US Postal Service 2006 Annual Report Download - page 39

2006 Annual Report United States Postal Service | 37
Despite the recent slowdown in the housing market, long-term trends
for housing can be expected to track long-term trends in population. We
expect the number of delivery points to continue to grow in the future.
Household growth will translate into a continuing expansion of our delivery
network. As the population and delivery network continue to grow, we
expect First-Class Mail volume to continue to decline. This combination of
trends will continue to challenge us to build all other postal business and
increase productivity to continue to finance the nation’s universal delivery
system.
Impact of Inflation and Changing Prices
The Postal Reorganization Act requires that we provide universal mail
service and set postal rates and fees so that total estimated revenues of
our organization equal our total estimated costs. Our primary costs are
for labor and the related cost of benefits, transportation, utilities, material
costs, and the cost of maintaining, replacing and expanding our retail and
distribution network.
The back-to-back rate increases in 2006 and 2007 have two different
underlying causes. The January 2006 rate increase was designed only
to cover escrow related provisions of P.L.108-18. The 2007 rate increase
will be the first rate increase associated with covering postal operating
expense increases since 2002. Despite the fact that $1.1 billion of
cost reductions are planned for 2007, these productivity improvements
alone will not offset the continuing upward cost pressures resulting from
resource cost inflation, the continuous expansion of our delivery network,
and the loss of First-Class Mail volume and its high level of contribution
to institutional costs. Further rate increases will be necessary to fund our
expense increases.
Expense Growth
We estimate that total expenses in 2007 will be $73.6 billion, a 2.3%
increase over our 2006 expenses of $71.9 billion. We expect personnel
costs and our cost per workhour to increase. This increase will be driven
primarily by cost-of-living pay adjustments and potential contractual pay
increases that may be incurred through collective bargaining with our
unions.
We expect non-personnel expenses, excluding transportation and
interest expenses, to increase approximately $242 million, or 2.6%.
Transportation expenses are expected to grow $214 million, or 3.5% over
2006 due to higher fuel costs.
The 2007 plan reduces workhours by 40 million hours below the 2006
total. Our planned workhour reduction target is equal to approximately
20,000 full-time equivalent employees. This will be the seventh out of
the last eight years in which we have reduced workhours. The workhour
reductions are a product of process improvements, automation through
capital investment programs and a projected volume decline.
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 financial
instruments for speculative purposes.
Revenue
Revenue is a function of the volume and mix of mail. As noted, mail
volume trends have resulted in a lower revenue-per-piece mix. If this
accelerates beyond what has been projected it will have a more significant
effect on revenue.
Economic Risk
The demand for all postal services is heavily influenced by changes in
the economy. The widely expected slowdown in the economy will impact
nearly every class of mail negatively in the coming year. Growth in retail
sales, investment spending and employment, all drivers of mail demand, is
expected to decline in 2007 and may further reduce forecasted results.
General Inflation Risk
Each of our labor contracts with our largest unions currently includes
provisions granting COLAs. These agreements expire on November 20,
2006. Under the current contracts, COLA adjustments are generally
granted semiannually and are linked to increases in the consumer price
index (CPI). Non-bargaining employees do not receive COLAs, but are
eligible for pay for performance increases. Because employee compensa-
tion represents a significant portion of our annual expenses, and COLAs
may be a component of future labor contracts, 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.
Fuel Price Risk
Fuel prices are a significant part of our expenses. We are exposed to
changes in commodity prices primarily for diesel fuel, unleaded gasoline,
aircraft fuel for transportation of the mails and natural gas for heating
facilities. A 1% change in fuel and natural gas costs would result in more
than a $48 million increase in our expenses on average. We currently do
not use derivative commodity instruments to manage the risk of changes
in energy prices.
Financial Section Part II