The Future Of Packages Jim Cochrane Manager Package

“The Future Of Packages” Jim Cochrane Manager, Package Services 1

Agenda • Market Trends • The New Law • Re-Designing Products • Transformation Strategies 2

Market Update ► Market is generally soft both domestically and internationally “It seems to us that the economy is headed for a soft landing” — Rosalind Wells, Chief Economist for the Retail Federation “We anticipate another good year despite a slowing U. S. economy, " — UPS' Chief Financial Officer Scott Davis. “The outlook among the parcel carriers is that domestic economic growth is slowing in the first half of 2007” 3 — William Greene, Financial Analyst for Morgan Stanley

Market Update ►Highest Published Increases In Over 10 Years ►Lightweight And Residential Continues To get Hit Heavier Than Published Rate Increase ►Subtle But Significant Changes In Discount Methodology ►Surcharges, New Ones And How They Are Enforced Continues To Drive Revenue ►Elimination Of On-Demand Rates 4 ►Adjusted Net Minimum

Market Update B 2 C Shipments On The Rise 5

Market Update What’s Fueling The Growth? ►B 2 B Is Stagnant ►As Noted - B 2 C Is Growing ►Packages Are Getting “Lighter” ►Online Retail Growth Is Replacing Manufacturing Segment Decline 6

Market Update ►Over 70% Of Packages Travel Less Than 700 Miles ►Significant Shift From Air To Ground ►Accessorial Surcharges Are A Strategy To Generate Revenue As Well As Yield ØIt Also Allows Our Competitors To Suppress Their Actual Rate Increases 7

The Right Products & Features Total Express Mail Volume FY 2002 8 2003 2004 2005 2006 2007

Market Update Total Priority Mail Volume FY 2002 9 2003 2004 2005 2006 2007

The Right Products & Features Total Package Services Volume FY 2002 10 2003 2004 2005 2006 2007

Market Update Customer Buying Criteria ► Service ► Convenience ► Price ► Visibility Segment Service Convenience Price Visibility National/Strategic 1 A 4 1 3 Premier/ Large 1 A 3 1 4 Consumer/SMBS 1 A 1 4 3 11

Market Update Reasons Shippers Change Carriers * Morgan Stanley/ Parcel 2006 Annual Best Practices Survey 12

Market Update Shippers Rated Carriers Less Favorably Biggest Complaint About Primary Carrier * 1 Pricing 2 Surcharges 3 On-Time Delivery 4 In-Transit Damage 5 Difficulty Working With The Carrier 13 * Morgan Stanley/ Parcel 2006 Annual Best Practices Survey

Market Update In Addition To Base Rate Increases, Competitors Continue To Add And Raise Rates On Surcharges Calendar Year Approximate Percent Change In Competitor’s Total Average Surcharge Amounts 2003/2002 2004/2003 2005/2004 2006/2005 Increase In Reported Number of Competitor’s Surcharges 2. 48% 18. 94% 14. 87% 15. 46% 1 3 7 3 3 2007/2006* 19. 34% 4 2007/2002 109. 29% 20 Surcharges Are Intended To Increase Package Contribution - They Are Rarely Discounted Note: The table above does not include fuel surcharges. 1 Based on Competitor’s accessorial charges published before each rate change. 14 * Estimate

Competitive Prices Competitor’s Rate Increases 2002 - 2007 Published Actual Commercial Actual Residential YEAR Increase 1 - 5 lbs. 2002 3. 50% 3. 90% 4. 08% 2003 3. 90% 4. 67% 4. 64% 2004 1. 90% 1. 91% 6. 06% 2005 2. 90% 4. 71% 5. 80% 2006 3. 90% 4. 57% 7. 57% 2007 4. 9% 5. 50% 5. 56% TOTAL 22. 89% 28. 02% 37. 85% AVERAGE 3. 82% 4. 67% 6. 31% 15

Competitive Prices Net Minimums Reduce Discount & Drive Up Cost 2007 Competitor Ground Commercial with 20% Discount - Actual Discounts Wgt Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone 7 Zone 8 1 0% 2% 5% 9% 13% 15% 17% 2 1% 7% 15% 17% 20% 20% 3 2% 11% 19% 20% 20% 4 5% 14% 20% 20% 20% 5 11% 15% 20% 20% 20% 16

Competitive Prices 2006 Priority Mail Vs 2007 Competitor’s Ground Residential Weight/ Zone L, 1, 2 3 4 5 6 7 8 Flat $ (2. 00) $ (2. 10) $ (2. 23) $ (2. 41) $ (2. 65) $ (2. 73) $ (2. 84) 1 $ (2. 00) $ (2. 10) $ (2. 23) $ (2. 41) $ (2. 65) $ (2. 73) $ (2. 84) 2 $ (1. 90) $ (2. 15) $ (2. 00) $ (1. 73) $ (1. 95) $ (1. 68) $ (1. 65) 3 $ (1. 14) $ (1. 56) $ (0. 65) $ (0. 01) $ (0. 06) $ 0. 45 $ 0. 66 4 $ (0. 65) $ (1. 13) $ 0. 11 $ 0. 93 $ 1. 01 $ 1. 80 $ 2. 14 5 $ (0. 40) $ (0. 66) $ 0. 85 $ 1. 97 $ 2. 18 $ 3. 12 $ 3. 63 6 $ 0. 03 $ (0. 37) $ 1. 66 $ 2. 44 $ 2. 18 $ 3. 15 $ 3. 53 7 $ 0. 26 $ (0. 02) $ 2. 52 $ 3. 02 $ 2. 94 $ 4. 25 $ 5. 04 8 $ 0. 66 $ 0. 40 $ 3. 36 $ 3. 68 $ 3. 71 $ 5. 20 $ 6. 30 9 $ 1. 11 $ 0. 85 $ 4. 24 $ 4. 31 $ 4. 53 $ 6. 10 $ 7. 61 10 $ 1. 42 $ 1. 30 $ 5. 03 $ 4. 97 $ 5. 38 $ 6. 89 $ 8. 80 11 $ 1. 83 $ 1. 64 $ 5. 67 $ 5. 60 $ 6. 26 $ 7. 59 $ 9. 92 12 $ 2. 22 $ 1. 99 $ 6. 27 $ 6. 21 $ 7. 16 $ 8. 29 $ 10. 97 13 $ 2. 57 $ 2. 34 $ 6. 91 $ 6. 90 $ 8. 02 $ 9. 03 $ 12. 04 14 $ 3. 00 $ 2. 70 $ 7. 52 $ 7. 48 $ 8. 69 $ 9. 69 $ 13. 09 15 $ 3. 39 $ 3. 04 $ 8. 15 $ 8. 16 $ 9. 42 $ 10. 38 $ 14. 22 3. 50% $1. 85 17 FUEL SURCHARGE INCLUDED RESIDENTIAL SURCHARGE INCLUDED / NO DISCOUNT USPS Rate Advantage Competitors Rate Advantage of $1. 00 or Less

Competitive Prices 2007 Priority Mail Vs 2007 Competitor’s Ground Residential Weight/ Zone L, 1, 2 3 4 5 6 7 8 Flat $ (1. 40) $ (1. 50) $ (1. 63) $ (1. 81) $ (2. 05) $ (2. 13) $ (2. 24) 1 $ (1. 40) $ (1. 50) $ (1. 63) $ (1. 81) $ (2. 05) $ (2. 13) $ (2. 24) 2 $ (1. 45) $ (1. 30) $ (1. 40) $ (0. 73) $ (0. 69) $ (0. 53) $ (0. 40) 3 $ (0. 99) $ (0. 66) $ (0. 50) $ 0. 89 $ 1. 19 $ 1. 55 $ 1. 81 4 $ (0. 35) $ 0. 17 $ 0. 56 $ 2. 43 $ 3. 06 $ 3. 55 $ 4. 09 5 $ (0. 00) $ 0. 79 $ 1. 50 $ 3. 77 $ 4. 68 $ 5. 37 $ 6. 13 6 $ 0. 48 $ 1. 23 $ 2. 56 $ 4. 94 $ 4. 68 $ 6. 00 $ 6. 63 7 $ 0. 76 $ 1. 68 $ 3. 47 $ 5. 72 $ 5. 69 $ 7. 40 $ 8. 54 8 $ 1. 01 $ 2. 25 $ 4. 26 $ 6. 53 $ 6. 71 $ 8. 65 $ 10. 25 9 $ 1. 26 $ 2. 85 $ 4. 69 $ 7. 36 $ 7. 78 $ 9. 85 $ 12. 01 10 $ 1. 42 $ 3. 40 $ 5. 13 $ 8. 22 $ 8. 88 $ 10. 99 $ 12. 40 11 $ 1. 58 $ 3. 89 $ 5. 62 $ 9. 05 $ 10. 06 $ 11. 14 $ 12. 72 12 $ 1. 77 $ 4. 34 $ 6. 02 $ 9. 66 $ 11. 26 $ 11. 34 $ 13. 07 13 $ 1. 97 $ 4. 69 $ 6. 51 $ 10. 30 $ 11. 72 $ 11. 63 $ 13. 19 14 $ 2. 20 $ 5. 00 $ 6. 97 $ 10. 98 $ 11. 99 $ 12. 39 $ 13. 74 15 $ 2. 39 $ 5. 34 $ 7. 45 $ 11. 21 $ 12. 07 $ 11. 98 $ 13. 67 3. 50% $1. 85 18 FUEL SURCHARGE INCLUDED RESIDENTIAL SURCHARGE INCLUDED / NO DISCOUNT USPS Rate Advantage Competitors Rate Advantage of $1. 00 or Less

The New Law & Package Business 19

The New Law & Package Business Two Product Categories Market-Dominant – 89% Competitive – 11% § First-Class Mail § Priority Mail § Periodicals § Expedited Mail § Standard Mail § Single-Piece Parcel Post § Media Mail § Bulk Parcel Post § Bulk International Mail § Bound Printed Matter § Library Mail § Special Services § Single-Piece International 20 FY 2005 Revenues

The New Law & Package Business Pricing- Market Dominant Products ►Future Price Increases Tied To Consumer Price Index (CPI) By Class ►USPS To File With PRC 45 Days Before New prices Become Effective Implications: ►Annual, predictable Increases 21 ►Productivity Improvements Are critical, Since Costs Like Fuel And Health Benefits May Rise At Rates Above CPI

The New Law & Package Business Pricing- Competitive Products ►New World- Allows The Postal Service To Compete Fairly In The Market Place. ØMust Cover Costs ØPRC Decides Cost Coverage & target Contribution To USPS ►Governors Set Prices ►Implied Income Tax To Postal Service MD Fund Implication: 22 Ability To Respond To The Marketplace By Creating Products And Pricing That Better Meet Customer Needs.

Re-Designing Products 23

The Right Products & Features Japan Shipping Options – 3 lbs. Services (today) GXG (Doc) GXG (Non-Doc) Global Express Mail Airmail Parcel Post Economy Parcel Post Global Priority Mail Airmail Letter Post 24 Economy Letter Post Range (Days) 2 -3 3 -5 4 -10 28 -42 4 -6 4 -7 28 -42 Weight Up to 70 lbs 5 to 70 lbs Up to 4 lbs 1 lb to 4 lbs Price Features $55. 75 Guaranteed Track and Trace Insurance - $100. 00 $61. 25 Guaranteed Track and Trace Insurance - $100. 00 $31. 15 Guaranteed – 5 Countries Tracking (major countries) Insurance $100. 00 $25. 80 Indemnity up to $270. 00 Insurance available Limited Visibility $24. 50 Indemnity up to $270. 00 Insurance available No Visibility $23. 25 <24 inches No Insurance No Visibility $21. 40 < 24” No Insurance No Visibility $9. 55 < 24” No Insurance No Visibility

The Right Products & Features Product Enhancements Old Services Today Global Express Guaranteed (doc) Global Express Guaranteed (non-doc) Global Express Mail Global Express Guaranteed Express Mail International Airmail Parcel Post Economy Parcel Post Global Priority Mail Airmail Letter Post Economy Letter Post 25 Priority Mail International First Class Mail International

The Right Products & Features Simple, Relevant Product Offering ► Leverage Domestic Supplies ► New Flat Rates 26 Ø Express Mail International Flat Rate Envelope Ø Priority Mail International Flat Rate Boxes Picture of new boxes

The Right Products & Features Simple Relevant Product Offering Service Economy Parcel Post Economy Publishers Economy Books and Sheets FY 2005 Revenue $80 M $18 M $1. 9 M FY 2005 Volume Strategy (Migration Flow) 3 M Eliminate Migrate to Air Parcel Post 14 M Eliminate Migrate to ISAL or Air Letter Post 493 K Eliminate Migrate to ISAL or Air Letter Post Economy Letter Post $23 M 4 M Eliminate Migrate to air letter post Global Priority Mail and Air Surface Lift Economy Registered Service $225 K 30 K Migrate to air registered service $3 K 1 K Eliminate Recorded Delivery Migrate to Air Letter Post 27 Aerogrammes $174 K 246 K

The Right Products & Features Packaging To Add Value ►Flat Rate Box Ø$577 Million Since Launch Ø$227 Million In Sales FY 07 ►Flat Rate Prepaid Envelope Ø Growing Adoption ØOver $34 Million Since Launch ►Priority Mail Shoebox ØGrowing Mid-Market Segment Ø Regular And e. Bay Versions 28

Customized & Co-Branded Packaging New Parameters Are Being Set: ►Customized Packaging- Was $500, 000 Will Be lowered To $250, 000 ►Co-Branded Packaging- Was $500, 000 Will Be Lowered To $250, 000 Minimum Acceptance Amounts For Co-Branding Any Of The Standard Priority Mail and Express Mail Products Example: Flat Rate Box #2 Minimum Quantity Would Be 12, 000 Boxes Equivalent To Around 8 Pallets 29

The Right Products & Features ►The Last Major Change Was in 1995 ØChanged the Eagle on the Logo Ø 4 Color Process to 2 Colors ►We’ve Changed ØFresher, Cleaner Look ØDual Use: Domestic and International ØReduced Supply Chain Management Costs ØCertified Cradle to Cradle 30

The Right Products & Features ►Significant Steps Were Taken To Improve Environmental Characteristics Ø Worked with Vendors to Analyze our Packaging Composition Ø Changed Inks, Chemicals and Adhesives Used in Manufacturing Ø Redesign for Simplicity and to Minimize Ink Ø Reduced Label Dependence 31 Ø Significantly Reduced Toxins, with No Increase in Cost.

The Right Products & Features Earned Cradle to Cradle Certification ►Materials Earned Cradle to Cradle Certification for Eco-effectiveness ►First And Only Firm to Receive This Endorsement for Packaging ►Packaging to Feature Cradle to Cradle Logo 32

The Right Products & Features Old Packaging Design 33 New Packaging Design

The Right Products & Features Old Packaging Design 34 New Packaging Design

Transformation Strategies 35

The Right Products & Features Customized & Co-Branded Packaging New Parameters Were Set: ►Customized Packaging - Was $500, 000 Will Be lowered To $250, 000 ►Co-Branded Packaging - Was $500, 000 Will Be Lowered To $250, 000 Minimum Acceptance Amounts For Co-Branding Any Of The Standard Priority Mail and Express Mail Products Example: Flat Rate Box #2 Minimum Quantity Would Be 12, 000 Boxes Equivalent To Around 8 Pallets 36

Improve Convenience Millions Revenue Growth Online Postage 37

Improve Convenience Carrier Pickup Volume 3. 7 Million O O AP 38 P /F AN SC

Improve Convenience Shipment Confirmation Acceptance Notice ONE Barcode Is Scanned for All Packages 39

Improve Convenience E-VS Update ► 9 Live Shippers Ø 18, 555 Manifests Submitted YTD ► 61 M Parcels ►$74. 8 M Revenue ►Extended Mandatory Implementation Date ►Technical Support 40

Improve Customer Service Time In Transit ►Priority Mail & Express Mail Ø We Know That World Class Service Is Essential Ø Service Scores Are The Highest They Have Ever Been ►Parcel Select Ø Service Is Already At World Class Levels. Ø DHL/UPS/Fed. Ex Last Year Trusted USPS To Deliver Over 300 M Packages 41

Improve Visibility Package Visibility Project - Goals ►One Intelligent Bar Code On Every Package ►End To End Visibility On Every Package ►Bar Codes That Tell Us More About The Package And Shipper ►Intelligence From Bar Codes Is Used To Manage And Grow Our Business 42

Intelligence/Visibility Where Are We? ► Intelligent Mail Device (IMD) § 210, 000 Of 303, 000 Deployed Through April 07 Full Deployment Sept 07 ► APPS § Completed Deployment Of 75 Machines § Lifting Images Now – In PTS § 60% Of PM Goes Across APPS ► SPBS § 44 Retrofitted With Barcode Scanners § Total Of 226 Will Be Installed By End Of FY 07 ► 43 Surface Visibility Will Nest These Events in PTS

Improve Visibility Make It Intelligent Container Load Trailer Load Surface Visibility Trailer Arrive Trailer Depart Data Collection Trailer Unload

We Will Continue: ►To Design ►To Enhance ►To Research ►To Educate ►To Create A Marketplace Position That Is Compelling And Meets Customer Needs 45