Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Periodicals volume decreased 191 million pieces, or 2.2%, in 2008. Price increases resulted in a revenue increase of $107 million, or 4.9%. Total periodicals volume has fallen by 16.6% over the last ten years. This long-term, steady decline is the result of the ongoing trend in reading preferences rather than the current economic downturn.
Periodicals volume decreased 227 million pieces, or 2.5% in 2007, driven by the same long-term trend noted above. This resulted in a revenue decrease of $27 million, or 1.2%, in spite of the price increase.
Package Services under the new law now includes single-piece Parcel Post, International Inbound Surface Parcel Post, Bound Printed Matter, Media Mail, and Library Mail. Parcel Select and Parcel Return Service are now part of the Shipping Services group. Price increases resulted in a revenue increase of $33 million, or 1.8%, compared to 2007. Package Services volume decreased 68 million pieces, or 7.4%, in 2008. Revenue increased despite volume decreases, due to the May 2007 and May 2008 price increases.
In 2007, Package Services revenues of $1,812 million increased $61 million or 3.5% on a volume decline of 5 million pieces or 0.5%.
Shipping Services
Under the new law, Shipping Services includes Priority Mail, Express Mail, destination entry Parcel Post, Parcel Select Return Service, and International Mail, excluding single-piece First-Class International Mail. Collectively these products earned $8,382 million in revenue, a $508 million increase, or 6.5%, while volume declined 55 million pieces, or 3.4%. The pricing structure of this service group does not have the CPI price cap restrictions of Mailing Services as outlined in P.L. 109-435.
Shipping Services revenue in 2007 of $7,874 million was $386 million, or 5.2% greater than 2006 revenues of $7,488 million, despite a volume decline of 6 million pieces, or 0.4%.
Operating Expenses
Operating expenses are comprised of Compensation and Benefits, Retiree Health Benefits, Transportation, and
Other Expenses.
In 2008, total operating expenses of $77,738 million were $2,367 million, or 3.0%, less than 2007, mainly due to the decrease of $2,677 million in retiree health benefits. Retiree health benefits were $7,407 million in 2008, compared to $10,084 million in 2007. The decrease is primarily due to a 2007 one-time charge in addition to the annual amounts required by P.L. 109-435. See Note 4, Postal Accountability and Enhancement Act, Public Law 109-435 (P.L. 109-435), in the Notes to the Financial Statements for more information. Despite the decrease, compensation and benefits, along with retiree health benefits were $60,992 million, or 78.5%, of our operating expenses compared to $64,270 million or 80.2% in 2007. Transportation expenses increased $459 million, or 7.1%, while other expenses increased $452 million or 4.8%.
In 2007, total operating expenses of $80,105 million were $8,424 million, or 11.8%, more than 2006. Retiree health benefits increased $8,447 million in 2007, driven by requirements of P.L. 109-435. The law also suspended our retirement payments to the CSRS fund which, along with a reduction in the estimate of our workers’ compensation liability, led to a $479 million, or 0.9%, decrease in total compensation and benefit expenses compared to 2006. A $457 million, or 7.6%, increase in transportation expenses also contributed to the increase in expenses.
Operating Expenses |
2008 |
2007 |
2006 |
|---|---|---|---|
(Dollars in millions) |
|||
Compensation and Benefits |
$ 53,585 |
$ 54,186 |
$ 54,665 |
Retiree Health Benefits |
7,407 |
10,084 |
1,637 |
Transportation |
6,961 |
6,502 |
6,045 |
Other Expenses |
9,785 |
9,333 |
9,334 |
Total Operating Expenses |
$ 77,738 |
$ 80,105 |
$ 71,681 |
Compensation and Benefits
Personnel compensation and benefits were $601 million, or 1.1%, less than 2007, mainly due to reductions in workhours. The average annual COLA increase per employee in 2008 was $469 in March and $1,487 in September. The total impact of COLAs in 2008 was $562 million.
Despite these large COLAs, which increased the 2008 average hourly labor cost 2.5%, we were able to decrease compensation costs by $1,062 million, or 2.5%, by reducing workhours. However, this was partially offset by increases of $162 million, or 2.8%, in retirement expenses and $347 million, or 39.4%, in worker’s compensation expense. Decreases in health benefits and other expenses accounted for the remainder of the decrease. Additional information on workhours, retirement, health benefits, and workers’ compensation expenses are provided on the following pages.