Historically, volume growth has financed the cost of our
continuous delivery network expansion. Delivery point growth requires
the equivalent of hiring 3,000 new carriers each year as well as purchasing
new vehicles and building or leasing new facilities.
Delivery network growth is driven by new household formation. In the 1980’s
delivery points grew by about 1.8% annually, as the last of the baby boom
generation was entering the housing market. Since then, annual delivery
point growth has held at 1.4%. From 2000 to 2002, delivery points grew
by 1.8 million annually. We expect this level of growth to continue for
the indefinite future. According to a report from the Joint Center for
Housing Studies of Harvard University, 1.2 million new households are
expected to form each year through 2020. Its 2002 report, “The State of
the Nation’s Housing,” states that household formation, together with
the demand for vacation and retirement homes and replacing units lost
from stock, calls for an average of 1.7 million new homes annually.
Adding to the risk in our financial outlook are the financial and market
implications specific to our own business model. Mail and related special
services generate virtually all of our revenue. Unlike many telecommunications
firms and utilities, we do not charge to access our network. Funds to
maintain network operations and to support network expansion can only
be generated by mail volume. Unlike competing delivery companies, we cannot
dynamically change prices or add surcharges to our products to account
for cost increases such as energy prices.
However, mail volume has not grown sufficiently in recent years to provide
the revenue that supports extension of our delivery and retail network.
Volume growth averaged 4.9% in the 1980’s, 2.2% in the 1990’s and close
to zero in the last three years, due in part to increasing competition
and electronic diversion.
Electronic alternatives are gradually diverting First-Class, Periodical
and Standard Mail volume, a trend we expect to continue. Internet-based
bill payment systems are well established, and consumers will increasingly
use these services. As electronic bill payment becomes more popular, the
number of bills presented to consumers electronically will also grow.
We expect First-Class Mail volume growth to be sluggish due to economic
conditions and the increasing market share of alternative bill presentment
and payment technologies.
The end result of slowing volume growth and continuing network expansion
is a declining number of pieces per delivery and a rising cost per delivery.
Since we are constrained to break even over time, we face an even greater
challenge in improving service and keeping rate increases reasonable,
in both frequency and magnitude. To combat this growing inequality, we
must continue to increase productivity, managing our costs and using fewer
resources.
The last several years, marked by stagnant mail volumes and continued
network expansion, have been notable for continued resource price inflation.
Resource price inflation dropped from 5.9% annually during the 1980’s
to 3.1% annually during the 1990’s, contributing to strong financial performance
from 1995 through 1999. Inflation in resource prices then increased to
an average of 4.1% annually over the last three years. In a low volume
and revenue growth environment, inflation in labor costs and other resource
prices translates directly into a need for rate increases.
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