As did our nation itself, the Postal Service met the direct unprecedented challenges of 2002 with extraordinary, effective response.

Following the terrorist attacks of September 11, new airline security restrictions forced the Postal Service to obtain alternative ground transportation and implement new logistical arrangements over the course of several months. We maintained mail service throughout our national delivery network. Only weeks later, the mail was used as the conduit for bioterrorist attacks that caused the death of two postal employees, the illness of others, and the contamination and long-term closing of several postal facilities. We acted immediately to safeguard employees, customers and the mail, conducting extensive national health and safety information programs and installing new processes and high technology equipment to screen and decontaminate mail. Emergency preparedness and security initiatives remained a priority throughout the year and will continue into 2003.

Our response to these events added unforeseen new costs to our already constrained financial plan. We had cut expenses and restricted capital outlays as the recession lengthened, mail volumes declined and revenue growth slowed. With the compound consequences of these crises, we then estimated that we could experience a net loss in excess of $4 billion. Instead, we finished the year with a net loss of $676 million. This remarkable achievement resulted directly from decisive actions taken by postal management and employees to control expenses, the actions of the President and Congress to provide emergency preparedness funding and, the support of our stakeholders in the postal ratemaking community to supply $1 billion of badly needed cash infusions with the early implementation of new rates.

For its part in this result, the Postal Service contributed remarkable accomplishments in 2002. We reduced costs by $1,452 million net of the impact of reduced volume, and reduced operating expenses by over $400 million from those of the previous year and $2.9 billion below plan. Workhours declined by 78 million as we reduced complement by 23,000 career employees through attrition, and still extended delivery to 1.8 million new addresses. Despite the decline in mail volume workload, we increased Total Factor Productivity (TFP) by 1.1 percent for the year, equating to a savings of $713 million. Historically, productivity had been achieved by absorbing workload increases. We continued a modified freeze on capital investments and held cash outlays to $1.7 billion for the year. With these cost reductions and stringent expense controls, we were able to reduce our debt outstanding by $200 million from 2001, the first time in five years that we reduced debt.


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 all of our 2002 Voice of the Business goals and indicators focus on productivity, with targeted achievement to be measured at all levels of the organization. In 2002, we effectively restrained resource usage and realized a gain of 1.1 percent in TFP. Our three-year cumulative TFP growth of 5.0 percent is equivalent to an expense reduction of over $3.0 billion. Not since 1993 have we achieved TFP growth of this magnitude. (Chapter III reports TFP performance in detail.)

Nonetheless, the cost efficiencies gained through these productivity programs were largely offset by structural and inflationary pressures on our revenue and costs. Our cost efficiencies allowed us to actually reduce 2002 total expenses by almost $200 million below 2001 levels. We reduced work hours by 4.8 percent, using almost 78 million fewer work hours than in 2001. This offset the 4.1 percent increase in our labor cost per workhour. The reduction in work hours, coupled with a reduction in non-personnel expenses, produced total cost reductions of more than $1.4 billion. However, health benefits, retirement costs, and workers’ compensation expenses exerted substantial upward pressure on expenses, offsetting most of the cost reductions.

Due to the financial uncertainties caused by declining volumes and increasing costs, the Postal Service adopted a capital plan of $2.4 billion in 2002 that was substantially below levels committed in most recent years. We instituted a process that prioritized all proposed capital projects, giving the highest priority to investments related to the safety of our employees and customers, legal requirements, emergencies and investments that produce labor efficiencies. Proposed investments that did not meet these criteria were effectively “frozen” until such time as our financial situation improved. Capital commitments were $1.3 billion in 2002.

Total Factor Productivity

Output per Workhour1

Multi Factor Productivity2

		Annual3	Cumulative From 1972		Annual	Cumulative From 1972		Annual3	Cumulative From 1972
	1990	2.9	8.6		3.4	13.9		(0.0)	11.3
	1991	(1.8)	6.8		(0.1)	13.7		(1.0)	10.2
	1992	0.4	7.2		1.0	14.8		2.0	12.2
	1993	3.8	11.0		4.6	19.3		0.5	12.7
	1994	(0.2)	10.9		0.8	20.2		1.0	13.7
	1995	(1.9)	8.9		(1.3)	18.9		0.4	14.1
	1996	(1.3)	7.6		(0.1)	18.8		1.4	15.5
	1997	1.3	8.9		1.7	20.5		1.0	16.5
	1998	(1.0)	7.9		1.2	21.7		1.2	17.7
	1999	(0.1)	7.7		0.9	22.6		0.7	18.4
	2000	2.2	9.9		2.0	24.6		1.7	20.1
	2001	1.7	11.6		1.7	26.3		(0.1)	20.0
	2002	1.1	12.7		2.2	28.5		2.7	22.8

	1		Output per work hour measures the change in the relationship between workload (mail volume and deliveries) and the labor resources used to do the work. Our main output is delivering mail and services to an expanding delivery network.
	2		2001 and 2002 MFP Data are estimates of DRI-WEFA. BLS Data for these years has not been released.
	3		Historical data is subject to revision as certain data used in calculating productivity are periodically revised. Prices indexes released by the Bureau of Labor Statistics and the Bureau of Economic Analysis that are used to calculate resource usage are subject to regular historical revisions by these agencies. When historical revisions are released, they are incorporated into the TFP calculation, can result in historical TFP revisions. TFP for the reporting year is also subject to revision when final Postal Service cost data for the reporting year is available. Generally, this revision occurs in April of the following year.