The year 2001 proved even more challenging for the Postal Service than had been forecast in the Annual Performance Plan. The plan called for improving our service levels, our understanding of employee issues and our overall business performance. It anticipated a net loss of $480 million and depended upon significant cost control initiatives to keep the loss to a minimum. This forecasted net loss was based on our expectation of a rate increase, slightly lower mail volume growth and rising labor expenses. Instead, the Postal Service was confronted with a softening economy and reduction in mail volumes, the Postal Rate Commission's decision to reduce and delay our rate request, unusually high inflationary pressure on our labor costs and, an increase in our fixed costs caused by the expansion of our delivery network to serve more than 1.7 million new addresses. Combined, these factors produced a loss far greater than planned, a loss that could have reached $3 billion had it not been for the success of intensified cost management efforts. In response to these unforeseen revenue reductions and cost increases, management implemented even more aggressive productivity improvements, reduced personnel, and, at the Governors’ request, called for a freeze on capital spending for new facilities. These focused efforts would have held the 2001 loss to just under $1.4 billion had it not been for the events of September 11. Between September 11 and our fiscal year end of September 30, we saw a further downturn in revenue of $200 million and increased costs of approximately $100 million. Thus, while we successfully reduced expenses and maintained consistently high service levels, we ended the year with a $1.7 billion loss.

    1. Business Performance
Because postage rates are set through a lengthy rate case process, productivity improvement programs are management’s best avenue to address short term revenue variances. This is why four out of our five Voice of the Business goals are productivity goals. In 2001, as the economy softened and mail volumes and revenue declined, we effectively restrained resource usage and realized a gain of 1.3 percent in USPS Total Factor Productivity (TFP) that was equivalent to almost $900 million in expense reductions. Our two-year cumulative TFP growth of 3.7percent is equivalent to an expense reduction of $2.5 billion. Not since 1993 have we achieved TFP growth of this magnitude. (Chapter 3 reports TFP performance in detail.)

Nonetheless, the cost efficiencies gained through these productivity programs were outstripped by structural and inflationary pressures on our revenue and costs. Although we reduced work hours by 2.3 percent, using 23.1 million fewer workhours than in 2000, our labor cost per work hour increased by 5.8 percent. That was more than double the Consumer Price Index increase of 2.5 percent in 2001 and exceeded the national Employment Cost Index increase of 3.7 percent.

To meet the challenges of declining revenue and increasing costs, the Postal Service enacted two separate modifications of our capital commitments goal. The first modification was made by Management after its review of 2000 results and first quarter 2001 financial indicators. The capital commitment target of $3.6 billion was reduced to $2.6 billion at that time and was so reported in the 2000 Comprehensive Statement to Congress. As it became apparent that revenue and cash flow from operations would not support the amended plan, we continued the freeze exception process and the capital commitments goal was reduced further to $1.6 billion.