The Challenge To Deliver

Letter From The Postmaster General And CEO And The Chairman Of The Board Of Governors

John E. Potter Postmaster General and Chief Executive Officer

Carolyn Lewis Gallagher Chairman, Board of Governors

To the President, members of Congress, postal customers, postal employees, and the American people:

Our 2009 fiscal year proved to be one of the most challenging in the history of the Postal Service. The deep economic recession significantly affected commercial mailing activity, creating a large imbalance between Postal Service revenues and costs. Total mail volumes declined an unprecedented 13 percent, or 25 billion pieces, compared to 2008, and operating revenues declined 9.1 percent to $68.1 billion. We concluded the year with a deficit that would have exceeded $7 billion had it not been partially offset through federal legislation that lowered the payment to our retiree health benefit trust fund by $4 billion.

As a self-funding organization operating independently of taxpayer support, such a steep and sudden decline in revenues required immediate, deep and aggressive cost-cutting throughout the organization. We are proud to say that we were able to reduce our total costs by an unprecedented $6 billion, and we did so while maintaining record high end-to-end service performance and customer satisfaction.

The Postal Service reduced the number of employees and overtime; renegotiated with suppliers to obtain more favorable terms; reached an agreement with the National Association of Letter Carriers to expedite the adjustment of delivery routes; imposed a moratorium on new construction; made significant process improvements; provided retirement incentive for up to 30,000 employees; and eliminated non-essential programs and projects.

To generate additional revenue, the Postal Service aggressively exploited the pricing flexibility provided by the Postal Accountability and Enhancement Act of 2006 (“PAEA”) to stimulate mail volume. Three such initiatives — the Standard Mail “Summer Sale,” the Saturation Mail Incentive, and most recently, the First-Class Mail Incentive Program — all offer price incentives on incremental volume. Recognizing that use of the mail is one of many alternative communications channels available to advertisers today, the Postal Service will explore additional ways — including price incentives — to ensure that advertisers and other customers continue to view the mail as an attractive value proposition.

Additionally, the Postal Service was supportive of and is grateful to President Obama and the United States Congress for the recent enactment of legislation (P.L. 111–68), which reduced the Postal Service’s retiree health care prefunding burden by $4 billion. However, while enactment of this legislation enabled the Postal Service to meet all of its financial obligations in fiscal year 2009, it was fundamentally a short-term response to a near-term cash gap — one that will likely recur in coming years in the absence of structural reforms.

The Board of Governors believes strongly that the Postal Service needs to operate with greater flexibility to meet the evolving marketplace demand for mailing products and services. Toward this end, we hope in 2010 to engage our customer and business partner stakeholders, the Administration and Congress, and the American people in a dialogue to determine a more financially sustainable future for the Postal Service. Building consensus for possible structural reforms, such as gaining the flexibility to transition to five-day delivery, is urgently needed for the Postal Service to remain self-sustaining on a long-term basis.

As we move aggressively to meet the challenges posed by the current economic downturn, and work to maintain the high level of service expected by the American people, we are ever mindful of the more than 600,000 career Postal Service employees whose dedication and commitment allows us to fulfill this mission. It is to their credit that the Postal Service remains among America’s most trusted, ubiquitous and indispensable organizations.

As you review in the following pages the many accomplishments of the past year, we hope you’ll share our confidence in a Postal Service that is ready to embrace change in order to better serve the evolving needs of the American public.

Despite the effects of the economic turmoil of the past year, the Postal Service remains a vital driver of the American economy, is an integral part of every American community, and delivers the greatest value of any comparable post in the world. If given the flexibility to respond to an evolving marketplace, it will continue to do so far into the future.