Postal Service: Issues Related to Settling a Disputed Contract for Air
Transportation (Letter Report, 03/24/94, GAO/GGD-94-92).

In April 1992, the U.S. Postal Service solicited bids for air cargo
service for its Eagle Network, which transports Express Mail and
Priority Mail, the Service's expedited mail classes. At the time of the
solicitation, Emery Worldwide Airlines was providing air service under a
contract scheduled to expire in January 1993. The Postal Service
received four offers and in September 1992 awarded a contract to the
lowest bidder--Postal Air Inc. Emery, the second lowest bidder, and
Express One Inc., another offeror, challenged the award to Postal Air.
The court later set aside that award because of a conflict of interest
on the part of an individual who had evaluated the contract proposals.
Under a court-approved settlement, Emery was awarded the contract and
Express One was designated a principal subcontractor to Emery. The
Postal Service and Emery agreed to pay Postal Air $10 million and $8.5
million respectively, and Postal Air waived any claims it might have as
a result of the contract award. This report answers the following
questions: What work was done by Postal Air that should receive
multi-million dollar payments from the Postal Service, the postal
ratepayer, and the American public in light of changing conditions in
the air freight industry? Was it proper contracting procedure for the
Postal Service to award the contract without resoliciting when the court
found the contract evaluation process to be flawed? What are the
specifics of the agreements among the parties?

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-92
     TITLE:  Postal Service: Issues Related to Settling a Disputed 
             Contract for Air Transportation
      DATE:  03/24/94
   SUBJECT:  Federal courts
             Litigation
             Contract award protests
             Postal service contracts
             Air transportation operations
             Judicial remedies
             Contracting procedures
             Procurement regulation
             Resolicitation
             Contract termination
IDENTIFIER:  USPS Express Mail Program
             USPS Priority Mail Program
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to the Chairman, Committee on Post Office and Civil Service,
House of Representatives

March 1994

POSTAL SERVICE - ISSUES RELATED TO
SETTLING A DISPUTED CONTRACT FOR
AIR TRANSPORTATION

GAO/GGD-94-92

Disputed Network Contract


Abbreviations
=============================================================== ABBREV


Letter
=============================================================== LETTER


B-256565

March 24, 1994

The Honorable William L.  Clay
Chairman, Committee on Post
 Office and Civil Service
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request for information about the U.S. 
Postal Service's court-approved settlement in April 1993 of a
disputed contract for air transportation on the Service's Express
Mail network.  You were interested in what work and payments were
agreed to by the parties to the settlement and whether it was proper
contracting procedure and in the Service's best interest to settle
instead of resoliciting the procurement. 

You have also requested a review that we will be conducting of the
adequacy of Postal Service procurement policies, particularly as they
related to this disputed contract and four other major Postal Service
procurements.  As a part of that review, we will consider whether use
of the Federal Acquisition Regulation in lieu of the Postal Service
Procurement Manual would have avoided the difficulties that occurred
in those procurements. 


   BACKGROUND
------------------------------------------------------------ Letter :1

In April 1992, the Service solicited contract proposals for air cargo
service for its existing Eagle Network.  The network, which operates
from a central hub in Indianapolis, transports Express Mail and, on a
space available basis, Priority Mail, the Service's expedited mail
classes.  At the time of the solicitation, air service was being
provided by Emery Worldwide Airlines for about $120 million annually
under a contract that began in 1989 and was scheduled to expire in
January 1993.  The Service wanted to award a 10-year contract in
order to allow offerors to spread their capital investment over a
longer period that would reduce the cost of the service.  The
solicitation called for overnight round-trip service 6 days a week
from 31 cities to Indianapolis over 19 routes.  Twenty-one Boeing 727
aircraft were mandated in the solicitation to be dedicated to the
network each day--one for each route plus two standby spares. 

The Service received four responsive offers and on September 16,
1992, awarded a contract to the lowest offeror, Postal Air
Incorporated.  Postal Air's low offer of $85 million\1 annually was
reduced to $80 million in postselection negotiations.  Emery had the
second lowest offer, $91.8 million. 

On September 29, 1992, Emery and another offeror, Express One
Incorporated, brought suit challenging the award to Postal Air.  The
U.S.  District Court for the District of Columbia subsequently set
aside the award to Postal Air because of a conflict of interest on
the part of an individual who helped evaluate the contract proposals. 
The court ordered that the contract be resolicited and that Emery,
Postal Air, and Express One be allowed to submit new proposals. 
Under the termination provisions of the Postal Air contract that was
set aside, the Service was liable to Postal Air for start-up costs
that the firm may have incurred. 

Subsequently, with the approval of the Attorney General, the Service
agreed with the other parties to the suit to settle the procurement
without a resolicitation.  The settlement, approved by the court on
April 15, 1993, called for the contract to be awarded to Emery for
$88 million annually, excluding pass- through costs, and specified
that Express One would be a principal subcontractor to Emery.  The
Service and Emery agreed to pay Postal Air $10 million and $8.5
million, respectively, and Postal Air agreed to waive any claims it
might have related to the contract award. 

You posed the following questions: 

(1)What work was performed by Postal Air that it will receive $10
million from the Postal Service and $8.5 million from Emery? 

(2)Was the settlement in the best interest of the Postal Service, the
postal ratepayer, and the American public in light of the cost and
changing circumstances in the air freight industry? 

(3)Was it proper contracting procedure for the Service to award the
contract without resoliciting when the contract evaluation process
was found flawed by the court? 

(4)What are the specifics of the agreements among the parties? 


--------------------
\1 The total cost of the 1989 contract and amounts cited for the new
contract are not comparable because of a difference in how certain
cost elements are treated.  The 1989 contract was variously priced at
a cost per trip or cost per day over its life, and $120 million is
the Service's estimate of its equivalent annual cost when the 1993
contract was solicited.  The proposal for the 1992 contract called
for a base annual price plus estimated pass-through costs for fuel,
deicing, and landing and ramp fees, which the contractor is allowed
to pass on to the Service.  Only the proposed base prices were
subject to evaluation, and these amounts are cited in this report. 
Pass-through costs were estimated to be $27.8 million under the
Postal Air contract, which was set aside, and $26.8 million in the
Emery contract, which replaced it. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The agreements by Postal Air with the Postal Service and Emery did
not require any work from Postal Air.  Rather, the payments to Postal
Air were negotiated to obtain a settlement and represented full
settlement of any amounts that might be due to Postal Air under the
termination provisions of the contract.  These amounts included bid
preparation costs, attorneys' fees and other start-up costs.  Chief
among these costs was $33.1 million related to Postal Air's
commitment to purchase 23 Boeing 727 aircraft.  Emery agreed to buy
most of these aircraft and obtained from the aircraft suppliers
releases of any claims against Postal Air.  In return, Postal Air
agreed to release the other parties to the litigation from any claims
against them. 

The Service's rationale for settling the contract was based on
financial analysis and qualitative considerations.  The Service
determined, with the assistance of a consulting firm, that settling
would be less costly and quicker than resoliciting.  Because start-up
after settlement took longer than expected, some of the financial
benefits from settling were overstated.  However, we do not believe
that the differences are significant enough to warrant a change in
the Service's overall conclusion.  Also, we did not find any
significant change in the air freight industry between the time of
the original award and the settlement that would have made
resolicitation preferable. 

There is no doubt that this procurement was seriously flawed as a
result of the decision by the Service to ignore the advice of its own
legal counsel and to award the contract notwithstanding a clear
conflict of interest that was not corrected.  However, after the
federal district court overturned the award and ordered the Service
to resolicit the procurement, the decision of the Service to resolve
the litigation through a court-approved settlement with the parties
to the litigation was not unreasonable in our view.  By entering into
the settlement, the Service was able to satisfy its own needs and the
legitimate interests of the parties to the dispute and the court. 
Had the Service not reached a settlement with the parties, it would
have been required under the terms of the initial court order as well
as its own procurement regulations to resolicit the procurement. 
Given the potential business risks from prolonging the procurement
through a resolicitation, in particular the likelihood of further
litigation and possible interruption of air service from changing
contractors, we believe that the settlement was a reasonable course
of action. 

Appendix I includes additional information about the basis for the
settlement and details of the various agreements among the parties to
the litigation. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

We reviewed documents pertinent to the settlement, including the
1989, 1992, and 1994 air cargo contracts; offerors' technical and
cost proposals for the new contract; Service documentation related to
the evaluation of those proposals; agreements entered into by the
parties to the settlement; the report of the management consultant
who advised the Service about the settlement; and the Postal Service
Procurement Manual.  We reviewed trade literature and interviewed
representatives of the Air Freight and Air Transport associations and
the Boeing Aircraft Company about the general state of the air cargo
industry at the time of the settlement.  We also interviewed Service
officials who were involved in the settlement.  We did our work at
Service headquarters in Washington, D.C., between June and December
1993 in accordance with generally accepted government auditing
standards. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :4

The Postal Service's Chief Counsel for Purchasing and the Manager of
Transportation Policies and Procedures reviewed a draft of this
report.  They agreed with its contents and suggested minor changes,
which we incorporated where appropriate. 


---------------------------------------------------------- Letter :4.1

We are sending copies of this report to the Senate Committee on
Governmental Affairs, the Postmaster General, the Postal Service
Board of Governors, and other interested parties.  Copies will also
be made available to others on request. 

The major contributors to the report are listed in appendix II. 
Please call me on (202) 512-8387 if you have any questions. 

Sincerely yours,

J.  William Gadsby
Director, Government Business
 Operations Issues


ADDITIONAL INFORMATION ON THE
SETTLEMENT
=========================================================== Appendix I


   WAS THE SETTLEMENT IN THE BEST
   INTEREST OF THE POSTAL SERVICE,
   THE POSTAL RATEPAYER, AND THE
   AMERICAN PUBLIC IN LIGHT OF THE
   COST AND CHANGING CIRCUMSTANCES
   IN THE AIR FREIGHT INDUSTRY? 
--------------------------------------------------------- Appendix I:1

An important factor bearing on the decision to settle or resolicit
the procurement was the fact that Postal Air was entitled to recoup
from the Postal Service its start-up expenses on the contract that
was set aside.  To help address this matter, the Postal Service
engaged a management consulting firm that (1) evaluated the ability
of the Service to mitigate the $38 million in claims that Postal Air
said it would make under the termination provisions of the contract
and (2) on the basis of that evaluation, analyzed the financial
desirability of settling the procurement versus resoliciting it. 

Most of the $38 million in potential termination costs reported by
Postal Air related to the firm's commitment to purchase 23 Boeing 727
aircraft.  Purchase agreements were entered into with two vendors on
October 20 and October 22, 1992, according to copies provided to the
Service by Postal Air. 

The Service's consultant concluded that these planes would be
difficult to dispose of if it were necessary for the Service to take
possession of them under the termination provisions of the contract. 
Boeing 727 passenger planes, as these were configured, were in
substantial excess supply in the marketplace.  Demand and aircraft
value were already depressed by weak world economies and were not
expected to improve.  Moreover, these planes had a higher operating
cost than newer, more modern aircraft and were subject to
increasingly stringent noise and emissions regulations that
necessitated expensive retrofitting.  The planes were believed to be
more useful to the air express industry in a cargo configuration
because cargo planes ordinarily operate fewer hours per day than
passenger planes, and their higher hourly operating cost was
therefore less of a factor.  However, the consultant pointed out that
although several hundred of these planes were in use in the growing
air express industry, the major firms were adding to their fleets
larger or different aircraft than the 727. 

The consultant concluded that there were unlikely to be more than a
few purchases of such aircraft in the near future and that buyers
would likely seek substantially discounted prices.  The consultant
suggested that if a settlement of the disputed contract could not be
reached, bidders to a new contract could be required or induced to
use the planes as part of their proposals. 

The consultant then estimated that a resolicitation would be
financially more attractive to the Service if the new contract price
were less than $82.6 million annually.  This amount was derived by
comparing the cost of the proposed settlement, which was known, with
the estimated cost of a resolicitation.  The annual cost of
settlement over 10 years was $89 million--$88 million for the new
Emery contract plus one-tenth of the $10 million\2

settlement payment to Postal Air.  Resolicitation costs, exclusive of
the cost of a new contract, were estimated to be $64 million.  This
estimate is broken down in table I.1. 



                          Table I.1
           
                Estimated Resolicitation Costs

                    (Dollars in millions)

Nature of cost                                        Amount
----------------------------------------  ------------------
Postal Air termination liability                         $38
Claims by other offerors for proposal                      4
 preparation
Additional commercial airlift                             18
Interim airlift network                                    1
Litigation on hub terminal contract                        1
Contract resolicitation process                            2
============================================================
Total estimate                                           $64
------------------------------------------------------------
Source:  U.S.  Postal Service. 


--------------------
\2 This was not the present value of the $10 million. 


      POSTAL AIR TERMINATION COSTS
      AND CLAIMS BY OFFERORS FOR
      PROPOSAL PREPARATION
------------------------------------------------------- Appendix I:1.1

As discussed previously, Postal Air reported that its termination
costs under the set-aside contract would be $38 million.  Of this
amount, $33.1 million related to aircraft that Postal Air had agreed
to purchase.  The consultant did not include in the cost comparison
any estimate for the value of the planes but did note in its report
that perhaps 25 percent could be recovered by selling the planes for
parts or scrap.  Had the consultant factored in a recovery value of
25 percent for the aircraft, the estimated termination costs would
have been about $30 million instead of $38 million. 

The consultant assumed that the other offerors to the solicitation
would also attempt to recover their proposal preparation costs from
the Service.  These were estimated to amount to about $4 million. 


      COMMERCIAL AIRLIFT AND
      INTERIM NETWORK COSTS
------------------------------------------------------- Appendix I:1.2

The new contract was to provide for more airlift capacity than the
existing contract, and the Service intends to use the extra capacity
to divert mail from commercial airlines.  An estimated $18 million in
commercial airlift costs would be avoided if the Service could settle
and begin operations under the new contract in August 1993, as
compared to delaying another year to complete another solicitation. 
Similarly, the $1 million for interim network airlift costs was
judged to be the minimum additional cost that the Service would incur
for an emergency network during the 1 year needed to resolicit. 
Extending the existing contract with Emery was considered to be more
expensive and unlikely in the event there was no settlement. 

We noted that, as events turned out, operations under the new Emery
contract were also delayed beyond August 1993.  Negotiation between
Emery and the aircraft vendors to settle the previous Postal Air
agreements took longer than expected, and this would have delayed
start-up until late October or November 1993.  The Postal Service
decided that an October or November start-up would put performance at
risk for the Christmas mailing period and moved the effective date to
January 1994. 

For the cost comparison, the delay of at least 4 months under
settlement, from August 1993 until January 1994, meant that
resolicitation would have required an 8-month delay instead of 1
year.  The $18 million estimate for commercial airlift and the $1
million for interim network airlift costs can be reduced accordingly,
to about $12 million. 


      LITIGATION ON HUB TERMINAL
      CONTRACT AND RESOLICITATION
      COST
------------------------------------------------------- Appendix I:1.3

Emery had also filed a suit against the Postal Service over a
separate procurement to operate the terminal hub.  Withdrawal of that
suit was part of the settlement.  The consultant assumed that
resolicitation for air transportation would result in additional
litigation over the hub operation, costing the Service $1 million. 
The consultant also estimated that resolicitation for air
transportation would cost the Service $2 million for legal and
consulting fees, time spent by postal personnel, and other costs. 

Proration of the estimated $64 million resolicitation cost over the
10-year life of the contract by the consultant resulted in an
estimated resolicitation cost of $6.4 million per year.  Subtracting
this amount from the annual cost of the settlement option, which, as
noted above, was $89 million, suggested that a resolicited contract
of less than $82.6 million\3 would be more beneficial than settling. 
The consultant cited several reasons why it was unlikely that a
technically acceptable offer could be obtained for that amount. 

The consultant believed that because of the publicity of this
litigation, the industry was aware of the bids that had been
submitted.  Therefore, offerors would probably make new proposals in
the middle or upper part of the range bounded by the Postal Air
contract amount of $80 million and Emery's offer of $91.8 million. 

Only one of the four final offers, Postal Air's, was below the $88
million settlement price.  Before the court suspended the contract,
Postal Air was having difficulty obtaining aircraft that conformed to
the proposal by the scheduled start-up date.  The consultant believed
that Postal Air's negotiated price of $80 million could have
adversely affected the company's ability to secure financing for
aircraft and other equipment.  There was little reason to believe
that a responsible offeror would enter into a contract at a price
that would jeopardize its ability to operate the network reliably and
profitably. 

The consultant reviewed the cost proposals of the original offerors
and concluded that there was not much fat in them, given the
magnitude of fixed costs and relatively modest percentages proposed
for profit and general and administrative expenses.  Finally, the
consultant noted that the $88 million settlement price was $1 million
less than the benchmark cost estimated as reasonable and justifiable
prior to submission of proposals. 

As discussed previously, certain of the estimated resolicitation
costs could arguably have been expected to be less than the amounts
used in the cost comparison.  These include $30 million instead of
$38 million for Postal Air termination costs and $12 million instead
of $18 million for commercial airlift costs.  The total difference,
$14 million, when considered over the life of the new 10-year
contract, amounts to $1.4 million a year.  This, in turn, would
increase the breakeven value of the resolicitation from $82.6 million
to $84 million.  We agree with the consultant and the Service that
this difference was not large enough to alter the conclusion from the
financial analysis.  We did not, however, verify the consultant's
estimates. 

The Service also pointed out some nonmonetary factors that it
believed were important reasons for settling: 

  Under settlement, the network would continue to be flown without
     interruption by a contractor of proven reliability.  However,
     resolicitation could require an interim contract and the
     possibility of changing contractors three times (Emery, an
     interim contractor, and a new contractor) in about a year, which
     would put performance at risk. 

  Settlement would avoid further litigation, which was believed
     inevitable if there were another solicitation for air service. 

With regard to changing costs and circumstances in the air freight
industry, a review of the trade literature and discussions with
representatives of the Air Freight and Air Transport associations and
the Boeing Aircraft Market Research Group revealed no indication of
an apparent change in the air freight market or availability of
aircraft between the time of the original award in September 1992 and
settlement in April 1993 that would have made a resolicitation
preferable to settlement. 


--------------------
\3 This breakeven price was based on 1993 dollars.  Taking into
account the present value of cash payments that would not be made
until later years, the consultant calculated that the breakeven price
would be slightly less, at $81.7 million. 


   WAS IT WAS PROPER CONTRACTING
   PROCEDURE FOR THE POSTAL
   SERVICE TO AWARD THE CONTRACT
   WITHOUT RESOLICITING WHEN THE
   CONTRACT EVALUATION PROCESS WAS
   FOUND FLAWED BY THE COURT? 
--------------------------------------------------------- Appendix I:2

To answer this question, we looked at whether the Service followed
proper procedures in resolving a conflict-of-interest situation that
existed when the offers were evaluated; we also looked at how the
Service and the court settled the matter. 

In this procurement, contracting procedures were violated when the
Service failed to correct a conflict-of-interest situation that
occurred when the offers were being evaluated.  Specifically, an
aircraft maintenance expert employed by a consulting firm that was
helping the Service evaluate the awards received an invitation to a
job interview by an owner of Postal Air, which later won the
contract.  The individual disclosed this to the contracting officer
for this procurement.  However, contrary to advice from the Service's
legal department, the contracting officer did not require that the
employee be removed from his position or refuse the job interview. 
The court overturned the award based on the conflict of interest and
the inability of the Service to provide a rational explanation of its
failure to eliminate the conflict.  The court also ordered the Postal
Service to request the parties in the litigation (Emery, Express One,
and Postal Air) to submit new proposals for evaluation. 

Subsequent to the court's order to the Service to request and
evaluate new proposals, the parties to the litigation negotiated a
settlement.  The Service analyzed the settlement, as described
previously, and concluded that it offered a savings in time and money
and less chance of interrupting service than a resolicitation. 
Because of the high dollar value of the contract, the settlement was
reviewed and approved by the Attorney General before it was submitted
to the court, which amended its previous order to approve the
settlement. 

There is no doubt that this procurement was seriously flawed as a
result of the decision by the Service to ignore the advice of its own
legal counsel and to award the contract notwithstanding a clear
conflict of interest that was not corrected.  However, after the
federal district court overturned the award and ordered the Service
to resolicit the procurement, the decision of the Service to resolve
the litigation through a court-approved settlement with the parties
to the litigation was not unreasonable in our view.  By entering into
the settlement, the Service was able to satisfy its own needs and the
legitimate interests of the parties to the dispute and the court. 
Had the Service not reached a settlement with the parties, it would
have been required under the terms of the initial court order as well
as its own procurement regulations to resolicit the procurement. 


   WHAT ARE THE SPECIFICS OF THE
   AGREEMENTS AMONG THE PARTIES? 
--------------------------------------------------------- Appendix I:3

The April 15, 1993, court order, which defined the overall
settlement, made effective several other agreements among the parties
to the litigation.  The major points in these agreements are
discussed next. 


      POSTAL SERVICE AND POSTAL
      AIR
------------------------------------------------------- Appendix I:3.1

On April 7, 1993, an amendment was issued to the Postal Air contract,
terminating it for the Service's convenience.  The amendment called
for the Service to make a one-time payment of $10 million to Postal
Air for full and final settlement of the contract.  Postal Air
released the Service from all claims relating to the litigation. 


      POSTAL SERVICE AND EMERY
------------------------------------------------------- Appendix I:3.2

On April 12, 1993, the Service accepted (contingent on the court's
approval) Emery's proposal of $88 million per year, $3.8 million less
than its earlier $91.8 million offer to the solicitation.  The main
items contributing to the difference were about $5 million less in
the contract for aircraft costs and about $1.6 million more for
aircraft maintenance. 

The contract became effective on January 10, 1994, 1 year later than
contemplated in the initial procurement, and about 9 months after the
settlement.  As discussed previously, part of the delay was due to
negotiations between Emery and the aircraft suppliers plus a decision
by the Postal Service not to begin operations during the Christmas
mailing period.  The contract provided for the same number of
aircraft and service as the initial proposal. 


      EMERY AND EXPRESS ONE
------------------------------------------------------- Appendix I:3.3

On March 15, 1993, Express One International entered into a
subcontract with Emery to provide air transportation service over
four of the routes and operate seven aircraft under Emery's contract
with the Postal Service. 


      EMERY AND POSTAL AIR
------------------------------------------------------- Appendix I:3.4

On March 23, 1993, Emery and Postal Air signed an agreement that
settled the litigation issues between them.  Emery agreed to pay
Postal Air $2 million initially and $162,500 each quarter over a
10-year period beginning in October 1993.  Emery also agreed to
deliver releases by American Airlines and Caldwell Aircraft Trading
Company of claims that those vendors had against Postal Air arising
from Postal Air's earlier agreements to buy 23 aircraft from them. 
Postal Air had agreed in October 1992 to buy 7 planes from American
for $14.25 million and 16 from Caldwell for $17.6 million.  These
agreements were made before the court set aside the award and were
never fulfilled.  Emery also agreed to obtain a refund of Postal
Air's $700,000 deposit from American. 

Postal Air agreed to release all claims it made against American,
Caldwell, Emery, Express One, and Ryan Airlines, another Emery
subcontractor. 


      EMERY AND AMERICAN AIRLINES
------------------------------------------------------- Appendix I:3.5

On March 24, 1993, Emery and American Airlines signed a letter of
intent for Emery to purchase from American seven Boeing 727 planes
for $10.2 million.  Six of the seven were the same planes that Postal
Air had agreed to buy in October 1992.  A purchase agreement was made
on April 1, 1993, between Emery and American for the planes at the
amount in the letter of intent.  American agreed to refund Postal
Air's deposit of $700,000, without interest, and to release Postal
Air from that agreement and all other claims. 


      EMERY AND CALDWELL AIRCRAFT
      TRADING COMPANY
------------------------------------------------------- Appendix I:3.6

On March 26, 1993, Emery and Caldwell entered into an agreement
whereby Emery would purchase from Caldwell 8 of the 16 Boeing 727
aircraft that Postal Air agreed to buy in October 1992.  Emery agreed
to pay $8.8 million for the planes plus $2.5 million for maintenance,
storage, insurance, attorneys' fees, and administrative costs that
Caldwell incurred because Postal Air failed to take delivery of the
aircraft.  The agreement also included $500,000 to hold the aircraft
until April 26, 1993, the estimated date of the court settlement, and
options to extend the agreement until May 14, 1993, for $250,000 plus
additional 15-day extensions at $250,000 each. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Michael E.  Motley, Associate Director
James T.  Campbell, Assistant Director
Leonard Hoglan, Assignment Manager

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

V.  Bruce Goddard, Senior Attorney
