If the full provisions of the Act are applied to the Postal Service, our annuitant health benefit obligations could be reduced by over $6 billion.

Workers' Compensation

Our employees are covered by the Federal Employees' Compensation Act, administered by the Department of Labor's Office of Workers' Compensation Programs (OWCP) which makes all decisions regarding injured workers' eligibility for benefits. However, we pay all workers' compensation claims out of postal funds. Thus, our bottom line is directly affected every time an employee is injured.

We record as a liability the present value of all future payments we expect to make to those employees receiving workers' compensation. At the end of 2004, we estimate our total liability for future workers' compensation costs at $7,579 million, an increase of $343 million or 5% over 2003.

For 2004, because of a 5.9% decrease in the number of medical claims and a 1.8% decrease in the cost per medical claim, we had lower workers' compensation costs. This builds on the 3.3% reduction in costs we had in 2003 from 2002. These lower costs are a result of our multi-year efforts to prevent injuries and are reflected in every available measure — total accident rates, lost workdays, injuries reported to OWCP, and new compensation and medical claims. As part of our safety program, we attempt to identify anything that might contribute to the possibility of worker injuries.

In the past, workers' compensation expenses tended to increase every year as more and more employees received benefits. With medical costs rising as they have in the past several years, it remains imperative that we manage current claims, minimize new claims and eliminate fraudulent claims.

We expect workers' compensation costs to remain stable in 2005 as a result of our continuing efforts to improve safety and prevent injuries, to manage the impact of rising medical costs, and to increase the recovery of expenses related to injuries sustained by employees as a result of their own actions. We also have a joint initiative with OWCP to increase the number of injured employees returned to work. Finally, OWCP has instituted a more rigorous review of medical bills to lower costs.

In 2004, we made changes to the discount rates we use to estimate our liability in order to improve the accuracy of our estimate. We discuss these changes in note 3 of the Notes to the Financial Statements.

Transportation

Transportation expenses decreased by $20 million, or 0.4%, in 2004 to $4,969 million. Although fuel prices rose to record levels in 2004 and were a major factor in our transportation expense, we were able to offset this increase in several ways. During our peak holiday season, we significantly reduced the number of dedicated airplanes we use to move mail. This saved us approximately $54 million. We also moved more mail by truck and by the FedEx network. Not only did these changes result in reduced costs, they also improved service.

In 2003, our transportation expenses amounted to $4,989 million, a reduction of $143 million from 2002. We achieved this reduction primarily by transporting a larger percentage of Priority Mail on ground transportation and by negotiating changes to our FedEx® contract that lowered our rates as volume on that network increased. A midyear dip in fuel prices also helped to reduce transportation costs.

There is every indication that fuel prices will not significantly decrease in the near future. Since we cannot offset cost increases by charging our customers a fuel surcharge, we must control this expense growth through cost savings. We use approximately 800 million gallons of fuel (gasoline, diesel and jet fuel) each year to transport and deliver the mail. A one-cent increase in fuel prices for one year adds approximately $8 million to our expenses.

We have implemented, and are continuing to implement, a number of measures to control fuel expenditures. These efforts have focused on leveraging our size and buying power to obtain more favorable pricing by purchasing fuel in bulk. For example, we reduced our fuel cost for certain highway contract routes by 9.3 cents per gallon by consolidating our fuel purchases. We also purchase fuel in bulk through the Defense Energy Support Center wherever we have bulk facilities. In addition, as we continue our multiyear program to improve our information gathering systems, we have better data that allows us to make better decisions and to refine our network to respond more efficiently to changing demands.

AVIATION SECURITY

Bills intended to improve aviation security continued to be introduced in the second session of the 108th Congress. In particular, Representative Edward Markey introduced two aviation security bills that had significant implications for us,