International Mail Air Transportation:

Proposed Changes to the Rate-setting process

GAO-05-529R: Published: Apr 8, 2005. Publicly Released: Apr 8, 2005.

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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.

DOT's process for setting international mail air transportation rates is based on a methodology that was established by CAB in the late 1970s. The methodology set at that time allocated all the expenses required to transport the mail on the basis of the percentage of mail traffic to total traffic (i.e. mail, passengers, and cargo). DOT's process for annually updating the rates involves air carriers submitting the relevant cost and volume data to DOT, which then incorporates that updated data into the CAB methodology. Over the last few decades, changes have occurred in the domestic and international mail and air transportation markets that have greatly altered the environment in which these services are provided. These changes include deregulation of the airline industry, deregulation of some domestic and international mail transportation rates, increased competition from foreign air carriers, expansion of the global postal marketplace, and changes in the air transportation marketplace. Potential implications of these market changes on the current rate-setting process are that the process may not reflect the current costs of transporting mail and may not be consistent with deregulated and competitive air transportation and international mail markets, may not provide sufficient incentives for efficiency gains, and may not reflect or respond to changes in customer service demands. Thus, USPS may not be benefiting from potential cost saving opportunities--USPS stated it may be paying rates that are too high for services that it does not need, its customers, including DOD, may be incurring higher costs than necessary, and the air carriers may be providing services that are not required. Provisions in the proposed postal reform legislation would end DOT's role in setting rates related to international mail air transportation and grant USPS the flexibility, under certain conditions, to negotiate with both U.S. and foreign air carriers about rates and services to be provided. Section 1004 of this legislation includes congressional guidance that suppliers and contractors be treated fairly and consistently. Section 1002 includes a reciprocity provision under which each contract awarded to a foreign air carrier shall be subject to the requirement that U.S. air carriers be provided the same opportunity to carry mail of the country to and from which the mail is transported and, if different, the flag country of the foreign carrier. DOT has not taken a position on the provisions in the current legislation. However, it has in the past supported legislative proposals to remove DOT from the rate-setting process. Other stakeholders, however, have voiced divergent views of these provisions to change the rate-setting process. USPS supports these provisions because it believes the provisions will result in lower costs for USPS, provide better incentives for service performance, and allow it to better compete in the global market. We found that the provisions related to changing the process for setting international air transportation rates are consistent with key principles of balancing flexibility, efficiency, and fairness that we have identified as being important for transforming USPS so that it can remain viable in the competitive 21st century environment. These provisions grant USPS the flexibility to utilize private sector best practices to improve overall efficiencies by allowing it to, among other things, negotiate rates and services with certain U.S. and foreign carriers. Furthermore, other provisions in this postal reform legislation are consistent with the principles of ensuring fairness and consistency.

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