Priority Mail volume, which showed positive growth in 2005 after four years of decline, is forecast to be flat in 2006 due to the slowdown in the economy coupled with a rate increase. Express Mail has a highly elastic demand. As in the case of Priority Mail, the rate affect will overpower increases in volume due to economic growth in the economy, leading to a decline in the 2006 volume. The growth we forecast in Package Services is based on projected increases in both Bound Printed Matter and Media Mail volumes, even though we expect a decline in Parcel Post. Building the business to exceed these forecasts is a major priority in 2006.

We project revenues to increase by $2.3 billion, or 3.4% to $72.3 billion in 2006. Most of this increase is due to the requested rate increase which will be implemented January 8, 2006.

Network Growth

Historically, First-Class Mail volume and the growth in contri-bution it has produced have financed the cost of operating and expanding our universal delivery network. Over the last several years, however, the volume of First-Class Mail has declined while the number of delivery points in our network has continued to increase. Since 2001, First-Class Mail volume has decreased by over 5.6 billion pieces while our delivery network has expanded through the addition of 6.6 million new delivery points. Furthermore, we operate a retail network anchored by over 37,000 Post Offices, stations, branches and contract units.

Delivering mail to individual delivery points six days a week is a major part of our work. Each year, we add over 1.8 million delivery points to our network. In 2004, we adjusted our reporting of rural and highway contract deliveries to customers who have their mail forwarded to a Post Office box as an alternative to a physical address. Prior to 2004 we included both addresses in our count of "possible" delivery points. We also no longer count a vacant delivery point on rural and highway routes as "possible" delivery points. These adjustments reduced our total delivery points by 824,388, and we have therefore adjusted our 2004 Operating Statistics in last year’s report to reflect this change. Our actual growth in delivery points in 2004 and 2005 were 1,782,900 and 2,006,577 respectively.

We expect the number of delivery points to continue to grow for the indefinite future as a result of population growth and continuing demand for new housing. The Bureau of the Census reported housing starts in August 2005 at a seasonally adjusted rate of 1.8 to 2 million.

Also, Harvard University’s Joint Center for Housing Studies reported that "Demand for new homes is on track to total as many as 20 million units between now and 2015." This projected increase in household growth will translate into a continuing expansion of our delivery network. In the same period, First-Class Mail volume is projected to continue to decline. As the revenue and contribution produced by First--Class Mail decline, we will lose our primary historic means of financing our delivery and retail networks. This combination of trends will continue to challenge us to build all other postal business to continue to finance the nation’s universal delivery system.

Impact of Inflation and Changing Prices

The Postal Reorganization Act requires that we provide universal mail service and set postal rates and fees so that total estimated revenues of our organization equal our total estimated costs. Our primary costs are for labor and the related cost of benefits, transportation, utilities, material costs, and the cost of maintaining, replacing and expanding our retail and distribution network.

We have maintained stable prices since the implementation of the last omnibus rate case recommendation in the summer of 2002, and will maintain them until January 2006. We achieved this through continuous productivity improvement and from the benefit of reduced CSRS retirement costs of P.L.108-18. We plan to continue mitigating inflationary pressure with $1.1 billion of cost reductions planned for 2006. But these productivity improvements alone will not offset the continuing upward cost pressures resulting from resource cost inflation, the continuous expansion of our delivery network, and the loss of First-Class Mail volume and its high level of contribution to institutional costs.

Expense Growth

We estimate that total expenses in 2006 will be $71.1 billion, a 3.7% increase over our 2005 expenses of $68.6 billion. We expect personnel compensation and our cost per workhour to increase. This increase will be driven by higher cost-of-living pay adjustments, health benefit inflation and delivery network expenses.

We expect non-personnel expenses, excluding transportation expenses, to increase approximately $350 million, or 3.9%. Increased costs to deploy and operate systems to protect postal employees and the public from biological agents that could be introduced into the mail stream account for over $100 million of the growth. Investments in programs to update and improve information technology capabilities, and improvements to customer access and service are also main drivers for 2006. Transportation expenses are expected to grow $300 million, or 5.7% over 2005 due to higher fuel costs.