International Mail Air Transportation: Proposed Changes to the Rate-setting process

Provisions in the Senate's proposed postal reform legislation, the Postal Accountability and Enhancement Act, seek to address longstanding concerns about the Department of Transportation's (DOT) role in setting transportation rates for certain segments of the U.S. Postal Service's (USPS) international mail. Specifically, these rates are what air carriers charge USPS for transporting letter-class and military mail to international destinations. The methodology DOT uses to set these rates was established by the Civil Aeronautics Board (CAB) in a rate proceeding that concluded in the late 1970s. The transportation of this mail is subject to various statutory requirements, such as having DOT set the rates that USPS is to pay to U.S. air carriers for transporting international mail and a duty to carry provision that requires the air carriers to provide facilities and services for transporting this mail. DOT, USPS, and U.S. air carriers have raised concerns about the current rate process, particularly because the rate-setting methodology has not been comprehensively updated since the late 1970s. Some stakeholders view the current rate-setting process as an anachronism in today's increasingly deregulated international mail and transportation marketplace. USPS has stated that this system results in excessive rates, which negatively affects its financial position and impedes its ability to compete in the international postal marketplace. Some U.S. passenger carriers, however, are concerned that eliminating the current system would exacerbate their existing financial difficulties. Although the stakeholders made efforts over the past year to improve the current rate-setting process, they were not able to reach a consensus. The proposed legislation would eliminate DOT's rate-setting authority and allow USPS to negotiate contracts with U.S. and foreign air carriers for its international mail transportation rates and services. Therefore, to gain a better understanding of the rate-setting process and the potential impact of the provisions in the recently introduced postal reform bill related to setting rates for international mail air transportation, our objectives were to (1) describe the current process DOT uses in setting international mail air transportation rates, how the mail transportation market has changed over time, and the possible implications of these market changes for the current rate-setting process; (2) describe applicable S.662 provisions and the key stakeholders' views of these provisions; and (3) assess these provisions against key principles of postal reform--flexibility, efficiency, and fairness.