Financial Section Part II

claimants on the rolls. The $45 million increase in the cost of claims also was the driver behind the $342 million increase in our total liability. In 2005 we experienced a 4.4% decrease in the number of paid medical claims and a 5.5% decrease in the number of paid compensation claims. The total expenditure in 2005 was $12 million lower than 2004.

The lower number of claims are a result of our efforts to prevent workplace injuries and our joint initiative with OWCP to increase the number of injured employees returned to work. There have been a total of 809 successful outplacements and rehabilitations in our fourth year of a five-year program to outplace 1,000 employees from the workers’ compensation roles. This program has long-term impacts to the cost of workers’ compensation by reducing the base costs. Finally, OWCP has instituted a more rigorous review of medical bills to lower costs. See Note 11, Workers Compensation in the Notes to the Financial Statements for additional information.

Transportation Expenses

Transportation expenses for 2006 were $6,045 million, an increase of $608 million or 11.2% over 2005 expenses. A large part of this increase was due to increased fuel expenses of $307 million. We continue to implement a number of measures to control fuel expenditures. These efforts focus on leveraging our size and buying power to obtain more favorable pricing by purchasing fuel in bulk. For example, we minimize our fuel cost for certain highway contract routes by consolidating our fuel purchases. We also purchase fuel in bulk through the Defense Energy Support Center. Transportation expenses in 2005 were $5,437 million, an increase of $468 million over 2004 and were driven by many of the same factors mentioned above.

Transportation Expense 2006 2005 2004
(Dollars in millions)
Air Transportation
$ 2,771
$ 2,445
$ 2,185
Highway Transportation
2,977
2,658
2,423
Other Transportation 297 334 361
Total Transportation Expense $ 6,045 $ 5,437 $ 4,969

AIR TRANSPORTATION

Air transportation expenses for 2006 were $2,771 million, an increase of $326 million over 2005. This increase is primarily due to increased fuel charges as well as increased mail volume and contractual rate increases for our dedicated air transporter. During 2006, the index by which jet fuel costs are adjusted increased 45.4%, resulting in an increase in fuel costs of approximately $130 million. Increased mail volume added an additional $33 million in fuel costs and more air mail volume increased costs by $51 million. Contractual rate increases contributed an additional $77 million in air transportation costs.

Air transportation expenses for 2005 were $2,445 million, an increase of $260 million over 2004. As with the current year, 2005 expenses were affected by increasing fuel cost and mail volume. Jet fuel costs attributed to fuel price increases added almost $83 million and extra fuel cost from added mail volume accounted for $26 million.

HIGHWAY TRANSPORTATION

Highway transportation expenses increased by $319 million in 2006 as fuel prices and volume increased. Diesel fuel used by our highway contract routes increased $144 million, while increased volume and usage of highway transportation added another $102 million in expense over 2005 totals. Contractual rate increases accounted for an additional $73 million.

In 2005, our highway transportation expenses increased by $235 million mainly driven by fuel prices and volume increases. Diesel fuel costs rose by $102 million. Contractual rate increases accounted for an additional $79 million while increased volume and usage of highway transportation added another $54 million in expense over 2004.

OTHER TRANSPORTATION

Other transportation expenses decreased $37 million in 2006. International mail transportation costs decreased $47 million. This decline was partially offset by increases in rail transportation and water transportation of $10 million.

Other transportation expenses decreased by $27 million in 2005 primarily as a result of our decision to reduce the use of rail to transport mail and shift this mail onto highway routes. This was done as a result of the higher service performance scores that our highway contractors were achieving.

Aviation Security

On October 4, 2006, the President signed into law the Fiscal Year 2007 Homeland Security Appropriations Act, P.L.109-295. The Act requires the Secretary of Homeland Security to research, develop and procure new technology for screening cargo on passenger aircraft at the earliest date practicable. It also requires the Transportation Security Administration (TSA) to utilize existing checked baggage explosive detection equipment and screeners to screen cargo carried on passenger aircraft to the extent practicable until the new technologies are available. It is unclear whether the TSA will use such equipment to increase mail screening in order to meet the requirement. The law also requires the TSA to report air cargo inspection statistics on a quarterly basis, including the total number of packages. The Postal Service will continue to monitor and communicate with TSA as it implements these legislative mandates. Mail on commercial aircraft is considered air cargo for these purposes.