[an error occurred while processing this directive]

In addition, major corporations now dominate the parcel and express markets, and the competitive landscape for postal services is becoming more global. Foreign postal operators are moving outside their geographic borders and expanding beyond their traditional postal services into express delivery, logistics, financial, and electronic services. Foreign posts have established significant nationwide sales forces and operations around the country. Currently, eight foreign operators maintain facilities in major metropolitan areas. In addition, many are partnering with international mail service providers to authorize use of their postal indicia for export from the United States. This has contributed to an increase in the outbound market share of our foreign competitors

While the majority of our prices are now linked directly to general inflation, our costs are not. Accordingly, we may not be able to increase prices sufficiently to offset increased costs, which would adversely affect our results of operations.

P.L.109-435 is intended to benefit both residential and business customers by providing predictable price increases tied to the rate of inflation for Mailing Services (primarily First-Class Mail, Standard Mail, certain Package Services, and Periodicals). These services represent about 90% of total revenues and about 87% of our attributable costs.

While the majority of our prices are now linked directly to general inflation, our costs are not. Postal costs are heavily concentrated in wages, employee and retiree benefits, and transportation. They are significantly impacted by wage inflation, health benefit premium increases, and by the continuous expansion of our delivery network. We believe that both volume and revenue growth, along with increasing productivity improvements, will be required to address the challenge presented by the regulatory price cap.

The contracts with our four largest unions currently include provisions granting cost of living allowances (COLAs). These contracts expire in 2010 and 2011. Under current contract provisions, COLAs are linked to the Consumer Price Index — Urban Wage Earners and Clerical Workers (CPI-W) and are granted semiannually. In 2008 CPI-W was 5.4%. Employee compensation represents a significant portion of our annual expenses; therefore, an increase in the CPI-W greater than had been incorporated into our financial plans could adversely affect financial results. We estimate that an increase in the CPI-W of 0.5% would cause an annualized increase in our COLAs of about $124 million.

Adverse events may call into question our reputation for quality and reliability, which could diminish the value of the Postal Service brand and potentially adversely affect our business and results of operations.

We serve almost every American household and business nearly every day. For the fourth year in a row, the Ponemon Institute named the Postal Service the most trusted government agency and among the ten most trusted of all organizations. The Postal Service brand represents quality and reliable service and therefore is a valuable asset. We use our brand extensively in sales and marketing initiatives, and take care to defend and protect it.  Any event that calls into question this quality and reliability could diminish the value of our brand and potentially adversely affect our business and reputation.

Fuel expenses are a material part of our operating costs. A significant increase in fuel prices could adversely affect our costs and results of operations.

Fuel prices are a significant part of our expenses. We are exposed to changes in commodity prices primarily for diesel fuel, unleaded gasoline, and aircraft fuel for transportation of the mail, and natural gas for heating facilities. A 1.0% increase in fuel and natural gas costs would result in a $29 million increase in expense. We did not use derivative commodity instruments to manage the risk of changes in energy prices during the periods covered by this report.

We are subject to Congressional oversight, regulation by other government agencies, and also oversight by various other organizations and the public. If we cannot successfully address their various, and sometimes competing, concerns, we may be subject to greater regulation, which could increase our costs or otherwise place additional burdens on our operations.

We are subject to a variety of forms of oversight and scrutiny by Congress, the PRC, mailer organizations, the media, and the general public. This is an outgrowth of our unique status as a provider of a fundamental service to the American people. We attempt to balance the interests of all groups with the need for operational efficiency. Our efforts to be responsive to these various stakeholders sometimes adversely impact the speed with which we are able to respond to changes in mail volumes, or other operational needs. Any limitations on our ability to take management action could adversely affect our operating and financial results.

[an error occurred while processing this directive]