    [House Hearing, 113 Congress]
    [From the U.S. Government Publishing Office]

                  ALASKA BYPASS MAIL DELIVERY: A BROKEN SYSTEM

    =======================================================================

                                    HEARING

                                   before the

                       SUBCOMMITTEE ON FEDERAL WORKFORCE,
                        US POSTAL SERVICE AND THE CENSUS

                                     of the

                             COMMITTEE ON OVERSIGHT
                             AND GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 4, 2014

                                   __________

                               Serial No. 113-90

                                   __________

    Printed for the use of the Committee on Oversight and Government Reform

             Available via the World Wide Web: http://www.fdsys.gov
                          http://www.house.gov/reform

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                  COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                     DARRELL E. ISSA, California, Chairman
    JOHN L. MICA, Florida                ELIJAH E. CUMMINGS, Maryland,
    MICHAEL R. TURNER, Ohio                  Ranking Minority Member
    JOHN J. DUNCAN, JR., Tennessee       CAROLYN B. MALONEY, New York
    PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of
    JIM JORDAN, Ohio                         Columbia
    JASON CHAFFETZ, Utah                 JOHN F. TIERNEY, Massachusetts
    TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
    JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
    JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
    PAUL A. GOSAR, Arizona               GERALD E. CONNOLLY, Virginia
    PATRICK MEEHAN, Pennsylvania         JACKIE SPEIER, California
    SCOTT DesJARLAIS, Tennessee          MATTHEW A. CARTWRIGHT,
    TREY GOWDY, South Carolina               Pennsylvania
    BLAKE FARENTHOLD, Texas              TAMMY DUCKWORTH, Illinois
    DOC HASTINGS, Washington             ROBIN L. KELLY, Illinois
    CYNTHIA M. LUMMIS, Wyoming           DANNY K. DAVIS, Illinois
    ROB WOODALL, Georgia                 TONY CARDENAS, California
    THOMAS MASSIE, Kentucky              STEVEN A. HORSFORD, Nevada
    DOUG COLLINS, Georgia                MICHELLE LUJAN GRISHAM, New Mexico
    MARK MEADOWS, North Carolina         Vacancy
    KERRY L. BENTIVOLIO, Michigan
    RON DeSANTIS, Florida

                       Lawrence J. Brady, Staff Director
                    John D. Cuaderes, Deputy Staff Director
                        Stephen Castor, General Counsel
                           Linda A. Good, Chief Clerk
                     David Rapallo, Minority Staff Director

     Subcommittee on Federal Workforce, U.S. Postal Service and the Census

                       BLAKE FARENTHOLD, Texas, Chairman
    TIM WALBERG, Michigan                STEPHEN F. LYNCH, Massachusetts,
    TREY GOWDY, South Carolina               Ranking Minority Member
    DOUG COLLINS, Georgia                ELEANOR HOLMES NORTON, District of
    RON DeSANTIS, Florida                    Columbia
                                         WM. LACY CLAY, Missouri

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on March 4, 2014....................................     1

                                   WITNESSES

    The Hon. Mark Begich, U.S. Senator from the State of Alaska
        Oral Statement...............................................     5
        Written Statement............................................     8
    The Hon. Don Young, U.S. Representative (At-Large) from the State
      of Alaska
        Oral Statement...............................................    11
        Written Statement............................................    13
    Mr. Ronald S. Haberman, Alaska District Manager, U.S. Postal
      Service
        Oral Statement...............................................    24
        Written Statement............................................    26
    Ms. Tammy Whitcomb, Deputy Inspector General, Office of Inspector
      General, U.S. Postal Service
        Oral Statement...............................................    30
        Written Statement............................................    32
    Mr. Dennis Devany, Deputy Director, Office of Aviation Analysis,
      Office of Aviation and International Affairs, U.S. Department
      of Transportation
        Oral Statement...............................................    40
        Written Statement............................................    42
    Mr. Steven Deaton, Senior Vice President, Alaska Central Express
      (ACE) Air Cargo, Inc.
        Oral Statement...............................................    47
        Written Statement............................................    49
    Mr. Jeff Butler, Vice President, Airport Operations and Customer
      Service, Alaska Airlines
        Oral Statement...............................................    54
        Written Statement............................................    57

                                    APPENDIX

    Chairman Darrell Issa, Opening Statement with pictures...........    84
    Statement of Senator Lisa Murkowski of Alaska....................    90
    USPS OIG letter to Senator Murkowski, Rep. Young, and Sen. Begich
      responds to their Dec. 2 letter regarding USPS OIG.............    93

                  ALASKA BYPASS MAIL DELIVERY: A BROKEN SYSTEM

                                  ----------

                             Tuesday, March 4, 2014

                      House of Representatives,
        Subcommittee on Federal Workforce, U.S. Postal
                               Service, and the Census,
                  Committee on Oversight and Government Reform,
                                                       Washington, D.C.
        The subcommittee met, pursuant to call, at 1:33 p.m., in
    Room 2154, Rayburn House Office Building, Hon. Blake Farenthold
    [chairman of the subcommittee] presiding.
        Present: Representatives Farenthold, Collins, Issa, Clay,
    and Cummings.
        Staff Present: Ali Ahmad, Professional Staff Member;
    Melissa Beaumont, Staff Assistant; Will L. Boyington, Deputy
    Press Secretary; Molly Boyl, Deputy General Counsel and
    Parliamentarian; Lawrence J. Brady, Staff Director; Sharon
    Casey, Senior Assistant Clerk; John Cuaderes, Deputy Staff
    Director; Adam P. Fromm, Director of Member Services and
    Committee Operations; Linda Good, Chief Clerk; Tyler Grimm,
    Senior Professional Staff Member; Mark D. Marin, Deputy Staff
    Director for Oversight; Ashok M. Pinto, Chief Counsel,
    Investigations; Jeffrey Post, Senior Professional Staff Member;
    Jessica Seale, Digital Director; Peter Warren, Legislative
    Policy Director; Rebecca Watkins, Communications Director; Eric
    Cho, Detailee; Kevin Corbin, Minority Professional Staff
    Member; Devon Hill, Minority Research Assistant; Julia Krieger,
    Minority New Media Press Secretary; Lucinda Lessley, Minority
    Policy Director; and Mark Stephenson, Minority Director of
    Legislation.
        Mr. Farenthold. The committee will come to order.
        I would like to begin this hearing by stating the Oversight
    Committee's mission statement, as we do at every hearing. We
    exist to secure two fundamental principles. First, Americans
    have a right to know that the money Washington takes from them
    is being well spent. And second, Americans deserve an
    efficient, effective government that works for them. Our duty
    on the Oversight and Government Reform Committee is to protect
    these rights.
        Our solemn responsibility is to hold the government
    accountable to taxpayers because taxpayers have a right to know
    what they get from their government. We will work tirelessly,
    in partnership with citizen watchdogs, to deliver the facts to
    the American people and bring genuine reform to the Federal
    bureaucracy. This is the mission of the Oversight and
    Government Reform Committee.
        I will start today by recognizing myself for a short
    opening statement. Today we are here to discuss the Alaska
    Bypass mail delivery. Our goal is to see if the current Bypass
    system is really the most cost-effective way for the Postal
    Service to subsidize the cost of packages for delivery to rural
    and outlying areas in the State of Alaska and talk about
    whether it is also the most economical way for the Alaskan
    people. We will also discuss a number of potential reform
    options for the Bypass system that could provide the cost-
    effectiveness that the Postal Service needs in able for a
    greater benefit to be able to be passed along to rural
    Alaskans.
        The Bypass system was first designed in 1972 as a way to
    save the Postal Service money and improve service to isolated
    villages throughout the State of Alaska. Under the system,
    instead of large parcel orders being processed through the
    normal Postal Service infrastructure, the entire process is run
    and managed by private air carriers throughout the State.
        Over the last several decades, Bypass mail has evolved into
    the most widely used way to ship many foods and commodities to
    the rural areas of the State on large several-hundred-pound
    pallets that are shrink wrapped. As a result, Bypass mail
    doesn't look at all like the mail we have in the other 49
    States.
        Under the current system, Bypass orders must be at least
    1,000 pounds. This differs greatly from the Postal Service
    policy outside of Alaska which prohibits parcel post weighing
    more than just 70 pounds. Once the 1,000 Bypass order is
    placed, it is fulfilled at warehouses in Anchorage or Fairbanks
    and completed orders are grouped together on any number of
    pallets. From there the pallets are handed off directly to
    private air carriers who are then responsible for the
    transportation and final delivery of the shipment.
        The air carriers are paid for their service based on rates
    set by the Department of Transportation. It is one of the last
    remaining vestiges of the government setting rates for
    airlines. The Postal Service has no control over these rates
    and no power to contract with more efficient service providers.
    It may only pay the applicable rate to each air carrier that
    has met certain statutory qualifications.
        With little power to control costs, the Bypass Program only
    covers about 30 percent of its cost. In the last fiscal year,
    the Postal Service lost more than $70 million operating the
    Bypass system. In D.C.-speak that may not sound like a lot of
    money, but you multiply it over the 40 years of the program, we
    are talking close to $3 billion.
        Today's Bypass mail system is tightly governed by lengthy
    statutes that create significant barriers for entry for new air
    carriers and deliberately discourage competition. The
    ostensible goal of this regulation is to allow air carriers to
    feel secure in markets and allowing them to feel comfortable in
    purchasing larger, more efficient aircraft without fear of
    being outcompeted by new, more efficient competitors.
        However, a November 2011 report by the IG, inspector
    general of the Postal Service, has cast doubt on whether the
    Bypass Program is operating ideally for the Postal Service or
    for the rural Alaskan. Specifically, the IG audit concluded
    that the current system subsidizes the Alaskan aviation
    industry, is made up of shipments that would normally be
    nonmailable elsewhere in the Nation, and appears to fail at
    reducing the cost of goods for rural Alaska, with the savings
    to the program largely diverted to a wide variety of other
    commercial interests within the State.
        Today we will hear testimony from representatives of many
    of the key stakeholders in the current system, the Postal
    Service, the Department of Transportation, and two
    representatives of the Alaska aviation industry. But first we
    will hear from some of the elected representatives here in
    Washington from Alaska. I thank the witnesses and look forward
    to a spirited discussion on how we can make this important
    program better.
        I will now recognize the distinguished ranking member, I
    guess of the full committee, Mr. Cummings.
        Mr. Cummings. Thank you very much, Mr. Chairman.
        The Alaska Bypass Program is one of the most complicated
    systems in the United States Postal Service and is unfamiliar
    to those who have never lived or traveled to Alaska. The system
    was established in response to a unique local circumstance and
    needs.
        Unlike other Postal Service programs, the Bypass Program is
    just not only to deliver packages and freight, but also to
    subsidize passenger air service to remote locations in Alaska.
    It is proper for us to examine whether the Bypass Program is
    the most efficient way of moving packages in Alaska and whether
    it remains the right way to support faster air service there.
        In 2011 the Postal Service inspector general issued a white
    paper finding that the cost of the Alaska Bypass Program
    exceeded the rates paid by shippers by tens of millions of
    dollars every year, resulting in significant annual losses to
    the Postal Service. The inspector general offered
    recommendations to reduce the costs of and increase the
    revenues generated by the Bypass Program to make the Postal
    Service responsibilities in Alaska more reasonable and
    consistent with its current role to provide universal service,
    as it does in every other State.
        Last month the committee voted to approve H.R. 4011, the
    Alaska Bypass Fair Competition Act. During our consideration of
    this legislation Chairman Issa stated that the measure would
    encourage greater competition and bring savings to the Postal
    Service and rural Alaskans. However, the committee considered
    H.R. 4011 without first holding hearings or hearing from Alaska
    residents.
        Before the vote last month, Congressman Don Young of Alaska
    wrote to the committee in opposition to this legislation. He
    wrote that, ``The passage of H.R. 4011 will undermine successes
    accomplished,'' in the Rural Service Improvement Act of 2002.
    He also wrote, ``The market pressures would invite the
    operations of smaller, less efficient carriers and necessitate
    multiple stops. This will increase the operating costs of the
    USPS, and these costs will ultimately be passed along to
    consumers and taxpayers.''
        I am pleased that we are convening a hearing today to
    examine the many complexities of the Bypass Program. I am also
    pleased that we now have the opportunity to hear from Senator
    Begich, as well as Congressman Young, since they represent the
    people who would be directly affected by any legislation
    reported by this committee.
        With that, Mr. Chairman, I yield back and look forward to
    the testimony.
        Mr. Farenthold. Thank you very much.
        And I believe the Chairman of the full committee, the
    gentleman from California, Mr. Issa, has an opening statement
    as well.
        Mr. Issa. Thank you, Mr. Chairman. And I want to associate
    myself with the ranking member's statement. This committee does
    have an obligation to protect the ratepayers of the post
    office, particularly in light of their year-over-year losses.
        Additionally, I side with the ranking member in saying that
    the earlier bill moved last month or 2 weeks ago was in fact
    moved specifically without a hearing. One of the reasons for
    that was that when the law was created, it was moved without a
    hearing and it was clearly anticompetitive.
        Notwithstanding that, Alaskan Bypass Mail is, in fact, a
    complex system, carefully constructed as a program designed
    purposely to use postal taxpayers--it is designed for the
    purpose of having postal ratepayers' funds subsidize Alaska's
    aviation industry. Last year alone, that subsidy was $76
    million.
        I make no attempt to minimize the fact that the situation
    in Alaska is different than the lower 48. Additionally, the
    situation in Alaska really does beg the question of, are there
    places in which universal service is required and promised and
    not available by road? The answer, of course, is yes.
        There is no question, though, that the bulk ordering system
    in Alaska, if it were simply done exactly the same as the lower
    48, would still lose money, but it would lose very little
    money. If the parcel post rate were applied, the losses to the
    post office would be less. That is not to say that I want to
    end Bypass mail. Just the opposite. The bill that we are going
    to be considering in a markup next week is designed to bring
    Bypass mail to a 50 percent self-sufficiency with a 50 percent
    subsidy.
        Now, going from 30 to 50 percent shouldn't seem like a
    lofty goal, nor does it mean that over the coming weeks,
    months, or years we are going to fix a system that should be
    funded by appropriations, should be funded by the FAA, should
    be funded by the transportation bill, but in fact is funded on
    the backs of ratepayers. The postal inspector general, though,
    deserves to have his recommendations considered and
    efficiencies found.
        I will give you an example of why Alaskans should be
    concerned. If I were to go, as I did, to Anchorage and attempt
    to buy a bag of potato chips, the cost of a given bag of potato
    chips would be $4.29 in Anchorage, while in Bethel, some 400
    miles away, a single plane trip, which I took, the price would
    go to $9.99, meaning more than double, more than $5.
        The fact is the shipping costs under Bypass mail for that
    trip is 35 cents. Alaskans need to understand that the prices
    they pay in Bethel or on remote islands often have more to do
    with other parts of distribution and profiteering by people in
    that system. The difference between 35 cents and $1 in that bag
    of chips, if passed on proportionately, would take that $4.29
    bag that already goes to $10 and would take it to $10.70. I am
    not asking Alaskans to pick up $10.70 cents. I am asking them
    to pick up 20 cents or less of that cost.
        To give you an example in the lower 48, because today we
    will hear arguments undoubtedly that Alaska doesn't have roads,
    well, here in Washington, we have roads. In Toledo, Ohio, we
    have roads. In you were if you were to ship 150 pounds of goods
    some 400 miles, let's say, from here to Toledo via UPS it would
    cost approximately 80 cents a pound.
        Well, in fact to ship that same distance in Alaska costs
    less than half that. In other words, you can ship by air in
    Alaska cheaper than you can ship by ground in the U.S. That was
    not and should not have been the cost of doing business.
        If we go to the most efficient way of delivering this
    freight called Bypass mail to Alaskans, we can save money.
    Witnesses today will undoubtedly argue that you will destroy
    passenger travel in Alaska. If that is the case, the question
    is, should postal ratepayers anywhere, but particularly in the
    lower 48, subsidize passenger traffic in Alaska or should
    Alaska seek to receive, as it might well, some portion of FAA
    money, landing fees, or an appropriation to take care of the
    need for maintaining subsidized passenger travel in Alaska?
        Our bill and the bill that we will consider next week deal
    with the ability to try to give the opportunity to be more
    competitive. For some reason, Alaska Air, which operates a
    fleet of 737-400s, a relatively old aircraft, and only recently
    upgraded to that, makes the case that their unique ability to
    haul as a preference this freight at a rate the Department of
    Transportation sets is essential and that if they have
    competition attempting to deliver this freight for the same or
    less, that it will somehow disrupt a carefully designed plan
    which is working perfectly.
        The American people understand this best when one puts it
    in perspective. To be clear, the excess capacity of these
    airlines is paid for by the Postal Service. More importantly,
    the subsidy means that every 6 years the American ratepayer is
    buying a Bridge to Nowhere. If one were to look at the so-
    called Bridge to Nowhere in Alaska, what you discover is that
    in fact it was a bridge to provide access to an airport. I
    personally am not a user of the Bridge to Nowhere very often,
    but the level of this subsidy every 6 years rises to the cost
    of another one of those bridges.
        That is why I put forward H.R. 4011, which I believe at a
    minimum tries to reduce the preferences given to specific
    airlines carefully crafted to lock out new competition. No
    American understands why incumbent carriers should be in
    perpetuity able to have a preference over other carriers
    operating for at least 1 year in Alaska.
        Mr. Chairman, thank you for your indulgence. I yield back.
        Mr. Farenthold. Thank you very much.
        Mr. Farenthold. And other members will have up to 7 days to
    submit their opening statements for the record.
        Mr. Farenthold. We will now recognize our first panel. We
    have the junior Senator from Alaska, Mr. Begich, and we have
    the Honorable Don Young, the Representative to the House from
    the State of Alaska.
        We will start by recognizing Senator Begich.

     STATEMENT OF THE HONORABLE MARK BEGICH, UNITED STATES SENATOR
                        FROM THE STATE OF ALASKA

        Senator Begich. Chairman Farenthold of the subcommittee and
    subcommittee Ranking Member Lynch and Chairman Issa and Ranking
    Member Cummings, thank you for the invitation that the Alaska
    delegation can make today in these opening remarks. And, again,
    I look forward to the continued discussion on this issue.
        I would also like to submit for the record my written
    comments, if that is possible, Mr. Chairman.
        Mr. Farenthold. They are already part of the record, I
    believe.
        Senator Begich. Thank you.
        As everyone knows, the Postal Service has an obligation
    under the Constitution to provide universal service to all
    areas of the Nation. I am here today to shed some light on
    Bypass mail, a crucial system that allows the Postal Service to
    fulfill its universal service obligation to Alaska. I am also
    here to tell you the system is not broken.
        Chairman Issa, I appreciate your visit to Alaska a couple
    of years ago.
        There is no doubt Alaska presents some unique challenges to
    the Postal Service when it comes to universal service. I want
    to note the hard work that the Postal Service employees put in
    every day to deliver Alaska mail in a timely manner. In
    particular, I single out Alaska's District Manager Ron
    Haberman, who is testifying here today.
        Ron, I want to thank you for your hard work for Alaska.
        Bypass mail is very important to Alaska, but it also is
    very important for the Postal Service because it allows
    universal service to Alaska in the most cost-effective way
    possible. Before Bypass mail existed, Alaskans still relied on
    the Postal Service to make shipments. Eighty percent of Alaska
    communities are off the road system, so we are forced to ship
    groceries and other necessary items through the mail. When it
    became clear that the postal facilities couldn't handle the
    high volume of postal parcel post, the Postal Service
    established Bypass mail. The system relieves the Postal Service
    of the need to pay for staff, facilities, and equipment to
    process these shipments.
        Let me make that point very clear: Bypass mail saves the
    Postal Service money. The savings from using Bypass mail and
    avoiding the costs of parcel post are estimated to be $45
    million annually. Anyone citing the cost needs to make sure
    that is factored into the savings.
        Last month this committee approved legislation, the intent
    of which is to increase competition among mainland carriers
    that deliver Bypass mail in rural hubs, to supposedly save
    money. However, the bill will actually have the opposite
    effect, make the system more expensive and less effective for
    the Postal Service and customers.
        Here is why. The Rural Improvement Service Act of 2002
    purposely limited competition among mainland carriers because
    too many carriers were providing mainland service and they
    didn't have an adequate share of the mainland market. The
    result was unreliable service for Alaskans and high operating
    costs for the Postal Service. The bill created an
    interdependent relationship between mail and passenger service
    to make the system more cost-effective and reliable.
        Remember, Alaska is a fifth the size of the continental
    United States and has very few roads. When you are covering
    that many miles, sometimes you need to kill two birds with one
    stone. Something to highlight, the Postal Service has not asked
    for the changes that Chairman Issa has proposed. Why is the
    chairman pursuing changes that would increase costs for the
    Postal Service, especially when the Postal Service has stated
    the current process is the most cost-effective way for it to
    provide service to Alaska? While the Chairman's proposed
    legislation might benefit air carriers that want to enter the
    mainland market, it would not benefit Alaskans or the Postal
    Service, period.
        Let me hit on a couple more points. Chairman Issa has
    argued that the system benefits businesses more than it does
    rural residents. Wrong again. Just to point out the issue that
    we responded to the IG report in regards to your example, on
    the potato chip package, it didn't incorporate fuel costs,
    utility costs, healthcare costs, housing and wages that are
    much more expensive in rural Alaska. It is not as simple as
    drawn by the presentation. The cost of living is high in rural
    Alaska, plain and simple. If you charge carriers and small
    businesses more to provide goods, those expenses will simply be
    handed down to the communities in the form of higher grocery
    prices.
        Chairman Issa has also argued Alaskans need to pay
    disproportionately more for their service. This flies in the
    face of the Postal Service's universal service obligation. We
    should not have to pay more to receive the same service as
    other Americans.
        While the committee has failed to reach a bipartisan
    agreement on much-needed postal reform legislation, here we are
    today debating proposals that would actually cost the Postal
    Service more money and make the system less effective. These
    proposals are counterproductive to the overall postal reform
    effort. I just participated in the Senate committee markup of
    the postal reform legislation. We need to stay focused on the
    comprehensive postal reform legislation for the sake of the
    Postal Service and the American people.
        Despite the title of this hearing, Bypass mail is not
    broken. The system is far from it. Alaskans are open to change
    to make the system more effective, but I urge the committee to
    reject any changes that would violate universal service for
    Alaska or make the Bypass mail system more expensive for the
    Postal Service or my constituents.
        Finally, I urge the committee to consult both the Alaska
    delegation and the Postal Service before proceeding with any
    proposed changes.
        Thank you, Mr. Chairman. I am happy to answer any
    questions.
        Mr. Farenthold. Thank you very much, Senator.
        [Prepared statement of Senator Begich follows:]

        [GRAPHIC] [TIFF OMITTED] T7203.030

        [GRAPHIC] [TIFF OMITTED] T7203.031

        [GRAPHIC] [TIFF OMITTED] T7203.032

        Mr. Farenthold. We will now recognize Representative Young.

          STATEMENT OF THE HONORABLE DON YOUNG, UNITED STATES
           REPRESENTATIVE (AT-LARGE) FROM THE STATE OF ALASKA

        Mr. Young. Thank you, Mr. Chairman. I ask unanimous consent
    to submit for the record, if it is not there, my written
    statement.
        Mr. Farenthold. Without objection, so ordered.
        Mr. Young. Mr. Chairman, I again thank you for this
    hearing, and because I have a written statement I am not going
    to use it because the Senator has covered most of the subject
    that I would cover in my written statement, so I will just
    speak from the cuff.
        Mr. Chairman, I will agree on one thing with the Senator,
    the comment of this hearing, ``Alaska Bypass: A Broken
    System.'' I don't know where that came from. I don't know why
    it was used. It is not broken. It is working. It is working
    quite well. And as the Senator mentioned, why this proposal is
    before us I don't quite and do not know for sure.
        Chairman Issa has a great interest, as I have said before,
    in legislating in my State, and he is worried about $70 million
    lost, supposedly, which would cost the Postal Service probably
    $200 million if they were to have just what we call parcel
    post. And there is a $15 billion debt in the post office and
    you are worried about $70 million that would cost $200 million.
    I don't quite understand that. That is what you call picking up
    peanuts when you have a forest fire in your backyard. It
    doesn't make a whole lot of sense.
        When this system works, it is working well, not only for
    the rural community, but again I would like to remind my
    colleagues very straightly, because you are reading, I see one
    guy up there, Mr. Clay, is on his telephone, and that deeply
    disturbs me as a chairman. So I would prefer if you would like
    to listen very carefully. Okay. Okay. All right. That is fine.
        You take all the land east of the Mississippi River to the
    tip of Maine, to the tip of Florida, that is part of Alaska,
    and in that area you have got 253 Congressmen and 52 Senators.
    And you have more mileage of highway in that area, 10,000 times
    more than we do. There are no highways in Alaska. We do have
    post offices. And the people as American citizens have a right
    for universal service.
        Now, if we wish to do so, we will just go back to the
    parcel post system. Bypass mail, people don't understand. What
    it is, it is the products you are going to ship parcel post
    don't go through the post office. That means you don't need to
    build more postal buildings. It means you don't have to hire
    any more people if you want universal services.
        Now, I will say the post office attempted to in fact
    eliminate parcel post in Alaska, and that was changed back to
    the way it should be.
        So we are talking about a situation here that concerns me a
    great deal because it doesn't make sense to have this bill or
    the bill that was passed last week moved to the House floor
    when it has something in it that saves peanuts, when in fact it
    costs us money, the taxpayer money, the Postal Service money.
        Now, we all know that, very frankly, there were some people
    talking about noncompetition. This is not a new subject.
    Chairman Issa has gone to Senator Stevens and advocated for one
    of his constituents to make it more competitive. The way it was
    written into law, and it was Senator Stevens, was in fact it is
    very competitive now. It is not just one. But we couldn't have
    everybody participating in or you have not enough to make it
    work.
        Now, people say we are subsidizing the passengers. Now, you
    build me some highways, Mr. Chairman, and I will go along with
    you. You give me the land back that this Congress took away
    from Alaska, I will go along with you. You let us have what the
    statehood said and I will go along with you. Do you know that
    this Congress took 27 million acres away from the State of
    Alaska and hodge-podged our map so we can't build a road if we
    wanted to.
        In the IG's report--and, by the way, he is full of it, I
    mean right up to his eyeballs, and if he is in the room I will
    say it again, when he says in fact the State of Alaska ought to
    build more roads. That is the dumbest statement I have heard in
    my whole life. I doubt if he has ever been to Alaska. If he
    has, he knows why we can't build roads.
        We need this for the people, in fact, in the rural areas of
    Alaska. We don't need to fix something that is not broken. It
    does work. We use the potato chip example like we said before.
    You go into one of those stores, and I used to be in a little
    side store business in Fort Yukon before we had Bypass mail and
    I know the what the profit margin is, it is about 1 percent. So
    let us think about this before we move this bill.
        Three people versus 253 Congressmen. Two Senators. Maybe we
    ought to really think about it. This is not good legislation.
    It doesn't do what it says it will do. It doesn't fix a system
    that is not broke. It meddles, and I don't like meddling.
        I yield back.
        Mr. Farenthold. Thank you very much, Mr. Young.
        [Prepared statement of Mr. Young follows:]

        [GRAPHIC] [TIFF OMITTED] T7203.001

        [GRAPHIC] [TIFF OMITTED] T7203.002

        Mr. Farenthold. We appreciate your testimony, as well as
    the Senator's.
        I know, Senator, you agreed to answer some questions.
    Typically when we have legislators testify, unless they are
    willing, we don't question them. We do have some questions if
    you all would be willing to entertain them.
        I am going to yield my time to the gentleman from
    California to ask his questions. Being from Texas, the second
    largest State, we are over the fact you all are bigger than us
    now. So I yield to the gentleman from California, another large
    State.
        Mr. Issa. Thank you. That is how the gentleman won his
    primary today.
        Senator, your statement repeatedly of the guarantee of
    universal service, I might note for the record that there is no
    such guarantee in the Constitution. However, in my visits to
    Alaska, both officially and unofficially, going up to Prudhoe
    Bay, obviously looking at Bypass mail going to Alaskan islands,
    I am totally committed to the fact that unless we find other
    sources of revenue to provide the appropriate subsidy for
    reaching those islands, that the post office will continue to
    maintain Bypass mail, because as both of you alluded to, it is
    more efficient than taking in a bunch of parcels in 70-pound
    increments. You don't have an argument with me. Both the
    legislation that has already been passed by this committee and
    the next legislation deal only with the questions of
    efficiency.
        Now, I might ask why it is that everywhere else companies
    such as Alaskan Airlines sooner or later have to rebid and they
    can lose in a rebid, but in Alaska they are guaranteed
    effectively in perpetuity to have what effectively is a
    legislative earmark for them to get a certain amount of
    revenue. Senator, do you have a reason?
        And I understand Congressman Young said that we are
    meddling and that they can't afford--I think he basically said
    you couldn't afford to have additional competition. Is it
    additional competition that is objected to, and if that is the
    case, then couldn't we name a number of maximum vendors, but
    then allow a bid in which a vendor could lose theirs, whether
    it is Alaska Airlines or a smaller one?
        Senator Begich. Mr. Chairman, let me make it very clear
    again. How it is operated, as you know, in 2002 I wasn't here
    when the original bill was done. I know Don can--Congressman
    Young, can talk to it.
        Mr. Issa. You know, Senator, you would not have wanted to
    be sitting in the office with Ted Stevens telling me not to
    meddle in Alaska when I asked him why he was locking out
    existing carriers.
        Senator Begich. I would be very happy to answer your
    question. Mr. Chairman, the economy of scale, Alaska Airlines
    is a dominant player. It creates opportunities to create more
    efficiency in the delivery of the system. I fly on those
    flights a lot. I know you came up one time and you went up to
    Prudhoe. Prudhoe is not a village, okay?
        Mr. Issa. Senator, Prudhoe is where I went to look at other
    issues. I have been to Alaskan islands on a hydrofoil. I came
    up to look at Bypass.
        Senator Begich. Right. And when you went up there, going
    out to the villages, when we have direct and we have volume
    players in there, and Alaska Airlines is a volume player, and I
    know you are going to have a representative here, you can ask
    more questions, but in order to do it on economy of scale in
    Alaska, if you have multiple carriers the odds they will not be
    able to create the business necessary to keep the prices
    marketable and fair to the consumer at the end of the day.
        Now, you may disagree with that. I come from the private
    sector just like you. You are much wealthier than me, and I get
    it. But I come from the small business world. And you always
    want competition, but you also have to understand this delivery
    system of parcel post, and I know how you packaged up your
    comments when you said they put them in big 1,000 packages.
    Well, that is because it is more efficient. If they didn't do
    it that way, they would do the 70 pounders and the post office
    would pay that bill and that shipping cost and it would be
    passed on.
        Mr. Issa. Senator, that wasn't the question. Would you be
    responsive to the question? And I want to be very fair to you.
    You came here to help us. But we are not arguing over changing
    the efficiencies that are in Bypass mail.
        Senator Begich. Yes, you are, by the conversation.
        Mr. Issa. No. What we are talking about is excessive stops,
    additional port stops, if you will, of aircraft; the ability
    for carriers to bid to do additional work, for additional
    carriers to bid; and ultimately the possibility that carriers
    might not carry passengers, but might only carry freight. These
    are areas we are looking at to try to wrench out 10, 20, 30
    million dollars worth of the cost of the existing Bypass mail.
        No part of those freight shipments called Bypass mail are
    we talking about eliminating. We are asking can you in fact,
    tell us that locking out potential bidders of existing Alaskan
    airlines that have been doing business in Alaska for more than
    a year continuously, locking them out of the so-called
    preference, tell us why that is important, that they will in
    perpetuity never have an opportunity to replace an incumbent
    carrier.
        Senator Begich. Again, Mr. Chairman, in all due respect----
        Mr. Issa. I don't want due respect. I just want the
    question answered.
        Senator Begich. That is fine. There is competition in the
    market. New carriers can enter the system. The issue is,
    especially in Alaska, when you are flying in Alaska several
    aspects play into it, not only the competition that we have in
    Alaska, but also the safety issues and knowing Alaska pilots
    and knowing Alaska flight areas. This is a part of the equation
    also. It is not just getting the mail there. It is also the
    safety of the passengers and getting mail there. There is
    multiple reasons.
        You are not going to get the answer you want from me. I
    understand that. We are going to disagree on this aspect of
    what you are proposing.
        Mr. Issa. Senator, the airlines that we are talking about,
    the three I understand----
        Senator Begich. I disagree with your premise, Mr. Chairman.
        Mr. Issa. Well, I understand. I just want you to make sure
    we make the record accurate. The airlines that would be added,
    I think there are three that under this legislation, there
    could be more later, as far as I know they are able to carry
    this same freight, they are safe enough to be able to carry.
    They are just locked out from the preference. Additionally,
    there is, what, $870 per thousand if a plane simply lands one
    additional time even if bypassing that might be efficient for
    carrying the mail. These are the areas we are dealing with.
        And I think it is important that the record be clear. Are
    you saying that these other three carriers would not be safe to
    carry milk or vegetables or cans of Coke?
        Senator Begich. I am saying that safety is part of the
    equation. But let me just say this.
        Mr. Issa. But what level of safety do you need for a can of
    Coke?
        Senator Begich. Mr. Chairman, I am not going to go back and
    forth with you. Maybe you want to. I have seen how some of
    these hearings work. I operate differently in the way we have
    conversations. I am not going to go back and forth with you
    over the same argument.
        I will just tell you this. The Senate has passed out of the
    committee in a bipartisan way a comprehensive postal reform
    bill that puts the postal reform on the right track with
    ensuring Bypass mail stays in the way it is because it is a
    small piece of the puzzle and does it efficiently. We have been
    able to balance the budget on the Postal Service and doing it
    the right way with the Senate bill and looking at all these
    issues, and Bypass mail, as it is today, which I will go back
    to my original quote, it is not broken, despite this committee
    hearing's title. And we were able to do it with Democrats and
    Republicans in a bipartisan way on the Senate side.
        Mr. Farenthold. Thank you very much.
        Mr. Young. May I make a comment?
        Mr. Farenthold. If you would like to comment for a moment,
    Mr. Young, absolutely. Did you have something you wanted to
    add?
        Mr. Young. You know, this is about safety and efficiency.
    If you open for bid, I can come in, I know on the bill it says
    I believe they are supposed to be operating 6 months, I think
    that is correct.
        Mr. Farenthold. I think it is a year.
        Mr. Young. A year before they can bid? But you remember
    this system has been working for a period of time where each
    carrier now has a system by equipment, loading capability, and,
    in fact, if you had another competitor would he guarantee
    passengers back to the home base? If he just wants to supply
    Bypass mail he would have to raise the rates because there is
    no passengers.
        Alaska Airlines has passengers. I think that is crucially
    important to remember. This is about saving money and making
    sure that the planes are safe. Now, that may be up to the FAA.
    I don't know. I mean, that is something we have to think about,
    the system. We have not had an accident. We have delivered the
    mail. There hasn't been any real problems. I mean, that goes
    back is it broken? Are we just looking for a problem? That is
    all.
        Mr. Farenthold. We are a little over on Mr. Issa's time--or
    my time--and Mr. Cummings has indicated he would like to go to
    Mr. Clay first.
        So, Mr. Clay, you are recognized for an equal amount of
    time.
        Mr. Clay. Thank you, Mr. Chairman.
        And thank you, my friend from Maryland, the ranking member,
    for yielding.
        Senator Begich, welcome to the friendly confines of the
    House Oversight and Government Reform Committee. You know, on
    December 2, 2011, the Alaska delegation sent IG Williams a
    letter requesting the findings within the 2011 inspector
    general's report. Could you elaborate on the delegation's
    concerns with the report?
        Senator Begich. Absolutely. Thank you very much for the
    question.
        First off, when you look at it, as I mentioned a little bit
    earlier in regards to the cost, as I highlighted, that 35 cent
    bag of chips, shipping, they didn't incorporate all the other
    costs of that product and therefore that is a huge gap. They
    also had information regarding the flights, for example,
    comparing a 144-seat passenger planes to 36-prop passenger
    planes and making them equal, which is incorrect.
        We went through a list of items. The infrastructure cost,
    how is that incorporated? If I took the position, and I do, and
    I would love more roads, as Congressman Young said, if you
    suddenly say we don't want Bypass mail, then there is a
    substitute, parcel post, like everyone else can get. They can
    drive and deliver parcel post. Well, okay, where is that road
    construction money, that cost factor? None of these things are
    put into this discussion in the IG's report. We detail that, as
    you noted, 2-1/2 pages by the delegation, which we think are
    legitimate issues that detail out why the system today is not
    broken and is efficient. It is very efficient in the delivery
    of the system.
        So as I said on the costing, the shipping, the amount of
    travel, the savings, they never incorporated. They never asked
    the post office how much are they saving by not doing this.
    Well, it is $35 million bucks. Well, where is that in this
    equation? That should be incorporated.
        So there are several items that we highlighted that we
    think should be taken into account when you are looking at this
    system. And that is what it is. It is not a program. It is not
    a subsidy in the sense like people like to make other programs.
    This is a postal delivery system. I mean, I would just venture
    to guess an envelope from California to D.C. costs more than an
    envelope going from southern California to maybe a town across
    the street, but the postal cost is the same.
        Mr. Clay. And I do empathize with your position, having
    just finished a recent trip to the North Pole. And I was in a
    place called Churchill, Manitoba on Hudson Bay, pretty close to
    the North Pole. And it was a remote town. There were no roads
    leading in or out. The only way there was through train
    service, by rail or by plane. And, yes, the cost of goods and
    services were much higher in that town.
        Let me move on to Representative Young. I hope you are not
    reading your BlackBerry, Representative Young.
        Mr. Young. I have never read my BlackBerry in my life. The
    day I turn that sucker on is the day I am going to walk out of
    these halls, I will tell you that right now.
        Mr. Clay. You know, for the life of me I cannot understand
    why we are having this hearing on this bill. I mean, maybe you
    can shed some light on it, to bring----
        Mr. Issa. I can----
        Mr. Clay. No, I am talking to the witness now, Mr. Chair. I
    am talking to our colleague.
        Mr. Young. I really think, in all due respects to the
    chairman of the full committee, it was being held because Mr.
    Cummings and Mr. Lynch raised this point on the letter I wrote,
    and I do think this is why this hearing is being held. I
    believe the same provisions are in the major bill that was
    voted on, and now we can go to the floor and say we had a
    hearing. I think that is the main reason.
        But the reality is, this will inform you, I think, a little
    bit about the challenges we have in the State of Alaska. I have
    said before, if you guys help me build some roads, I will be
    all for it. We have a broken infrastructure system in the lower
    48. We don't have any infrastructure of any consequence in the
    State. Remember how many miles of road.
        So we need to have universal service for the post office.
    The post office is losing money. There is no doubt about that.
    And I hope in the postal reform we will finally solve the
    problem and allow them to make some money. But $70 million,
    when it is going to cost about $200 million to do what they are
    losing on $70 million, to me that is a $130 million profit, any
    way you want to cut it. So I don't know.
        Mr. Clay. I yield to the gentleman from Maryland.
        Mr. Cummings. Congressman Young, the reason why we wanted
    to hold a hearing is so we would get a better understanding
    about this mail. I understand that there are unique situations
    in Alaska, and what we wanted to do was make sure we understood
    what we were voting on.
        And so as I have been listening to the discussion, I
    wondered, you know, we often hear in the Congress the terms
    picking winners and picking losers, and I am just wondering,
    those carriers that are in already, have we now given them a
    license to be there forever, and what about others that might
    want to compete? This is just out of curiosity. I mean, this is
    a question. And I just wondered, if you were on the outside
    looking in, I mean, how would you handle that?
        In other words, if you were a carrier and you wanted to
    have an opportunity to get in on the action. And I am not
    saying. I don't know. I am just curious.
        Mr. Young. May I address that? I am not locked into any
    airline's permaturity as far as carrying mail, but I am locked
    into safety and efficiency. That is what I am locked into. And
    when you put up a bid, now, I have seen some of the bids the
    post office puts up, and they may go for the cheapest bid. Now,
    that is well and good for their bottom line, but that doesn't
    protect the person that is flying in that airplane or the lack
    of efficiency receiving the mail.
        Mr. Cummings. So if they put up the requirements of a bid
    were to have the level of safety and the things that you just
    talked about in there, your concern is, I take it, first of all
    that they would likely not require those things in the bid, and
    even if they did, that bidders would, even if they said they
    were going to do it, they probably wouldn't perform to the
    level of safety and efficiency that you are talking about. Is
    that a fair statement?
        Mr. Young. That is what I am saying. And by the way, again,
    I go back to the post office, they will take the cheapest bid.
    That is what concerns me. They will take the cheapest bid. And
    in doing so they can jeopardize the efficiency and the safety.
        Mr. Cummings. Okay. Senator.
        Senator Begich. Very quickly. Also, inherently when you do
    freight, for example freight coming out of Anchorage going,
    say, to Bethel or Koyukuk or a small village, that goes out
    there full up, if it is just a straight freight liner, it comes
    back empty. What do you think the costs are going to be? They
    have got to pay for that. So the costs go up. That is why there
    is this combo. And people who have a combo, they can enter the
    market now. But you do the combo so then it becomes a more
    efficient system. It is the similar problem we have with our
    big boat ships that come up tote. They come up full, they go
    back empty because we don't have product that we are exporting
    back to Seattle or Tacoma.
        Inherently a straight freight shipper will cost more money
    in the end product. Now, I know someone will argue differently,
    but I am telling you, I have flown on those have known on those
    combi planes, Don Young has flown on those combi planes, half
    freight, half people. And the reason it is done is because you
    have got an efficiency to the system, and that is just a fact,
    and that has been proven by the post office in its analysis of
    savings.
        Mr. Young. Another thing, too. Unless they have the
    aircraft available, and that is where the bid would come in, if
    you think you are going to be able to carry this freight in a
    Caravan, which is a single engine turbo prop, or in a Dash 8,
    you are not going to meet the requirement. The efficiency goes
    out the door. And to my knowledge those seeking this new
    competition within the State don't have any type of aircraft
    like that. It will probably come, very frankly, someone leasing
    them from the lower 48 bringing the new aircraft in to get in
    the direct freight business.
        Mr. Farenthold. Thank you very much.
        And we will now recognize the gentleman from Georgia for 5
    minutes, Mr. Collins.
        Mr. Collins. Well, in the midst of all the big States
    discussing here, the small State of Georgia is going to yield
    its time to the chairman from California.
        Mr. Issa. I thank the gentleman for yielding.
        Well, I think the round of questioning helped us a lot in
    understanding that it is all about passengers. Is that correct,
    Representative Young? That in fact, notwithstanding everything
    else, this program, what is basically the current rules tie the
    hands of the post office, forcing them to give a preference to
    airlines who carry passengers. Is that correct?
        Mr. Young. No, it is not correct. It is forcing them to
    make it more efficient. If you fly empty, you know this, Mr.
    Chairman, if you fly empty going back you are going to raise
    that price of the potato chips up to $12 a pack.
        Mr. Issa. Well, that begs the question, if the post office
    has the ability--and I am happy to change this legislation to
    make it fit the model that you and the post office seem to
    want--if the post office has an obligation to get the lowest
    long-term price, does that meet your requirement?
        Mr. Young. Lowest long-term price with efficiency. With
    efficiency. And you can't be efficient if you don't haul
    passengers.
        Mr. Issa. Okay. But it is all about passengers.
        Mr. Young. No, it is about efficiency.
        Mr. Issa. Well, you know, Don, when I went----
        Mr. Young. If you can't have passengers, you will not have
    efficiency.
        Mr. Issa. Well, when I went up to that Aleutian island on a
    hydrofoil we went up with freight and we came back without
    anything. We didn't bring any passengers back.
        Mr. Young. You lost money, too.
        Mr. Issa. Well, I didn't, but the hydrofoil, I guess, might
    have done that. But let's go through the arithmetic that you
    have been giving up until now. The $35 million you say it would
    cost more to do parcel post, that is a number you are good
    with?
        Mr. Young. I think it would.
        Mr. Issa. That is fine. I am fine with that number. They
    lost $76 million. Had they billed parcel post rate they would
    have billed over $100 million. The arithmetic is that they
    could raise the price $41 million, pass only on to the
    efficiency of the Bypass mail $41 million in discounts, and
    everybody walks away happy. The only problem is that is more
    than my bill is purporting to charge.
        The current cost, let's just say round numbers, it is $100
    million, $110 million to ship if you were shipping parcel post.
    And by the way, that is almost exactly the number of what it
    would take for this program to break even, meaning if they used
    Bypass mail but charged parcel post rates the post office would
    roughly break even.
        And I will take your number, it is a good number, $35
    million in savings. I believe the post office needs to pass on
    that entire $35 million that they save by not touching the
    mail. I am completely in agreement with you. The problem is
    they pass on tens of millions of dollars of additional
    discount. The problem is that universal service has a price.
    The Alaskan who receives parcel post by air, even including
    discounting the Bypass savings, is still paying less than a
    parcel post person who gets a package delivered over 1,000
    miles or 800 miles or whatever in the U.S. The discount is
    greater currently than in fact is earned due to Bypass.
        And, Senator, I believe Bypass is the most efficient way. I
    think it could be more efficient if we allow some competition,
    and we could talk about ways to protect against unreasonable
    competition. But do you agree that Bypass mail, the portion of
    the savings that comes from a more efficient distribution, is
    what should be passed on to the ratepayer, not that plus more?
        Senator Begich. I will give just a general comment. Not
    seeing your numbers, and I like to see stuff written down, but
    let me just make it a broad----
        Mr. Issa. Senator, I was taking Don Young's numbers.
        Senator Begich. Well, let me just make a broader sweep
    here.
        Mr. Young. He hasn't seen my numbers either.
        Senator Begich. That is right. I was looking over his
    shoulder here. But let me take a broader. You made the comment
    that you will tweak the bill to get it to where it needs to be
    to make it work. Well, it is working now. Now, if we want to
    argue the point about, for example, if you now want to change
    the system of universal service in the sense of making sure it
    pays for itself in areas, then we should talking about the
    Grand Canyon. I could start taking a list of places across the
    board to deliver that mail.
        Mr. Issa. Senator, I will tell you, on this side of the
    dome I am happy to hear you out as long as you want to talk.
    But I asked you a question about the level of discount. I have
    already said I believe Bypass mail should be maintained. What I
    am looking to do in this legislation is to have as much free
    market competition as possible. If there is an explicit subsidy
    for passenger, not an efficiency but a subsidy for passenger, I
    want that to be measured in a way that everyone knows that it
    is open and transparent. But most importantly, if we can find
    ways to lower the cost, I want to lower the cost, because
    currently the discount given for Bypass mail is greater than
    the savings versus parcel post, which it was an alternative to.
        Now, to be honest, we are arguing over about $20 million
    and three companies that might be able to enter the market, at
    least measured under this current legislation. It is not a lot
    of money. It is more a matter of principle, that I want to make
    sure that the post office is allowed to seek the most
    competitive vendors. And if you want to have a discussion about
    what those vendors must do and maybe they have to be in
    business for 5 years, that is fine.
        When I went up to Alaska the first time, I saw tail
    dragger, gas burner, they weren't DC-3s, they were more like
    DC-5s, but they were cousins, big cousins of a DC-3, and those
    were carrying postal freight in some of the oldest planes I had
    ever seen. So I have seen a lot of old ragged planes carrying
    postal freight.
        The question isn't, is Alaska a first class airline? It is.
    Is Alaska an efficient carrier? I believe it is. But that is
    not the whole system and that is not really what we are talking
    about.
        Chairman Young, Don Young, quite frankly, he is always
    going to be a chairman to me, he made the point about those
    single engine props. Well, they will carry a lot of those
    locations. Alaska Air carries a relatively few number of
    locations but a lot of freight. And as you know, small singles
    and light twins are carrying a lot of the freight. That is
    really where I suspect that some of the efficiency could be, if
    they were to Bypass a stop here or there, deliver more
    appropriate for the needs of freight, maybe less appropriate
    for the desire of passengers.
        That is what this discussion is about, and I hope you could
    ask me will I work with you to achieve certain things and then
    tell you us what you want to achieve rather than saying there
    is no savings here. The post office and the IG are going to get
    up after you and they are going to say, yes, there is. I am
    quite sure of that.
        Senator Begich. Mr. Chairman, I guess my comment back to
    you would be that we have done this work on the Senate side I
    think with fair deliberation on the overall issue on the budget
    of the post office in trying to get a solid bill that pulls the
    post office in a broad, back to breaking-even-plus, in order
    for it to survive.
        Bypass mail, as we are sitting here, to be frank with you,
    I will talk Bypass mail forever, but to spend this kind of
    amount of time on what you just claimed a $20 million issue
    seems why taxpayers are more outraged with us than ever before,
    when it is a multibillion dollar issue. We have a bill that we
    passed that dealt with Bypass mail and everything else.
        Mr. Issa. Senator, as far as we know, your bill didn't
    touch Bypass mail.
        Senator Begich. Because we don't think it is broken,
    Republicans and Democrats.
        Mr. Issa. And most of the savings came from a transfer from
    the post office to Medicare. It is no net savings to the
    unified bill.
        Senator Begich. On the overall bill, I beg to differ.
    Senator Coburn, who is fairly conservative I would say, who
    supported the bill coming out of committee as the ranking
    member, I wouldn't think he would pass a bill that, one, cost
    money, doesn't show savings, and doesn't solve the problem long
    term.
        Senator Begich. He even, through the discussions we had in
    that committee, saw no need to modify or change Bypass mail
    because it wasn't broken. Other elements of the post office are
    broken. That is where we should be spending our time.
        Mr. Farenthold. We are getting a little beyond the scope of
    where we get here overall postal reform versus the more focused
    look at the Alaska Bypass mail system. At this point, I think
    we do need to move on to our other witnesses, Let
    Representative Young and the Senator get back to work for the
    people.
        Mr. Young. Thank you, Mr. Chairman, and thank you, Mr.
    Chairman, two chairman up there. As chairman and chairman, I do
    appreciate the hearing. I am still willing to sit down and talk
    to people about solving, if there is a problem, if there is
    something we can do together. But right now, it ain't broke,
    don't fix it.
        Mr. Farenthold. Thank you very much. Now we will take a
    short recess while the clerks set up for the next panel.
        [recess.]
        Mr. Farenthold. Well, we are back, and we will now
    recognize our second panel.
        Mr. Ronald Haberman is the Alaska district manager for the
    United States Postal Service. Ms. Tammy Whitcomb is deputy
    inspector general for the Postal Service Office of Inspector
    General. Mr. Dennis Devany is deputy director of the Office of
    Aviation Analysis in the Office of Aviation and International
    Affairs at the Department of Transportation. Mr. Steve Deaton
    is senior vice president at ACE Air Cargo. And Mr. Jeff Butler
    is vice president of customer service, airports, and cargo for
    Alaska Airlines.
        Pursuant to committee rules, all witnesses will be sworn in
    before they testify. Would you please rise and raise your right
    hand, please. That was two pleases.
        Do you solemnly swear or affirm that the testimony you are
    about to give will be the truth, the whole truth, and nothing
    but the truth?
        Let the record reflect that all the witnesses answered in
    the affirmative. You all may be seated.
        We've received your written testimony, so in order to allow
    time for discussion, please try to limit your testimony to 5
    minutes. Your entire written statements are a part of the
    record. You should see in front of you a red, yellow, and green
    light. Much like when you're driving, green means you're doing
    good, yellow means hurry up, and red means stop. So we will now
    start our testimony with Mr. Haberman.
        You are recognized for 5 minutes, sir.

                    STATEMENT OF RONALD S. HABERMAN

        Mr. Haberman. Good afternoon, Chairman Farenthold and
    members of the committee. My name is Ronald Haberman, and I
    serve as the district manager of the Postal Service's Alaska
    District. I have been employed by the Postal Service for 29
    years, and I have been a resident of Alaska for nearly 18
    years.
        Thank you, Mr. Chairman, for calling this important hearing
    on Alaska Bypass service. I am pleased to be here today to
    provide a historical overview of Bypass mail delivery in Alaska
    and to explain how the current system works. I will also
    discuss the differences between Alaska Bypass mail and standard
    post, previously known as parcel post, and some of the costs
    associated with bypass service.
        The State of Alaska is vast in geography with no roads
    connecting the majority of its communities. Mail is transported
    via airplanes, helicopters, hovercraft, and ferries. While a
    very limited road system allows some areas to be reached by
    surface vehicles, nearly all mail must at some point be
    transported by air in order to reach its final destination.
        Bypass mail service came into existence in the early 1970s
    when increased parcel post volume, which at that time included
    mail delivered to bush communities, began to exceed the Postal
    Service's operational facility and infrastructure capacities.
    Bypass mail is prepared by an authorized shipper, tendered
    directly to mainline and bush carriers, and then delivered to
    the addressee at final destination. Items that flow through the
    Bypass process are not collected, transported, or delivered by
    the Postal Service. These items bypass originating and
    designating postal operations, thereby incurring no cost for
    Postal Service infrastructure, such as labor, facilities,
    processing, and equipment.
        The Department of Transportation is the sole rate-making
    authority for all intra-Alaska mail transportation. Alaska is
    the only remaining regulated air environment, which means the
    Postal Service is not authorized to negotiate rates directly
    with air carriers except under limited circumstances.
        There are stark differences between Bypass mail and
    standard post. Standard post consists of single packages that
    must adhere to weight and size restrictions and enters the
    Postal Service system via contact with postal retail or
    delivery employees. The packages are processed and delivered
    within the Postal Service's infrastructure.
        Alaska Bypass service consists of goods and commodities
    that are similar to freight and cargo that is shipped in bulk
    on pallets to rural communities. The pallets far exceed the
    Postal Service's maximum weight limit of 70 pounds and are
    prepared in a warehouse and inducted into air carrier
    facilities for transportation and delivery.
        Alaska Bypass service allows businesses, which typically
    include popular big box wholesalers with locations in Anchorage
    and Fairbanks, to ship directly to rural customers, usually
    retail merchants, schools, and medical clinics using a hub-and-
    spoke system. These recipients order goods and supplies from an
    approved Bypass shipper who processes the order and tenders it
    to an approved Bypass air carrier based at acceptance point
    airports in Anchorage or Fairbanks. The assigned Bypass air
    carrier transports the order to a hub community where the large
    pallets are tendered to bush air carriers who deliver the items
    to the recipients.
        Goods shipped via Bypass mail must be ordered from
    authorized shippers in minimum quantities of 1,000 pounds, and
    Bypass pallets generally travel the same routes and in the same
    planes as Priority Mail, Priority Mail Express, and First Class
    mail. The minimum shipping price for a Bypass mail order is
    $365. Last year, 87.5 million pounds of Bypass mail was
    delivered.
        The Postal Service incurred $109 million in transportation
    costs and $32 million in revenue for Bypass mail service in
    fiscal year 2013. This means that Bypass mail costs exceeded
    revenue by $77 million. However, transporting mail to customers
    and post offices in remote areas of Alaska is a part of the
    Postal Service's universal service obligation. Although the
    measures the Postal Service takes to deliver to remote areas of
    Alaska are unique, operating delivery services to some
    locations at a loss are not. For instance, the Postal Service
    loses money transporting mail to customers at the bottom of the
    Grand Canyon using mule trains. Nonetheless, as part of the
    Postal Service's statutory mission to provide prompt, reliable,
    and efficient service to all communities, these addresses must
    receive the same level of commitment to delivery as all others
    across the United States.
        Bypass mail is a cost-effective and efficient way to handle
    items that would otherwise require processing through the
    postal infrastructure. If the Postal Service were to process
    Bypass mail through in-house operations, it would incur
    substantial transportation, facility, and labor cost.
        Mr. Chairman, this concludes my remarks. I would be pleased
    to answer any questions.
        Mr. Farenthold. Thank you very much, and you gave back some
    time. Always a winner with that.
        [Prepared statement of Mr. Haberman follows:]

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        Mr. Farenthold. We'll now go to the deputy inspector
    general for the Postal Service, Ms. Tammy Whitcomb.
        You're recognized for 5 minutes.

                      STATEMENT OF TAMMY WHITCOMB

        Ms. Whitcomb. Thank you. Mr. Chairman and members of the
    committee, Alaska Bypass is a unique service not provided
    anywhere else in the country. It was created in 1972 to ease
    operational bottlenecks but has come to resemble a freight
    service rather than typical mail or parcel delivery.
        As you can see on the screen, under the program, large
    orders weighing a minimum of 1,000 pounds are shipped on
    pallets via air transportation. The Postal Service's normal
    weight limit for parcels is 70 pounds.
        The Alaska Bypass pallets of goods travel from the
    commercial warehouse via the airline to the merchant's door,
    bypassing the Postal Service's infrastructure. The Postal
    Service is required to pay for this air transportation;
    however, postage is assessed at less than $30 for every 70
    pounds and has no relation to the actual cost.
        The Postal Service has lost money on Alaska Bypass every
    year since its inception. In 2013, the Postal Service paid out
    $108 million for Alaska Bypass transportation while it brought
    in only $32 million in revenue, losing $76.8 million.
        Keeping the program consistent with its original intent has
    been challenging. For example, in the late 1980s, the Postal
    Service began prohibiting shipments of concrete and certain
    building materials after excesses emerged. In 2002, the program
    goals were formally expanded to include supporting Alaskan
    passenger and freight air transport. Thus the program has
    evolved beyond improving Postal Service operations.
        The Postal Service is also restricted in how it operates
    the program. Changing the Bypass network requires 12 months of
    public notice in consultation with the government of Alaska.
    Additionally, in a throwback to the days before airline
    deregulation, the law mandates that the Postal Service pay air
    carriers noncompetitive rates set by the Department of
    Transportation. The Postal Service is required to equitably
    share Bypass volume among designated carriers, and new carriers
    must overcome significant hurdles to participate. These
    features burden the Postal Service with additional costs
    unrelated to the postal mission.
        Alaska is an enormous State with few roads and many
    communities accessible only by air. We are sympathetic to
    States facing infrastructure challenges, but national and State
    infrastructures are typically financed by the Federal
    Government and the States. Under the current Bypass program,
    significant support to Alaska's transportation infrastructure
    is paid for by postage sales outside Alaska.
        Postage revenues are collected from postal customers, not
    taxpayers, and the Postal Service has a duty to collect only
    such revenues as are needed to provide each service. Programs
    that do not pay for themselves requires cross-subsidization
    from other products and customers, which is normally prohibited
    for the Postal Service. Moreover, our research suggests that
    Alaskans buying goods shipped through Alaska Bypass do not
    appear to benefit from this transportation subsidy. For
    example, in the towns our staff visited, a tube of toothpaste
    cost $1.10 more than in Anchorage even though shipping costs
    through the Bypass program were as low as 14 cents. Also, the
    University of Alaska, Fairbanks, has found that the same basket
    of groceries can cost more than twice as much in some Bypass
    hubs than in Anchorage.
        One possible reform is to end Alaska Bypass and return
    freight shipment to the private sector. If Congress wishes to
    retain Alaska Bypass, we developed several options for
    consideration. The Postal Service could be given freedom to
    operate Alaska Bypass more efficiently by ending the 12-month
    notice and consultation period. Statutory restrictions that
    prevent new carriers from entering the market and that restrict
    competition could be removed. The Postal Service could charge
    higher rates to make the Alaska Bypass self-sufficient and
    eliminate its burden on other postal customers.
        Alternatively, the Federal Government or the State of
    Alaska could reimburse the Postal Service for its Alaska Bypass
    losses. The Alaska Permanent Fund, which was established to
    invest Alaska's oil and mineral revenues, has a balance of
    almost $50 billion that earns interest. The postal losses from
    Alaska Bypass would be just 2.6 percent of the nearly $3
    billion that the fund earned last year.
        Delivering mail and parcels anywhere in the United States,
    regardless of geography, is the Postal Service's primary
    responsibility to the American people. But this universal
    service obligation has no relation to Alaska Bypass. Reforming
    the program should not affect universal mail and parcel
    services to Alaskans or to any other American. Thank you.
        Mr. Farenthold. Thank you very much for your testimony.
        [Prepared statement of Ms. Whitcomb follows:]

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        Mr. Farenthold. We'll now recognize the deputy director of
    the Office of Aviation Analysis for the Department of
    Transportation. That would be Mr. Dennis Devany.
        Devany is correct, right?

                       STATEMENT OF DENNIS DEVANY

        Mr. Devany. Yes.
        Mr. Farenthold. If you could make sure your microphone is
    on, please, sir. Press the ``talk'' button.
        Mr. Devany. Okay. I'm not good at this.
        Mr. Farenthold. And you need to bring the microphone a
    little bit closer. We are all dying to hear what you have to
    say.
        Mr. Devany. Yeah, I'm sure. And I sat on my glasses
    yesterday. My wife found 10-year-old glasses, so I can barely
    see.
        But in any event, thank you, Mr. Chairman and members of
    the committee. I appreciate the opportunity to be here. Am I
    too loud?
        Mr. Farenthold. No, you're great. You're knocking it out of
    the park.
        Mr. Devany. Okay. I'm not good at this, so I don't know.
        DOT is required by statute to set intra-Alaska mail rates.
    I can read what the statute says, but you guys probably already
    know it. I've done written testimony. It's fairly detailed and
    boring, and so I'll try and kind of just do an overview here.
        First of all, the rates we set have nothing to do with the
    price of stamps. It doesn't have anything to do with you put a
    stamp on a mail. The rates we set are what the Postal Service
    pays to the airlines to carry a ton of mail a mile or whatever
    distance.
        When Congress deregulated the airlines in 1978 and they
    said anybody can fly wherever they want, charge whatever they
    want, an exception was made for intra-Alaska mail rates. The
    mail system in Alaska comprises both what we consider regular
    mail, which is where you put a stamp on a mail, and Bypass,
    which is the focus, obviously, of this hearing.
        And Bypass takes its name from the fact that it bypasses
    the Postal Service. They don't take physical possession of the
    mail. If a shipper from a big box store, as I think Mr.
    Haberman mentioned earlier, wants to send something from
    Anchorage to Bethel, they contact the Postal Service, the
    Postal Service will say give it to Carrier A or Carrier B,
    depending on who had the last shipment.
        There's two elements to the mail rate. Basically what we
    call the terminal charge and the linehaul charge. The terminal
    charge means how much does it cost to get a ton of mail on this
    airplane, irrespective of distance. You know, you got to get a
    forklift, you got to do something to get it on the plane. The
    linehaul is how far does it fly, and that costs fuel, that
    costs pilots, maintenance, and so on. And those are the two
    rates we set. It's the terminal and the linehaul.
        Originally, when we took this responsibility over, and it's
    been a number of years, we conducted an exhaustive study to try
    and differentiate between the cost to carry mail, the cost to
    carry cargo, passengers. Passengers walk onto an airplane, mail
    doesn't. Mail can offload cargo if the plane is overloaded.
        In any event, we went through an exhaustive study,
    established what we call base rates. Since then, we have done
    an update, much like you'd update with the Consumer Price Index
    or any other index. We don't use CPI. We use cost per available
    ton mile. The assumption in our methodology is that if the unit
    cost of flying an airplane in Alaska goes up 2 percent, the
    mail rates go up 2 percent. If you go down 1 percent, the costs
    go down 1 percent.
        The only other refinement, if I can call it that, we've
    done to that, I think it was in 1999, we did a fuel surcharge
    when fuel was going up steadily. Now we do quarterly fuel
    surcharges, so we adjust the rate.
        Other than that, we set the rates every year, and it's a
    fully transparent process. We issue, we call it a show cause
    order. It says this is what we think the rates should be, we
    have all the underlying data, costs, unit costs, and people can
    say, they have an opportunity to object if we have done our
    arithmetic wrong, if we have done something else wrong, and
    then we take those comments, of course, into consideration. And
    then we issue a final order, and that's it for the next year,
    and then we do it annually.
        So I hope I helped.
        Mr. Farenthold. That's a great overview of the process. We
    appreciate your enlightening us.
        [Prepared statement of Mr. Devany follows:]

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        Mr. Farenthold. Our next witness is Mr. Steve Deaton,
    senior vice president at ACE Air Cargo.
        Mr. Deaton.

                       STATEMENT OF STEVEN DEATON

        Mr. Deaton. Thank you, Mr. Chairman. Thank you, members of
    the committee, for allowing me to come have this opportunity to
    talk to you today. I've submitted my written testimony, and I
    have decided to take a little bit of a different tack in my
    summary. I wouldn't want to bore you with continuing to talk
    about the uniqueness of Alaska. No doubt it is unique. I think
    the committee recognizes that, and the people have been
    pointing that out because it's very important.
        I think one of the things that I'd like to talk about is
    the fact that it sounds like the committee and Congressman Issa
    and even the Senate through Senator Begich's comments, the goal
    here isn't to do away with the Bypass mail program. It has the
    support of the committee and the Congressman and the Senator.
    And therefore I'd like to talk a little bit about the
    efficiencies, the competition, the ways to make the system
    better. And while I agree that the Bypass mail system is not
    broken, I do have some thoughts on the Rural Service
    Improvement Act, what it's accomplished and what it is
    currently doing to the system and the Postal Service as a
    whole.
        A lot of the testimony today is focused on what I would
    call mainline air carriers. I was involved for 30 years as a
    retired Postal Service person now. I was around when Bypass
    mail was rolled out, when the Bethel experiment happened. I
    managed that process for 25 years. I have submitted my bio. I'm
    here today as senior vice president of ACE, but I'm talking to
    you more as from my postal and my 50-year residency in Alaska
    as my base rather than my current career job.
        The issues, as I see them, ensuring passenger service,
    ensuring freight service for the residents of Alaska, and
    trying to create efficiencies and cost savings or loss
    avoidance for the Postal Service, seem to be what's the
    important thing today. Most of the discussion being mainline
    carriers, the Rural Service Improvement Act. When it was
    enacted, there were three mainline carriers up to that point
    that carried passengers, Reeve Aleutian Airways, Era Aviation,
    and Alaska Airlines. Today, under the Rural Service Improvement
    Act, there are still three mainline passenger carriers carrying
    mail and Bypass mail, Era Alaska, Alaska Airlines, and Penair.
        I think it's important to know that the majority of the
    Postal Service losses don't come from the mainline side. They
    come from the bush air carrier side, the small carriers that
    fly mail around the State of Alaska.
        Prior to the Rural Service Improvement Act, there were as
    many as 35 air carriers. The Rural Service Improvement Act came
    in, was enacted to protect the passenger freight service, and
    it's done its job. There are now nine Bypass bush carriers left
    carrying mail in the State. There are still three mainline
    passenger carriers. In addition, there are three mainline cargo
    carriers. The mainline industry, in my opinion, is not the
    issue.
        On the bush side, where the majority of postal losses
    occur, there are some things in the Rural Service Improvement
    Act that could be improved to provide competition, increase it,
    and to provide efficiencies. One of those things is called the
    pool concept. As the congressman referred to earlier, the
    Postal Service has to give the majority of its mail on the bush
    side to over 200 destinations to the carriers that carry and
    qualify for passenger carriage who have the least amount of
    capacity to move it. Currently today there is more mail
    transfer from bush carrier to freight carrier or bush carrier
    to bush carrier than there was before the Rural Service
    Improvement Act.
        If the pool concept were either eliminated or altered, then
    it would allow for greater competition, there would not be
    monopoly markets, which there are today in bush Alaska, and the
    unit cost for bush carriers that is used by the DOT to set
    rates would have a downward pressure on the Postal Service's
    cost.
        Another element that could be improved would be the
    equalization policies of the DOT, either straight equalizations
    or composite equalizations, the latter which brings an
    immediate savings to the Postal Service by eliminating one of
    the terminal handling fees that Mr. Devany talked about.
        Equalizations bring more competition, both from acceptance
    point to hub and certainly from acceptance point to bush point,
    and more efficiencies, along with better service to the
    communities and lower cost to the Postal Service.
        I thank you for this opportunity to share some of my
    thoughts.
        Mr. Farenthold. Thank you very much, Mr. Deaton.
        [Prepared statement of Mr. Deaton follows:]

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        Mr. Farenthold. We will now hear from the vice president of
    customer service of airports and cargo for Alaska Airlines, Mr.
    Jeff Butler.

                      STATEMENT OF JEFFREY BUTLER

        Mr. Butler. Good afternoon, Chairman Issa, Ranking Member
    Cummings, Chairman Farenthold. My name is Jeff Butler, and I do
    serve as the vice president of customer service, airports, and
    cargo and reservations for Alaska Airlines, and I am genuinely
    appreciative of the opportunity to testify today on the
    importance of the Bypass mail system to the State of Alaska.
        It's been interesting listening to the deficit conversation
    thus far this morning because I agree with Mr. Deaton, 75
    percent of that issue really is between the hub locations and
    the bush, not mainline, which has been the testimony thus far
    and the crux of this bill.
        Nonetheless, the vital importance of this program really
    can be summarized in one sentence: It provides rural Alaskans
    with access to fresh food and basic supplies which otherwise
    they could not afford to pay if they had to pay higher air
    freight prices. Statements to this subcommittee by the Yukon-
    Kuskokwim Health Corporation, the mayor of the North Slope
    Borough, and other native organizations confirm the dire
    consequences in these remote communities if there are changes
    to the Bypass mail system.
        Alaska Airlines, the largest air carrier in the State of
    Alaska, has been a significant mainline Bypass carrier and
    respectfully disagrees with H.R. 4011. That legislation could
    create negative effects among all of the mainline Bypass
    carriers' stakeholders, most importantly the residents of the
    State's most isolated villages and regional communities, as
    well as the United States Postal Service and the existing
    Bypass mail carriers.
        The only beneficiaries of H.R. 4011 would be the three or
    so new entrant Bypass mail carriers that the legislation would
    make eligible. It would transform the entire Bypass mail system
    and lead to reduced Bypass mail and passenger service levels.
    It would jeopardize the rural communities' fragile
    transportation infrastructure and drive the United States
    postal costs even higher.
        The economic reality is that the Bypass mail market has
    been shrinking because of out migration from the rural
    communities and other recent changes in the program itself.
    Alaska Airlines' January 2014 Bypass mail volumes were 13
    percent lower than January, 1 year ago. The resulting reduction
    in revenue is already straining the ability to maintain the
    level of regularly scheduled mail, freight, and passenger
    service we have long operated to rural communities. The
    significant Bypass mail revenue diversion resulting from
    additional new Bypass mail carriers would almost certainly
    oblige Alaska to materially reduce the level of both its
    passenger as well as Bypass mail service within the rural
    communities. The Alaska native organizations emphasize the
    serious negative effects on the rural communities from such
    service reductions.
        We strongly encourage this subcommittee to bear in mind
    that an important objective of the 2002 Rural Services
    Improvement Act expressly provided that the use of the Bypass
    mail system be used to support passenger as well as mail
    service to the isolated rural communities. Operating Bypass
    service is costly. The towns do not maintain their own airport
    terminals like most of the lower 48. In Nome, Kotzebue, Barrow,
    Bethel, Alaska Airlines built those terminals. Alaska Airlines
    maintains those terminals on both the passenger, cargo, and
    mail facilities.
        These are really small towns of 2,000 to 4,000 residents
    serving even smaller outlying villages. The resulting economic
    challenges of operating to these communities long ago
    established a clear need for a program like Bypass mail.
        The suggestion that the system is broken that we spoke of
    earlier and would somehow benefit with the addition of more
    carriers just simply does not comport with the facts. The
    Bypass mail market is not a typical aviation market which
    positively responds to the addition of new carriers. It is a
    market that is declining, and there appear to be few prospects
    for meaningful growth.
        There is no possibility of market growth from price
    stimulation. Parcel post rates are set by the USPS with the
    approval of the Postal Rates Commission. It is these parcel
    post rates that the shippers pay directly to the United States
    Postal Service and which the rural residents then indirectly
    pay in the form of commodity prices. With a flat to declining
    market and price uniformity, the addition of three or so new
    Bypass mail carriers could only lead to one result, the
    decrease in each of the four Bypass mail carriers' approximate
    market share from 25 percent to just 14. That substantial
    Bypass mail reduction has to translate into reduced levels of
    Alaska Airlines' passenger and freight service, in addition to
    reduced Bypass mail service among the four existing mainline
    Bypass carriers
        The United States Postal Service would also experience
    significantly worse financial results if new operators of
    smaller, less efficient aircraft became Bypass mail
    participants. Those negative results would directly flow from
    the application of the DOT's longstanding rate-making formula
    establishing the rates the USPS must pay the Bypass mail
    carriers for transporting mail.
        The proliferation of new entrants' smaller, less efficient
    aircraft would unquestionably increase flying costs. The
    magnitude of that substantial increase is apparent. A simple
    comparison of the flying capacity unit cost of Era Aviation,
    one of the prospective new entrants, and the same cost of
    Alaska Airlines shows that Era's available ton mile cost for
    its smaller propeller aircraft is $1.92, in sharp contrast to
    Alaska's Boeing 737 ton mile cost of just 57 cents, a 236
    percent spread.
        The fixed warehouse cost component would also increase
    because of the corresponding reduction in each carrier's Bypass
    mail volume. Under DOT's formula, warehouse costs are computed
    on the basis of the number of tons of Bypass mail each carrier
    transports. A 42 percent reduction in per carrier Bypass mail
    volume means that the same fixed warehouse costs have to be
    spread over far fewer tons, thus driving up the per ton
    warehouse-related expenses. The result will only further weaken
    USPS' financial condition.
        So on behalf of the people of rural Alaska, we urge this
    subcommittee to not advance H.R. 4011. Thank you.
        Mr. Farenthold. Thank you very much.
        [Prepared statement of Mr. Butler follows:]

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        Mr. Farenthold. To express my gratitude for everybody for
    their testimony. We'll now take a few moments for questions.
    I'll start out by recognizing myself for 5 minutes. And I'd
    like to say up front, I really do appreciate this group
    enlightening this committee, and me in particular. The last
    time I was in Alaska was 5 years before I was elected to
    Congress, and I was much more interested in where the salmon
    were biting than how the mail and goods got delivered to rural
    areas.
        I'd like to start with Mr. Haberman. I'm going to take the
    30,000-foot view of this. This Bypass mail system is something
    that's completely different than the Postal Service offers
    anywhere else. Our idea of universal service is you get your
    bills, you get your catalogs, and you get your packages
    delivered anywhere in the U.S., and there's a 70-pound limit on
    what the Postal Service will deliver through the regular mail.
    Is that correct?
        Mr. Haberman. Yes, sir
        Mr. Farenthold. And Bypass mail is only available in
    Alaska. And would you say it's more akin to something like a
    truck line or a freight company or even an air freight company
    like, you know, FedEx or Atlas or somebody might do?
        Mr. Haberman. Well, Mr. Chairman, I think it's important to
    remember that, even though it's called Bypass, it is mail. The
    pieces in those pallets that you see have to be prepared per
    our DMM regulations.
        Mr. Farenthold. Right, but we could say we are not going to
    play this game anymore and Alaska would have no different
    service than everybody else from the mail system if we
    completely got out of Bypass mail. This is something special we
    are doing for Alaska.
        If I were to walk into the post office with that, I
    couldn't mail it from Corpus Christi to Washington.
        Mr. Haberman. That is correct, sir, but you have to
    remember that each one of those individual pieces you could
    mail, and those were the pieces that were in the parcel post
    lines going through the postal infrastructure prior to Bypass
    mail. They are simply combined on the pallets for ease of
    transportation.
        Mr. Farenthold. Right. All right, so 40 years ago there
    might not have been as many options for getting that. But we're
    getting away from it. I just wanted to make sure we were clear
    that this is something that's unique to Alaska. We don't offer
    it in Hawaii, where it's difficult to get from island to
    island, or to Guam. It's only within Alaska.
        Mr. Haberman. Bypass mail service, yes, sir.
        Mr. Farenthold. Okay.
        Let me go to Mr. Devany from the Department of
    Transportation. You guys set these rates for this. I mean, you
    all used to set rates for passenger air travel. It was all
    regulated. What happened when you all quit regulating that? Did
    rates go down and lots of new service come up and good things
    generally happened? Microphone, please. Microphone, please,
    sir.
        Mr. Devany. How do I do it. Is it on?
        Okay. Yeah, I was at the Civil Aeronautics Board when
    airlines were deregulated. We used to tell airlines where to
    fly, how much to charge for passengers, how much to charge for
    cargo, how much to charge for mail, and so on, and it was
    deregulated. They didn't just flip a switch. But intra-Alaska
    mail rates were unique.
        Mr. Farenthold. Sure. It's a statutory creation.
        Mr. Devany. Yes.
        Mr. Farenthold. I get that. Part of what we've heard is
    that this was designed also to help out passenger service.
    Aren't there other programs that the Department of
    Transportation has to subsidize air service to remote airports?
        Mr. Devany. Yes, there is the Essential Air Service
    program, which I'm also----
        Mr. Farenthold. Right. And so this is basically subsidizing
    Alaska Airlines at the expense of postal customers. So when I
    go buy a Forever stamp and put it on my Valentine card to my
    wife, a small portion of that is going to subsidize delivering
    Diet Coke to remote Alaska?
        Mr. Devany. Well, I don't know.
        Mr. Farenthold. Okay.
        Mr. Devany. First class mail is----
        Mr. Farenthold. Right. But I mean it's coming from the
    Postal Service.
        I guess I can ask that to Ms. Whitcomb. Is that an accurate
    statement that, you know, one whatever of a cent of every stamp
    I buy goes to help subsidize this?
        Ms. Whitcomb. Right. Yes, I think it's fair.
        Mr. Farenthold. I'm going to just say, I think Congress, if
    we wanted to appropriate money for this, that's great, but do
    we really need to hide it within what folks do for stamps.
        One of the other things we heard earlier was there was a
    concern about the safety of these new carriers. Mr. Devany,
    you're in the DOT. I mean, there's a news story whenever
    there's an airline accident, whether it's passenger or freight.
    I mean, there's usually a news story. Do we have a problem with
    safety of any of our carriers in this country?
        Mr. Devany. Mr. Chairman, I don't work for FAA. I'm in DOT.
        Is this on.
        Mr. Farenthold. Yeah, it's on.
        Mr. Devany. I still don't know how this thing works.
        Mr. Farenthold. Mr. Butler, you work for Alaska Airlines.
        Mr. Issa. You need to get the mic closer to you there.
        Mr. Devany. I'm sorry. I'm not in FAA.
        Mr. Farenthold. I'll go to Mr. Butler. He's in the
    industry. I'm sure you all watch accidents for every carrier
    for lessons learned. I mean, do we have a safety problem
    anywhere within the U.S. aviation system?
        Mr. Butler. I wouldn't necessarily say so. But I do believe
    that the conversation earlier this morning was more focused on
    the very unique climate and terrain that you do fly within the
    State of Alaska, and that does take a particular skill level.
        Mr. Farenthold. We certainly found that some of the
    carriers coming into Washington don't have that skill level,
    based on the number of flights that have been canceled over the
    past couple of days.
        Mr. Butler. I think where I was headed with that was that
    there is certainly any number of navigation systems that are on
    a lot of those airplanes that in fact our planes do have, and
    not all of those types of aircraft that Chairman Issa was
    referencing earlier have that. And all of that affects the
    delivery time and delivery strain or timeline of how you get--
    --
        Mr. Farenthold. But I mean, if that becomes necessary, the
    NextGen stuff, the NTSB type stuff, they're pretty much
    available for any airplane. I mean, you can buy it.
        Mr. Butler. They're not available for usage at all of the
    mainline airports in Alaska yet. But that's true.
        Mr. Farenthold. That's a problem we can deal with over on
    the Transportation Committee, and believe me, that's something
    they're working on.
        I see I have already gone over time, and I will apologize
    to Mr. Cummings and give him an extra minute-40 for his
    questions.
        Mr. Cummings. Thank you very much, Mr. Chairman.
        According to the inspector general, Congress passed the
    Rural Service Improvement Act of 2002 because carriers in
    Alaska were focusing on providing services to the Bypass routes
    that were the most profitable rather than on providing broad
    passenger service. That created the equitable tender system and
    gave statutory preferences to those mainline carriers providing
    service before January 2001. The act also set high barriers to
    entry to any new carriers seeking to enter the mainline market.
        Mr. Haberman, just so we have the basic facts, can you
    quickly explain how these provisions work, what advantages do
    carriers that were providing Bypass service before January 2001
    how over new entrants, and what are the specific conditions new
    entrants must meet to carry Bypass?
        Mr. Haberman. Congressman, I think the best way to answer
    that is there in RSIA there are some hurdles that a carrier
    would have to live up to in order to enter that pool. And if I
    recall correctly, they are they have to provide service for 36
    months in the marketplace, they also have to have a passenger
    load capability of 75 percent of the other carriers. Does that
    answer your question?
        Mr. Cummings. Yeah, that's a pretty high hurdle? Would you
    consider that a pretty high hurdle to get over?
        Mr. Haberman. I couldn't comment on that, sir. I'm not----
        Mr. Cummings. All right. Well, why don't we go to the
    inspector general. The inspector general's white paper
    criticized this provision of the Rural Service Improvement Act,
    saying that it provided protection for the five existing
    mainline carriers. Ms. Whitcomb, does the IG still stand by
    that position?
        Ms. Whitcomb. Yes, we do
        Mr. Cummings. And why is that?
        Ms. Whitcomb. We believe that the situation, as it stands,
    results in increased cost to the Postal Service because of the
    limitations of the five air carriers and the hurdle that you
    spoke of earlier.
        Mr. Cummings. Well, now, the IG report is recommending
    changing the law to eliminate the statutory restrictions placed
    on new entrants to both the mainline and bush markets.
        Ms. Whitcomb, is it your contention that allowing
    additional carriers to enter this market would drive down the
    cost to the Postal Service?
        Ms. Whitcomb. We believe that it would, there would be some
    impact to the reductions in the cost to the Postal Service. And
    that was one of the options, one of the suggestions in the
    report. We had several others as well that could be considered.
        Mr. Cummings. What effect might the entry of additional
    carriers to the Bypass market have on passenger service in
    Alaska, particularly with regard to the remote regions?
        Ms. Whitcomb. It's a complex system, as you know, and as
    we've discussed here on the panel. We talk about, I think, in
    the report about how the increased competition in the
    international rates has resulted in reduced cost, and so we
    were kind of looking to that as a model. But, again, it's a
    complex system, and this was one suggestion as a possible
    option to look at related to Bypass mail, Bypass.
        Mr. Cummings. Is it the inspector general's position that
    we shouldn't have a Bypass system?
        Ms. Whitcomb. I don't think we've stated that that's our
    position.
        Mr. Cummings. I'm asking you, what time do you think? I'm
    just curious. I mean, I understand that the system was put
    together because of a unique situation.
        Ms. Whitcomb. Right.
        Mr. Cummings. And there have been allegations earlier that
    the Constitution requires that we have this. Do you agree with
    that, some kind of system like this?
        Ms. Whitcomb. We believe universal service is an
    appropriate role for the Postal Service. This, though, in many
    cases resembles more of a freight type of service versus a mail
    kind of service. So that's the way that we looked at it in our
    paper and how we did our evaluation.
        Mr. Cummings. Go ahead.
        Ms. Whitcomb. I think asking about whether we believe it's
    appropriate to have an Alaska Bypass at all, program at all,
    I'm not sure that we came down on whether that is appropriate
    or that we have a position on the appropriateness. We believe
    it serves a purpose for the citizens of Alaska, but it's
    evolved into a very important role in the State of Alaska. We
    do have many concerns, though, about the Postal Service's role
    in kind of subsidizing the system.
        Mr. Cummings. Now, You were in the room when the Senator
    and the Congressman testified a little bit earlier, were you
    not?
        Ms. Whitcomb. Yes.
        Mr. Cummings. Were you here?
        Ms. Whitcomb. Uh-huh.
        Mr. Cummings. And you heard them say that the legislation
    that we passed out of our committee a week or so ago, they
    claim that what it would do is it would cost more, a lot more.
    And do you agree with that? Obviously, you don't.
        Ms. Whitcomb. We have not done a thorough analysis of it.
    It's a very complex system, as I said. We don't believe that it
    would cost more. But again, I'm not certain as to what they're
    relying on, what numbers they're relying on to come to that
    conclusion.
        Mr. Cummings. Now, Mr. Haberman, in February 2014 the
    committee did consider H.R. 4011, the Alaska Bypass Fair
    Competition Act of 2014. What is the Postal Service's
    understanding of exactly what this legislation would do?
        Mr. Haberman. I believe the Postal Service attorneys are
    still looking at that legislation, sir, so I can't offer an
    opinion at this time
        Mr. Cummings. Well, is the Postal Service aware of air
    carriers that are seeking to enter the Bypass market?
        Mr. Haberman. We believe there are some carriers that would
    like to be in the Bypass market, yes, sir
        Mr. Cummings. I mean, have they approached you all? I'm
    just curious
        Mr. Haberman. They have talked to some of our
    representatives in the Alaska District. I don't know who they
    are specifically.
        Mr. Cummings. And could the carrier or carriers meet the
    36-month performance standard?
        Mr. Haberman. I can't answer that, sir. I can certainly go
    back and verify that and provide an answer for the record.
        Mr. Cummings. And, Mr. Butler, what is Alaska Air's
    position on H.R. 4011?
        Mr. Butler. As I stated earlier----
        Mr. Cummings. Keep your voice up, please.
        Mr. Butler. Yes. As I stated earlier, we disagree with it.
    And I think Mr. Haberman's paper that he submitted in advance
    where it says this is the most cost-effective process and
    program there is, is our opinion. It works today.
        Mr. Cummings. And, Mr. Deaton, what is ACE Air's position
    on the legislation?
        Mr. Deaton. ACE believes that there are sufficient barriers
    in entry to intra-Alaska Bypass mail transportation, other than
    requiring 36 months or having a 12/1/2001 date. The requirement
    is 12 months service, not 36 months service between any two
    points within the State of Alaska, and there is also a
    requirement of performing that 12 months with equipment of the
    size, either mainline or bush, that you're going to be
    continuing once you qualify for.
        Those hurdles, along with the certification process by the
    FAA, are extremely strenuous both from a certification and
    regulatory process, as well as from an economic process,
    because even once a mainline carrier gets past its 12-month
    hurdle of intra-Alaska service, which was written in there
    specifically to give it the experience from a safety standpoint
    of flying within Alaska, that carrier then needs to provide 75
    percent of the seats in whatever market it's determined it
    wants to begin carrying passengers in for matching 75 percent
    of the ensured seats offered by the incumbent. That economic
    barrier, in addition to 12 months of flying within the State of
    Alaska, make it extremely difficult, and to my knowledge there
    are no mainline carriers that are seeking Bypass mail entry.
        Mr. Cummings. Thank you very much.
        Mr. Farenthold. Thank you, Mr. Cummings.
        We'll now go to the chairman of the full committee, the
    gentleman from California, Mr. Issa.
        Mr. Issa. Thank you.
        There has been a lot of talk about killing Bypass mail, as
    though there's anything in either of these bills that intends
    do it. Mr. Haberman, you talked about this being the most
    efficient system. What does that have to do with this
    legislation? Aren't we attempting to make this system more
    efficient? In other words, you contrast, in your opening
    statement seemingly parcel post or the post office getting
    involved in this delivery versus not getting involved. Nothing
    in this legislation puts the postal system back into the
    picture, does it?
        Mr. Haberman. Not that I'm aware of, sir.
        Mr. Issa. So I was a little perplexed, because from a
    postal standpoint you simply take the bill that Mr. Devany
    gives you indirectly and pay it. You collect a fraction of the
    revenues that it takes to operate it, so you collect $36
    million and you pay out $100-and-some million. That's really
    all you're doing, right?
        Mr. Haberman. That's the way the system is.
        Mr. Issa. Okay. So you're calling this an efficient system,
    and I'm a little perplexed that you're calling it an efficient
    system.
        Mr. Devany, when you look at the cost of the various
    carriers, do the cost of operation of the various carriers
    vary?
        Mr. Devany. Yes, Mr. Chairman, they do.
        Mr. Issa. Okay.
        Mr. Devany. And what we do----
        Mr. Issa. Well, let's just go through real quickly, because
    I want to allow a lot of time for you to answer, but I'm
    looking at revenue ton prices. You pay Alaska Airline, from
    what I can tell, $2.13 or $2.14 per ton mile as of March 4,
    2014, because they're a mainline nonpriority Bypass carrier, I
    believe. Mainline priority, you would pay them $3.53 per ton
    mile. A bush pilot under Part 121, which is a scheduled airline
    bush pilot, you pay $5.74 a ton mile, and then a Part 135 you
    pay $14, almost $15 a ton mile. And a bush seaplane--now, I
    suspect that these guys don't have advanced equipment and fancy
    terminals when they land on the lake or the ice--you pay $32.59
    per ton mile. Those figures sound familiar?
        Mr. Devany. Yes, sir. Yes, Mr. Chairman
        Mr. Issa. Okay. So you've got all kinds of levels of
    efficiency in Alaska. Isn't that true?
        Mr. Devany. Yes.
        Mr. Issa. Additionally, if I take a bush pilot, every time
    that bush pilot makes a terminal stop you pay him $850 per ton
    that he's carrying. Is there any way that you can see that we
    could save money? For example, if they made less stops at
    terminals, wouldn't you save $850 per ton on a bush pilot?
        Mr. Devany. Well, Mr. Chairman, the DOT is responsible for
    setting what we believe are the best fair and reasonable rates.
    It costs more to operate seaplanes than big planes on a per
    unit basis.
        Mr. Issa. Right.
        Mr. Devany. Because there's salt and whatnot.
        Mr. Issa. So you take what actually occurs and you measure
    it, right?
        Mr. Devany. Yes, sir
        Mr. Issa. And if somebody were to come in, I don't know
    what it is, let's just say with an Embraer small jet, freight
    only, and they could do it for less money than a 737, I'm not
    saying they would, but if they could, you would measure a lower
    amount of cost and put that into your rate calculations, right?
        Mr. Devany. That's exactly correct, sir. What we do is we
    set--and I don't want to get too technical here--but we set
    what is called a class rate. We take the mainline, for example,
    there's a mainline class rate, and there's four or five
    airlines, we put all the cost into the pot, divide it by all
    the units, and we say, okay, it's X dollars per ton and X
    dollars per mile that you fly the mail.
        Now, if your costs are above average, you're not going to
    make out so well. If your costs are below the average, you're
    going to make out fairly well, and that's the whole concept of
    a class rate.
        Mr. Issa. So with the current rating system if you let
    three additional--300 additional, doesn't matter--amount of
    competitors in, the only way it would drive up price is if
    those competitors came in and were less efficient, right?
        Mr. Devany. Yes, I think, is the answer. It gets a little
    more complicated, Mr. Chairman, because then you get into
    equalization and bush rates and so on. But, yes, I mean, if
    you're going to introduce someone who has higher unit costs,
    that would raise the cost for the entire class.
        Mr. Issa. Okay. So I think going back to Ms. Whitcomb's
    report, the report that the IG gave us, it sounds like--and
    we're doing legislation and it's early on to a certain extent.
    We've got a long time to go to pass the bill, pass it out of
    the full House, get with the Senate, conference it, it appears
    as though the Senator from Alaska could have comments.
        But, Mr. Deaton, let me go through a couple of the things
    that you've seen in the way of efficiencies. If we were to
    allow the post office to look for efficiencies, in consultation
    with Department of Transportation's numbers, and then make
    selection on all carriers based not on a bid rate, so to speak,
    but based on a bid rate based on efficiency, thus choosing more
    efficient carriers or more efficient routes, in your opinion,
    would that save us money? You have 25 years of watching the
    system. Could we use systems like that, empower the post office
    to save money by making the network more efficient?
        Mr. Deaton. Are you referring to moving the environment
    from regulated tender to actual contract bid?
        Mr. Issa. Well, contract bid is certainly something that I
    envision as a lower 48 person. But even if we accepted for a
    moment this theory that you have so many people who all get
    access to pick up the freight, but you pay them based on a
    calculation of average cost, is it possible to drive down
    average cost by getting more efficient carriers, meaning that
    the carrier gets the same rate?
        I mean, you're with ACE, next to you is Alaska. If you try
    to compete with Alaska with your aircraft, my assumption is
    that if they pay you the same as they pay Alaska for the same
    route, you wouldn't make money, or you certainly wouldn't make
    what they make. Is that right.
        Mr. Deaton. That's correct.
        Mr. Issa. Okay. So by definition you're only going to want
    to pick up freight if you can be competitive and you have a
    reason to be below the average against other carriers you're
    competing with, right?
        Mr. Deaton. Correct.
        Mr. Issa. So now the question goes back, and this goes back
    to--and I'll go to the IG--when the IG looked at the
    inefficiencies and the ability to fix this, my understanding is
    what they wanted to see was the opportunity to look for cost
    savings. Now, Alaska Air is here, and you, without a doubt,
    with your 737 mixed cargo, if that cargo plane is full, you
    have the most efficient carrying capability, and actually both
    ways because you carry salmon back and so on.
        The real question is, are we picking all the most efficient
    carriers for each route and then routing in the most efficient
    fashion? Mr. Deaton, you've operated there for longer than some
    people on the dais have been alive. Are we doing it as
    efficiently as we could or can we increase efficiency, thus
    causing Mr. Devany the ability to calculate a lower rate as a
    result of efficiencies?
        Mr. Deaton. I believe that could be accomplished, Mr.
    Chairman. I think it's first important to understand, to
    separate out mainline efficiencies from bush efficiencies.
        Mr. Issa. And that's been made abundantly clear that we are
    dealing with three to four different submarkets, Anchorage to
    Bethel, you know. I've been to those places. They have big
    runways, big aircraft land. To be honest, the State capital may
    be a small, isolated place, but it has a big runway
        Mr. Deaton. That's correct. Alaska Airlines is the
    predominant passenger carrier on the mainline side. There are
    two other passenger carriers. But it's important to understand
    that the mainline tender of Bypass mail is a straight equitable
    tender. All the carriers that are qualified and are in markets
    receive an equitable or equal share of mail. This allows them
    to maximize their flight schedules, their combi versus full
    passenger versus all cargo, and is quite an efficient mix. The
    issue there in that mainline market becomes a factor of numbers
    in terms of bringing more mainline carriers in, would that be
    more competitive.
        On the bush side, it's a different----
        Mr. Issa. But let me switch it around before you go off of
    that, because I'm a big fan of Alaska Air, I've flown them,
    frequent flier and all that. But let me ask the question. The
    equitable question is, if we lock out alternate carriers, which
    current law does, and Alaska is making money on theirs, but the
    other carriers are not able to have access to what is
    effectively lucrative freight, are we in fact putting Alaska at
    an advantage in the passenger and other miles? You know, the
    locking them out of the ability to carry that, Alaska would
    say, well, if they can't carry all of that mail on the mainline
    for the most part, then somehow prices are going up. The
    question is, wouldn't you end up with all three carrying the
    same amount of mail and adjusting their aircraft accordingly?
        Mr. Deaton. I believe so, that's correct. You know, the
    issue of mail getting on a passenger airplane, whether it's
    Alaska or Era or Penair, after passengers and bags, means that
    the more efficient carrier, the higher carrier with the higher
    ridership usually carries the least amount of mail because they
    can't enplane it.
        So that becomes transfer functions and moves around to
    carriers, the other passenger carriers that may not have the
    ridership, and they end up carrying the mail that was
    originally given to, for instance, Alaska Airlines. So it
    spreads itself out over an equitable basis based on who has the
    capacity, and at the mainline level it tends to lend itself to
    a flow of mail that increases the efficiency of each carrier.
        There's three passenger carrier, three cargo-only carrier
    at the mainline level. Quite frankly, in my experience and
    opinion, the markets, the economy in Alaska would not support
    anymore than those. Actually, I would argue that there's
    probably too many as there are. There's too many freight
    carriers for sure.
        When you go to the bush side, the issue becomes the pool
    concept. If you're looking for efficiencies, to give 75 percent
    of the mail to those carriers with the least capacity to carry
    it and to restrict entry into monopoly markets because other
    passenger carriers can't get the ridership to enter or freight
    carriers cannot get enough mail to enter, it not only hurts the
    residents of that community from a freight and passenger
    standpoint, but it restricts competition. So it goes in both
    directions.
        Mr. Farenthold. I'm going to do a couple more questions. We
    will do a second round of questions. Chairman Issa has done a
    good job getting down into the bush or the weeds of this. I
    want to get back up to 30,000 feet, because quite a few people
    reading this record may not have the level of familiarity with
    the system that Chairman Issa has.
        Mr. Haberman, I want to go back for a second on the history
    of the Bypass mail. I know in my first line of questioning I
    was pointing out that it was something unique to Alaska. But it
    was actually born to bring Postal Service costs down, if I'm
    not mistaken. Is that correct?
        Mr. Haberman. Yes.
        Mr. Farenthold. I mean, rather than to meet the 70 pound
    limit, I could probably mail, to go back to my Diet Coke
    example, a dozen 12 packs of Diet Coke is about all you can get
    in 70 pounds. Well, if I am a retailer selling Diet Coke I
    would have to do twenty or thirty 70-pound packages of 12 packs
    of soft drink to get what I want, and the Postal Service would
    have to process each one of those individually, probably
    palletize them themselves, contract with an air carrier to get
    them there. So actually in Alaska I would imagine normal parcel
    post would be a huge loss leader for the post office. Is that
    correct?
        Mr. Haberman. I would agree with that statement, Mr.
    Chairman, yes.
        Mr. Farenthold. So it actually does hold some of the costs
    down for the Postal Service. I wanted to get that side of the
    issue into the record.
        I also wanted to ask Ms. Whitcomb, there was some testimony
    that the legislation we are talking about would result in a
    smaller market share as we let more carriers in. Couldn't what
    we do be crafted in such a way that we limit the number of
    carriers but have some competition among the carriers? So
    rather than having 25 Bypass carriers, we have five, but they
    bid for it competitively over a reasonable amount of time. Or
    we could create something that wouldn't flood the market and
    make it fail. Now, is that not correct?
        Ms. Whitcomb. Yes, I think that would be correct.
        Mr. Farenthold. Quite frankly, I am not sure it is the
    government's responsibility to protect businesses from their
    own stupid mistakes, bidding on a contract that they can't keep
    or an industry overbuilding its capacity. A lot of times that
    actually results, I think, in lower costs for consumers as they
    look for more efficiencies and ways to do that.
        So those are my personal final two 30,000-foot questions. I
    will now go to Mr. Cummings for a second round of questioning.
        Mr. Cummings. First of all, Mr. Chairman, I ask for
    unanimous consent to enter into the record letters from
    citizens and interest groups from Alaska concerning H.R. 4011
    and the vitality of the Bypass Program to their community.
        Mr. Farenthold. Without objection, so ordered.
        Mr. Cummings. Mr. Devany, how often does the DOT visit
    Alaska and audit the carriers?
        Mr. Devany. Typically, I think we go up about once a year.
    Whether it is officially what you would call an audit, I don't
    know.
        Mr. Cummings. Well, why don't you tell me what you do?
        Mr. Devany. Okay. All airlines, whether they are Alaska
    Airlines or United Airlines or any airline, are required to
    submit data to the Department. It is called the Bureau of
    Transportation Statistics. They are auditable, just like your
    income taxes. I am not sure every single one is audited, but
    they are subject to audit, and the airlines have to swear and
    declare that the data are accurate. And we use those data to
    set the mail rate.
        Mr. Cummings. And how does the DOT ensure there is no
    collusion between the airlines to keep the costs high?
        Mr. Devany. Well, again, all the data are subject to audit.
    It is in a different department of DOT. It is the Bureau of
    Transportation Statistics. They have audit checks, edit checks,
    and so on. The inspector general at DOT does audit carriers. I
    don't know what their schedule is and they probably don't want
    me to know what their schedule is. But it is audited.
        Mr. Cummings. And the purpose of the audit again is what?
        Mr. Devany. I'm sorry, I didn't hear your question.
        Mr. Cummings. The purpose of the audit is what?
        Mr. Devany. Would be to make sure that the data are
    accurate. And this goes far-reaching beyond Alaska mail rates.
    This could have to do with airline mergers, international
    alliances, all kinds of financial and passenger and traffic
    data.
        Mr. Cummings. At the end of fiscal year 2013, the Postal
    Service estimated the cost of the Bypass Program to be
    approximately $108 million. Mr. Haberman, how much of the total
    cost of the program goes directly to the carriers?
        Mr. Haberman. Those are the costs that go to the carriers,
    sir, so it would be 100 percent.
        Mr. Cummings. One hundred percent goes to the carriers?
        Mr. Haberman. Yes, sir, I believe that is the correct
    answer.
        Mr. Cummings. And, Mr. Devany, can you explain to the
    committee what the Essential Air Service program is and can you
    tell us how many of the airlines participating in the Bypass
    Program also participate in the Essential Air Service program?
        Mr. Devany. Yes, sir. The Essential Air Service program was
    created as part of the Airline Deregulation Act of 1978 to
    ensure that communities that receive air service under
    regulation would receive it for at least 10 years after
    deregulation. It was extended. So that was 1978 to 1988. It has
    been extended a couple of times.
        The current program is roughly 160 communities where we pay
    an airline to provide service where the community would
    otherwise not have any air service, roughly 160. I think it is
    about 117 in the lower 48 and 43 in Alaska. Our total bill is
    roughly $250 million a year. In Alaska it is $18 million, $15
    million to $18 million. Frequently we pay a small airline to
    provide one or two, maybe three round trips a week to Bethel or
    to Juneau or to some acceptance point where people can then go
    to doctors appointments and get medicine and food and so on. So
    there is a little bit of interplay between the mail rates and
    the Essential Air Service program. Not a lot.
        Mr. Cummings. Mr. Butler, does the Alaska Airlines receive
    subsidies under the EAS program?
        Mr. Butler. We do. None of the mainline Bypass markets are
    EAS markets.
        Mr. Cummings. So on average how much does it receive?
        Mr. Butler. I do not know the answer to that question.
        Mr. Cummings. Can you get that to us, please?
        Mr. Butler. I certainly can.
        Mr. Cummings. Very well. I yield back.
        Mr.  Issa. [presiding] Mr. Devany, would you repeat the
    essential air subsidy in Alaska for delivering passengers to
    areas that otherwise wouldn't be served is how many dollars a
    year roughly?
        Mr. Devany. It is 43 communities currently and it is
    between $15 million and $18 million. I can get you the precise
    figure----
        Mr. Issa. Okay.
        Mr. Devany. --including Diomede and Adak.
        Mr. Issa. So some of the same communities that the post
    office is losing money delivering Bypass mail to?
        Mr. Devany. There is some overlap, I believe.
        Mr. Issa. So if there is an Essential Air Service subsidy
    would it be fair for this legislation to say that we are not
    going to subsidize passenger service for those communities? In
    other words, the post office should be able to pick the low
    bidder freight-only in those communities that are already
    subsidized--their passengers are subsidized by passenger?
        In other words, if a freight-only carrier can underbid on a
    competitive basis the rate that would otherwise exist, should a
    freight-only carrier, Mr. Deaton, be able to bid for those
    lines, since obviously we are funding the passengers through
    another means? Because whether the Senator or the House Member
    Mr. Young said so, we all understand, and I understand directly
    from the late Ted Stevens, that this program is intended to
    keep passengers getting access to communities. He made it very
    clear when he did the legislation that he didn't like a number
    of companies, including the one you work for, because you were
    trying to game the system by not carrying passengers. I mean, I
    don't want to speak ill of the dead, but he understood, this
    was why he did it, and he told me so in no uncertain words in
    his own office.
        So the question is for each of you, including Mr. Butler,
    if essential service is being paid for by the Department of
    Transportation providing a subsidy for passengers, is there any
    reason that we shouldn't pick a less expensive carrier if they
    are willing to carry freight-only to those locations?
        Mr. Butler, I will start with you.
        Mr. Butler. I just want to go back to my comment before. In
    my world it doesn't apply because EAS is not in any of the
    mainline markets.
        Mr. Issa. Right. So it wouldn't affect your carrier. But do
    you see any reason that a freight-only carrier shouldn't be
    able to bid freight-only in those markets where there is a
    subsidy? You are not receiving a subsidy for essential service,
    is what you are saying, in the mainline markets.
        Mr. Butler. I think there were other opportunities that we
    talked about earlier that perhaps we should explore instead.
    For instance, the rate-making authority, that doesn't require
    legislation to do that. I would prefer to go down that path
    before I would answer that question.
        Mr. Issa. Okay. Well, you know, one of the reasons we are
    having this hearing today is because in 2002 with no hearings
    Senator Stevens locked out future competition as a matter of
    statute. And today you are objecting to H.R. 4011, which simply
    undoes a portion of the mandate put in by the late Senator
    Stevens.
        Mr. Butler. What I would also say, in that 2002 model, that
    the DOT and the State of Alaska and the Northern Economic Study
    said that the mainline Bypass mail product is more stable, more
    efficient than it was prior to 2002.
        Mr. Issa. Okay. The reason for that lockout had to do with
    people who were trying to not carry passengers. That was the
    reason Senator Stevens did it.
        Mr. Butler. I understand that.
        Mr. Issa. And so I understand as a passenger carrier your
    preference is not to have something that might allow
    nonpassenger carriers to compete more effectively. But I still
    go back to the same point. What share of the market did you
    have in 2001?
        Mr. Butler. The market in the State of Alaska is flat.
        Mr. Issa. What share of the market did you have?
        Mr. Butler. Of the freight market?
        Mr. Issa. Freight or passenger, I will take either one.
    What was your passenger share in 2001, what is your passenger
    share today?
        Mr. Butler. They are pretty much the same.
        Mr. Issa. What was your freight share in 2001, what is your
    freight share today?
        Mr. Butler. They are pretty much the same.
        Mr. Issa. Okay. So this legislation didn't affect Alaska
    Air.
        Mr. Butler. Bypass mail is dropping for us. Freight is----
        Mr. Issa. People are drinking less Diet Coke? Why is it
    dropping? Is it just less people living in the outer areas?
        Mr. Butler. The volume year over year is down. The out-
    migration out of the rural communities, yes.
        Mr. Issa. Or in-migration into the cities?
        Mr. Butler. Somewhat. The State of Alaska is not growing
    greatly.
        Mr. Issa. Right. So people are leaving rural Alaska,
    leaving Aleutian islands, leaving Alaskan native islands, and
    coming into cities where they are better served.
        Mr. Butler. There is certainly out-migration from the bush.
        Mr. Issa. You know, they did that in the lower 48 some
    years ago, too.
        So I guess the question is, legislation in 2002 didn't seem
    to do anything for you except lock out competition, but your
    market share is roughly where it was. Your complaint is your
    market is smaller, right?
        Mr. Butler. The market share is what it is, and the
    interior market has never made money for Alaska Airlines.
        Mr. Issa. Okay. Do you carry mail in the lower 48?
        Mr. Butler. Very limited. Los Angeles to Mexico, Los
    Angeles to Vancouver.
        Mr. Issa. So you do carry mail.
        Mr. Butler. A limited amount.
        Mr. Issa. Do you have a monopoly on those two lines?
        Mr. Butler. We do not.
        Mr. Issa. So you do it with a rate schedule and you do it
    because it makes you money.
        Mr. Butler. Yes.
        Mr. Issa. So competition isn't the problem in those two
    routes. I just want to understand that you can carry to Mexico
    and to Vancouver and other people can carry and you are happy
    to take the mail and have it as part of your profit analysis.
        Mr. Butler. My concern in the State of Alaska is all on the
    mainline portion, the portion that Alaska Airlines is
    responsible for out to the hub location.
        Mr. Issa. Okay. But if you had to bid for Bypass mail,
    which is freight basically, because you also bid for freight, I
    assume, in those aircraft. Now, Alaska Air 737-400s, which are
    split cargo-passenger versions, you carry mail, you carry
    people, you carry Bypass mail, and you carry freight.
        Mr. Butler. You're correct.
        Mr. Issa. Okay. And you get paid, let's say, $1 a pound for
    freight, you get paid $1 a pound for Bypass mail, and you get
    paid whatever you get paid for your passengers, roughly. Okay.
        The difference is that, Mr. Haberman, you get paid 32 cents
    a pound, so to speak, to carry freight that is costing you
    $1.08 because of Mr. Devany's rates on a blended basis, is that
    right? I have got my numbers roughly right. But you have about
    $32 million of income and $108 million of outflow, and that is
    how you get a $76 million loss on this program, right?
        Mr. Haberman. Yes, Mr. Chairman, that is accurate.
        Mr. Issa. So the only thing we are dealing with is not the
    efficiency of the program, we will assume for a moment that the
    efficiency was perfect, but you are only getting paid a
    fraction, about 30 cents on the dollar of what it costs to do.
        Mr. Haberman. That is correct.
        Mr. Issa. It is actually slightly less than 30, but close
    to 30. And I want to make sure, Mr. Devany, your testimony
    today is there are some ways that we could structure or allow
    to be structured Alaskan Bypass that would lead to your
    calculations being lower because of less expensive blended
    rates. Is that correct?
        Mr. Devany. Mr. Chairman, we are agnostic on who should be
    included in the rate pool and who not. Obviously----
        Mr. Issa. No, no, I am not asking that. I am asking that
    you calculate it, and you said that some carriers cost less and
    some cost more, right?
        Mr. Devany. Yes, sir.
        Mr. Issa. And you said under oath that if you take the less
    expensive carriers and you give them more and you take the more
    expensive carriers and you take them out, then your rate would
    drop on a blended basis, right?
        Mr. Devany. I believe the blended rate would drop. There is
    also this equitable tender issue. So it is not like if a good
    restaurant opens up in your city and it is cheap and they have
    good food and everybody goes there. The statutes require an
    equitable tender. So everybody, every airline gets an equal----
        Mr. Issa. Every airline that is allowed in.
        Mr. Devany. Yes.
        Mr. Issa. Okay. But they are locking people out, right? And
    they are not locking out the least efficient, they are locking
    out ones after a certain date of incorporation or operation,
    right?
        Mr. Devany. Yeah, I believe it is 2001 or whatever it is.
        Mr. Issa. Okay. I just want to understand that the Senator
    and Congressman Young, they talked about how this whole system
    would fall apart and there would be all this inefficiency and
    it is going to collapse if we change anything, that it is a
    perfect system. Mr. Butler effectively said the same thing from
    Alaska Airlines, you can't change anything, it would only get
    worse, everything is going to cost more money.
        This committee is not interested in destroying Bypass mail.
    We would love to find somebody else to pay for it. We would
    love Essential Air Service to pay for it. But given that that
    is not likely to happen and it is not within our jurisdiction,
    all we are looking for in H.R. 4011 and in follow-on
    legislation we are working on today is, can we enable, not Mr.
    Haberman but the people broadly behind him and so on at the
    Postal Service, to be empowered to find ways to authorize
    greater competition leading to greater efficiency, greater
    efficiency in structure leading to lower cost? If we can't,
    then this exercise is a lot of work for $20 million in savings.
    We are hoping to be able to do that.
        My question to you is, do you see carriers that are more
    efficient and as a result, if they were the only carriers in
    the world, would we have lower costs. And your answer is?
        Mr. Devany. I mean, we would have to look at the numbers,
    Mr. Chairman. Yes, if their unit costs are lower, then the----
        Mr. Issa. But some carriers unit costs are lower. Okay.
        Mr. Devany. Perhaps. I don't know.
        Mr. Issa. Right. So a process of selecting those who had
    the lowest unit cost, either by having them bid because they
    are able to do it for less or having them--for example, if we
    were to allow three other carriers that as a result of changing
    dates or the leading dates in H.R. 4011, if we were allowing
    them only to enter if they could show that their costs would be
    favorable to the pool, in other words they would be at or below
    the average, then contrary to Mr. Butler's statement, it
    actually would lower costs. Is that right?
        If only people could enter who could prove that they would
    not be adverse to the rate pool were allowed to enter, your
    calculation--what was Kevin's name--your functionary, the
    person that works for you who actually does the calculations.
        Mr. Devany. Yes, that is arithmetically correct.
        Mr. Issa. I wish I had had him. But I get the idea. I mean,
    that is one of the things in the legislation, is we don't want
    to open up competition to get higher prices. I am a pro-
    competition person because it normally leads to innovation,
    better products, better services, and so on. I understand
    aviation even in the lower 48 is more complex than just open it
    up, get better service. Anyone who has flown knows that
    deregulation wasn't all about better service.
        I saw you didn't leave, Blake.
        Okay, so we have established there are at least ways in
    which the way you calculate cost we could have a favorable
    result as a result of giving the post office certain guidance
    capability.
        Mr. Devany. I think that could be the result. I don't know
    that it necessarily would be.
        Mr. Issa. Mr. Butler, would you agree that if somebody
    could carry freight and have a lower cost of delivering it,
    whether it is on the mainline or in the bush or a hydrofoil to
    a remote island, that we should be able to consider adding them
    if they are a more efficient carrier?
        Mr. Butler. I think you absolutely want to look for
    efficiency. I totally agree with you on that statement.
        Mr. Issa, I keep thinking about your time in Alaska and the
    instability that that industry has been through, whether it be
    Reeve Air Aleutian, whether it be Wien, whether it be Alaska
    Airlines.
        Mr. Issa. Well, let me go through a little of the history--
    --
        Mr. Butler. The market is a bit unstable, I guess is what I
    am trying to say.
        Mr. Issa. Well, I understand it is not stable. The post
    office lost $16 billion if calculated under GAAP last year and
    5-point-some billion the way government calculates. That is a
    lot of money. We are doing a long hearing on a small part, but
    I am doing it separately because I want to be fair to the
    Alaskans rather than the lower 48 problems, which the President
    has addressed better than Congress.
        But going back to parcel post, and I just want to make sure
    we get this in the record, Mr. Haberman, do you know when
    parcel post began in the United States?
        Mr. Haberman. I don't know the date, sir. I can certainly
    get that for you.
        Mr. Issa. No, it is 1913. And it was in reaction to the
    1887 international convention where the world began looking at
    the idea of transporting packages, and they worked out a
    convention, and the United States entered a domestic route.
    Prior to that time, we didn't ship freight through the post
    office. The post office was a letter carrier for over 100
    years. So I just want to make sure that we leave that as part
    of the record.
        I had two distinguished Members of the House and Senate in
    front of me and they talked about freight/package delivery as
    some sort of a universal entitlement. It's not. If the post
    office to survive is going to carry only letters and UPS and
    FedEx and all these other folks have to worry about freight,
    that's okay. That's consistent with the Constitution and over
    100 years of our--all of our Founders were dead by the time we
    carried the first parcel post, at least based on my calculation
    of their longevity.
        Mr. Butler, since Alaska Airlines was nice enough to come
    here, let me go through a couple more things. You are in charge
    of freight for Alaska Airlines, right?
        Mr. Butler. The Cargo Division reports to me, yes.
        Mr. Issa. Is the 737-400 your most efficient aircraft?
        Mr. Butler. It is not.
        Mr. Issa. But that is the one you use in Alaska?
        Mr. Butler. It is the one that we are currently flying in
    the State of Alaska.
        Mr. Issa. So when I fly Alaska in the lower 48, I fly a
    newer, more efficient aircraft, isn't that correct?
        Mr. Butler. For passenger traffic, that is true.
        Mr. Issa. Okay. And Boeing, I understand you are from
    Seattle, they would make you a new combo aircraft, wouldn't
    they?
        Mr. Butler. We are in the process of looking at that today.
        Mr. Issa. And if you bought probably a 737-800 type
    airframe combo you would have a cap cost, but you would have a
    lower cost of operation, wouldn't you?
        Mr. Butler. That is a true statement. That airplane would
    not fly to all of those mainline Bypass markets, however.
        Mr. Issa. I understand there is a right plane for every
    runway. But, Mr. Devany, your people, if they were calculating
    a more efficient airplane, would in fact pay Mr. Butler and
    everyone else less, right?
        I just want to understand that the current system rewards
    inefficiency to a certain extent, that if it costs more to
    operate, the rate goes up. And the only reason that you drive
    down your cost is that you want to make sure that whatever the
    rate is you then make money on it, right?
        Mr. Devany. Yes, Mr. Chairman, I think that is essentially
    right. I analogize it to spaghetti sauce. You throw everything
    in there, you put in the spices and everything and stir it up,
    and then there is an average price. And if you can keep your
    costs below average, you make out fairly well; if your costs
    are above average, you don't make out so well.
        Mr. Issa. Right.
        Mr. Butler, you would agree with that?
        Mr. Butler. Yes.
        Mr. Issa. Okay.
        Now, where else do you operate in which you operate based
    on that system, other than Alaska, where you get compensated
    based on the average cost of multiple carriers?
        Mr. Butler. The Bypass mail products is the only one.
        Mr. Issa. The only one. Give me your biggest run. Your
    biggest run would be Anchorage to Fairbanks?
        Mr. Butler. For Bypass mail?
        Mr. Issa. Yes.
        Mr. Butler. Nome or Bethel.
        Mr. Issa. Bethel. Okay, I have taken that run. So 400
    miles, Anchorage to Bethel. How many carriers carry Anchorage
    to Bethel.
        Mr. Devany, in the pool, and you can check with your staff,
    in the pool that you calculate for the run Anchorage to Bethel,
    how many carriers are there?
        Mr. Devany. I don't know the answer, Mr. Chairman. I can
    certainly get that.
        Mr. Issa. Okay. If you would give us for the record sort of
    a calculation of at a given time and a given span who the
    carriers were, A, B, C, D, I don't even care about the names,
    and what their average cost is so we could see the difference
    in the cost calculated based on people all carrying tonnage on
    the same route.
        Mr. Devany. I would be happy to get that to you, Mr.
    Chairman.
        Mr. Issa. Okay.
        Mr. Deaton, we are considering legislation that would
    encourage or prioritize or try to have carriers basically skip
    ports which are presently costing us money and try to have them
    go from point to point without an interim stop. Does that save
    money on the route?
        Mr. Deaton. When authorized the Postal Service can tender
    mail to a composite carrier that flies direct from an
    acceptance point to a bush point and immediately, day in and
    day out, saves the terminal handling fee for every pound of
    mail that is tendered to that location. Consequently, also that
    community, the residents there, also receive direct service,
    better mail service, better product that goes through the
    Bypass mail. So all of those things are correct, yes.
        Mr. Issa. Okay. I obviously have a keen interest in this.
    Between the late Ted Stevens and myself I am the only one left
    to hold a hearing on this. I have asked a lot of questions. Do
    any of you have any additional closing things that you think
    should be made for the record? Do any of you have any
    additional items that we didn't ask that you want to make sure
    were in the record?
        Mr. Deaton.
        Mr. Deaton. I would just like to make sure the record
    reflects that there are multiple components, I think we have
    all established. The Rural Service Improvement Act and Bypass
    mail is a very complex system. I would totally agree, because I
    was involved in the development of the Rural Service
    Improvement Act, with the chairman's position on why it came
    about and what the purpose of it was. The role was to favor
    passenger carriers over all other carriers. The role was to
    restrict entry. The role was to award bush passenger carriers
    more favorable mail tender than they did others. And, quite
    honestly, it was aimed specifically, in the equalization
    portion, was aimed specifically at one carrier at the time.
    That carrier is a freight carrier at the time and remains so.
        Your comment about efficiencies and unit costs, I would
    like to also get on the record that the current law requires
    the DOT on the bush side to only consider passenger carrier
    costs when it sets rates and it does not consider when it sets
    rates the cost and the lower unit costs of efficient freight
    carriers. So I would like to make sure that that is a part of
    the record also.
        Mr. Issa. I appreciate that.
        Mr. Butler?
        Mr. Butler. You know, my only comment is that I don't
    necessarily believe that the Bypass mail product requires
    anywhere near the surgery that this bill particularly
    contemplates, nor the enormous----
        Mr. Issa. Wait a second. The bill only undoes the 2002
    restrictions, as far as I know. We do have some additional
    legislation we are looking at, and that may be more surgery
    than you want. But what in 4011 was so onerous to allow
    additional competitors that were able to be in prior to 2001?
        Mr. Butler. A number of the things that we talked about
    earlier that allow for the potential for the commodity product
    in the bush to go high, sky high, for one, I guess primarily
    that one.
        Mr. Issa. So your point on 4011 is that we should make sure
    that we put protections in, in the selection, that would be
    allowed to prevent that. In other words, the post office in
    consultation with Department of Transportation would be allowed
    to select carriers based on preventing the price from going up
    due to an adverse cost. Is that what you are saying?
        Mr. Butler. No. My point is that I believe that 4011 causes
    a number of disruptions.
        Mr. Issa. But it certainly means that people can compete
    against you for mainline, right?
        Mr. Butler. That is true.
        Mr. Issa. Is there anything you don't like about this bill
    other than that?
        Mr. Butler. Well, I would suggest based upon the
    conversation earlier that there is an opportunity for the rate-
    making formula to be looked at, and that doesn't require
    anything related to legislation to make that happen, and that
    is one of the potential opportunities here.
        Mr. Issa. How would the post office affect Mr. Devany's
    absolute ability to look at price, set it, and then they have
    to pay it. You understand, they don't write a purchase order,
    they just write the check.
        Mr. Butler. File a petition with the DOT.
        Mr. Issa. Okay. So you are telling me that the post office
    could beg the DOT to come up with a rule to change something,
    but there is no legislation required.
        Mr. Butler. I think that's a potential.
        Mr. Issa. Mr. Haberman, have you been contemplating begging
    the ability to reduce the cost to the post office?
        Mr. Haberman. I am not aware of any ability for us to
    lobby.
        Mr. Issa. Would it be reasonable that you should have been
    begging for years for that?
        Mr. Haberman. Yes, sir.
        Mr. Issa. Do you think that the postmaster could get back
    to us and see if he has ever thought about trying to pay less?
        Mr. Haberman. Absolutely, sir.
        Mr. Issa. I am astounded that we are only discovering that
    here today. But, Mr. Butler, I certainly will be working with
    the postal system to see if they believe there is any
    reasonable way that they could simply pay less. Something tells
    me that I wouldn't be here if it wasn't for $76 million worth
    of cross-subsidy going on.
        Mr. Butler. I believe that the DOT has routinely changed
    some of those parameters, but you will discover that yourself.
        Mr. Issa. Okay. Anyone else?
        Mr. Devany. Chairman, there are provisions in statute and
    regulations that either party, either the Postal Service or
    airlines, can request to reopen----
        Mr. Issa. Have the airlines ever requested to reopen, try
    to get more money?
        Mr. Devany. No, sir.
        Mr. Issa. They must be doing okay, right? They are not
    dissatisfied apparently.
        Mr. Devany. In our world, Mr. Chairman, we want both sides
    to be mad at us. We want the post office and the airlines to be
    mad at us. Because if one side is happy, then maybe the rates
    are too high or too low. If they are both kind of unhappy----
        Mr. Issa. But your testimony today is you simply measure
    the world as it is. You are not in the business of creating
    efficiencies or even lobbying for efficiencies, isn't that
    correct?
        Mr. Devany. That is correct.
        Mr. Issa. And doesn't that create an odd situation in which
    the post office cannot force efficiencies. You are not in the
    business of creating efficiencies. Mr. Butler is in the
    business of being efficient enough to make money, but not
    necessarily to drive down the cost to the post office. There is
    no particular incentive to him, is there?
        Mr. Devany. It is an unusual situation where we play
    referee between the airlines----
        Mr. Issa. And I understand we could have called in the bush
    pilot that is costing us $32 per ton per mile, plus $850 per
    ton every time he lands. We oddly enough had Alaska Airlines
    volunteer to come here when without a doubt you are flying the
    most efficient aircraft, large capacity aircraft, to these
    large airports in Alaska. I mean, in a sense, Mr. Butler, I was
    a little surprised that you were worried as an incumbent that
    you wouldn't continue to compete successfully and have the
    lion's share of the load. But, you know, I still was happy to
    have you come here and make the case on behalf of your airline.
        Mr. Butler. It isn't just the airline, it is the State and
    our commitment to the State. There is a reason why there is an
    Eskimo on that tail. We represent the State and the people
    within the State.
        Mr. Issa. Ms. Whitcomb?
        Ms. Whitcomb. The only additional comment I would like to
    make is that earlier, in the earlier panel, there was a
    reference to concerns with the report that we issued. We
    provided a response to the concerns that were addressed by the
    Alaska delegation at the time that that report was issued. So
    that might be of interest.
        Mr. Issa. We will make sure that is included in the record,
    since I suspect that you were not in agreement with their
    position.
        Ms. Whitcomb. Right.
        Mr. Issa. Okay. The last thing is I am going to ask each of
    the other potential carriers to submit statements for the
    record, particularly as to the allegation of safety. I am going
    to invite all Alaskan potential carriers of all sort, including
    bush pilots, to submit anything they want for the record
    relative to their ability to safely carry passengers. We will
    send a letter to the FAA asking about carriers in Alaska.
        Mr. Issa. Mr. Butler, if you have concerns about the three
    potential entrants to the market, if you want to tell us about
    their safety records and concerns that they would be unsafe for
    carrying Diet Cokes on the mainline, I would appreciate it.
        Mr. Issa. Those are areas that obviously our goal is not to
    disrupt the ability to carry freight in Alaska at an affordable
    rate. It is just the opposite. It is to drive down the cost,
    not the price but the cost, since it is being borne by the
    ratepayer.
        If there are no other comments, I will keep the record open
    for 5 days for any of your comments in addition to what I had
    described.
        Mr. Issa. And with that, we stand adjourned.
        [Whereupon, at 4:10 p.m., the subcommittee was adjourned.]

                                    APPENDIX

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                   Material Submitted for the Hearing Record

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