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

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

2. Outline • Background • Current Overview • Transformation Plan

3. 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.”

4. 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.

5. 3,400 New Carrier Routes 4,800 New Carriers 80 New Delivery Facilities at $5.0 Million Each Universal Delivery Service

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

7. 400 First-Class Postage 350 300 CPI 250 Cumulative % Change 200 150 100 50 0 May71 Mar74 Dec75 May78 Mar81 Nov81 Feb85 Apr88 Feb91 Jan95 Jan99 Jan01 Jun02 8¢ 10¢ 13¢ 15¢ 18¢ 20¢ 22¢ 25¢ 29¢ 32¢ 33¢ 34¢ 37¢ CPI vs. First-Class Postage Rates

8. Post Office Department 1942-1971 United States Postal Service 1972-2002 Financial Results (Cumulative) Revenue $90 $1,108 Expense 109 1,114 Deficit ($6) ($19) Revenue/Expense 82.6% 99.5% Post Office DepartmentandPostal Service $Billions

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

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

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

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

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

14. FY 2001 Expenses 57% $38B $38B

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

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

17. First-Class Single Piece Letters (Billions Pieces)

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

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

20. Standard Mail Volume Billions of Pieces FY

21. 14.7% 17.3% 19.3% (2.3%) Internet Advertising Radio & Television/Cable Newspapers & Magazines Other Standard Mail Volume Market Share 1972- 2002 Direct Mail Source: McCann-Erickson WorldGroup

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

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

24. Financial Effect Volume Necessary to Replace Contribution From $1 Billion of First-Class Mail Revenue Volume Increase % Growth 8% 26% 70% 465% Standard Mail or Priority Mail or Express Mail or Parcel Post 7.1 B 313 M 50 M 1.5 B

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

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

27. 1970 Postal Reorganization • Capital Investment Financing • Self-Directed Research • Longer Term Planning Strategy: Achieve Lowest Combined Cost Postal Operations 1970’s 1980’s 2000’s 1990’s • Mechanized Mail Processing • Automated Letter Distribution • Automated Flat and Parcel Processing • “Network Optimization” • Delivery Point Sequencing

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

29. 33% 33% 30% 25% 18% 16% 15% 15% 10% 10% 3% First-Class First Ounce Rate Increase Recessions Average Rate Increase – All Classes – 2001 and 2002 increases implemented in 3 steps Rate Increases & Economic Conditions Rate Increases and Economic Conditions 40% 35% 30% 25% 20% 15% 10% 5% 0% 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

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

31. M M M M M Financial Stress - Equity

32. TRANSFORMATION PLAN

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

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

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

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

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

38. 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

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