GAO-05-529R International Mail Air Transportation

United States Government Accountability Office

Washington, DC 20548 

April 8, 2005 

The Honorable Susan M. Collins, Chairman 

Committee on Homeland Security 

 and Governmental Affairs 

United States Senate 

Subject: International Mail Air Transportation: Proposed Changes to the Ratesetting Process

Dear Chairman Collins: 

Provisions in the Senate’s proposed postal reform legislation, the Postal 

Accountability and Enhancement Act (S.662 §1002), 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 
Page 2 GAO-05-529R International Mail Air Transportation

related to setting rates for international mail air transportation (S. 662 §1002 and 

1004), 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. To provide 

information on the current rate-setting process and the issues raised about this 

process, we met with various stakeholders; reviewed current legal provisions, 

legislative history, the President’s Commission on the U.S. Postal Service (the 

Commission) report, and DOT rate-proceeding documents; and analyzed cost, 

volume, and weight information for certain segments of USPS mail. To describe 

the provisions related to changing the rate-setting process for international mail air 

transportation and stakeholder views of these changes, we reviewed the proposed 

legislation and interviewed USPS officials, DOT officials, and Department of 

Defense (DOD) officials. We also met with various air carriers that have publicly 

commented on issues related to the current rate-setting process. These air carriers 

included representatives from three of the major U.S. passenger air carriers; one 

U.S. cargo air carrier; and the Air Transport Association, which is a trade 

organization for certain U.S. air carriers. To assess these provisions, we applied 

certain principles found in past GAO reports and testimonies and in the 

Commission’s report. These principles are related to the major transformation 

goals for postal reform legislation and include balancing increased flexibility for 

USPS to act more like a business with appropriate accountability mechanisms to 

ensure fairness to customers and competitors. These principles also include 

enhancing incentives to improve efficiency by utilizing best practices from the 

private sector. We determined that the data we used from USPS and DOT were 

sufficiently reliable for the purposes of our review. Our work was conducted from 

February 2005 to April 2005 in accordance with generally accepted government 

auditing standards. We requested comments on this report from USPS and DOT, 

and they provided oral comments to us, which are discussed later in this report. 

Results In Brief 

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. Although changes in the market have moved 

toward more competition, the rate-setting methodology has not been updated to 
Page 3 GAO-05-529R International Mail Air Transportation

reflect these changes. DOT and some of the stakeholders have raised concerns 

about the appropriateness of the current process in light of these changes and the 

potential implications on rates and services. For example, USPS has stated the 

system does not provide market-based rates and services; however, the passenger 

air carriers we met with stated that the rates charged are commensurate with the 

services provided. 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. Likewise, officials we spoke with at DOD 

stated that, to the extent USPS would benefit from a reduced rate structure, the 

costs of transporting military mail should also decrease. The cargo carrier we 

spoke with supported these legislative provisions because it would move the 

international air transportation market to be more consistent with other 

deregulated markets, such as the U.S. airline industry, and should result in more 

efficient, market-based rates. However, the passenger carriers we met with oppose 

these provisions due to various concerns, such as the potential loss of revenue, 

concerns that international air and postal markets are not sufficiently competitive, 

and concerns that USPS could engage in unfair contracting practices. 

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. Similar to what was recommended in the Commission’s 

report, we previously testified that if USPS is provided additional flexibility to act 

in a more efficient, businesslike manner, this increase in flexibility must be 
Page 4 GAO-05-529R International Mail Air Transportation

balanced with accountability mechanisms and enhanced oversight to ensure that 

USPS competes fairly and that postal customers and competitors are protected 

against undue discrimination.1 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. Section 1004 

provides congressional guidance to protect contractors, and section 1002 includes 

a reciprocity provision and a 5-year transition period in which foreign air carriers 

are restricted in competing for USPS contracts. We are in the process of further 

reviewing USPS’ contracting practices to determine whether additional 

congressional oversight or other mechanisms may be needed to ensure that an 

appropriate balance of flexibility, fairness, and efficiency is maintained. In 

providing oral comments on this report, USPS agreed with the message of our 

report, while the DOT stated that it has not established a position on the current 

legislative provisions related to setting rates for international mail air 

transportation. 

Background 

The statutory provisions associated with DOT-regulated international mail air 

transportation vary significantly from those for the transportation of most other 

domestic and other international mail classes. The transportation rates for these 

other classes of mail are negotiated and contracted by USPS and the carriers. 

Table 1 lists the current provisions that apply to the air transportation of 

international mail. 

 

1

U.S. Postal Service: Key Reasons for Postal Reform, GAO-04-565T (Washington, D.C.: March 23, 

2004). 
Page 5 GAO-05-529R International Mail Air Transportation

Table 1: Selected Provisions Related to International Mail Air Transportation

Provision Citation Description 

U.S. air carrier 

duty to carry mail. 

49 U.S.C. §41903 U.S. air carriers must provide the service and facilities 

to transport international mail tendered by USPS up to 

the maximum load prescribed by DOT. 

DOT’s authority to 

set rates for U.S. 

air carriers 

49 U.S.C. §41901(b)(1) Requires the Secretary of the Department of 

Transportation to set reasonable prices that USPS will 

pay U.S. air carriers to transport international mail. 

USPS contracting 

authority—bulk 

mail. 

39 U.S.C. § 5402(b) USPS can contract with U.S. air carriers for air 

transportation of international mail if the contract is 

for at least 750 pounds of mail per flight, and no more 

than 5 percent of the mail, by weight, can be letter mail. 

Contract must be filed with the Secretary of 

Transportation at least 90 days before its effective date, 

and the contract will take effect unless it is 

disapproved by the Secretary at least 10 days before 

the effective date. 

USPS contracting 

authority—

unavailable 

service. 

39 U.S.C. §5402(c) When USPS determines transportation of mail by 

aircraft is required between points in foreign air 

transportation where no U.S. air carrier has been 

authorized by DOT, USPS may contract with any U.S. 

air carrier for the transportation of any class of mail. 

Transportation under these contracts must cease when 

a DOT authorized U.S. air carrier begins service. 

USPS contracting 

authority—

inadequate service. 

39 U.S.C. §5402(d) When USPS determines that service by U.S. air carriers 

in foreign air transportation is not adequate for its 

purposes, it may contract under certain conditions with 

any air taxi for transportation. USPS must cancel the 

contract when adequate transportation by U.S. air 

carriers becomes available. 

Use of foreign air 

carriers 

49 U.S.C. §41904 USPS can make arrangements with foreign air carriers 

when it determines that the transport of mail by 

aircraft to a foreign country is necessary. This 

authority has historically been used in situations in 

which U.S. air carrier service is inadequate. 

Source: GAO. 

The segment of international mail that is subject to rate-setting by DOT does not 

encompass all of USPS’ international mail. The types of international mail that fall 

under this regulatory structure include letter class and military mail that originates 

from the United States.2

 According to DOD officials, DOD is obligated by law to 

use U.S. carriers for the transportation of military cargo, and reimburses USPS for 

the transportation costs associated with the international air transportation of 

military mail.3

 Other types of international mail that are not subject to DOT ratesetting include those moved by surface transportation (i.e., trucked to Canada or 

Mexico) or bulk air shipments whose rates are set through negotiated contracts. 

Table 2 shows that the volume and weight of USPS international mail subject to 

DOT air transportation rates in fiscal year 2004 were less than 1 percent of USPS’ 

total mail volume and weight. 

 

2

There are three types of military mail: (1) Military Ordinary Mail (MOM) that is official military mail, (2) 

Space-Available Mail (SAM) that is military personal mail, and (3) Military Priority Mail.

3

49 U.S.C. §40118.
Page 6 GAO-05-529R International Mail Air Transportation

Table 2: Mail Volume and Weight for Fiscal Year 2004

Mail category Mail volumes 

(in millions 

of pieces) 

Percent of 

total mail 

volumes 

Mail weight 

(in millions of 

pounds) 

Percent of 

total mail 

weight 

Domestic maila 205,261,930 99.6% 25,055,323 99.1% 

International mail-DOT 

rates 

711,566 0.3% 147,838 0.6% 

International mail-other 132,248 0.1% 80,787 0.3% 

Total all mail 206,105,744 100% 25,283,949 100% 

Source: USPS. 

a

According to USPS, all military mail transported overseas is recorded as domestic mail for financial accounting purposes 

because customers are charged domestic postage rates. 

In 2004, USPS spent about $555 million for the international transportation of 

DOT-regulated mail; of this amount, U.S. carriers were paid $445 million and 

foreign carriers were paid $110 million.4

 Furthermore, DOD’s expense for 

reimbursing USPS for the costs associated with transporting military mail overseas 

was $344 million in 2004. Revenues from transporting mail account for about less 

than 1 percent of total annual operating revenues for U.S. air carriers. 

The Current Rate-setting Process and How Changes in the Marketplace 

May Affect This Process

DOT’s process for setting international mail air transportation rates involves 

gathering operating data from the carriers and annually updating the rates by 

applying cost adjustment factors to the rate-setting methodology originally 

established by CAB in the late 1970s. After applying these cost factors, DOT 

calculates updated rates. These proposed rates are then issued in a show cause 

order, and interested parties are provided an opportunity to comment on the 

proposed rates before the rates are finalized in a DOT order. 

The rate methodology resulted from a nearly 5-year rate proceeding before CAB in 

which air carrier groups and USPS differed about the appropriate methodology for 

allocating costs to the mail (e.g., fuel costs and facility costs). CAB eventually 

decided upon the fully-allocated cost methodology to be used when calculating 

rates, set the rates through June 1979, and established a process whereby future 

rates would be updated on the basis of changes in operating expenses.5

 When CAB 

was discontinued in 1984 due to deregulation of the airline industry, the 

responsibility for setting international mail transportation rates was transferred to 

DOT. 

DOT’s process for setting international mail transportation rates was not 

challenged until late 2003 when USPS filed its analysis of international mail 

 

4

According to USPS officials, the amount paid to foreign carriers does not reflect the amounts paid to them 

under any code-sharing agreements they have with U.S. carriers. Under these agreements, USPS would pay the 

U.S. carrier the DOT-set rate for transporting the mail, the mail is transported on a foreign air carrier, and the 

U.S. carrier pays some portion of their compensation to the foreign carrier. 5

According to DOT, the fully-allocated cost methodology allocates all the expenses associated with the assets, 

materials, services, and labor required to transport mail on the basis of the percentage of mail traffic to total 

traffic—mail, passengers, and cargo. 
Page 7 GAO-05-529R International Mail Air Transportation

transportation rates with DOT.6 According to USPS’ supporting analysis, mail rates 

were substantially overstated when compared with the marginal cost allocation 

methodology that USPS advocated.7 USPS also filed a request for all interested 

parties to meet and strive to reach consensus on a reasonable alternative(s) to the 

existing rate-setting process. Although some passenger carriers did not oppose the 

notion of informal discussions, these carriers submitted a report that was 

conducted on their behalf to refute USPS’ analysis that rates are excessive.8

 In 

March 2004, DOT issued an order directing the parties to engage in informal 

discussions about possible revisions to the current methodology for determining 

rates. The order pointed out that DOT recognized that there were inherent 

problems with the historical update methodology used to project cost increases. 

An initial workgroup meeting with representatives from DOT, USPS, and U.S. 

passenger and cargo carriers took place in May 2004. In a subsequent meeting, the 

parties agreed to strive for more market-based rates that could facilitate more 

frequent and efficient rate-setting. Little progress was made, however, in 

alleviating the concerns raised by USPS and the passenger carriers, and the group 

has since been discontinued. 

On March 15, 2005, DOT issued an order requesting comments within 30 days from 

the interested parties regarding whether DOT should conduct a new rate 

proceeding, what the procedure for doing so should be, and what methodology 

should ultimately be applied to determine mail rates. This proceeding could result 

in the rate-setting process being changed to account for the changes in air 

transportation and mail markets. 

Changes in the Air Transportation and Mail Markets 

Significant changes have occurred in the domestic and international mail and 

transportation markets since the rate-setting process was set in the late 1970s. 

These changes have greatly altered the environment in which international air 

transportation services are provided. Air transportation, particularly to 

international destinations, was relatively limited at the time CAB originally set the 

methodology; however, significant increases in traffic both within the United 

States and internationally have changed this market. Furthermore, the 

international postal marketplace has become more competitive, with many foreign 

postal administrations operating in the United States. Some of these changes, such 

as the increases in competition from foreign postal administrations and changes in 

air transportation, are likely to continue in the future. 

 

6

Discussion of International Mail Rate Methodology, Before the Department of Transportation, Office of the 

Secretary, Washington, D.C.; December 1, 2003 (DOT Docket OST-96-1629). 

7

According to USPS, marginal cost allocation methodology reflects the additional costs incurred by carriers for 

handling and transporting USPS mail, as well as some general and administrative expenses and profit 

component. Notice of the United States Postal Service of Filing of Supporting Data, Before the Department of 

Transportation, Office of the Secretary, Washington, D.C.; December 30, 2003 (DOT Docket OST-1996-1629). 

8

Comments on the USPS Proposal and Supporting Analysis Regarding International Mail Rates. Mercer 

Management Consulting, March 10, 2004, (DOT Docket OST-96-1629).
Page 8 GAO-05-529R International Mail Air Transportation

 

These changes include: 

• Deregulation of the airline industry: The U.S. airline market has been deregulated 

and become more competitive as U.S. air carriers (both passenger carriers and 

cargo carriers) serve markets in the United States and internationally. Between 

1980 and 2004, the number of revenue-generating flights flown by U.S. carriers 

within the United States has doubled from over 5.2 million flights to over 10.8 

million flights. During this same period of time, the annual number of 

international revenue-generating flights flown by U.S. carriers has also more than 

tripled from about 235,000 flights to over 709,000 flights (see Fig. 1). The structure 

of the U.S. airline industry has also changed due to carrier consolidations and the 

emergence of regional and low-cost airlines. Although actions, such as the signing 

of the first Open Skies agreements in 1992, have helped to reduce government 

restrictions in the international air market, this market is still not as deregulated as 

the U.S. airline market. For example, some European governments have restricted 

night-flight operations and have limited U.S. carriers’ access to their markets.9

 

Figure 1: Trend in the Annual International Revenue-Generating Flights Flown by 

U.S. Air Carriers

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Calendar year

Number of flights (in thousands)

International revenue generating flights

Source: GAO analysis of DOT data.

0

100

200

300

400

500

600

700

800

• Deregulation of some domestic and international mail air transportation rates: 

Rate-setting for the air transportation of most domestic mail and certain segments 

of international mail has been deregulated (see table 3). Currently, less than 1 

percent of all USPS mail volume is subject to transportation rates set by DOT. For 

 

9

GAO, Transatlantic Aviation: Effects of Easing Restrictions on U.S.-European Markets, GAO-04-835

(Washington, D.C.: July 21, 2004). 
Page 9 GAO-05-529R International Mail Air Transportation

most other domestic and international classes (except for mail transported by air 

within Alaska), USPS now negotiates with carriers about the prices and services 

that are to be provided. USPS began contracting the transportation rates for 

certain bulk international mail in the 1980s and expanded its contracting to include 

international parcels and Express Mail in 2003. 

Table 3: Timeline of Selected Changes to Mail and Transportation Markets

Action Type of 

deregulation 

Date of 

action 

U.S. airline deregulation: The Airline Deregulation Act of 1978 

ended the Civil Aeronautics Board’s (CAB) regulation of the 

airline industry in several phases. 

Transportation 1978-1984 

USPS contracts for certain international bulk mail: USPS 

introduces International Surface Air Lift (ISAL) service 

contracts under which USPS contracts for reduced-rate bulk 

mailing shipments for certain classes of printed matter such as 

publications, advertising mail, and catalogs that are offered 

mailers as a 7- to 14-day service. 

Mail 1980 

USPS contracts for domestic air mail: Air transportation rates 

for domestic mail service were deregulated with the sunset of 

the CAB. 

Mail 1984 

Move towards deregulating international routes and capacity: 

United States and foreign countries agree to more “open skies”. 

Transportation 1980s1990s 

USPS contracts for containerized international mail: USPS 

introduces the International Air Transportation (IAT) contracts 

to only U.S. carriers for the transportation in airline containers 

(rather than in loose sacks) of international air parcels and 

Express Mail. 

Mail 2003 

Source: USPS and DOT. 

• Increased competition from foreign air carriers: Since deregulation, there has 

been an increasing international presence of foreign air carriers on routes that 

originate in the United States. USPS’ ISAL contracts, which were initiated in 1980, 

can include foreign carriers; and as of June 30, 2004, 30 percent of USPS’ ISAL 

contracts were awarded to foreign carriers. In addition to ISAL contracts with 

USPS, foreign carriers can enter into code-sharing agreements with U.S. carriers, 

under which the foreign carrier transports USPS’ DOT-regulated mail on one of its 

aircraft. In this instance, USPS pays the international rate to the U.S. carrier, 

which then pays a portion of this cost to the foreign carrier for the service. 

• Expansion of global postal marketplace: The international postal marketplace has 

expanded, and USPS faces increasing competition from foreign postal 

administrations. As figure 2 shows, USPS has lost market share in this 

environment as its international mail revenue as a percentage of its total mail 

revenue has been decreasing. Several factors have contributed to this change. 

First, the distinction between the roles of public and private providers of postal 

services has blurred as the deregulation of postal administrations continues in 

many foreign countries. For example, the German national postal operator, 

Deutsche Post World Net, is partially privatized and has expanded globally in 

Europe and the United States, offering a wide range of international postal 

products. Second, several foreign postal administrations have set up facilities in 

the United States that can transport international mail from the United States to a 
Page 10 GAO-05-529R International Mail Air Transportation

third country without going through USPS.10 According to USPS, as of March 2005, 

nine foreign countries were operating 25 such facilities in the United 

States; and at the end of fiscal year 2004, nearly 20 postal operators have 

established 100 such facilities worldwide. 

Figure 2: USPS’ International Mail Revenue Share of Total Mail Revenue Has Been 

Decreasing

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

19941995

1996

1997

1998

1999

20002001

2002

2003

2004

Fiscal year

Percentage of total mail revenue

International mail revenue

Source: GAO analysis of USPS data.

0

1

2

3

4

• Changes in air transportation marketplace: The roles of U.S. carriers (both cargo 

and passenger) in transporting mail and freight have also changed over time. Since 

the fall of 2001, security restrictions prohibited U.S. passenger carriers from 

transporting mail domestically weighing 1 pound or more. As such, USPS has 

moved most of its Priority Mail and larger mail pieces to a U.S. cargo carrier. 

Furthermore, since 1980, revenue from transporting freight internationally has 

increased significantly for the major U.S. cargo carriers to about $3.6 billion in 

2004 (see figure 3). This increase was due in large part to the demand for 

worldwide express and expedited delivery services. In comparison, revenues from 

transporting freight internationally for the major U.S. passenger carriers were 

about $1.3 billion in 2004. 

 

10These facilities, extraterritorial offices of exchange (ETOE’s), are offices that postal operators 

establish outside of their national territory to process and tender international mail. 
Page 11 GAO-05-529R International Mail Air Transportation

Figure 3: International Freight Revenues For the Major U.S. Cargo Carriers Has 

Been Increasing 

Millions of dollars

Calendar year

Freight revenue

Source: GAO analysis of DOT data.

19801981

19821983

1984

1985

19861987

1988

1989

1990

19911992

1993

1994

1995

1996

1997

19981999

20002001

2002

2003

2004

0

1,000

2,000

3,000

4,000

5,000

As freight revenues for these carriers have been increasing, the percentage of 

domestic carrier operating revenues from mail has decreased (see Figure 4). In 

regards to DOT-regulated international air mail, however, USPS stated that its 

costs paid to domestic carriers’ for this segment of mail have more than doubled, 

from $216 million in fiscal year 2000 to almost $445 million in fiscal year 2004. 
Page 12 GAO-05-529R International Mail Air Transportation

Figure 4: Mail Revenue as a Percentage of Total Operating Revenue for U.S. 

Carriers Has Been Decreasing

19901991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

20032004

Percentage of total operating revenue

Calendar year

Mail revenue

Source: GAO analysis of DOT data.

0

1

2

3

4

Potential Implications of Market Changes on Current Rate-setting Process

Although changes in the market have moved toward more competition since 1978, 

the rate-setting process has not been updated to reflect these changes. DOT’s 

process for annually updating the rates involves reviewing cost and volume data 

submitted by the air carriers and incorporating this data into the methodology 

established by CAB. Some potential implications that may result from using a 

methodology that has not fully incorporated these changes are that the rate-setting 

process may not reflect a competitive, efficient, and service-oriented market. 

Therefore, postal customers, including DOD, may not be benefiting from potential 

cost-saving opportunities and may be paying higher rates than necessary. 

Specifically: 

• The process is inconsistent with deregulated and competitive markets. According 

to DOT officials, the system may not reflect current accounting and economic 

principles. DOT has raised questions about how effectively the update process 

incorporates changes in carrier costs. USPS has raised concerns that the system is 

inconsistent with its rate-setting process for negotiating domestic mail 

transportation rates. USPS believes that its inability to contract for and receive 

more market-based competitive rates may result in loss of international market 

share. In addition, the U.S. cargo carrier we met with stated that the current ratesetting process is not needed and expressed concern that the process is unlikely to 

achieve a true market-based competitive rate. On the other hand, the three 

passenger carriers we met with raised concerns that some segments of the 

international transportation market are still not sufficiently competitive. For 
Page 13 GAO-05-529R International Mail Air Transportation

example, they noted that some foreign governments have operational restrictions, 

such as limitations on U.S. carrier access to certain routes. They also told us that 

some foreign governments provide subsidies to their national air carriers, which 

give these air carriers an unfair advantage in terms of the rates they could charge 

for transporting mail and cargo. Further, they all had concerns that USPS would 

unfairly leverage its government mail monopoly when negotiating for international 

mail transportation contracts. To offset these limitations, these carriers believe 

that some level of regulation is needed. 

• The process does not provide sufficient incentives for efficiency gains. The 

current statutory requirements and rate-setting process limit the ability of 

stakeholders to achieve potential efficiency gains. For example, under the current 

statutory requirements, in order to be eligible to transport the segment of USPS’ 

international mail subject to DOT rate-setting, U.S. air carriers are required to 

make available the facilities and services necessary to do so. This may result in 

duplicative costs because USPS already has facilities nearby at many of these 

departure locations. Furthermore, the current rate structure does not require 

USPS to submit known volumes or mail in a containerized form—two actions that 

may result in more efficient mail transportation. These components are typically 

negotiated between the customer and the air carrier in transportation contracts, 

particularly for USPS in its domestic mail air transportation contracts. Thus, 

USPS’ ability to provide variable amounts of mail in a noncontainerized manner 

results in additional costs for the air carriers and higher rates charged to USPS. 

These cost increases may be directly passed on to international postal ratepayers. 

The current rate-setting process may also not provide the necessary incentives to 

air carriers to seek cost-saving approaches (either by actually cutting costs or by 

reporting lower costs to DOT) because the higher costs they incur and/or submit 

will be reimbursed through higher rates charged to USPS. 

• The process does not reflect customer (USPS) service demands. USPS raised 

concerns about the quality of service it receives and noted that few incentives 

exist in the current process for air carriers to provide better quality service. For 

example, USPS reported that service problems are of a greater concern now 

because, under new arrangements with foreign postal administrations, USPS can 

be penalized if service performance standards, such as timeliness of delivery, are 

not met. USPS also noted that U.S. carriers do not always have schedules that 

meet mail service requirements or provide sufficient capacity. Further, USPS said 

that it has only limited methods to correct service issues; and it has to pay rates for 

some services that it does not need (e.g., priority boarding associated with the 

duty-to-carry requirement), which results in costs higher than necessary. USPS 

would prefer rates similar to cargo market rates for similar products and would 

prefer to be able to negotiate service loads. The passenger carriers stated that 

they provide services for USPS that are required by law; and because the services 

are significantly different from what they typically provide other customers, they 

incur higher costs. These higher costs must be reflected in rates that are higher 

than the rates some other customers are charged. 
Page 14 GAO-05-529R International Mail Air Transportation

The Provisions in the Recent Postal Reform Bill to Change the Ratesetting Process and Stakeholder Views of this Change 

Congress has recently proposed making a substantive change in how rates are set 

for the segment of international mail currently regulated by DOT. Provisions in the 

recent postal reform bill (S. 662, §1002) would end DOT’s responsibility for setting 

rates and grant USPS the flexibility to negotiate with both U.S. and foreign air 

carriers under certain conditions about the rates and services to be used in 

international mail air transportation. Section 1002 would also repeal some of the 

current service requirements, such as duty to carry for U.S. carriers, and require 

foreign carriers to be authorized by DOT. Further, it sets forth a “reciprocity” 

provision which specifies that 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. Section 1004 provides 

congressional guidance for USPS to protect contractors and suppliers by ensuring 

fair and consistent treatment in its purchasing policies. Stakeholders have voiced 

divergent views of these changes, with USPS and the cargo carrier generally 

supporting them; the three U.S. passenger carriers we met with strongly opposed 

them. While DOT has not taken a position on the current legislative provisions, it 

has in the past supported legislative proposals to remove DOT from the ratesetting process. Table 4 summarizes selected provisions in this legislation related 

to rate-setting for international mail air transportation rates. 
Page 15 GAO-05-529R International Mail Air Transportation

 

Table 4: Selected Provisions Included in S. 662, the Postal Accountability and 

Enhancement Act

Citation Summary provision 

S. 662, §1002 USPS may contract rates and service terms with U.S. or foreign air carriers for the 

transportation of mail by aircraft in foreign air transportation, either through 

negotiations or competitive bidding, except that: 

• Contracts can only be awarded to air carriers that are authorized by DOT to 

provide air transportation. 

• Mail transported under such a contract is not subject to any duty-to-carry 

requirement. 

• USPS cannot contract for service in foreign air transportation or tender mail to 

or with a foreign carrier or an air carrier in a code-sharing arrangement where 

the air carrier’s code is used to identify a flight operated by a foreign air carrier, 

for a period of 5 years beginning 1 year after enactment of the proposed 

legislation, subject to certain exceptions. 

• Beginning 6 years after enactment of the proposed legislation, every contract 

that USPS awards 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 the flag country of the 

foreign air carrier, if different, as USPS had afforded the air carrier. 

• The Postmaster General must consult with the Secretary of Defense concerning 

actions that affect the carriage of military mail in foreign air transportation. 

S. 662, § 1004 Congress wants USPS to ensure the fair and consistent treatment of contractors under 

USPS purchasing policies and procedures, and to implement commercial best practices 

in its purchasing policies to achieve greater efficiency and cost savings, as 

recommended by the President’s Commission. 

Source: S. 662. 

USPS, DOT, and Air Carriers Have Divergent Views of the Proposed Changes to 

the Rate-setting Process

Stakeholders have voiced divergent views on these potential changes and their 

implications. USPS and a U.S. cargo carrier generally support the changes to move 

toward a negotiated, competitive process in contracting for international mail air 

transportation rates because they feel that this system would result in marketbased rates and service. The passenger air carriers that we met with, however, 

prefer the current DOT rate-setting process. These carriers are opposed to the 

changes because they have concerns about restrictions on competition that exist 

in international mail and transportation markets, as well as about USPS’ ability to 

ensure fair and consistent treatment in its contracting practices. 

Issues Related to Competition in International Mail and Air Transportation 

Markets 

USPS supports these provisions and would like to establish a competitive 

contracting environment for this segment of international mail. USPS stated that 

the proposed changes could address its concerns mentioned previously regarding 

the current rate-setting process. The officials believe that negotiating rates and 

services will enhance innovation, provide incentives for improved service 

performance, and allow USPS to better compete in the global postal marketplace. 

Specifically, USPS stated that this new rate-setting system will help it to meet its 

contracting objectives, which include achieving greater service performance, 
Page 16 GAO-05-529R International Mail Air Transportation

improving document control, and reducing transportation costs. USPS stated that 

experience suggests that allowing foreign carriers to participate in 

transportation contracts would stimulate competition and result in lower prices. 

The U.S. cargo carrier that we met with told us that it also supported the changes 

because they would establish a competitive contracting process that would likely 

result in true market-based rates and services. DOT has not taken a position on the 

current legislative provisions. However, in the past, DOT has supported legislative 

proposals that would have ended what it characterized as its outdated role in 

setting rates for transporting international mail. DOD officials we spoke with 

stated that to the extent that USPS would benefit from a reduced rate structure, 

the costs of transporting military mail should also decrease. DOD officials also 

stated that to the extent that USPS would receive equal or better services, DOD 

would expect to share in that equal or better service. 

The passenger air carriers we met with oppose the proposed changes to DOT’s 

rate-setting authority because they believe that some parts of the international 

mail air transportation market are not competitive enough to ensure market-based 

competitive rates. These carriers noted that the reciprocity provision would not 

provide a level playing field for the U.S. carriers or ensure that U.S. carriers have 

access to foreign markets. They noted that certain international air transportation 

remains regulated due to flight restrictions, route restrictions, and foreign country 

restrictions that limit U.S. carriers’ ability to fly mail to or from certain foreign 

countries. These carriers also stated that this proposal would unfairly benefit 

foreign carriers because there is significantly more outbound USPS mail than 

incoming mail to the United States from other foreign postal administrations. 

Another disadvantage they cited that would affect the competitive position of the 

U.S. airlines in the international air transportation marketplace is that some 

foreign air carriers are subsidized by their governments. One U.S. passenger 

carrier, in particular, raised concerns that foreign carriers have not had to make 

similar capital investments in facilities or equipment to process and transport 

USPS international mail. This carrier stated that the proposed change would 

ultimately have three consequences: (1) it would cause U.S. air carriers to lose 

revenue, (2) more international mail would travel on foreign carriers, and (3) 

customers would not receive better service even if the international mail rates 

decrease. 

 

Issues Related to Fairness in USPS’ Contracting Practices 

The U.S. passenger carriers that we met with also raised concerns about USPS 

leveraging its monopoly in ways that could result in unfair and inconsistent USPS 

contracting practices. Specifically, one carrier told us that its concerns have 

arisen from negative experiences in other areas where USPS has been granted 

unfettered contracting authority for the domestic transportation of mail. All of the 

carriers felt that the current processes USPS uses, as outlined in the USPS 

Purchasing Manual, do not provide adequate protections for the carriers if USPS 

breaches a transportation contract. These carriers contend that USPS has 

unilaterally changed the terms of domestic mail transportation contracts. 
Page 17 GAO-05-529R International Mail Air Transportation

However, when asked about ensuring fair and consistent treatment under its 

proposed expanded contracting authority, USPS stated that appropriate 

competition will be ensured, similar to how it is provided under the competitive 

contracting for other international mail segments. USPS officials noted that U.S. 

carriers are still the primary contractors for most of these contracts and that DOT 

has not disapproved any of the contracts for this type of mail. Further, an 

air carrier stated that under the proposed changes, if USPS requests for price and 

service terms are unreasonable, it may not receive competitive bids that could 

result in lower costs. 

Provisions in S. 662 Related to International Mail Air Transportation 

Rate-setting Incorporate Key Principles 

We analyzed the provisions in the proposed postal reform legislation and 

compared them with key principles of balancing flexibility, efficiency, and fairness 

that we and the Commission recognized are important when postal reform is 

considered and found that the proposed provisions are consistent with these 

principles. We have testified and reported on multiple occasions that we support 

postal reform legislation that would provide USPS additional flexibility to act in a 

more efficient, businesslike manner along with appropriate accountability 

mechanisms to ensure fairness.11 Similarly, the Commission’s report called for 

USPS to take advantage of corporate best practices to improve overall efficiencies, 

and stated that in instances where USPS is granted additional flexibility, 

mechanisms are needed to ensure fairness and transparency in USPS operations.12 

Although we found that the provisions in S. 662 related to setting rates for 

international mail air transportation are consistent with these key principles, 

additional congressional oversight may be needed to ensure that a balance of 

flexibility, fairness, and efficiency is maintained under this new contracting 

authority. 

These provisions in the recent postal reform legislation give USPS the flexibility to 

utilize private sector best practices to improve overall efficiencies. Flexibility and 

efficiency are consistent with what we have reported in our prior work and with 

the Commission’s report that USPS needs to increase overall postal efficiencies—

both in terms of cutting costs as well as improving service. The additional 

flexibility granted to USPS to negotiate with carriers (both U.S. and foreign) about 

rates and services may help to promote a more successful and efficient contracting 

system—one that balances the current service needs of the customer with rates 

that reflect the actual costs incurred to meet those needs. To the extent that the 

proposed change to competitive negotiations helps to drive out inefficiencies in 

the current system, customers should benefit from paying market-based rates that 

are commensurate with the services that are being provided. 

 

11GAO-04-565T; Need for Comprehensive Postal Reform, GAO-04-455R (Washington, D.C.: Feb. 6, 

2004); U.S. Postal Service: Key Elements of Comprehensive Postal Reform, GAO-04-397T

(Washington, D.C.: Jan. 28, 2004); U.S. Postal Service: Bold Action Needed to Continue Progress on 

Postal Transformation, GAO-04-108T (Washington, D.C.: Nov. 5, 2003). 12President’s Commission on the United States Postal Service, Embracing the Future: Making the 

Tough Choices to Preserve Universal Mail Service, (Washington, D.C.: July 31, 2003). 
Page 18 GAO-05-529R International Mail Air Transportation

In addition, the postal reform legislation contains proposals aimed at ensuring 

fairness and consistency in contracting practices that are consistent with our prior 

work and the Commission’s report. In instances where USPS is granted additional 

flexibility, this flexibility is coupled with accountability and transparency to help 

facilitate fair and consistent treatment of consumers and contractors. We have 

previously stated that postal reform legislation should clarify USPS’ mission by 

defining the scope of the monopoly to ensure that it competes fairly. The 

legislation should also provide enhanced oversight to protect postal customers and 

competitors against undue discrimination. The postal reform legislation in section 

1004 includes a statement on the sense of Congress that suppliers and contractors 

be treated fairly and consistently. Section 1004 promotes specific mechanisms, 

such as competitive contract award procedures, effective dispute resolution 

mechanisms, and socioeconomic programs, to improve fairness and access to 

contracting opportunities. Further, section 1002 contains other provisions, such as 

a 5-year transition period during which foreign air carriers are restricted in 

competing for USPS contracts, as well as the reciprocity provision. We have not 

examined USPS contracting practices to determine how the concerns of the 

passenger carriers we met with related to USPS’ contracting practices need to be 

addressed. We have been asked to review USPS’ proposed changes to its 

contracting procedures and are in the process of determining if further 

congressional oversight or other mechanisms may be needed to ensure that a 

balance of flexibility, fairness, and efficiency is maintained. 

Agency Comments and Evaluation 

USPS and DOT provided oral comments on a draft of this report. USPS agreed 

with the message of our report, while DOT stated that it has not established a 

position on the current legislative provisions related to setting rates for 

international mail air transportation. We also incorporated technical comments 

from USPS where appropriate. 

Scope and Methodology 

To provide information on the current rate-setting process, how the international 

mail air transportation market has changed over time, and the potential 

implications of these changes, we met with DOT officials and various 

stakeholders, such as USPS, DOD, the Air Transport Association, three U.S. 

passenger carriers, and one U.S. cargo carrier. These carriers also participated in 

recent efforts to improve the current rate-setting process. We also reviewed 

current legal provisions related to USPS’ contracting authority for international air 

transportation rates subject to DOT; DOT rate-proceeding documents, including 

DOT orders and submissions from USPS and various U.S. airlines; and the 

President’s Commission on the U.S. Postal Service report. To provide quantitative 

data on the various segments of USPS mail, we reviewed USPS’ periodic reports 

and financial statements and discussed the specific operating and financial 

information with USPS officials. USPS officials then supplemented this data with 

other volume and cost information related to DOT-regulated mail, which we also 

reviewed with them. The DOT financial and operating data was generated from a 
Page 19 GAO-05-529R International Mail Air Transportation

database that GAO recently reviewed. On the basis of these efforts, we 

determined that the data provided to us was sufficiently reliable for the 

purposes of our review. 

To identify the proposed legislative changes to USPS’ contracting authority and the 

views of key stakeholders, we interviewed officials from DOT, USPS, the Air 

Transport Association, three U.S. passenger carriers, and one U.S. cargo carrier. 

These carriers have been active in congressional discussions regarding proposed 

legislative changes in this area. We also reviewed the contents of current and 

previous postal reform legislation, as well as any pertinent legislative history, 

committee reports, or DOT and stakeholder comments. 

To assess the proposed changes to USPS’ contracting authority, we applied certain 

principles found in past GAO reports and testimonies and in the Commission’s 

report. These principles are related to the major transformation goals for postal 

reform legislation and include balancing increased flexibility for USPS to act more 

like a business along with appropriate accountability mechanisms to ensure 

fairness to customers and competitors. Another key principle is to enhance 

incentives to improve efficiency by utilizing best practices from the private sector. 

We conducted our work from February 2005 to April 2005 in accordance with 

generally accepted government auditing standards. 

We are sending copies of this report to the Chairman and Ranking Minority 

Member of the House Committee on Government Reform, Ranking Minority 

Member of the Senate Committee on Homeland Security and Governmental 

Affairs, Senator Thomas R. Carper, the Secretary of the Department of 

Transportation, the Postmaster General, and other interested parties. We will also 

provide copies to others on request. This report will also be available on our Web 

site at no charge at http://www.gao.gov. 

If you have any questions regarding this report, please contact me at 

siggerudk@gao.gov or by telephone at (202) 512-2834. Major contributors to this 

assignment included Teresa Anderson, Joshua Bartzen, and Tonnye Conner-White. 

Sincerely yours, 

Katherine Siggerud 

Director, Physical Infrastructure Issues 

 

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