1. GENERAL
It was the most challenging year the Postal Service ever faced. Following the terrorist attacks of September 11, 2001, the Postal Service had to reconfigure its nationwide transportation network, virtually overnight, to adjust to significant reductions in air transportation and stringent security limitations that affected what could be flown by commercial passenger aircraft. Large volumes of mail were shifted to ground transportation, including long-distance trucks and Amtrak. Our transportation alliance with FedEx, which was implemented only weeks before the beginning of the fiscal year, was critical to the air transportation of time-sensitive products, including Express Mail^® and Priority Mail^® packages. Added capacity on FedEx provided even more air transportation of mail beginning in January 2002.

Barely one month after the September 11 terrorist attacks, the Postal Service learned that anthrax had been sent through the mail. This resulted in the tragic deaths of two employees, with others becoming ill and the long-term closing of two mail processing facilities, one in Trenton, NJ, and the other in Washington, DC, pending decontamination.

The Postal Service acted quickly to provide medication to employees with potential anthrax exposure and made personal protective equipment — masks and gloves approved by the National Institutes of Occupational Safety and Health — available to all employees. Facility maintenance procedures were modified to limit the potential of further anthrax infection to employees. Information about the proper handling and disposition of suspicious mail was sent to every address in the United States.

When the Trenton and Washington processing plants were closed, mail left inside was delivered only after being successfully sanitized using an electron-beam irradiation process. This same process is also being used to treat mail addressed to federal government offices in Washington, DC.

An initial reward of $1 million was offered jointly by the Postal Service and the Federal Bureau of Investigation for information leading to the arrest and conviction of the anthrax mailer. This reward was later doubled and augmented by an additional $500,000 offered by ADVO, Inc., one of the nation’s largest mailers. The reward stands at $2.5 million.

Within two months of the anthrax attacks, independent polling indicated that consumer confidence in the safety of the mail had rebounded to pre-crisis levels. The Postal Service, however, continued its efforts to work with all stakeholders to develop programs and processes to continue improving the safety and security of the mail. By March, the Postal Service completed and submitted to Congress an Emergency Preparedness Plan to identify technologies, processes and costs associated with protecting America’s mail system from similar attacks, both in the near and long term.

At the beginning of the year, the Postal Service projected that several factors, primarily a sluggish economy, could result in losses as high as $1.35 billion for the year. As the costs of the anthrax response and those of declining mail volume following September 11 were estimated, it appeared that we could close the year with a loss over $4 billion. However, this was tempered by a number of factors.

Most significantly, the Postal Service began the year with a focused program of cost reduction. This included realigning the field and headquarters management structure, aggressive balancing of workhours against workload, postponing some program expenditures, reducing career employment by 23,000 positions through attrition, cutting 78 million workhours, and increasing labor productivity and total factor productivity. By the end of the fiscal year, Postal Service career employment was reduced to 1995 levels yet we delivered 21 billion more pieces of mail to 12 million more addresses. In addition, Congress and the President made $762 million available to the Postal Service for costs related to the bioterrorist attacks. And the early implementation of new postage rates in June added some $1 billion to our bottom line.

In April the Postal Service completed and submitted its comprehensive Transformation Plan to Congress. The Plan represents our response to long-term technological and commercial trends that are reshaping national and international postal services. As such, it contains specific strategies that will enable the Postal Service to successfully carry out its long-standing mission of providing affordable, universal service to everyone in America — no matter who, no matter where. To meet the challenges of today and to prepare for fundamental structural transformation, we are pushing business effectiveness and operational efficiency to the limits permitted by current postal laws. In addition, the Plan calls for legislative actions to provide the Postal Service with the increased flexibility needed in a changing marketplace.

Flexibility in postal ratemaking is a key element of the Transformation Plan. Recognizing the Postal Service’s challenging financial position, the independent Postal Rate Commission encouraged parties to settle the omnibus rate case filed in September 2001. The parties were able to reach a negotiated rate settlement which resulted in implementation of new rates three months earlier than anticipated, increasing revenue by some $1 billion during the final quarter of the fiscal year.

Due to aggressive cost management, homeland security appropriations and the early implementation of new postage rates, our net loss for the fiscal year was $676 million, significantly less than original projections. We were also able to reduce outstanding debt for the first time in five years and, for the first time in 31 years, reduce total expenses below the previous year. We did this while extending delivery to 1.8 million new addresses and ending the year with record levels of service performance and strong customer satisfaction.

A historic rates summit, jointly organized by the Postal Service and the Postal Rate Commission, with representation from throughout the mailing community, explored a number of innovative approaches to postal ratemaking. By the end of the year, the Postal Service had filed an innovative, flexible pricing proposal with the Postal Rate Commission for our new Confirm service. By the end of the year, the Postal Service filed two targeted pricing proposals with the Commission: a new classification for periodicals and a negotiated service agreement with Capital One Financial Services, Inc., the largest user of First-Class Mail service. These initiatives are indicative of an aggressive and sustained growth strategy occurring throughout the entire organization.

The actions we took in 2002 have laid a foundation for savings in 2003 and beyond, setting the stage for achievement of our Transformation Plan goal of reducing/removing $5 billion in costs from our system by the end of 2006.