A Message from the Chief Financial Officer
and Executive Vice President

The Postal Service moved further into record territory as we closed 2006 with an unprecedented seventh straight year of increased productivity and a third consecutive year of positive retained earnings. Guided by our new Strategic Transformation Plan 2006–2010, the Postal Service achieved a net income of $900 million, while keeping service and customer satisfaction near all-time highs.

Although First-Class Mail volume declined for the third time in four years, total mail volume rose .7 percent, reaching a new peak of 213.1 billion pieces. At the same time, to serve an expanding U.S. population, we added more than 1.8 million new delivery addresses, increasing the size of our delivery network to a record 146.2 million homes, business, and post office boxes.

Despite service improvements, increased convenience, and numerous innovations to improve the value of the mail, the Postal Service continues to be challenged by shifts in customer usage patterns to lower margin mail products. The modest overall decline in First-Class Mail was driven by a much larger 3.3% decrease in higher-margin single piece letters, which are particularly susceptible to electronic diversion such as on-line bill payment. Some single-piece First-Class volume migrated to the First-Class workshare letter subclass, which increased 2.1%.

Standard Mail, which surpassed First-Class Mail last year to become our largest mail class, increased by 1.5 percent. While this enabled us to set a new mail volume record, it was the slowest rate of growth for this category since 2002, and it provides lower per piece revenue and margins than the First-Class Mail it replaces.

It is a testament to the quality of our organization’s strategic focus and through previous investments in automation, process improvements, and focus at all employee levels that we were able to reduce almost five million workhours in 2006, despite adding over 1.8 million new delivery points and handling 1.4 billion additional pieces of mail. Nevertheless, in the face of the changing mail mix, sustained and evolving competition, and a challenging economic environment — for example, soaring fuel prices added over $300 million to our costs — there is a need for even greater productivity in the years ahead. With labor costs representing 78.8% of our total cost base, a continued focus on workhour reductions is imperative.