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In 2005 Operating expenses of $68,283 million were $2,432 million more than 2004. The increase was driven primarily by increases in compensation and benefits and transportation expenses. Rising fuel prices contributed significantly to the increase in transportation expenses, and also contributed to increased compensation and benefits expenses through their impact on employee cost-of-living adjustments (COLAs). Compensation and benefits expense growth was also influenced heavily by contractual pay increases, and retirement and health benefits costs. These same factors, in somewhat different proportions also drove the $1,949 million increase in operating expenses in 2004, compared to 2003.

Compensation and Benefits

Personnel compensation and benefits, including interest on deferred retirement obligations, made up 79.1% of our total expenses. These costs grew $1,958 million in 2005. This year’s growth was due primarily to contractual labor rate increases, COLAs, health benefits payments for current and retired employees and an increase in interest on deferred retirement. Our 2005 average hourly labor rates increased by 2.5%, and our 2005 health benefits expense for current employees and retirees increased by $437 million to nearly $6.6 billion, or 9.7% of total expenses. The increase in these expense categories was partially offset by a $401 million decrease in workers’ compensation expense (see workers’ compensation discussion on page 26).

In addition to labor and benefits rates, workhours are the other major component of our compensation and benefits expense. This year’s growth in costs was driven by an increase of almost 11 million workhours, the first time in six years in which workhours increased over the prior year. The workhour increase involved increased workload due to the addition of 2 million delivery points and an additional 6 billion pieces of mail. Despite the slight increase in 2005, we have cumulatively eliminated 686 million workhours since 2000. This has been the single biggest contributor to the ongoing achievement of our Transformation Plan savings targets.

The 2004 increase of $1,693 million in compensation and benefits expenses was driven by the same factors as the 2005 increase, although COLAs were smaller in 2004. Average hourly labor rates in 2004 increased by 1.7% over 2003. The increase in compensation and benefits in 2004 was somewhat alleviated by a $234 million decrease in workers compensation expenses and a 21 million workhour reduction. Beginning in 2004, we implemented a change in how we track workhours for employees in limited duty or rehabilitation assignments. The workhours for these employees are now included in the functions (operations) in which they work.

(Dollars in millions)

% Change


Operating Expenses 2005 2004 2003 2005-2004 2004-2003
Compensation
and Benefits*		 $ 53,932 $ 52,134 $ 50,428 3.4% 3.4%
Transportation 5,437 4,969 4,989 9.4% -0.4%
Supplies and Services 2,416 2,414 2,328 0.1% 3.7%
Depreciation and
Amortization		 2,089 2,145 2,295 -2.6% -6.5%
Other expenses 4,409 4,189 3,862 5.3% 8.5%
Total Operating
Expense		 $ 68,283 $ 65,851 $ 63,902 3.7% 3.0%

* This does not include interest on deferred retirement obligations, which is included on the compensation and benefits table below. Interest is not considered an operating expense on the financial statements.


(Dollars in millions)

% Change


Compensation And Benefits 2005 2004 2003 2005-2004 2004-2003
Compensation $ 39,299 $ 37,876 $ 37,144 3.8% 2.0%
Retirement 7,073 6,574 5,877 7.6% 11.9%
Health Benefits 5,100 4,845 4,526 5.3% 7.0%
Retiree Health
Benefits		 1,495 1,313 1,133 13.9% 15.9%
Workers’
Compensation		 838 1,239 1,473 -32.4% -15.9%
Other 390 390 391 0.0% -0.3%
Total Compensation
and Benefits*		 $ 54,195 $ 52,237 $ 50,544 3.7% 3.3%

* Equals compensation and benefits plus interest on deferred retirement on the financial statements.


(In thousands)

% Change


Workhours 2005 2004 2003 2005-2004 2004-2003
Operations
Operations Support 9,606 9,077 9,102 5.8% -0.3%
Mail Processing 336,210 336,737 347,964 -0.2% -3.2%
Rural Delivery 179,549 171,628 166,873 4.6% 2.8%
City Delivery 471,071 464,683 464,300 1.4% 0.1%
Vehicle Services 31,880 31,947 32,111 -0.2% -0.5%
Limited Duty and
Rehabilitation		 3,604 6,356 21,455 -43.3% -70.4%
Plant & Equipment
Maintenance		 80,867 81,302 81,807 -0.5% -0.6%
Customer Services
& Retail		 233,953 233,237 232,529 0.3% 0.3%
Postmasters &
Installation Heads,
Supervisors,
Administration
and Other		 116,513 117,354 117,652 -0.7% -0.3%
Total Workhours 1,463,253 1,452,321 1,473,793 0.8% -1.5%