Ser-vice  n [from Latin servus one who serves another] 1:  help, use, benefit, or contribution to the welfare of others 2:  the heart of the Postal Service brand 3:  so much a part of the United States Postal Service, that it's our family name.

Despite unique challenges from the faltering economy and the direct impacts of terrorist attacks that together caused the greatest ever decline in mail volumes, the Postal Service realized a net loss of $676 million in 2002. Although our third consecutive net loss, it was less than the $1.35 billion loss that had been projected in the plan for the year. We achieved this result through a cash infusion from the early implementation of rate changes and through our own stringent controls on expenses and capital spending. We reduced operating expenses $400 million below 2001 levels and $2.8 billion below plan. As a result, Total Factor Productivity (TFP) increased 1.1% despite the fact that workload declined. We were even able to retire $200 million of debt, our first reduction since 1997. Additionally, the federal government provided appropriations to fund health and safety improvements necessitated by the terrorist and anthrax attacks.

The early implementation of new postal rates came about through the unprecedented action of the Postal Rate Commission (PRC). In October 2001, the PRC convened settlement conferences among the 63 participants of the Postal Service’s Docket No. R2001-1 Omnibus Rate Filing. Of these participants, 57 signed an agreement advancing new rates implementation by three months to June 30, 2002. The average rate increase was 7.7%, including a 3-cent increase in the price of a First-Class stamp. Early implementation of new rates directly increased 2002 postal revenue by about $1 billion.

We received $762 million in appropriations for securing the mail, and protecting the health and safety of Postal Service employees and customers following the terrorist and anthrax attacks. The President of the United States authorized an initial funding of $175 million for 2002. Congress later appropriated $587 million for health and safety protections and for the repair of facilities damaged in the New York City terrorist attacks. Some of those funds will be expended in 2003 and thereafter, as required safety equipment is placed in service.

Although many of the fundamental challenges of the past year will continue into 2003, we are cautiously optimistic about the coming year when economic growth will be a major driver of our performance.

The Federal Reserve recently retreated from its assessment that the risks of inflation and economic weakness are equally weighted, stating that “weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance” mean that risks “are weighted mainly toward conditions that may generate economic weakness.”

We are particularly concerned about these downside risks because our volumes and revenue are increasingly subject to competition and substitution by alternative media. Historically our mail volume growth rates have tracked the economy. Therefore, while we expect economic recovery to generate volume growth, we expect growth to be less than 2%, giving us lower volume in 2003 than in our peak year of 2000.

Nevertheless, the outlook is subject to great risk and uncertainty. Risks from terrorism are ever present. The economy is on an uneven growth path. The recovery has been slow and is far from complete. Instability in South Asia and the Middle East could drive up oil prices or threaten consumer and business confidence. The long-term effects of recent corporate governance problems and accounting scandals are unclear. We do not expect a rapid buildup of economic activity in 2003 and remain concerned about the possibility of a “double dip” recession.

Of critical importance to us in this assessment of economic indicators and projections of mail volumes are signs that the advertising recession is abating. A large portion of First-Class Mail volume and essentially all Standard Mail contain advertising material. These two products rank first and second in generating contribution to overhead costs. Standard Mail volume increased in the last quarter of 2002, the first such increase in 18 months. In addition, advertising industry employment has stabilized over the last six months, after steadily declining from its peak in June 2000.

The economic and advertising recovery should boost Standard Mail. Since Standard Mail is often part of a multifaceted advertising campaign, the prospects for Standard Mail volume growth are favorable. Advertisers know they can use Standard Mail to reach a very specific audience, rather than having a message broadcast to many uninterested parties, making it a highly cost efficient advertising medium.