BRIEFING for the PRESIDENT S COMMISSION on the UNITED

BRIEFING for the PRESIDENT’S COMMISSION on the UNITED STATES POSTAL SERVICE January 8, 2003 1

Outline § Background § Current Overview § Transformation Plan 2

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. ” 3

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. 4

Universal Delivery Service 3, 400 New Carrier Routes 80 New Delivery Facilities at $5. 0 Million Each 4, 800 New Carriers 5

1971 – 2002 Comparisons 1971 2002 %Change Delivery Points (Millions) 81 139 72% Volume (Billions) 87 203 133% Employees (Thousands) 731 854 17% 6

CPI vs. First-Class Postage Rates Cumulative % Change 400 350 First-Class Postage 300 CPI 250 200 150 100 50 0 May 71 Mar 74 Dec 75 May 78 Mar 81 Nov 81 Feb 85 Apr 88 Feb 91 Jan 95 Jan 99 Jan 01 Jun 02 8¢ 10¢ 13¢ 15¢ 18¢ 20¢ 22¢ 25¢ 29¢ 32¢ 33¢ 34¢ 37¢ 7

Post Office Department and Postal Service Financial Results (Cumulative) Post Office Department 1942 -1971 United States Postal Service 1972 -2002 Revenue $90 $1, 108 Expense 109 1, 114 Deficit ($19) ($6) Revenue/Expense 82. 6% 99. 5% $Billions 8

Summary Statistics B B M M K K K Career Complement Delivery Points 9

Annual Net Margin = Net Income (or Loss) / Revenue 10

Growth in Revenue Per Delivery Point FY Rate Increase: 3% 15% 11

Revenue Composition - FY 2002 Priority 7% Package Services 3% First-Class 55% Standard 24% (Mostly Advertising) Other 11% 12

Expense Composition - FY 2002 Other 13% Transportation 8% Compensation/Benefits 79% 13

FY 2001 Expenses 57% $38 B 14

“Fixed”vs Volume-Variable Costs FY 2001 Expenses 57% Volume-Variable $38 B Volume-Variable Costs Include: “Fixed” Costs include: - Transportation - 38, 000 Post Office, Station, and − Mail Distribution Work Hours Branch Operations − Del. Rte. Coverage - 240, 000 Delivery Rts. − Mail Containers − Fuel − 215, 000 Vehicles − Retail Transactions − Retirement Costs − Delivery Carrier Prep in Office − Overhead 15

First-Class Mail Major Contribution to “Fixed” Costs Volume Revenue First. Class Other 50% First. Class Other 54% 46% FY 2001 Contribution to “Fixed” Costs First. Class Other 66% 34% 16

(Billions Pieces) First-Class Single Piece Letters 17

First-Class Mail-Sector Analysis Source: Household Diary Study 1987 2001 Household to Nonhousehold to Nonhousehold Household 18

Standard Mail Volume 1987 and 2001 90 B B 60 B B 19

Billions of Pieces Standard Mail Volume FY 20

Standard Mail Volume Market Share 1972 - 2002 14. 7% 17. 3% 19. 3% Direct Mail Internet Advertising (2. 3%) Radio & Television/Cable Newspapers & Magazines Other Source: Mc. Cann-Erickson World. Group 21

Package Services Revenue Share FY 2001 Airborne 10% Ground Source: Colography Group 22

First-Class Mail – FY 2001 Major Contribution to “Fixed” Costs Volume Revenue First. Class Other 50% First. Class Other 54% 46% Contribution to “Fixed” Costs First. Class Other 66% 34% 23

Financial Effect Volume Necessary to Replace Contribution From $1 Billion of First-Class Mail Revenue Volume Increase % Growth 8% Standard Mail 7. 1 B or Priority Mail 313 M 26% or Express Mail 50 M 70% or Parcel Post 1. 5 B 465% 24

Competition and Technology First-Class Mail Standard Mail • Business e. Mail • Print/Broadcast Media • Electronic Bill Payment • Internet Advertising Periodicals • Internet News Sources • Lifestyle Changes Packages • No Longer the Only Nationwide Package Service 25

Strategy: Achieve Lowest Combined Cost Progression of Customer Worksharing Options 1970’s 1980’s 1990’s • Presorted Bundles • Presorted Trays • Prebarcode Pieces • Dropship $15 Billion Current Annual Discounts 26

Strategy: Achieve Lowest Combined Cost Postal Operations 1970’s 1980’s 1990’s 2000’s • Mechanized • 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 27

Pricing Cycle Five Months Preparation Ten Months Rate Case Litigation Three Months Governors’ Consideration Implementation 28

Rate. Increases and Economic Conditions Rate Increases & Economic Conditions 40% 35% 33% 30% 25% 20% 16% 15% 18% 10% 15% 10% 5% 3% 0% 75 74 73 72 71 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 90 19 89 19 88 19 87 19 86 19 85 19 84 19 83 19 82 19 81 19 80 19 79 19 78 19 77 19 76 19 19 19 First-Class First Ounce Rate Increase Recessions Average Rate Increase – All Classes – 2001 and 2002 increases implemented in 3 steps 29

Financial Stress Debt $ 11 B Other Liabilities (Excluding CSRS) $ 19 B Retiree Health Benefits Obligation ($40 – 50 B) Cumulative Losses (Since 1971) $6 B 30

Financial Stress - Equity M M M 31

TRANSFORMATION PLAN 32

Transformation Plan § “Push the Envelope” § Legislation – Short Term – Public Policy Issues 33

Transformation Plan “Push the Envelope” § Growth § Efficiency § Performance Based Culture 34

Transformation Plan – Results to Date Service § Externally Measured § Service At Record Levels 35

Transformation Plan – Results to Date Cumulative Work Hour Reductions -34 M 111 Million Work Hour Reduction Equivalent to 62, 960 Full-Time Employees -111 M 36

Transformation Plan – Results to Date Career Complement Reductions AP 04 -10, 533 -22, 218 -45, 181 37

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 38

BRIEFING for the PRESIDENT’S COMMISSION on the UNITED STATES POSTAL SERVICE January 8, 2003 39