a message from the CHIEF FINANCIAL OFFICER  

This has been a year of challenge. It has been a year of success. It has been a year of change.

The Postal Service faced the challenge of improving performance above previous levels. We faced the challenge of expanding to serve an ever-growing nation. And we faced the significant challenges of a changing economy, a cumbersome rate-setting process and the aftermath of the September 11 terrorist attacks.

I am pleased to report that the Postal Service met these challenges.
We delivered high levels of service. We improved the workplace environment. We set new records for efficiency in operations. At the same time, aggressive and successful cost management efforts limited our net loss to $1.7 billion, down significantly from a figure that could have reached $3 billion.

While the Postal Service raised rates this year, those rates reflected economic assumptions that were developed some two years earlier, consistent with an extremely lengthy statutory rate process. However, after we filed our rate request in early 2000, we were faced with a number of unexpected economic events.

One of these was unusually high inflationary pressure on labor costs. The cost per work hour increased by 5.8% in 2001, exceeding the 4.8% increase of 2000. In addition, a downturn in the economy affected growth in mail volume and revenue. Against this backdrop, the independent Postal Rate Commission failed to recognize the need for the level of contingency funds included in the rate case filed in 2000. The rate process itself prevented full implementation of new rates before the last quarter of the fiscal year. These factors, combined, produced the year's loss of $1.7 billion.

Managing costs and improving service have become watchwords in the Postal Service, and they exist comfortably side by side. This year we extended delivery to 1.7 million new addresses. We did that while we reduced the number of career employees by over 11,500, and saved 23.1 million work hours. This drove a productivity gain of 1.3%, with allied cost savings of $900 million. At the same time, we achieved record levels of customer satisfaction and quality service.

When we recognized that the economy was changing, we put a temporary hold on more than 800 capital facility projects nationwide. At headquarters, we instituted a hiring freeze and reduced programs. Other actions were taken in administrative functions throughout the organization. Without these efforts, our net loss for the year could have reached $3 billion.

And we will not stop there. Over the next year, we will continue our work to increase productivity and cut expenses. We will take $2.2 billion in additional costs from our system while we cut 25,000 more work years. Despite these actions, we face a loss in 2002 that will exceed this year's.

Looking ahead, we filed a rate case to meet our needs for additional revenue in 2003. Our proposals incorporate a modest contingency provision of 3% of total projected costs for 2003. This amount, falling within the accepted historical range for contingency provisions, must serve as a cushion against unforeseen events. However, it may not be adequate in light of the dramatic events that have occurred since September 11.

Clearly, the rate-setting mechanisms available within our existing statutory framework fall short of what is needed to provide quality, secure mail service in an uncertain future. This inadequacy, combined with the delay inherent in the rate-making process, will continue to impede our ability to restore the Postal Service to a position of robust financial health.

We face a future that has been forever changed. We face unprecedented uncertainty. We face attacks on the mail that seek to cripple this essential conduit of American ideas and commerce. But we will stand strong and united against those who would stop us from our historic mission of binding the nation together. They have underestimated the resolve, the capabilities and the dedication of our employees.

We will continue to do all we can to protect the financial health of this great organization. From Maine to Hawaii, from Alaska to Puerto Rico, we will continue to deliver for America.

Richard J. Strasser, Jr.
Chief Financial Officer
& Executive Vice President
November 9, 2001