Management’s Discussion and Analysis of Financial Condition and Results of Operations
Tobacco Legislation
On September 10, 2008, H.R. 4081, The Prevent All Cigarette Trafficking Act of 2008 (PACT Act), passed the House by a 379 to 12 vote. The bill would make cigarettes and smokeless tobacco nonmailable under the criminal provisions of Title 18 of the U.S. Code. The bill would also place shipping and record-keeping requirements on those selling cigarettes and smokeless tobacco over the phone, through the mail, or via the Internet. Sellers would be required to verify the age and identity of purchasers to reduce sales to minors. In addition, the bill would make failure to comply with state tobacco tax laws a felony. The Postal Service estimates that shipping tobacco constitutes approximately $35–$40 million of revenue annually. A companion bill has been awaiting Senate floor action for over a year.
Outlook
The U.S. economy had experienced a year of slow growth before experiencing an actual contraction of GDP, which began in Quarter IV. Most economists agree that the contraction in GDP will be more serious during the first half of 2009. Global Insight, an economic forecasting and consulting firm, expects real GDP to decline for three quarters in a row beginning with Quarter IV of 2008.
The U.S. economy had slumped long before the current credit crisis began. The housing market, sub-prime mortgage issues, and energy price fluctuations resulted in a year of slow economic growth, causing a major downturn in both First-Class Mail and Standard Mail advertising.
A financially healthy Postal Service is dependent upon a healthy U.S. economy. Retail sales, employment, and investment spending are all significant indicators of mail demand. All three of these indicators are projected to significantly decrease in 2009. Outright declines in consumer spending are anticipated during the final quarter of calendar year 2008 and the first quarter of 2009. These would be the first declines in consumer spending since 1991. Non-farm employment has been in steady decline since February, and is expected to continue to decline throughout 2009. Finally, investment spending should see a sharp decrease in 2009.
Revenue Outlook
We project revenue to increase between 1.0% and 2.0% in 2009 on a volume decrease of 3.0% to 4.0%. This expected revenue increase is due primarily to anticipated price increases.
First-Class Mail volume is expected to decline about 2.0% during 2009. Electronic alternatives to mail will continue to decrease First-Class Mail volume. Prior to 2008, this was offset to some degree by growth in First-Class Mail workshare letters and flats.
Standard Mail revenue is expected to decline in 2009.
Periodicals revenue and volume are both projected to decrease in 2009. We expect the modest year-over-year declines in Periodicals volume to continue. While the declines in Periodicals are not dramatic, they are part of a long-term trend.
Both volume and revenue are expected to grow in 2009 for Package Services.
Our Shipping Services products revenues and volumes are expected to grow modestly in 2009. This entire group is influenced by competitor’s prices, which may include fuel surcharges. P.L. 109-435 has provided an opportunity for greater competition by the Postal Service in this area of services.
Pricing for shipping services will change in January 2009, with new prices announced in November 2008. The move to a January implementation for shipping services is consistent with industry standards, and provides a clearer picture of the competitive, affordable rates the Postal Service offers. P.L. 109-435 changed the way we operate and conduct business. It provides new flexibility, especially in competitive pricing for shipping services, enabling us to respond to dynamic market conditions and changing customer needs. Prices will change in January for Express Mail, Priority Mail, Parcel Select, Parcel Return Service, and some international shipping products. It will be the first time we will separate price adjustment and implementation dates for our shipping and packaging business from the dates for our mailing services and products.
Expense Outlook
Total expenses for 2009 are estimated to increase between 1.0% and 2.0%. Personnel costs increases in 2009 will be driven primarily by cost-of-living adjustments, contractual pay increases, and increases in health benefits. This will be offset by planned cost reductions. We are offering voluntary early retirement opportunities to almost 25% of our workforce in 2009. The total number of employees who accept the early retirement offer will impact the savings for FY 2009.