
17.3% 19.3%
19.3% Direct Mail
Internet Advertising (2.3%)
24.6%
28.5%
32.1% Radio & Television/Cable

39.7%
34.2% 25.1% Newspapers & Magazines

21.0% 20.0% 21.2% Other

1972 1987 2002


Source: McCann-Erickson WorldGroup
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Package Services
Revenue Share FY 2001

Air Airborne All


10% Others
Ground All
Other
FedEx 4%
3%
12% USPS
6%
FedEx
USPS
36%
21%

UPS
78%
UPS
30%

Source: Colography Group


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First-Class Mail – FY 2001
Major Contribution to “Fixed” Costs
Contribution to
Volume Revenue “Fixed” Costs

First- First- First-


Class Other Class Other Class
Other
50% 50% 54% 46% 66%
34%

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Financial Effect
Volume Necessary to Replace Contribution
From $1 Billion of First-Class Mail Revenue
Volume
Increase % Growth
Standard Mail 7.1 B 8%

or Priority Mail 313 M 26%

or Express Mail 50 M 70%

or Parcel Post 1.5 B 465%

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Competition and Technology

First-Class Mail Standard Mail


•Business eMail •Print/Broadcast Media
•Electronic Bill Payment •Internet Advertising

Periodicals Packages
•Internet News Sources •No Longer the Only
Nationwide Package
•Lifestyle Changes Service

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Strategy: Achieve Lowest Combined Cost
Progression of Customer Worksharing Options

1970’s 1980’s 1990’s


•Presorted •Presorted •Presorted
Bundles Bundles Trays
•Prebarcode •Prebarcode
Pieces Pieces
•Dropship
$15 Billion Current
Annual Discounts

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Strategy: Achieve Lowest Combined Cost
Postal Operations
1970’s 1980’s 1990’s 2000’s
•Mechanized •Automated •Automated Flat •“Network
Mail Letter and Parcel Optimization”
Processing Distribution Processing

•Delivery Point
Sequencing
1970 Postal Reorganization
• Capital Investment
Financing
• Self-Directed Research
• Longer Term Planning
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Pricing Cycle

Five Months
Preparation
Ten Months
Rate Case Litigation
Three
Months
Governors’ Consideration

Implementation

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Rate Increasesand
Rate Increases & Economic Conditions
Economic Conditions
40%

35%
33% 33%
30% 30%

25% 25%

20%
18%
15% 15% 16% 15%

10% 10% 10%

5%
3%
0%
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71

84
85

First-Class First Ounce Rate Increase Recessions


Average Rate Increase – All Classes – 2001 and 2002 increases implemented in 3 steps
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Financial Stress

Debt $ 11 B
Other Liabilities
(Excluding CSRS) $ 19 B
Retiree Health
Benefits Obligation ($40 – 50 B)
Cumulative Losses
(Since 1971) $6B

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Financial Stress - Equity

­$447 M
­$646M
­$810 M

­$2,326 M

­$3,002 M

1998 1999 2000 2001 2002

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TRANSFORMATION PLAN

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Transformation Plan

 “Push the Envelope”

 Legislation – Short Term


– Public Policy Issues

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Transformation Plan

“Push the Envelope”

 Growth

 Efficiency

 Performance Based Culture

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Transformation Plan – Results to Date

Service

 Externally Measured

 Service At Record Levels

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Transformation Plan – Results to Date
Cumulative Work Hour Reductions
Work Hour Reductions
FY 2000 FY 2001 FY 2002

-11M
-23M
-34M

111 Million Work Hour Reduction -


Equivalent to 62,960 Full-Time Employees -77M

-111M
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Transformation Plan – Results to Date
Career Complement Reductions
FY 2000 FY 2001 FY 2002
AP 04

-10,533
-11,685

-22,218
-22,963

-45,181
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Transformation Plan - Results to Date

 First Ever Expense Reduction – $200 Million


Below 2001 Level
 Labor Contracts – In Place to Provide Stability

 Record Setting Safety Performance


 Negotiated Rate Settlement/Expedited
Implementation
 Delivered $1.5 Billion of Cost Savings
Goal - $5 Billion By 2006
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BRIEFING
for the
PRESIDENT’S COMMISSION
on the
UNITED STATES POSTAL SERVICE

January 8, 2003

39