1. MAIL VOLUME

	(billions of pieces)	2001	2002	Projected 2003	Projected 2004
	First-Class Mail	103.7	102.4	102.0	103.0
	Priority Mail	1.1	1.0	0.9	1.0
	Express Mail	.1	.1	.1	.1
	Periodical Mail	10.1	9.7	9.4	9.6
	Standard Mail	89.9	87.2	90.9	93.7
	Package Services	1.1	1.1	1.1	1.1
	International	1.1	0.9	0.8	0.8
	Other	0.4	0.5	0.5	0.5
	Total Mail	207.5	202.8	205.7	209.7

In 2002, the Postal Service suffered the largest volume decline in our history. An economic recession began in 2001; and its effects have continued through this year. Mail volume historically has tracked the economy, usually with some lag. The recession in the advertising market was particularly damaging to our volumes. Advertising billings actually declined in 2002 as the industry was more greatly impacted than the rest of the economy and began to show signs of recovery only at the end of the year. Since advertising mail has been the main source of mail volume growth in recent years, this decline in the advertising market seriously hurt 2002 mail volume growth.

With the possible exception of Periodicals, all mail categories also were affected early this year by the events of September 11 and the anthrax attacks. Both mailers and consumers became concerned about the security of the mail. Service disruptions resulting from these events caused mailers to delay or cancel mailings or to use alternate providers.

The 7.7 percent average rate increase implemented on June 30 further reduced volume growth, especially in competitive categories such as Priority Mail and Express Mail. This early implementation of the rate increase, however, brought in an additional billion dollars in revenue that flowed through to our bottom line.

The lagging economy reduced letter-size mail (First-Class and Standard Mail services) in 2002. Since virtually all Standard Mail and a significant portion of First-Class Mail contain advertising, these classes are also sensitive to the state of the advertising industry. In addition, electronic diversion continues to eat slowly into the market share of the letter-size mail products. The continuing shift to categories with deeper worksharing discounts affects the revenues of letter mail products. Mailers continue to develop methods to sort and deliver mail farther down our processing stream, effectively doing part of the work involved in moving the mail.

First-Class Mail volume fell 1.4 percent this year. Electronic diversion continued to affect First-Class Mail and many analysts predicted a spike in the adoption of Internet bill paying in the wake of the anthrax attacks. In fact, evidence suggests that the rate of adoption has remained basically the same. In 2000, 4.4 percent of households paid bills over the Internet; in 2001, this figure rose to 7.5 percent. For 2002, it is 11 percent. The proportion of bills that consumers pay over the Internet has risen from 3.2 percent in 2001 to 4.2 percent, or less than half of one bill per household. Rather than Internet bill presentment, the main source of growth in electronic payments in 2002 was automatic deduction, which rose almost 30 percent. Mail is still vital to the payment processing system. With a slow economic recovery and continued electronic diversion, we expect First-Class Mail volume growth to be flat in 2003.

Standard Mail volume fell by 2.6 percent in 2002 as a result of the weakness of the advertising market and declined most sharply early in the year in the wake of September 11 and the anthrax attacks. Non-profit mail was especially affected as organizations whose philanthropy was not directed to the victims and survivors of the September 11 attacks pulled back fundraising efforts. Standard Mail volume is projected to grow just under 4 percent next year, accounting for most of our projected volume increase. This growth represents mailers returning to mail after the anthrax attacks as well as some recovery in the economy and the advertising market.

Priority Mail volume fell 11 percent this year, dropping more rapidly than the 8.6 percent decline experienced in 2001. Priority Mail volume dropped most sharply early in the year when prohibitions against packages being transported on commercial airlines disrupted the Postal Service’s transportation network. Priority Mail growth was further hampered by the 35 percent price increases in this category since January 2001. Priority Mail service is part of the highly competitive expedited package market in which each competitor's actions affect the performance of all others. In 2002, such market-shaping actions included the expansion of the FedEx ground network to cover the entire nation and UPS’ increased aggressiveness, evidenced by its new, high-profile ad campaign. The Postal Service anticipates that Priority Mail volume will continue to fall in 2003, as the market responds to the 16 percent price increase of June 2002.

Total volume of Package Services declined 2.3 percent, although Parcel Post volume grew 5.1 percent. Most of this growth was in bulk-entry products. Some of this growth represents migration out of Priority Mail service, as mailers looked for more economical means of shipping their merchandise. In particular, the increasing use of package consolidation services enabled mailers to take advantage of drop-shipping discounts. Additionally, since it moves over the road, Parcel Post service avoided the negative impact of restrictions on airline parcel carriage. In 2003, growth in package services should be effectively flat, with Parcel Post growth of less than 1 percent.

Periodicals volume was down 4.3 percent this year, accelerating the long-term decline in household subscriptions. This reflected the large number of magazine titles that ceased publication during the recession. Remaining publications were hit hard by the shrinkage in the ad market. Publication weight, advertising pages, and per piece revenue all declined in 2002. The Postal Service expects volume to continue to decline in 2003 while the economy is sluggish.

International Mail volume declined 20.6 percent this year, a result of the worldwide recession and restrictions on mail carriage imposed after September 11. The global economy appears to be lagging that of the United States and in 2003, the Postal Service expects continued declines in International Mail volume. Customers will also explore alternative means to deliver international communications, further impacting this sector.

In 2003, the Postal Service expects total volume to grow about 1.4 percent compared to 2002. Overall, the Postal Service foresees that a sluggish economic recovery and the effects of the R2001-1 rate increase will restrain volume growth in 2003. Revenue will rise by around 5.7 percent, however, as the full effect of the June rate increases flows through.