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3. The Business Environment
The business and operating environment of the Postal Service changed dramatically in 2001.
Three major challenges – the declining economy, terrorism and growing competition - disrupted postal operations and planning for 2002.
a. Declining Economy
Mail volume has historically grown with the U.S. economy, and the Postal Service has been able to depend on growing revenues to support the increased cost of extending service to new businesses and households. However, the decline of the U.S. economy has reduced revenue from mail volume while the number of new deliveries continues to increase.
The Postal Service is limited in its ability to reduce costs in the short-term in response to the severe economic downturn. For example, the Postal Service is restricted from closing uneconomic post offices. Instead, the statutory requirement is for the Postal Service to raise rates to cover revenue shortfalls. However, in the current economy, raising prices is not necessarily an effective solution since business mailers may reduce their mailings or seek alternatives to the Postal Service instead of accepting higher costs.
On September 24, 2001, the Postal Service filed a request with the Postal Rate Commission for a Recommended Decision on general increases in rates and fees. The Postal Service proposed an average overall rate increase of 8.7 percent that would generate an additional $4.3 billion dollars annually. First-Class Mail rates were proposed to increase by an average of 8.2 percent, including a 3-cent increase in the price of a First-Class stamp, to 37 cents.
The September 11 terrorist attacks and ensuing anthrax mailings occurred shortly after the Postal Service’s proposals were approved for filing. These events combined with a slowing economy to substantially increase the Postal Service’s need for future revenue. As a result, the Chairman of the Postal Rate Commission suggested that the Postal Service and the other participants attempt to settle the case. After protracted negotiations, 56 out of 62 parties, with only one party opposing, reached a settlement agreement that would enable the Postal Service to implement new rates three months sooner than if the case had been fully litigated. After limited further proceedings, the Commission must consider the settlement agreement and issue a Recommended Decision to the Postal Service’s Board of Governors, who must approve it before the increases can be implemented. If approved, the increases could take effect June 30, 2002.
b. Terrorism and Anthrax
The Postal Service was severely affected by the costs of the terrorist attacks on the United States.
Mail volume and revenue growth, which were already weak due to the economy, plummeted after September 11 and have not shown signs of significant recovery.
In addition to the financial pressure resulting from lost revenue, the use of the mail for anthrax attacks resulted in unexpected and unavoidable new costs. The cost, including capital investments, of responding to these attacks is currently estimated at $1 billion in FY 2002. The impact of the attacks will continue to affect our finances throughout FY 2002 and beyond. The actual cost and timing of these costs will depend on the review and selection of technologies to detect, contain and sanitize biohazards in the mail.
The Postal Service has provided a separate detailed report on its Emergency Preparedness Plan to Congress. This plan will further define the near-term and long-term costs related to protecting our employees, customers and the mails from exposure to biohazardous material.
Our goal of providing a safe and secure workplace was affected. Two Postal Service employees died as a result of anthrax inhalation, and others were affected. Some postal employees also suffered from side effects of medication. Although the Postal Service, management associations and unions worked closely together, communication difficulties and conflicting expert opinion on this complex subject had an impact on the employee satisfaction index, one of the key performance measures.
Service performance also was affected. On September 11, all flights were grounded. It took some time before flight operations were resumed. Scheduled airlines, already troubled financially, significantly reduced flights and changed operating schedules. As a result, mail service was disrupted, and the Postal Service had to seek extraordinary alternative transportation to restore service. In addition, FAA regulations prohibited mail pieces weighing over 16 ounces on most scheduled airlines as a security measure, further disrupting postal operating schedules. Furthermore, many areas have been affected by the closing of processing centers as a result of anthrax contamination, and facilities were disrupted by testing for anthrax. Despite these problems, service performance in most areas has returned to previous high levels.
c. Competition
The Postal Service provides services to customers in markets where the customers have competitive alternatives and technological substitutes to traditional mail services.4 While total mail volume has continued to grow over the last decade, the rate of growth – especially for the critical First–Class Mail category5 – has been declining.
Direct competitors in the package market include firms such as UPS and FedEx, as well as privatized foreign postal services such as TPG and Deutsche Post. Indirect technological substitutes for First–Class Mail include facsimile, e-mail, direct deposit/debit and electronic bill presentment and payment. Advertisers have a wide variety of choices, including direct mail. More than 90 percent of mail volume is subject to direct competition or indirect substitution.
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TABLE 4.3 EXTRAORDINARY EXPENSES |
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