REPORT TO THE CONGRESS

1998 INTERNATIONAL MAIL

VOLUMES, COSTS AND REVENUES

POSTAL RATE COMMISSION

1333 H Street, NW

Washington, DC 20268-0001

June 30,1999
NOTICE: This Reporf contains information that the Postal Service considers to be of

a commercial nature, including trade secrets, which under good business practices it

would not publicly disclose. The Postal Service provided this information as required by

39 U.S. C. 3663(b), but it requests that this information be kept confidential.

SUMMARY

This is the initial report to Congress on the costs, revenues, and volumes of

international mail handled by the United States Postal Service. This report analyzes

fiscal year 1998 information.

The Commission finds that the data provided by the Postal Service on its

international mail costs, revenues and volumes are generally reliable and the

Commission has included an analysis of the coefficients of variation for the attributable

costs per piece of international mail products.

All international mail combined generated revenues equal to 112.9 percent of its

attributable costs. In comparison, all domestic and international mail combined

generated revenues equal to 158.3 percent of its attributable costs. The financial

performance of international products is summarized in a table appearing at page 9 of

this report

Financial results are presented separately for outbound international services

and inbound international services. The Postal Service has unilateral authority to set

the rates for mail sent from the United States to other countries. In total, Outbound

International Mail recovers its attributable costs and makes a contribution to the

institutional costs of the Postal Service, although at least four individual international

services do not earn revenues sufficient to cover their attributable costs. See page 35.

The Postal Service does not set the rate of compensation it receives for

delivering a substantial portion of the mail sent from other countries to the United

States. The Universal Postal Union (UPU) establishes schedules of terminal dues that

countries must accept as payment for the delivery of letters and printed matter. In total,

Inbound International Mail does not recover its attributable costs, largely because

terminal dues do not fully compensate the Postal Service for the delivery of inbound

letters and printed matter.

The Postal Service was cooperative in providing data requested by Commission,

however it failed to provide sufficient information to enable the Commission to evaluate

two small international services, Value PoWCanada and Bulk Letter Service to Canada.

Rates for these services were recently increased, which may be an indication that the

revenues for these service have not been covering costs.
Report to Congress 1998 international Mail

TABLE OF CONTENTS

Page

I. INTRODUCTION ..................................................................................................... 1

ii. GENERAL DESCRIPTION OF INTERNATIONAL MAIL.. ....................................... 5

A. The Basic Categories of international Mail Service ........................................... 5

8. Characteristics of international Mail Rates ......................................................... 6

C. Description of Specific International Mail Services .............................................

Iii. MEASURING THE COSTS, REVENUES, AND VOLUMES OF INTERNATIONAL

MAIL.. ....................................................................................................................12

A. Description of Data Sources and Data Development Methodology.. ............... 12

(1) Outbound Revenue, Pieces, and Weight.. ............................................... 12

(2) Inbound Revenue, Pieces, and Weight.. .................................................. 13

(3) The Development of Attributable Costs for the Standard Services .......... 14

(4) The Development of Attributable Costs for the initiatives ........................ 16

(5) International Mail Incremental Costs.. ......................................................17

B. Evaluation of Data Sources and Data Development Methodology.. ............... .17

(1) Outbound Revenue, Pieces, and Weight. ................................................18

(2) Inbound Revenue, Pieces, and Weight.. .................................................. 19

(3) The Attributable Costs for the Standard Services .................................... 20

(4) The Attributable Costs for the initiatives ..................................................2l

(5) Analysis of Unit Attributable Costs.. ......................................................... 22

IV. PRESENTATION OF COST, VOLUME, AND REVENUE DATA ......................... .29

A*

B.

Aggregate Data.. .............................................................................................. 29

individual Services ........................................................................................... 32

(1) Outbound Mail ......................................................................................... -33

(2) Inbound Mail ............................................................................................37

(3) Other Comments.. ...................................................................................38
Report to Congress 1998 International Mail

Table II-1

Table 111-I

Table Ill-2

Table IV-I

Table IV-2

Table IV-3

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E Outbound Regional Data

Appendix F The Postal Service’s Revised Treatment of International Air

Transportation Costs and the Settlement Difference

Appendix G

LfST OF TABLES

Summary of Volume, Revenue, and Attributable Cost for

Section 3663 International Mail Services .__. , . . . . . . . . ..____ _. . . . . . . . . . . .____ __. . . ._ . . . . ..9

Coefficients of Variation for SIRWO Estimates for Selected

Categories . . . . . . . . . . . . . . . . . . . . . . . .._..._..+... I .,...._........_. _ ._.__._.,....... ~ . . . . . . . . . . . .._.____.... 19

Cost per Piece, Revenue per Piece and Coefficients of Variation for

International Mail . . . . . . . . . . . . . .._......._ _ .._. _ .,.....___.._........__ __._ ._.......,....... ~ . . . . . .._.. 25

Summary of FY 1998 Revenue and Attributable Cost for

Outbound and Inbound International Mail . ..* ..,, _ .,....___......._.__...._._._......... 30

Summary of Revenue, Volume, and Costs for Outbound and

Inbound International Mail . . . . . . . . . . . . . . . . . . .._._...__....._.__ _ _.... _ . . .._...___._._....__._._.. 34

Comparison of Revenue and Cost Data and Percentage

Distribution of Originating Volume for Selected International Mail

Categories . . . . . . . . . . .._. _ . . . . . .._....._......__........._.__. + .,.....,...,....,..._.__ _ _......____ . . . ..+.39

LIST OF APPENDICES

List of Reference Sources

Outbound International Services

Measuring the Costs, Revenues and Volumes of International Mail

Derivation of Approximations for Attributable Cost Per Piece (ACP)

and Its Coefficient of Variation (CV)

Reference Material - Postal Service Views

ii
Report to Congress 1998 International Mail

I. INTRODUCTION

On October 21, 1998, the President signed into law H.R. 4328. H.R. 4328

contained a new 5 3663 of title 39, United States Code. Section 3663(a) directs the

Postal Rate Commission to submit to Congress a comprehensive report on the costs,

volumes, and revenues of the Postal Service’s international mail services by July 1 of

each year. Section 3663(b) directs the Postal Service to provide to the Commission, by

March 15 of each year, the data it needs to prepare its repot-t. This is the first such ’

report prepared by the Commission.

Because the Commission’s task is novel, several issues of first impression had

to be addressed during the course of preparing its report. The Commission opened

Docket No. IM99-1 to consider these issues. The most significant issues raised in

Docket No. IM99-1 were the precise nature of the data to be provided to the

Commission by the Postal Service, the proper definition of individual international postal

products for purposes of § 3663 analysis, the proper method for attributing costs to

individual international mail products, and whether data provided by the Postal Service

should be available for public inspection and comment.

Issues that the Commission needed to address were first raised in a round of

pleadings prompted by a petition for rulemaking filed by United Parcel Service (UPS).

UPS requested that the Commission commence a rulemaking to determine “(1) the

data to be provided to the Commission by the United States Postal Service and (2) the

methods to be used by the Commission in analyzing the costs, revenues, and volumes

of each international mail product” to prepare the report required by 5 3663. Petition of

UPS to Institute Rujemaking Proceeding to Study International Costs and Revenues,

December 16, 1998, at 3. In response, the Commission invited interested parties to

submit comments identifying the specific international mail products or services that

should be analyzed. The Commission included a preliminary list of possible

international mail products and asked interested parties to comment on the

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Report to Congress 1998 International Mail

completeness of the list and the appropriateness of the level of disaggregation reflected

by the list. Order No. 1226 (January 15, 7999) at 3.

Upon review ofcomments submitted, the Commission published a revised list of

international mail products or “subclasses,” while recognizing that the Postal Service

might not be able to produce reliable data on some products in time for the FY 1998

report. The Commission also decided that, to the extent possible, its report should

include cost coverages for these international mail products, Order No. 1228 at 2, 5, ,

even if the calculations of those cost coverages could not be revealed because of the

commercial sensitivity of the underlying data. Order No. 1228 (February 16, 1999) at

6-7.

The issue of commercial sensitivity, however, was revisited when UPS sought

access to essentially all the international mail data filed with the Commission by the

Postal Service. UPS made its request in the form of a motion in Docket No. IM99-1.

Motion of United Parcel Service to Provide Public Access to International Mail Data

Requested in Order No. 1228 and for Opportunity to Provide Public Comment,

March 26, 1999. In declining to disclose all of the international mail data provided by

the Postal Service, the Commission distinguished the 5 3663 reporting procedure from

the Commission’s formal rate hearings, where the Commission must balance a litigant’s

need for discovery of facts against a need for protection of commercially sensitive

information. The Commission also noted that the Postal Reorganization Act reiterates

the exemption from the mandatory disclosure policy of the Freedom of Information Act

(FOIA) for commercially sensitive information, and that Congress had taken no steps to

alter the Service’s eligibility for that exemption when passing $j 3663. The Commission

concluded that there was no basis for applying a blanket disclosure policy to

information provided through the $j 3663 reporting process. Order No. 1245 (May 21,

1999) at 3-4.

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Report to Congress 1998 International Mail

The March 15 deadline established in 3 3663(b) is well ahead of the date by

which the Postal Service had traditionally completed its International Cost and Revenue

Analysis (ICRA). Nevertheless, the Postal Service was able to supply a large portion of

the data requested in Order No. 1228 by March 15,1999. Between March 15 and

June 15, 1999, the Postal Service submitted additional clarifying information in

response to six additional Commission data requests.’ The Commission’s data

requests were promulgated via Order Nos. 1236, 1240, 1244, 7246, 1257, and 1252.

The Commission’s data requests generally sought information underlying the Postal

Service’s estimates of the costs, volumes, and revenues of international “subclasses.”

The Commission has been able to evaluate the reasonableness of the Postal

Service’s methods of collecting international mail data and the reasonableness of its

procedures for developing estimates of systemwide totals from those data. They

should yield generally reliable results. However, the short time available for reviewing

the data on international mail provided by the Postal Service has not allowed the

Commission to evaluate that data as thoroughly as it evaluates such data in the context

of a domestic rate case conducted under Administrative Procedures Act standards.

The Commission has had less opportunity to independently confirm that data were

sampled or compiled according to the established procedures. It also has had less

opportunity than is available in a domestic rate proceeding to scrutinize the data for

anomalous results. Although the Commission concludes that the Postal Service’s

estimates for international mail are generally reliable, this conclusion is more tentative

than it typically would be if data on domestic mail were being evaluated in the context of

a domestic rate hearing. As the Commission gains experience with the unique

’ For convenience, this report uses a nontraditional method for citing references. Appendix A

contains a list of numbered references with their complete titles. In this report, citations using the word

“Source” followed by a page number or other location reference (e.g., Source 1, p. 3-l) refer to the

specific numbered source listed in Appendix A.

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Report to Congress 1998 International Majl

characteristics of the data collection systems, rate structures, and markets for

international mail, its subsequent § 3663 evaluations will be more definitive.

On June 7,1999, the Postal Service submitted the FY 1998 ICRA Report -

Postal Service Version. It included a new method for estimating attributable

international transportation costs, and a new approach to analyzing the difference

between imputed settlement costs and the settlement costs in the Books of Account.

Because the Commission has not had time to fully consider the merits of the

methodological changes in the postal Service version, it is not able to validate them.

Nevertheless, the Postal Service’s recent methodological changes, if subsequently

determined to be valid, would have a noticeable impact on international mail costs and

cost coverages. The impact that they would have is shown in Appendix F.

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Report to Congress 1998 International Mail

II. GENERAL DESCRIPTION OF INTERNATIONAL MAIL

A. The Basic Categories of International Mail Service

The Postal Service provides three broad categories of international mail service:

letter post, parcel post and Express Mail. These categories reflect Postal Service

agreements to provide a common set of services on a reciprocal basis with other ,

members of the Universal Postal Union (UPU). With respect to outbound mail, the

Postal Service provides mailers in the United States with access to the domestic

delivery services offered by the postal administration of the destinating country. With

respect to inbound mail, the Postal Service provides access to its domestic delivery

services to the postal administration of the originating country.

Generally, the letter post and parcel post categories are divided into “air,” or

premium service, and “surface,” or regular service. The UPU distinguishes between

mandatory international services, which all members are obligated to provide, and

optional international services. The exchange of international letter-post services on

reciprocal terms is mandatory among UPU members. These services include letters

and cards (LC), whose content is most comparable to domestic First-Class Mail, and

other articles (AO, from the French term “autres objets”). The content of A0 is

comparable to domestic Standard A, Standard B, and Periodicals mail. Printed papers,

literature for the blind, and small packets, are mandatory A0 services. Services that

are optional under the UPU structure include international parcel post (the air portion of

which is analogous to domestic Priority Mail and the surface portion of which is

analogous to domestic parcel post), and international Express Mail Service (EMS),

which is analogous to domestic Express Mail.

There are subcategories of LC, AO, and parcel post that provide service

enhancements to, or volume discounts from, these basic categories of service. Within

Page 5
Report to Congress 1998 International Mail

these subcategories are numerous rate groups. They reflect differences in terminal

dues (the amount that postal administrations have agreed to charge for domestic

delivery of mail originating in another country). They also reflect regional differences in

international transportation costs, which are important for bulk mail and parcel services.

B.

costs:

Characteristics of International Mail Rates

The Postal Service’s international mail rates are designed to cover two sets of ’

(1) the cost that it incurs to collect and forward mail to the postal administration

of the destinating country and, (2) the amount that the postal administration of the

destinating country charges the Postal Service for domestic delivery of that mail. In

aggregate, just about half of the costs of the Postal Service’s outbound international

mail consists of charges for domestic delivery in the destinating country.

Charges for delivering the Postal Service’s outbound international mail in the

destinating country are of three types. K/A0 mail is charged “terminal dues,” parcel

post is charged “inward land rates,” and Express Mail Service is charged “imbalance

charges.” The terminal dues that are charged for delivering IX/A0 mail are set by the

UPU. These are based on a global average cost, and are the same for all UPU

members. This reflects a universal service obligation on the part of UPU members to

take all letter post items sent by other UPU members.

Terminal dues rates are set by the Congress of the UPU, which convenes every

five years, The Postal Operations council of the UPU, however, can amend them

between Congresses. The Postal Service unilaterally determines what it will charge to

deliver optional categories of inbound international mail. It sets the inward land rates

that it charges to deliver inbound parcel post. It may revise them annually. It also

enters bilateral agreements that set the imbalance charges that it applies to inbound

Express Mail Service.

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Report to Congress 1998 International Mail

Currently three terminal dues rate structures may be applied to the LWAO mail

of UPU members. The first is the basic dues structure, which is a flat rate per kilogram.

Where the mail flow between a pair of member countries is above a 150-metric-tonthreshold, a second dues structure known as a “revision mechanism” may be invoked.

The revision rate is a combined per-item and a per-kilogram rate that may be invoked

for mail flows that are either considerably lighter than average, or considerably heavier

than average, in terms of the number of pieces per kilogram, Invoking the revision ,

mechanism has the effect of reducing terminal dues charged to deliver mail that is

heavier than average, and of increasing terminal dues to deliver mail that is lighter than

average.’ The third structure is a bulk mail option. Of minor importance is the lower

terminal dues rate that applies to M-bags. (M-bags contain the A0 mail of one mailer

all going to a single foreign address.). The Postal Service also enters into multilateral

payment agreements to settle its accounts outside the UPU structure. The Postal

Service entered into separate agreements with the European Bilaterals (EURB)’ and

Canada.

C. Description of Specific International Mail Services

Section 3663(a) of title 39 requires the Commission to prepare “a comprehensive

report of the costs, revenues, and volumes accrued by the Postal Service in connection

with mail matter conveyed between the United States and other countries.” Section

3663(b) indicates that the Commission’s report should “analyze the costs, revenues,

and volumes for each international mail product or service, under the methods

2 The revision mechanism is asymmetrical. It can be invoked to reduce terminal dues for flows of

heavier-than-average mail from developing countries to industrialized countries, but cannot be invoked to

reduce terminal dues for flows of heavier-than-average mail from industrialized countries to developing

countries. See Appendix A, Source 14.

3 Belgium, Denmark, Finland, France, Germany, Great Britain, Iceland, Ireland, Italy,

Luxembourg, Netherlands, Norway, Spain, and Sweden. See Appendix A, Source 13.

Page 7
Report to Congress 1998 International Mail

determined appropriate by the Commission for the analysis of rates for domestic mail.”

Section 3663(b) does not specify which of the over 70 international products and

services that the Postal Service offers should have its “costs, revenues, and volumes”

separately analyzed in this report. The Commission, therefore, must decide at what

level of detail a presentation of costs, revenues, and volumes would most meaningfully

aid Congress’ understanding of the financial posture of the Postal Service’s

international mail services.

The Commission infers from 5 3663 that Congress contemplates a report that

provides data and analysis from which the Congress can draw conclusions about the

adequacy of the rates charged for international services, whether viewed from the

standpoint of the Postal Service’s domestic users, or from the standpoint of the

competitors of the Postal Service’s international services. From either viewpoint, it

would appear that an important consideration is identifying which categories the Postal

Service itself focuses on when it relates international mail rates to costs. Consequently,

this report attempts to display the financial posture of the international services for

which the Postal Service consciously designs a specific margin of revenue over costs

(or “cost coverage”) when it chooses rates for its international services. In subsequent

reports, the Commission will have an opportunity to consider whether additional criteria

might be appropriate for determining the list of international services to be included in

reports submitted under 5 3663. The Commission’s first report under 5 3663, however,

presents cost, revenue, and volume data for a list of international services for which the

Postal Service itself designs specific cost coverages. See Table U-1, below.

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Report to Congress 1998 International Mail

TABLE II-1

SUMMARY OF VOLUME, REVENUE, AND ATTRIBUTABLE COST

FOR SECTION 3663 INTERNATIONAL MAIL SERVICES

International Mail Category

OUTBOUND MAIL

surface

Printed Matter & Small Packets. exct ISAL 8 Per

Periodicals

Parcel Post

Int’l Surface Airlift

ValuePostKanada I!

Subtotal, Surface

Air

Letters and Letter Packages

Postcards, Postal Cards, and Aerogrammes

Printed Matter and Small Packets (AO)

International Priority Airmail Service

Bulk Letter Service to Canada L/

Parcel Post

Express Mail International Service

Subtotal, Air

Initiatives

Global Pnority Mail

Global Package Link

Direct Entry/Inbound

International Customized Mail

Subtotal, Initiatives

Total Outbound

INBOUND MAIL

Surface WA0

Surface Parcel Post

Surface Subtotal

Air LC/AO

Express International Mail Service

Air Parcel Post

Air Subtotal

Direct Entry/Inbound

Global Parcel Services

Other 11

Total Inbound

International Service Incremental Cost

Volume

(1) ($1

(2)

Attributable Contribution

Cost ($) ($1

(31 (4)=(2)-W

Cost

Coverage

(5)=(2)/W

28.215

65.082

2,312

163,587

259,196

57,461

68.615

57,607

116,120

0

299,803 310,880 (11,077) 96 4%

510,053

63,010

45,017

52,843

4,240

4,694

679,857

451,943

31,299

194,833

39.219

0

124,029

125,363

966,686 633,264 333,402 152,6%

33,002 66,307 76,356 (10,049) 86.8%

972,055 1,332,796 1,020,520 312,276 130.6%

46,735

2,142

48,877

587,926

3,763

2.192

593,881

301

1,049

36,637

16,752

53,389

163,179

30.137

20,029

213,345

116

2,552

12,909

262,311

62,561 (9,172)

222,081 (8,736)

B44,lOB

0

287,379 (5,OSB)

122,445 (122,445)

85.3%

96.1%

98.2%

0.0%

Total International Mail 1,616,163 1,615,107 1,430,344

Source Table IV-2 I/ See Table IV-2 for caveat.

164,763 112.9%

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Report to Congress 1998 International Mail

-

A second concern causing the Commission to modify the list of international

Services Covered by its report is that some international services are so small, and the

sample data are so thin, that separating their cost, revenue, or volume data from the

larger subclass to which they belong yields results that may not be sufficiently accurate

to support meaningful conclusions. Accordingly, some senrices (specifically M-Bags)

are combined with their parent subclass (AO) for purposes of calculating their cost

coverages.

Table II-l, therefore, displays costs, revenues, and volumes for all of the

outbound international services for which the Postal Service separately selects a target

cost coverage, except for ValuepostKanada, Bulk Letters to Canada, and M-bags. It is

apparent that Table II-I disaggregates outbound services to a greater extent than

inbound services. This reflects the fact that the Postal Service determines what it

charges for outbound services+ but has only limited influence over the charges

promulgated by the UPU for inbound LClAO services. The Postal Service sets rates,

and has distinct revenue targets, for more outbound services than there are distinct

inbound services.

The outbound and inbound flows of the broad, UPU-defined subclasses of

international mail are related in the sense that country pairs exchange mail service that

is similar in content and service features. In the case of LWAO mail, the same terminal

dues rates are applied to both directions of the exchange. All things being equal, an

increase in terminal dues will increase the markup on inbound mail and decrease the

markup on outbound mail. It can be argued, therefore, that the outbound and inbound

costs, revenues, and volumes of like services should be combined to determine the

financial posture of a given service. Counter-arguments are that many outbound mail

services do not have direct inbound analogues, and that outbound flows are not the

primary cause of inbound mail flows. Furthermore, the costs and service features of

outbound mail are largely within the control of the originating postal administration,

Page 10
Report to Congress 1998 International Mail

while the charges and service features that apply to inbound mail are largely

determined by the UPU. It can be argued that because of this bifurcation of

responsibility, the financial posture of a given outbound international service should be

analyzed separately from its corresponding inbound service.“ The Commission has

concluded that both points of view can be accommodated by presenting the costs,

revenues, and volumes of outbound and inbound mail flows separately for the services

included in Table II-l. The separated data can be readily combined by those who view.

particular outbound and inbound services as sufficiently related to warrant combined

analysis.

The Postal Service characterizes some of its newer products that are designed

to compete directly with privately provided international mail services as its international

mail “initiatives.” These are displayed together in Table II-1 at lines 15 through 19.

A description of the international services listed in Table H-7 is presented in

Appendix 6.

4 The Postal Service itself has changed its position on this issue. Prior to 1986, the Postal

Service pooled outbound and inbound costs in selecting target cost coverages for its international

services. This had the effect of burdening outbound ratepayers with the cost of delivering inbound,

foreign-origin mail. After it suspended application of the Private Express Statutes to its international

services in 1986, the Postal Service designed rates for its outbound international services to cover the

costs only of the outbound portion of each service.

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Report to Congress 1998 International Mail

III. MEASURING THE COSTS, REVENUES, AND VOLUMES OF INTERNATIONAL

MAIL

A. Description of Data Sources and Data Development Methodology

The Postal Senrice uses many of the same data sources for international mail

that it uses for domestic mail. For volumes, this includes the Permit system. For costs,

this includes the In-Office Cost System (IOCS), the Transportation Cost System

(TRACS), and the City Carrier and Rural Carrier data collection system. Where

necessary, the Postal Service augments its data needs with additional data systems

like the System for International Revenue and Volume - Outbound (SIRV/O) or the

System for International Revenue and Volume -Inbound (SIRV/I). The Service also

has to account for its new offerings referred to as initiatives. Because some of the

existing data collection systems do not generate sufficient information on the initiatives,

the Service uses alternative data sources to obtain estimates. This section briefly

describes the data sources and the methodology the Postal Service uses to calculate

the revenue, pieces, weight, and attributable cost for international mail. A more

detailed description is contained in Appendix C. It should be noted that the Posta!

Service has provided attributable costs using the Commission’s costing methodology,

i.e., the same costing methodology that underlies the recommended rates in the

Commission’s most recent decision in an omnibus domestic rate case.

(1) Outbound Revenue, Pieces, and Weight

In FY 1998, the Service obtained its volume and revenue data from the Permit

system or permit-like systems. These systems identified 33 percent of outbound piece

volume. See Appendix C at 3. The remaining 67 percent were obtained from the

SIRV/O. The Permit system tracks the data from mailing statements on a census basis,

Page 12
Report to Congress f998 International Mail

as do the permit-like systems. These census systems cover (I) Periodicals,

(2) lnternational Surface Airlift (ISAL), (3) International Priority Airmail Service (IPAS),

(4) ValuePosUCanada, (5) Bulk Letter Service to Canada, (6) Global Package Link

(GPL) (except for a small portion), (7) Direct Entry, (8) Express Mail International

Service (EMS), (9) Global Priority Mail (GPM), and (10) International Customized Mail

(ICM).

The SIRV/O is a stratified random sampling system that collects revenue and .

volume data for (1) Surface Printed Matter, (2) Surface Parcel Post, (3) Air Letters and

Letter Packages, (4) Air Cards and Aerogrammes, (5) Air Printed Matter, and (6) Air

Parcel Post. The SlRVlO is supported by the Military and International Accounting and

Dispatch System (MIDAS). This operational system provides a census count of the

weight of outbound mail by destination country. It provides a control weight figure for

adjusting sample estimates to coincide with a direct measure of the actual weight of

international mail.

The Service also uses an auxiliary sample data collection system independent of

the SIRVKI to provide an estimate of GPM volume by country. The accounting systems

do not track GPM volume by destination country. The sampling process is similar to the

SIRVIO.

(2) Inbound Revenue, Pieces, and Weight

The Postal Service’s International Accounts Branch (IAB) routinely collects

volume information on inbound international mail from the manifests that accompany

the mail. Source 1, p. 6-1 and Source 8, Response to Item 2. Through this process, it

collects piece and weight data for parcel post, EMS, and M-bags. For LC/AO mail it

collects only weight information. To develop the number of pi&es for this mail, the

Postal Service estimates the average number of pieces per kilogram by transportation

mode and country or country groups, This estimate is obtained from the SIRVII, which

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Report to Congress 1998 International Mail

is a stratified random sampling system similar to SIRVIO. The Service multiplies the

total weight of inbound LClAO mail for each country by the applicable piece per

kilogram. Source I, p. 8-2 and 8-5.

To develop inbound revenue for mail, the Service multiplies the volumes,

described above, by the applicable terminal dues rate, inward land charge, or

imbalance charge, adjusted for the appropriate exchange rate. The Service knows

these charges from agreements with other countries and published schedules. 0

Source 1, p. 6-l. The Postal Service maintains a separate system for accumulating

revenue and volume information on inbound mail from Canada. The Service uses the

same calculation procedure for Canadian mail as described above. Source 1, pp. 6--l

and 6-3.

Since the described procedure provides imputed values for revenue, the Postal

Service adjusts the figures to match the revenues included in the Domestic RPW

Report. Air conveyance dues and transit fees are obtained from the books of accounts.

Source 1, p. 6-3.

(3) The Development of Attributable Costs for the Standard Services

There are six generalized components for international mail costs: (1) mail

processing; (2) delivery (in-office and street), (3) domestic transportation;

(4) international transportation; (5) settlement charges; and, (6) “all other” costs

(primarily costs that piggyback on the directly variable costs). This categorization

accounts for all cost elements in the Domestic Cost Segments and Components Report

and the Domestic Cost and Revenue Analysis (CRA), which has a line item for

international mail.

Outbound services incur domestic mail processing, domestic transportation,

international transportation, terminal dues (the cost of delivery in the destination foreign

country), and applicable “all other costs.” Outbound costs do not require domestic

Page 14
Report to Congress 1998 International Mail

delivery. Inbound mail incurs domestic mail processing, domestic transportation,

delivery, and applicable all other costs. Inbound mail does not incur settlement charges

or international transportation costs.

The costs for mall processing are based on a combination of the Management

Operating Data System (MODS) activity cost and In-Office Cost System distribution

keys. Delivery costs are based on IOCS information and the data in the city and rural

carrier cost system. This report is based on an ICRA that uses the Commission’s I

methodology.

Domestic transportation costs are obtained from the book of accounts and

distributed to international services on the basis of distribution keys derived from

TFWCS. For some expense categories, the TRACS data are not sufficiently detailed.

In these cases, the Postal Service uses the outbound and inbound volumes described

above as a distribution key. Source 1, p. 2-l.

International transportation cost is attributed only to outbound mail. The

applicable cost for each service is obtained in four steps: (I) from International

Accounts Branch (IAB) data, unit cost by country and mail category is calculated,

(2) unit costs are multiplied by more detailed mail category information to develop

country totals, (3) country totals are grouped into applicable rate groupings, and (4) the

country group totals are reconciled to the book of accounts. Source 1, p. 4-l. Costs for

Canada and Mexico mail are estimated using analogous domestic unit costs. Source 1,

p. 4-4.

Settlement costs apply only to outbound mail. They reflect payment to foreign

postal administrations for delivering or forwarding U.S. mail. Source 1, pp. 5-1 and 5-2.

The Postal Service calculates an imputed value for these costs by multiplying the

outbound volumes by the applicable settlement charge. The Postal Service does not

reconcile the total imputed value to the book of accounts’ value because the latter

figure is accrued on a conservative basis to avoid underestimating expenses and

Page 15
Report to Congress 1998 lnternationai Maif

reflects other factors that are not a function of current volumes. In FY 1998, the Book

of Accounts value was $70 million higher than the imputed value. The Postal Service

treats this difference as an incremental cost of providing internationat mail service as

whole. Source 7, Response to Item 1 0.5

“All other” costs encompass all attributable costs not included above. These are

mostly cost items that are treated as varying in proportion to directly variable cost.

These costs include the costs of some lower level regional and headquarters

administration, rents, fuels, utilities, supplies and services, and other support costs.

There are also directly variable costs for supervision and for clerk and mailhandler

nonmail processing activities.

(4) The Development of Attributable Costs for the Initiatives

Cost data for the initiatives are gathered from sources outside the main data

collection systems because the initiatives are seldom observed in these systems with

the exception of GPM, which is obtained from the IOCS. GPL costs are based on an

engineering approach by which the operations are mapped out and classified as

variable or fixed. Unit costs are estimated for each of the operations deemed variable

and multiplied by volume to calculate total attributable cost. Source 3, Response to

Item 9. The Postal Service also identified product-specific costs for GPL. These costs

reflect advertising, promotional, and other costs related solely to GPL. GPM also had

product-specific costs for the same activities. Source 7, Response to Item 9.

5 On June 7, 1999, the Postal Service submitted the FY 1998 ICRA report- Postal Service

Version. The report contained a revised methodology for calculating international transportation cost and

a different treatment of the difference between imputed settlement costs and the settlement costs in the

Books of Account. Because of time constraints, the Commission has not been able to evaluate the merits

of the changes. For this reason, the attributable costs in this report reflect the FY 1998 ICRA Report -

PRC Version.

Page 16
Report to Congress 1998 tntert-dionat Mail

The costing for Global Direct Services (Direct Entry/Inbound) and ICM reflects

the costs of operations that vary by specific customer. Source ‘I, pp, Q-3 and 9-4.

The Postal Service estimates the costs for Global Parcel Services (GPS), an

inbound service, using a proxy unit cost estimated for domestic Priority Mail.

Transportation costs are adjusted to reflect weight differences between Priority Mail and

GPS. Source I, p. 9-5.

(5) International Mail Incremental Costs

The Postal Service has included costs that it views as incremental to

International Mail as whole. The cost has two components. As discussed above, the

first component reflects the difference in settlement charges between imputed costs

used in the ICRA as attributable settlement cost, and the booked cost in the system of

accounts. This cost amounted to $70 million in FY 1998. The second component

reflects expenses for the International Business Unit that amounted to $52 million in

FY 1998. ICRA Report, p. A-l, footnote I. The reported amount includes the salaries

and benefits for IBU personnel, supplies and services, rents, utilities, and other related

expenses. Source 3, Response to Item 4. Together, these expenses amount to

$122 million.

These costs cannot be causally related to specific international services on the

basis of current information, but can be causally related to international services as a

whole. Accordingly, the cost coverages for specific products shown on Table II-1 do

not reflect these incrementat costs.

0. Evaluation of Data Sources and Data Development Methodology

This section discusses the reliability of the volume, cost, and revenue data. The

organization of this section generally follows the preceding section. There is an

Page 17
Report to Congress 1998 International Mail

additional section that discusses data quality with respect to unit costs and cost

coverage.

(1) Outbound Revenue, Pieces, and Weight

The volume and revenue data that the Postal Service uses for outbound

international mail are quite reliable. Thirty-three percent of the volume data are

collected using census data systems, and the other 67 percent is estimated using the ’

SIRV/O system that has control numbers from the MIDAS system. The coefficients of

variation (CV) for these data are very small.

Most of the census data (94 percent) comes from the Permit system. The Permit

system has been accepted in omnibus domestic rate cases as reliable. It provides

volumes and revenues for Domestic Standard A mail, which amounted to 83 billion

pieces of mail in 1998. The system is based on mailing statements that contain the

detail of a mailing related to pieces, weight, and revenue. The statements are checked

by an acceptance clerk and entered into an automated accounting system. it is

therefore well suited to the task of accurately accumulating volumes and revenues for

any service. The data sources for the other 6 percent collect the same type of

information without it being entered into an automated accounting system. These

reports are similarly well suited to accurately generating volumes and revenues.

The SIRV/O is a well-designed system for randomly sampling containers of

outbound mail. The cornerstone, however, is the MIDAS system, which provides a

census count of the gross weight of all outbound mail by country, transportation mode,

and UPU class. The Postal Service uses the MIDAS numbers as control totals in the

expansion process. This adds to the reliability of the SIRV/O estimates.

The Commission’s confidence in the reliability of the outbound RPW estimates is

further bolstered for most of the major categories of outbound mail by their small

coefficients of variation as shown by the CVs below.

Page 18
Report to Congress 1998 International Mail

TABLE HI-1

COEFFICIENTS OF VARIATION FOR SlRVlO ESTlMATES

FOR SELECTED CATEGORIES

Mail Category

Coefficients of Variation

Revenue Pieces Weight

Air LC 1.3% 2.0% 1 .O%

Air A0 1.7% 2.6% 2.0%

Air Parcel 1.7% 3.2% 2.9%

Surface A0 5.0% 6.7% 5.0%

Surface Parcel 2.9% 2.6% 3.4%

Source: Source 7, Response to Item 17

(2) Inbound Revenue, Pieces, and Weight

The Commission believes the Inbound RPW estimates are generally reliable

because the SIRV/I sampling system underlying the estimates is well designed. The

estimates may suffer from unquantifiable nonsampling error. Nonsample error,

however, is not likely to be substantial for the reasons discussed below.

Like the SIRV/O, the SIRV/I estimate of pieces per kilogram relies on a set of

control numbers that allows the Postal Service to calibrate sampled volumes to censusbased volumes kept in the IAB. The control numbers are total kilograms by country and

transportation mode. The IAB maintains a count of the weight of mail entering the U.S.

based on the manifests that accompany the mail. Operations personnel check the

contents of inbound containers against the manifests. When there is a discrepancy,

these personnel prepare and dispatch to the origin country documentation known as a

Bulletin of Verification. Data files are updated accordingly. Source 8, Response to

Item 2. Thus, the Postal Service continuously takes steps to insure the accuracy of

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Report to Congress 1998 International Mail

inbound volume data. Since the control numbers appear to be accurate, the conversion

of pieces per kilogram to total pieces should be reasonably accurate.

The Postal Service identifies two nonsampling error problems that have

emerged. First, some inbound Canadian mail arrives in Postal Service containers and

is not sampled because it is mistaken for U.S. Domestic mail. Second, the Postal

Service has some indication that not all sampled mail containers from Canada and

Europe are selected randomly. The Postal Service explains that the magnitude of the ,

potential sampling problem is unknown as is the impact on revenue. The Postal

Service adds, however, that it has taken three steps to address the potential problem.

Source 8, Response to Item 1.

First, in the summer of FY 1998, the Postal Service began to clarify and improve

field data collection and administrative procedures. Second, the Postal Service held a

conference in November 1998 on international statistical programs bringing together

data collectors, data collector supervisors, and headquarters personnel to discuss the

issues. The Conference included workshops for each major program area, including

SIRV/I. Third, the Postal Service is preparing and will soon release Handbook F-85,

Data Collection Users Guide for International Systems. It contains updates of out-ofdate field procedures and consolidates data collection policy and procedures for all

international statistical programs. Source 8, Response to Item 2.

These corrective measures will only affect RPW data collected after FY 1998.

The impact of these potential problems on the FY 1998 RPW data is unknown.

(3) The Attributable Costs for the Standard Services

These costs are generally reliable. On average, settlement costs and

international transportation costs account for 71 percent of the total attributable cost for

outbound services. The Commission has reviewed the underlying workpapers and

found no material errors. The calculation of settlement costs is based on outbound

Page 20
Report to Congress 1998 International Mail

volume estimates which the Commission has concluded are reliable, as discussed

above, and known and certain schedules for the various forms of settlement charges.

International transportation costs are based on the generally reliable outbound volumes

and unit cost figures developed from the IA6 report which collects the actual outbound

weight and cost by country. Moreover, these costs are ultimately adjusted to match the

Book of Accounts. Thus, these costs should be reliable.

The other 29 percent of outbound costs and all inbound costs are based on the ,

costing methods that underlie the domestic CRA. In domestic rate cases, the

Commission has concluded that the data systems that underlie these costs are reliable.

For this reason, the Commission believes these costs should be reliable here.

The Commission also used the Service’s input data in its own cost model. The

Commission’s cost for international mail matched the Postal Service’s segment by

segment. For this reason, the Commission believes the attributable costs for the

standard services as calculated by the Service accurately portray the Commission’s

methodology.

(4) The Attributable Costs for the Initiatives

The Commission has not been able to veriv the accuracy of the input data for

the initiative cost models. It was able to review the model methodology underlying the

models. The Postal Service here employs models generally similar to ones it has

introduced in domestic omnibus rate cases and classification cases to support new

classifications, discounts, or special services. These models are referred to as

engineering models or special studies. In the domestic area, the Commission has

relied on broadly similar models to support recommended rates and classifications.

Under this modeling approach, the Postal Service identifies all the operations

that accompany a particular service. It then obtains unit cost estimates for each of the

operations. Typically, the Postal Service obtains the unit costs from a special study

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Report to Congress 1998 International Mail

conducted to estimate the cost of a specific operation or group of operations or it uses a

unit cost from the CRA for an analogous service and operation. After it has put

together the applicable unit costs, the Postal Service obtains volume estimates to apply

to them. If the service is already operational, actual volume estimates may be

available, as they are for each of the initiative cost models.

All the models incorporate the approach described above. They appear to

account for relevant operations and the unit costs estimates appear to be reasonable. .

For these reasons. the Commission uses these costs.

(5) Analysis of Unit Attributable Costs

The Postal Service computes estimates of Attributable Cost per Piece (ACP) for

many categories of inbound and outbound International Mail for its annual “International

Cost and Revenue Analysis” (ICRA) reports. These estimates of ACP are the result of

complex calculations performed on uncertain values for parameters and variables

derived from a number of Postal Service data systems and special studies. In this

respect the international ACPs differ little from their domestic counterparts in the

Service’s annual CRA Report.

Like the estimates of ACPs for domestic subclasses, the ACPs for International Mail

categories are subject to two kinds of errors. These are known as sampling and nonsampling errors. Sampling errors arise because, as a practical matter, it is usually

possible to observe only a small fraction of the mail as it is collected, processed,

transported and delivered by the Postal Service. Non-sampling errors arise if the

sampling processes produce errors with an expected value that is unequal to zero; that

is, if repeated applications of the sampling processes do not leave errors with an

average of zero. Therefore, non-sampling errors cause unwanted biases in the value of

the parameters or variables being sampled.

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Report to Congress 1998 International Mail

Eliminating non-sampling errors is one of the objectives of good sampling design

and statistical methodology. Some sampling error, on the other hand, is inevitable. It

can be reduced by taking larger samples but can only be eliminated by sampling all of

the mail. Consequently, a prudent user of the Postal Service’s estimates of ACP would

want to have a measure of the likely sire of the sampling errors that these estimates

inevitably contain.

The coefficient of variation (CV) for the attributable cost per piece (ACP) of a I

subclass or category of mail is a general-purpose measure of the accuracy of the

estimated ACP. The CV is defined as the ratio of the standard deviation of the

estimation error divided by the estimate of ACP. It is usually expressed as a percent.

As a rule of thumb, pfus-and-minus two times the CV gives the interval around the

estimate of ACP within which the unknown true value of ACP will fall with 95 percent

confidence. For example, a CV of 4 percent for an estimated ACP of $1 .OO means that

one can be 95 percent certain that the true value of ACP will lie within the range

between $0.92 and $1.08.

Table Ill-2 displays approximate values of the CVs for the ACPs of the major

categories of inbound and outbound International Mail. The calculations have been

made using an approximation formula derived in Appendix D and from estimates of

ACPs and CVs for the components of the formula provided to the Commission by the

Postal Service.

The column labeled “ICRA Cost per Piece” is the ACP for the corresponding

category of mail as it appears in the Service’s 1998 ICRA report where it is referred to

as “unit volume-variable cost”. “Revenue per Piece” is also as shown in the 1998 ICRA.

“Percentage Cost Coverage” is the ratio of revenue to attributable cost expressed as a

percent. The overall CVs for the fifteen major categories of inbound and outbound

International mail are shown in the column labeled “CV of Cost per Piece”. These

overall CVs are derived directly from CVs for the various cost components and volume

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Report to Congress 1998 International Mail

as shown in Appendix D. Finally, the column labeled “Coverage t-value” on the far right

holds t-values for statistical tests of hypotheses that the coverage is greater or less

than100 percent.

The t-values are defined as the Percent Cost Coverage minus 100 divided by the

CV of Cost per Piece. The t-value is positive if the coverage is greater than 100

percent, as is the case for most categories of International Mail. A positive t-value is

used to determine if there is any significant probability that actual coverage is less than.

100 percent. Mail categories with cost coverages of less than 100 percent have

negative t-values. For these categories the t-value is used to determine if there is any

significant probability that the actual coverage is above 100 percent.

Page 24
Report to Congress 1998 International Mail

TABLE Ill-2 COST PER PIECE, REVENUE PER PIECE

AND COEFFICIENTS OF VARIATION FOR INTERNATIONAL MAIL

Summary

International Mail Category

Outbound:

Letters and letter packages

Postcards, postal cards

International Prjority Airmail

Air A0

Air Parcel Post

Express Mail International Service

Surface A0

Surface Publishers Periodicals

InternaBonal Surface Airlift

Surface Parcel Post

Inbound:

Surface LC/AO

Surface Parcel Post

Air LCIAO

Express Mail International Service

Air Parcel Post

ICFU cost Revenue

per Piece per Piece

($1 ($1

0.886

0.497

0.742

4.328

29.252

26.709

2.037

? .054

0.71

24.917

0.784 9.76%

7.821 21.35%

0.278 7.70%

8.008 53.54%

8.137 17.49%

Pet cost cv of Cost Coverage

Coverage per Piece t-value

3.00%

6.00%

i .ao%

4.50%

5.07%

3.20%

8.63%

2.60%

0.37%

9.42%

The calculated CVs are approximate values for several reasons. First, ACP is a

non-linear function of various estimates of volume-variabilities, distribution key shares

and mail volumes produced by the Postal Service’s data systems and special studies.

For this and other reasons, the formula used to compute the overall CV for each

category of mail from the CVs of its components can provide only a close

approximation. Second, some of the CVs of the sampling statistics used in the formula

are missing from the Service’s responses to the Commission’s information requests. In

particular, there are no CVs for any cost pool volume-variabilities. These variabilities

are all assumed to be equal to one and their CVs are assumed to be zero. It is

Page 25
Report to Congress 1998 InternatjonaI Maif

frequently the case that the CVs for distribution key shares and mail volumes are

reported for aggregations of more than one category of mail, or in other ways that do

not exactly match the ICRA report. For example, the cost pool definitions used to

report ACP in the ICRA do not exactly match the cost categories for which the Service

has reported CVs for the IOCS distribution keys These and other defects in the data

have been overcome by using proxies and by making other assumptions as needed to

use whatever data has been supplied. Inevitably, the results of applying the formula, ,

which follows the category definitions used in the ICRA, are approximations. The

specific assumptions made to apply the approximation formula and the details of the

calculations are described in Appendix D. The actual calculations were performed

within a Lotus l-2-3 worksheet.

The calculations of the overall CVs for Cost per Piece have been made under the

assumption that all of the necessary estimates of volume-variabilities, distribution key

shares and mail volumes are free of any biases that might be caused by non-sampling

errors. The use of this assumption to calculate CVs does not mean that the

Commission believes that Postal Service estimates are completely free of non-sampling

errors. It means only that, if non-sampling errors are present, their effects are

unknown. In Appendix D it is shown that correcting for an additive bias in most of the

estimates would not strongly affect the CVs.

Table Ill-2 shows that for most categories of International Mail the Postal Service

has collected cost and volume data with sufficient accuracy to allow statistically

significant conclusions to be drawn regarding the coverage of ACP by revenues per

piece as shown in the 1998 ICRA. The exceptions to this finding are inbound LC/AO,

and inbound International Express Mail Service.’ The cost coverages shown for these

services are not statistically meaningful since it is not possible to reject with 95 percent

6 These findings apply to the estimates of ACP found in the 1998 ICRA and not to the Service’s

estimates of Revenue per Piece which are regarded as accurate for this analysis.

Page 26
Report to Congress 1998 International Mail

confidence the null hypothesis that the actual cost coverage (the cost coverage without

the sampling error} is greater or less than 100 percent.

The column of t-values provides the evidence of statistical significance. The critical

value of 3” for a one-tailed test with an assumed confidence level of 95 percent is

7.645. For this test a t-value greater than 1.645 means that the Postal Service’s

measurement of ACP is sufficiently accurate to leave it more than 95 percent certain

that revenue per piece covers the actual (but unknown) true ACP. Conversely, a .

t-value of less than -1.645 means that the measurement of ACP is accurate enough to

make it more than 95 percent certain that revenue per piece will fall short of ACP.

Higher (in absolute value) t-values make it possible to draw more precise conclusions

about coverage. For example, the t-value of for outbound letters and letter

packages shows that the coverage for this category of mail is much greater than the

margin needed to establish statistical significance. T-values near , such as those for

outbound Surface A0 and outbound Surface Parcel Post, show that the coverages for

these categories fall much closer to the boundaries that mark statistical significance.

Nevertheless, there is less than a 5 percent chance that the cost of outbound “Surface

AO” is covered by revenue, or that the cost of outbound “Surface Parcel Post” is not

covered.

Only inbound Air LWAO and inbound International Express Mail Service have

t-values with absolute values of less than 1.645. The cost coverage for inbound Air

LCIAO is only percent, however, the t-value of shows that there remains a

modest probability of around 12.5 percent that revenue per piece actually covers ACP.

For inbound International Express Mail Service the cost coverage of percent is so

close to 100 percent that it has little statistical significance. The t-value of means

that the probability that revenue per piece actually covered ACP is only about 50.9

percent while the probability that revenue fell short of attributable cost is almost as large

at 49.1 percent.

Page 27
Report to Congress 7998 International Mail

On the whole, the Commission is able to more accurately estimate ACP on

outbound categories of International Mail than inbound categories. This occurs

because a large share of the cost of outbound mail consists of international

transportation costs and terminal dues while these components are completely absent

from the ACPs for inbound mail. The Service’s data systems can identify international

transportation costs and terminal dues by mail category fairly precisely as shown by the

low CVs for these cost categories in the table in Appendix D. On the other hand, the 1

Service’s data systems do a poor job of identifying the shares of domestic costs for

most categories of International Mail as described by the much higher CVs for the

domestic cost categories entitled “Mail Processing,” “Delivery,” “Other,” and, especially,

“Domestic Transportation”.

The approximation formula makes evident the fact that the CV associated with the

ICRA estimates of volume are particularly important as determinants of the overall CV

of ACP for a category of mail. Fortunately, the Postal Service’s estimates of volume by

International Mail category are good, even for categories with relatively few pieces. The

highest CV for volume, 6.67 percent, is reported for outbound surface AO, a fairly small

category of mail. The largest categories of international mail are inbound and outbound

letters, cards and letter packages. The ICRA volumes for these categories appear to

be accurately estimated as evidenced by their volume CVs of 2.0-l percent outbound

and 2.50 percent inbound.

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Report to Congress 1998 International Mail

IV. PRESENTATION OF COST, VOLUME, AND REVENUE DATA

This section presents the volumes, costs, and revenues for international mail.

As noted elsewhere, the costs underlying the calculated cost coverages (i.e., the ratio

of revenue to attributable cost) reflect the methodology the Commission has applied in

setting current rates for domestic subclasses. Generally, this methodology results in

attributable costs that are somewhat higher than the method that the Postal Service

advocates, and leads directly to lower cost coverages than the Postal Service would

obtain.

The Postal Service has introduced a cost for international mail which has no

counterpart in domestic mail, namely, the incremental costs for international mail

service as a whole. As noted earlier, this includes the cost of the International Business

Unit and the difference in settlement costs between booked costs and imputed costs

(booked costs are higher than imputed). This is discussed further in Section 1V.A and

Appendix F. It should be noted that on June 7, 1999, the Postal Service submitted an

ICRA reflecting its preferred cost methodology. That report incorporated changes to its

previous methods for estimating international transportation and settlement costs not

reflected in the ICRA provided to the Commission on March 15, 1999 or the revised

PRC Version submitted on June 11, 1999. Because of time constraints, the

Commission has not been able to evaluate the merits of these new estimation methods.

For this reason, the data presented below reflect the March 15, 1999, FY 1998 ICRA

Report - PRC Version.

A. Aggregate Data

International mail is separated between outbound and inbound services. The

Postal Service states it designs rates for each of the outbound services so as to recover

all domestic handling and transportation costs, international transportation costs,

Page 29
Report to Congress 1998 International Mail

settlement costs, and a markup. Source 7, Response to Item 18. For inbound mail, the

Postal Service recovers costs through settlement charges. For LClAO inbound mail

from UPU countries, the Postal Service agrees to accept as payment a terminal dues

rate that is based on a worldwide average cost. This rate does not fully compensate

the Service for the cost it incurs delivering inbound mai!. There are important

constraints on the ability of the Postal Service to make terminal dues compensatory.

The Service is one of many voices at the UPU Congress. Further, because the UPU +

Congress only meets every five years, terminal dues rates generally remain in effect for

five years. For these reasons, the Service seeks to obtain cost based bilateral

agreements with other countries. Despite bilateral agreements, as Table IV-l shows,

inbound mail still does not pay its own way.

TABLE IV-4

SUMMARY OF FY 1998 REVENUE AND AlTRlBUTABLE COST

FOR OUTBOUND AND INBOUND INTERNATIONAL MAIL

(Amounts in Thousands)

Category

Total Cost

Revenue Attributable Incremental Atkibutable Contribution Coverage

(W cost ($1 cost ($1 Cost ($1 (5)

(1) (2) (3) (4) (5)=(1 k(2) (6)=(1 J/(4)

Outbound Mail 1,332,796 1.020,520 - 1,020,520 312,276 1306%

Inbound Mail 282,311 207,379 - 287,379 (5Jw 98.2%

Subtotal 1,615,107 1,307,899 - 1,307,899 307,208 123.5%

Int’l Mail Incremental Cost - 122,445 122,445 (122,445) -

Grand Total $1,615,107 $1,307,899 $122,445 51,430,344 $ 164,763 112.9%

Source: Table IV-2 - Reflects ICRA Report released 6/l 1199

In contrast, Table IV-l shows that outbound international mail makes a

contribution to the Postal Service’s institutional costs. There are a number of factors

that affect the amount of this contribution. One is that unlike inbound LC/AO mail, the

Postal Service has direct control over the rates that it charges for outbound LCYAO mail.

Page 30
Report to Congress 1998 International Mail

Another is that terminal dues charged to the Postal Service for LC/AO mail are low

relative to what it costs industrialized destinating countries to deliver this mail. As a net

exporter to these countries, the Postal Service is in a position to benefit from the

relatively low terminal dues that other industrialized countries are currently paid to

deliver LC/AO mail.

As Table IV-2 shows, the United States exports about 1% times as much mail as

it imports. Low terminal dues help keep the total unit cost of the mail that the Postal I

Service exports low, thereby increasing the Postal Service’s ability to set rates on that

mail which generate net revenue. Moreover, the Postal Service’s cost of delivering

inbound mail is relatively low, which minimizes the losses to the Postal Service from

delivering inbound maiL7 Low terminal dues combined with the Postal Service’s

position as a substantial net exporter of international mail are important factors making

it easier for the Postal Service to set rates that generate the net revenue it seeks from

international mail.

In FY 1998, the cost coverage for outbound mail was 130.6 percent while the

cost coverage for inbound mail was 98.2 percent. Adding the figures for inbound mail

to the figures for outbound mail reduces cost coverage from ‘l30.6 percent to

123.5 percent. The reduction in contribution to institutional cost is $5 million.

lnbound mail is not the only drag on international mail cost coverage;

incremental costs also reduce cost coverage. The incremental costs of international

mail service as a whole are costs which cannot be causally associated with specific

international services based on the information currently available, but that would be

eliminated if all international services were eliminated. Some of these costs, those

7 The Postal Service’s unit operating costs have historically been among the lowest of the postal

administrations of the 21 most industrialized countries. Source 12, p. 100. This implies that for most of

the industrialized world, terminal dues are less than the economic cost of delivering inbound mail.

Page 31
Report to Congress 1998 International Mail

associated with the International Business Unit, cannot even be traced exclusively to

outbound mail or to inbound mail. The incremental cost for which international mail

service as a whole is responsible is included in the calculation of the overall contribution

to institutional cost and the cost coverage of international mail as a whole. As a result,

the cost base for determining the cost coverage for international mail as a whole is

greater than the sum of the cost bases of the individual international services. Using

this approach, the contribution of international mail as a whole is reduced from $307 .

million to $185 million, and its cost coverage declines from 123.5 percent to 112.9

percent. See Table IV-l _

For comparison purposes, the systemwide cost coverage for domestic and

international mail combined in FY 98 was 158.3.

B. Individual Services

This section highlights some of the FY 1998 results for individual services. The

section discusses outbound and inbound mail separately and adds some further

comments and observations in the last subsection.

In preparing this report, the Commission has not attempted to assemble a list of

international mail products or services comparable to the domestic mail classification

schedule. The list of international services in this report is not grouped according to

homogeneous cost or demand characteristics designed to facilitate comparison of their

cost coverages and rates with those of other international services, or with

corresponding domestic mail services,

There are several factors that make compiling such a list difficult for international

services. The structure of international mail classifications is, in large measure,

determined by the Conventions of the UPU, and must be taken largely as given. The

categories of mail defined by the UPU are broader than the corresponding subclasses

of domestic mail in terms of content and service level, and therefore less homogeneous

Page 32
Report to Congress 1998 International Mail

in terms of cost and demand. A0 mail, for example, includes mail that is similar to

domestic Standard A, Standard B, and Periodicals mail. Service levels for the various

categories of K/A0 mail are somewhat difficult to compare, either with other

international categories or with domestic services. Some A0 service is “surface” (nonpriority) and some is “air” (priority) mail, while the corresponding domestic services

generally receive non-priority service. Some A0 mail (ISAL) is a hybrid of priority and

non-priority service (receiving priority handling and air transportation within the U.S., but

non-priority handling and ground transportation within the destinating country). A final

factor making it difficult to compare the rates and cost coverages of international and

domestic services is that terminal dues for LC/AO mail are not closely aligned with the

cost of delivering such mail as they reflect a global average cost, and the level of

terminal dues is sometimes below the economic cost of delivering mail in the

destinating country.

The Postal Service submitted two documents that may assist the reader to more

fully understand the scope of this issue. The first is a chart attempting to relate

international and domestic services, Source 7, response to item 23, and the second is

the Postal Service’s description of how it develops international mail rates, Source 7,

response to item 18. These documents are Appendix G.

(1) Outbound Mail

Table IV-2 summarizes revenue and cost data for each international mail

service.

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Report to Congress 1998 International Mail

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Report to Congress 1998 International Mail

It shows that of the fourteen outbound services for which the Commission

received separate cost data, at least four are noncompensatory: (1) Surface Printed

Matter and Small Packets; (2) Surface Periodicals; (3) Global Priority Mail; and,

(4) Global Package Link. During FY 1998, Surface Printed Matter and Surface

Periodicals experienced cost coverages of percent and percent, respectively.

According to the Postal Service, the contribution was positive for Fiscal Years 1993 to

1995, but was slightly negative in FY 1996, correlating with the increase in terminal

dues that went into effect in the second quarter. The negative contribution continued in’

FY 1997 and FY 1998. The Postal Service acknowledged that because of these poor

results, it planned an average increase of about 15 percent for these services. The

increase became effective May 30, 1999. The Postal Service also stated that it might

have to raise these rates still more in the future. Source 7, Response to Item 12.

Global Package Link had a cost coverage of percent in FY 4998 with

attributable costs exceeding revenues by . The Service reported that the

businesses using this service were adversely affected by the downturn of the global

economy and the corresponding decrease in value of some foreign currencies. The

economic slowdown hurt the Postal Service’s business customers because there were

substantially fewer overseas orders and, accordingly, fewer packages were mailed.

The Postal Service believes that revenue will cover cost in FY 1999 because (I) it has

increased rates by about 9 percent on average; and, (2) it expects to achieve cost

reductions in this area. The Postal Service did not provide any specific information on

the expected cost reductions. Source 7, Response to Item 12.

Global Priority Mail shows a cost coverage of percent for FY 1998. The

Postal Service observes that revenues covered volume variable costs but not the

B The Postal Service did not provide separable data for Bulk Letter Service to Canada and

ValuePostEanada. However, based on FY 97 results it implemented rate increases that did not become

effective until well into FY 99.

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Report to Congress 1998 International Mail

combination of volume variable and product specific costs. Revenues fall short of costs

by when product specific costs are included. The Postal Service believes

the contribution to institutional costs will improve because of expected reductions in

advertising expense that accounted for of the product specific

cost in FY 7998 and because of the 14 percent average rate increase that was effective

in December, 1998. Source 7, Response to Item 42.

ValuePostICanada and Bulk Letter Service to Canada are services with very little

volume. The Postal Service provided ValuePostKanada’s share of the revenue and

volume of Surface A0 overall, but did not provide ValuePostKanada’s share of the

revenue and volume of Surface AO’s component parts (periodicals and all other). The

revenues and volumes of Bulk Letter Services to Canada remain subsumed within the

revenues and volumes that the Postal Service provided for Air Letters. The Postal

Service did not provide separate attributable cost estimates for either of these services.

Early in the 5 3663 information gathering process, the Commission asked the

Postal Service to identify the FY 1998 costs attributable separately to

ValuePostKanada and Bulk Letter Service to Canada. See Order No. 1226 at 3 and

Attachment. The Postal Service stated that it did not track costs separately for these

services. Comments of the United States Postal Service on Order No. 1226, filed

January 29, 1999, at 3. Subsequently, the Postal Service indicated that it bases rates

for these services on costs estimated separately for each service. See Appendix A,

Source 7. Twice, the Commission requested the FY -l998 attributable cost estimates

for each of these services that the Postal Service would use to set rates for those

services. Order No. 1240, Item 3; Order No. 1244, Item 6. Twice, the Postal Service

did not directly respond. See Source 3, Item 3, filed May 17, 1999, and Source 8,

Item 6, filed May 27 1999.

In Order No, 1251, the Commission described specific calculations that it

suspected the Postal Service applied to FY 1997 data to estimate the attributable costs

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Report to Congress 1998 International Mail

for ValuePosKanada and Bulk Letter Service to Canada that the Postal Service used

when it designed the rate increases for those services that took effect May 30, 1999.

The Commission asked the Postal Senrice to confirm that it used the calculations

described, and to provide equivalent calculations for FY 1998. The Postal Service’s

response to Order No. 1251 confirmed that it used the method of calculating FY 1997

costs that the Commission described, but said that the data needed to perform

equivalent calculations for FY 1998 were not available. For this reason, the

Commission has not been able to report separate attributable cost estimates for these

services for FY 7998, and therefore can not compute cost coverages for these services.

(2) Inbound Mail

As shown on Table IV-Z, inbound mail, as a whole, had a cost coverage of 98.2

percent in FY 1998 with revenue falling short of attributable cost by over $5 million.

The losses are directly traceable to Surface LC/AO and Air LC/AO. These services

combined to lose million. The difference in cost coverage is a result of how

settlement charges (terminal dues, etc.) are established.

UPU terminal dues rates are based on global average cost and are

noncompensatory for the U.S. Postal Service. The U.S. Postal Service has entered

into separate agreements with Canada and the European Bilateral group, presumably,

to obtain rates that cover costs. However, the remaining UPU countries account for 42

percent9 of inbound LWAO and the Postal Service still did not achieve a compensatory

cost coverage for inbound LClAO as a whole. The Commission was not able to

satisfactorily disaggregate costs by terminal dues regime because the costs provided

by the Postal Service are averaged across regimes.

’ Based on Postal Service Response to Order No. 1236, Item 15.

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Report to Congress 1998 lnternatjonal Mail

Unlike terminal dues, inward land charges for parcel post and imbalance charges

for EMS are not based on a global average, but reflect country-specific costs. For

parcel post, each country publishes annual rates reflecting a per-piece and per-kilogram

rate. The U.S. Postal Service also has bilateral agreements with ten countries. As

Table W-2 shows, the unit revenues exceed the unit attributable costs for both

categories of parcel post. Surface parcel post and air parcel post show cost coverages

of percent and percent respectively. Achieving a positive outcome for EMS,

should not pose a problem as the Postal Service is free to enter into bilateral

agreements with other countries in which rates can be cost based. In fact, the U.S.

Postal Service has agreements with 188 countries. Source 9, pp. 5 and 6. The cost

coverage for inbound EMS is percent.

(3) Other Comments

The Postal Service provided the distribution of the major categories of outgoing

international mail between Household and Non-Household mailers. Table IV-3 arrays

this information along with revenue and cost data.

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Report to Congress 1998 International Mail

Mail

Categories

Mostlv NHH

EMS

ISAL

IPA

Air A0

Air CP

Surface A0

Subtotal

Mostly HH

Air LC

Surface CP

Subtotal

TABLE IV-3

COMPARISON OF REVENUE AND COST DATA

AND PERCENTAGE DISTRIBUTION OF ORfGINATiNG VOLUME

FOR SELECTED INTERNATIONAL MAIL CATEGORIES

Percentage

NonHousehold

(1)

91%

100%

700%

65%

60%

90%

45%

11%

Distribution Revenue

Household (W

(2) (3)

9%

0%

0%

35%

40%

10%

55%

125,363

116,120

39,219

194,833

124,029

126,076

725,640 600,414 120.9%

483,242

57,607

Attributable

cost ($1

(4)

cost

Coverage

(5)

540,849 343,750 157.3%

NHH = Non-Household; HH = Household

Source: Postal Service Response to Second Notice, Item 21 & Table IV-2

The weighted average cost coverage for the two categories with the highest

proportion of Household mail is 157.3 percent. For the six categories of mail with the

highest proportion of non-household mail, the cost coverage is 120.9 percent. The

largest volume category, Air Letters and Cards, which contains 55 percent household

mail (315 million pieces),” has the second highest cost coverage at percent. The

second largest volume category is ISAL mail (164 million pieces), which contains no

household mail. It has a cost coverage of percent.

lo 573 million pieces from Table II-1 times 55 percent from Table IV-3.

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