Responsibility for identifying opportunities and risks is devolved to the individual Business Departments, Corporate Departments and subsidiaries. The transfer of information to higher levels in the hierarchy is controlled by way of predefined materiality levels, updated on a quarterly basis, and consolidated centrally. The Board of Management receives a report on the significant opportunities and risks in the Group on a twice-yearly basis. Any major changes occurring over time are reported immediately. The functions of our risk management system are documented in a Group-wide manual, and are regularly examined for their suitability by Corporate Audit and the external auditors.

We are subject to risks arising from macroeconomic factors particularly in the form of political, legal and tax-related developments. For example, a rise in taxes, fees, or the cost of raw materials also causes our transport costs to increase.We do not consider the Group to be subject to any material risks with regard to economic and sociopolitical developments.

There are various sector risks for our Corporate Divisions. The MAIL Corporate Division in particular is subject to significant risks arising from the public policy framework. With the amendment to the Postgesetz (German Postal Act) in line with the EU Directive on the deregulation of the European postal market, letters and addressed catalogs over 100g were opened up to competition as of January 1, 2003. Starting in 2006, the weight ceiling will be cut to 50g. Alongside the related competition risk on the domestic market, this will also open up new opportunities for us on the European mail markets. The Postgesetz allows exceptions on the basis of which competitors are permitted to operate in the local post segment even within the boundaries of our exclusive license. The resulting additional competitive pressure can be seen from the fact that the RegTP had issued licenses to 1,255 licensees by the end of 2002.

On July 26, 2002, RegTP also announced its decision on the so-called price-cap procedure. It set out the framework for postal rates for mail products requiring approval, on the basis of which we will be obliged to cut prices or entitled to raise prices, depending on the rate of inflation, in the period January 1, 2003 to December 31, 2007. The mandatory price reductions that took effect for the most important mail products as of January 1, 2003 will depress our revenue and earnings by around €300 million a year throughout this period. Furthermore, we will have to allow customers and competitors partial access to our networks in accordance with conditions determined by the regulator.

Despite increased electronic communication, we expect that, on balance, volumes in the MAIL Corporate Division will remain stable due to market growth. Competition for the EXPRESS and LOGISTICS Corporate Divisions has heated up further, particularly on the European markets. We aim to counter the risks arising from this development by integrating all of the Group companies which are active in these markets under the DHL name, and developing joint products. An increase in the risk of terrorist attacks could dramatically increase the cost of the necessary insurance cover for DHL’s aircraft fleet.

The primary risks affecting the FINANCIAL SERVICES Corporate Division are market price risk and counterparty (default) risk. These are intensively monitored and managed by Postbank using a comprehensive set of instruments for risk management in foreign exchange trading, securities trading and lending, among other things. Compliance with the limits set by the Board of Management is monitored daily. Postbank is currently establishing a risk system for operational risks to ensure that compliance with the new requirements set out in the second consultation paper of the Basel Committee on Banking Supervision Basel II is achieved ahead of schedule.

Legal risks arise from the competition case pending before the European Commission. In the competition proceedings, which were initiated on the basis of accusations of excessive letter rates made by the Deutscher Verband für Post und Telekommunikation (DVPT - German Association for Posts and Telecommunications), we have presented the European Commission with detailed evidence of the reasonableness of our prices.

We have substantially reduced potential infrastructure risks by systematically monitoring our expensive conveyor and sorting systems, and by taking precautions in a number of areas, such as fire protection and IT security. In addition, corresponding emergency and contingency plans are in place in order to avoid potential interruptions to business due to fire, accident or natural disaster.

Financial risks relate to exchange rates, interest rates and the cost of raw materials.We limit the Group’s exposure to such risks by employing primary and derivative financial instruments. Derivatives are only employed when they can be allocated to an underlying transaction.

As a matter of principle, all financial transactions are captured regularly in a treasury risk management program. The Company’s management is kept informed about hedging measures on a timely basis as part of ongoing reporting. Derivatives are traded exclusively with prime-rated banks. In addition, the credit rating of counterparties is reviewed regularly and a trading limit is fixed. Hedging instruments are accounted for in accordance with IAS 39.

With regard to individual risks:
The Group’s monetary receivables and liabilities are subject to interest rate risks. Regular interest rate analyses help us to quantify this risk profile.We limit interest rate risk by implementing standard hedging instruments as part of our strategy of active interest rate management.

Due to the international nature of business throughout the Group, there are a variety of cash flows in foreign currencies, giving rise to exchange rate risks. For this reason, currency management is another key component of Group risk management. All Group companies are obliged to hedge currency risks when they arise. Hedging transactions are generally concluded with Corporate Treasury. Central currency management consolidates all of the Group’s foreign currency cash flows and calculates the net position for each currency. Each net position may be hedged with external counterparties, depending on the assessed risk. The most important foreign currency for the Group is the US dollar, since we conduct most of our foreign currency business in the US and in countries whose monetary policies are oriented towards the US dollar.

A further key component of our risk management strategy is raw materials management. Globally, we use around 250 aircraft and over 100,000 vehicles. This means that large quantities of various fuels are required, such as kerosene, diesel and gasoline. A portion of our fuel requirements is regularly hedged in advance. In addition, DHL issues fuel surcharges in the case of unusually high price increases.

As of the end of the fiscal year, no risks which could threaten the continued existence of the Group were identified. There is also no overall risk to the Group’s existence in the foreseeable future.

New technologies and services developed
As a service provider, Deutsche Post World Net does not carry out research and development in the narrower sense. At the same time, all of the Group’s Business Divisions are focused constantly and intensively on the fundamental task of research and development. Although the effort involved in these activities cannot be quantified, the results are visible – in the form of new products and business concepts, for example.

Among other things, our efforts were concentrated on the EXPRESS Corporate Division. In the second quarter of 2002, we started to install an innovative online communications platform which forms a cornerstone of the Europe-wide harmonization of our information technology. This new platform is a multi-functional, mobile terminal for parcel delivery, and has the footprint of a mobile phone. It allows information to be transferred between drivers and depot employees quickly and comprehensively, as well as serving to further optimize route planning. We are aiming to introduce this courier terminal at all of our European partners by the end of 2003. The greater data transparency provided as a result will allow us to improve our business processes, further improve quality, and identify potential savings.

Environmental protection and sustainable development intensified
In 2002, we set out a Group-wide environmental policy defining the areas of activity and responsibility within the Group.With these guidelines, we are aiming to ensure that our actions are even more closely tied to the principles of sustainable development.

We set ourselves the goal of making our transport activities even more environmentally friendly. In our opinion, integrated global transport networks are a prerequisite for sustainable mobility in the transport and logistics sector. The measures implemented in the year under review were concentrated on three key areas: optimizing transport flows, networking modes of transport, and expanding our fleet of modern, fuel-efficient vehicles.

For example, we further developed IT-based systems such as “GeoRoute”, a system for optimal, down-to-the-minute route planning which helps to reduce deadhead trips. In 2002, we were already able to reduce the total distance traveled by around 15,000 kilometers per week. With the “Parcel Intercity” project, we are shifting transportation within Germany from road to rail; we have now extended our successful cooperation with Deutsche Bahn Cargo until the end of 2004. In Switzerland, over 60% of our freight volume is already transported by rail. In Scandinavia, we offer “Green Tonnage”, a transport system using low-emission biogas and electric hybrid vehicles. In addition, we are pressing ahead with the employment of alternative drive technologies within the Group, such as courier vehicles using liquid gas.

The modernization of DHL’s aircraft fleet is a top priority. To this end, DHL has invested in 34 modern aircraft. Offering a noise reduction of 77%, the Boeing 757-SF more than meets all current noise legislation. It uses 20% less fuel per tonne, and emits significantly less CO2 than its predecessor, the B727. It can also carry 6,000kg more freight than the B727, thereby reducing overall transport costs. 20 of the 34 aircraft were delivered by December 2002; the remaining 14 will be ready for use by September 2003. At the same time, we will successively reduce our previous B727 fleet to 15 aircraft by the end of December 2003.

With our Group-wide value creation program, STAR, we have set out a number of projects aimed at conserving resources and reducing environmental impact. A prime example of this is our new integrated pick-up & delivery network in Europe, with which we intend to reduce the number of trips by more than 5% by 2005; at the same time, we will increase capacity utilization per trip by 10%, thereby cutting down on fuel consumption and emissions. We will reduce the scope of our overnight airmail network by twelve flights daily, which will result in a corresponding reduction in environmental impact and noise. We will also intensify employee training in order to promote environmental awareness within the Group. By 2005, for example, professional driving instructors will teach all 15,000 of our parcel deliverers how to drive using less fuel.

The efficient use of resources and protecting the climate are also two key factors behind the innovative energy and air conditioning concept at our new Group headquarters. The Post Tower boasts floor heating and cooling, with ground water used as a cooling agent. The double-skin facade means that around 20% less heating energy is needed compared with regular HVAC technology, and the use of cool ground water will reduce energy requirements in summer by around 30%.

We have identified and evaluated the environmental impact of our activities in Germany. Based on these results, we have developed an environmental program for 2003 and are also planning to publish our first-ever environmental report in the current fiscal year. We intend to press ahead with the use of environmental management systems. In 2002, DHL became the first air express courier to be certified under DIN ISO 14001 for its environmental management. Certification of the express service in Germany will be completed in 2003, and we will extend this certification to other key European locations by the end of 2004.

We are committed to our social responsibility
One aspect of our social responsibility is to help promote economic and social development in countries and continents. As a global company, we aim to make a contribution towards improving mobility, expanding social infrastructures and solving the challenges faced around the world. We carry out national and international labor market research in cooperation with the private-sector Institut zur Zukunft der Arbeit (IZA – Institute for the Study of Labor).

We have concluded a partnership agreement with the World Bank for over 500,000 US dollars. We are providing the World Bank with 50% of this amount in cash; the remaining $250,000 is guaranteed in the form of consultancy services. The aim of this agreement is to improve infrastructure and economic development in developing countries with regard to postal logistics, thereby contributing towards the fight against poverty.

In the year under review, we initiated the “Food for Afghanistan” program in conjunction with the international charity CARE and the North Dakota Farmers Union. A total of 1,000 tonnes of wheat – a donation by the North Dakota farmers – was transported to Afghanistan free of charge by Deutsche Post World Net; it was then distributed to widows and their children in Kabul by CARE.

In the US, we founded the “Deutsche Post USA Scholarship Fund” in the name of our 16,000 US-based employees. The fund, which is run in conjunction with the renowned Citizens’ Scholarship Foundation of America, has a total volume of 500,000 US dollars. It awards scholarships to young US citizens suffering in the aftermath of the terrorist attacks on September 11, 2001.

Group-wide procurement bundled
In the year under review, Corporate Purchasing entered into a number of worldwide agreements with global suppliers for goods and services with a high procurement volume. This has helped to increase the Group’s security of supply, while at the same time creating a cheaper economic basis for our procurement departments. A central agreement database gives all buyers within the Group access to the relevant information.

The annual procurement volume within the Group is currently €15.6 billion. Of this amount, €8.2 billion is attributable to transportation alone; the remaining €7.4 billion is due to so-called indirect goods and services, such as IT, vehicles and production systems. This procurement volume offers considerable potential for savings; for this reason, we analyzed all of the procurement processes and organizations within the Group as part of the STAR value creation program. As a result of this analysis, we intend to introduce binding Group-wide standards for procurement.