US Postal Service 2006 Annual Report Download - page 38

36 | 2006 Annual Report United States Postal Service
Additionally, in 2006, we implemented a new transportation strategy,
which balances the use of air and surface transportation to reduce cost
and improve service performance. We began implementing a national
preferential surface transportation network by activating surface transfer
centers (STC) in Salt Lake City, Phoenix and Memphis. The STC network
reduces cost by shifting mail from costly air transportation to less costly
more reliable surface transportation. We have extended our contracts with
select commercial air carriers, United Parcel Service and Federal Express
enabling improved service at competitive rates.
We will continue to invest in new equipment, consolidate operations
and optimize transportation to keep our network service responsive and
affordable.
Global Business
In 2006, we created the Global Business organization to manage our
worldwide trade to take advantage of opening markets.
Outlook
The economy in 2006 showed trouble signs that are expected to carry
forward to 2007 and adversely affect mail volume and revenue growth
in the year ahead. We began 2006 with the Hurricane Katrina recovery
which led to a spike in energy prices. This spike receded but was eventu-
ally followed by a long run up in prices through August 2006 when the
world price of oil reached record levels of just over $78 per barrel. While
energy prices were rising, housing sales, particularly on the east and west
coast were dropping after interest rates increased.
The current omnibus rate case includes a request for an increase in rates
of approximately 8.5%. The Postal Rate Commission is expected to issue
its recommendations on the request in late 2006 or early 2007. We have
assumed for planning purposes that the new rates will be accepted by the
Board of Governors and implemented in early May 2007. Any delay will
result in missed revenue opportunities of approximately $450 million per
month to us.
The demand for all postal products will be reduced in 2007 by three
factors. First, the widely expected slowdown in the economy will impact
nearly every class of mail negatively. Growth in retail sales, investment
spending and employment, all drivers of mail demand, is expected to
decline in 2007. Second, in May, the new rate increase will further
suppress demand for mailing services. Third, the widespread availability
and ease of use of electronic alternatives to mail will continue to depress
First-Class Mail volume.
We project Standard Mail volume growth to plateau at 1.9%, despite
a rebound in Standard Regular Rate and Nonprofit Enhanced Carrier
Route Mail volume. Standard Regular Rate Mail volume should increase
approximately 4.6%. Nonprofit Enhanced Carrier Route Mail will benefit
from additional election related volume. In quarter four of 2007, the
volume in all subclasses of Standard Mail is expected to decline by 2.2%
as the presumed May rate increase takes effect.
Although the demand for First-Class Mail is not particularly price sensitive,
it is not immune from rate effects. Therefore the back-to-back rate
increases are expected to adversely affect volume growth. First-Class Mail
single-piece letters are expected to continue to decline due to electronic
diversion and rate increases. Workshare letter volume is expected to
decline 1.5%, for the first time since 2003. Workshare letters are affected
by electronic diversion but to a lesser extent than single-piece letters.
However, the slowdown in retail sales will contribute to the softness in
workshare letter demand.
In both 2005 and 2006 Priority Mail volume had rebounded from several
years of declines. Priority Mail competes in a very competitive market
and is considerably more price sensitive than First-Class Mail. We expect
Priority Mail volume to be affected by the back-to-back rate increases and
decline by 3.9% in 2007. Express Mail has higher price sensitivity than
Priority Mail and is expected to decrease by 7.8% in 2007. The demand
for these two products is dependent on competitors’ prices that include
fuel surcharges. Therefore uncertainty with regard to future fuel prices
contributes an added degree of uncertainty to the projection of Priority
Mail and Express Mail volume.
Package Services volume is expected to decline 13 million pieces or
1.1% in 2007. Retail Parcel Post is expected to increase 1.2% but Parcel
Select is expected to decline 3.1% as retail Parcel Post is much less price
sensitive than Parcel Select. Projected Bound Printed Matter volume
increases of 1.3% are expected to be offset by an 8.1% volume loss in
Media and Library mail. Growing our business to exceed these forecasts is
a major priority in 2007.
Periodicals mail volume is projected to decline 2.7% in 2007. In addition to
being affected by the factors mentioned above, Periodicals mail is driven
by the changing reading habits of many Americans.
We project revenue to increase by $2.5 billion, or 3.4% to $75.3 billion in
2007. Most of this increase is due to the anticipated rate increase. Even
though mail volume will be lower, revenue will increase.
Network Growth
Historically, First-Class Mail volume and the growth in contribution it has
produced have financed the cost of operating and expanding our universal
delivery network. During the last several years however, the volume of
First-Class Mail has declined while the number of delivery points in our
network has continued to increase. Since its peak in 2001, First-Class
Mail volume has decreased by 6.1 billion pieces while our delivery network
has expanded through the addition of over 8 million new delivery points.
Furthermore, we operate a retail network anchored by almost 37,000 Post
Offices, stations, branches and contract units.
Delivering mail to individual delivery points six days a week is a major
part of our work. Each year, we add almost 2 million delivery points to
our network. We expect the number of delivery points to continue to grow
for the indefinite future as a result of population growth and continuing
demand for new housing.
Financial Section Part II