U.S. Postal Service: Unresolved Issues in the International Mail Market
(Letter Report, 03/11/96, GAO/GGD-96-51).
Pursuant to a congressional request, GAO reviewed the Postal Service's
(USPS) participation in the international mail market, focusing on: (1)
USPS responsibility for delivering and receiving international mail; (2)
the competition for international mail delivery and USPS plans to
increase its competitiveness; (3) legal or regulatory issues arising out
of the competition in international mail services.
GAO found that: (1) USPS and other Universal Postal Union (UPU) members
provide a worldwide mail delivery network even to remote locations; (2)
USPS is concerned that it is losing international mail market share to
private carriers whose services are more dependable, faster, and cheaper
than USPS service; (3) some foreign postal services also compete in the
United States for certain outbound international bulk business mail; (4)
USPS has developed an aggressive strategy to regain market share that
includes new services, service improvements, and market-based prices;
(5) USPS officials believe that the statutory requirement that it use
U.S. flag carriers at Department of Transportation-set rates limits its
ability to compete for international mail; (6) competitors believe that
USPS unfairly benefits from its federal status, exclusive access to
foreign postal administrations, and status as the sole U.S. UPU
representative; (7) competitors believe that certain USPS pricing
practices violate laws and regulations and the Postal Rate Commission
should set international mail rates just as it does domestic rates; (8)
although competitors believe that USPS status as the sole UPU
representative is unconstitutional, USPS believes it is justified by its
statutory and treaty obligations that are not shared by its domestic
competitors; and (9) the USPS role in the international mail market is
similar to the issues surrounding USPS competitiveness in the domestic
market.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-96-51
TITLE: U.S. Postal Service: Unresolved Issues in the International
Mail Market
DATE: 03/11/96
SUBJECT: Customer service
Mail transportation operations
International agreements
Postal law
Competition
Postal rates
International organizations
Foreign governments
Postal service contracts
Marketing
IDENTIFIER: USPS Express Mail International Service
USPS International Surface Airlift Service
USPS INTELPOST Service
USPS International Priority Airmail Service
Canada
France
Germany
Netherlands
Sweden
Denmark
USPS WORLDPOST Priority Letter Service
USPS International Package Consignment Service
USPS Customs Pre-Advisory Service
USPS International Customized Service
Mexico
United Kingdom
China
Japan
European Union
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on the Postal Service, Committee
on Government Reform and Oversight, House of Representatives
March 1996
U.S. POSTAL SERVICE - UNRESOLVED
ISSUES IN THE INTERNATIONAL MAIL
MARKET
GAO/GGD-96-51
International Mail Market
(240137)
Abbreviations
=============================================================== ABBREV
ACCA - Air Courier Conference of America
AO - Autres Objets (other articles)
CEPT - Conference of European Postal and Telecommunications
Administrations
CPAS - Customs Pre-Advisory Service
DHL - DHL Airways, Inc.
EMS - Express Mail International Service
IBRM - International Business Reply Mail
ICM - International Customized Mail
IECC - International Express Carriers' Conference
IPA - International Priority Airmail
IPCS - International Package Consignment Service
ISAL - International Surface Airlift
KLM - KLM Royal Dutch Airlines
LC - Lettres et Cartes (letters and cards)
OMB - Office of Management and Budget
PES - Private Express Statutes
PRC - Postal Rate Commission
SDR - Special Drawing Rights
TNT - TNT Express Worldwide
UPS - United Parcel Service
UPU - Universal Postal Union
WPL - WORLDPOST Priority Letter
Letter
=============================================================== LETTER
B-270328
March 11, 1996
The Honorable John McHugh
Chairman, Subcommittee on the Postal Service
Committee on Government Reform and Oversight
House of Representatives
Dear Mr. Chairman:
This report responds to your request for information on the U.S.
Postal Service's participation in the international mail market.\1
You were interested in learning more about international mail as a
part of your consideration of the need to revise the Postal
Reorganization Act of 1970 (1970 Act). As agreed with the
Subcommittee, we are reporting on (1) the Postal Service's authority
and responsibility for delivering and receiving international mail;
(2) the competition for international mail delivery, including any
Postal Service plans and actions to increase its competitiveness; and
(3) legal or regulatory issues arising out of the competition for the
delivery of international mail services.
--------------------
\1 The international mail market, also known as the international
delivery services market, includes letter mail, express, and parcel
delivery services.
BACKGROUND
------------------------------------------------------------ Letter :1
The Postal Service and its predecessors have delivered mail to and
from other countries since the 1840s. International mail to and from
the United States is regulated by both U.S. postal laws and
international agreements. The 1970 Act authorizes the Postal
Service, with consent of the President, to negotiate and conclude
postal treaties or conventions and to establish the rates of postage
or other charges on mail matter conveyed between the United States
and other countries [39 U.S.C. 407(a)]. On the basis of these
provisions, the Postal Service participates in the Universal Postal
Union (UPU).\2 Unlike domestic rate changes, the Postal Service's
rate changes for international postal services are not reviewed by
the Postal Rate Commission (PRC) and the delivery of outbound
international mail is not covered by the Private Express Statutes
(PES).\3 Like its foreign counterparts, the Postal Service collects
and retains revenues on outbound international mail, and UPU members
compensate one another for in-country delivery of foreign-origin
mail. The 1970 Act has been interpreted by Postal Service officials
as requiring total international mail revenues from both outbound and
inbound international services to cover all of the attributable costs
associated with international mail.
For fiscal year 1994, the Postal Service reported that it received
$1.6 billion from international mail services. It handled 1.1
billion pieces of outbound international mail and delivered 727
million pieces of inbound international mail.\4 International mail
accounted for about 3 percent of the total postal revenues of $50
billion, about 1 percent of the total postal volume of 177 billion
pieces, and contributed 2.5 percent to the total postal overhead
costs of $17 billion in fiscal year 1994.
Until June 1995, the Postal Service's international mail policies
were developed by various functional offices at postal headquarters.
For example, the Postal Service's operations support office was
responsible for setting policies and procedures for the Service's 28
international exchange offices, and its marketing office was
responsible for developing international marketing strategies. An
international postal relations office was charged with coordinating
these interdepartmental efforts within the Postal Service and it
continues to coordinate efforts with (1) international organizations
and other countries, (2) private delivery services, and (3) other
federal agencies. In June 1995, a new International Business Unit
was established that, according to Postal Service officials, brought
these and other functions together in a larger unit responsible for
international mail policies.
--------------------
\2 The Universal Postal Union is a specialized agency of the United
Nations that governs international postal service.
\3 The Private Express Statutes (18 U.S.C. 1693-1699 and 39 U.S.C.
601-606) are a set of federal laws enacted originally in 1792 to
restrict private carriage of letter mail. Inbound international
letter mail is covered by these statutes.
\4 Overseas military mail and Department of State mail are not
considered by the Postal Service to be international mail. Military
mail and Department of State mail go at domestic rates and are
transported and delivered overseas by military and Department of
State personnel.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
Through multilateral and bilateral agreements, the Postal Service,
together with other UPU member countries, provides a worldwide
delivery network that, according to a UPU document, covers "even the
most remote localities" and ensures mail service to people throughout
the world. For the rate of $1, anyone in the United States can send
a 1-ounce letter to any overseas location in the world.\5
Private carriers often provide some mail services that are more
dependable, faster, and cheaper than those provided by the Postal
Service under UPU auspices. As a result, the Postal Service is
concerned that it has lost and continues to lose market share in a
growing $4.6 billion international mail market not only to private
companies but also to some foreign postal administrations that
compete in the United States for certain outbound bulk business mail.
In 1995, the Postal Service outlined what it views as an "aggressive"
strategy to regain market share that includes new service offerings,
service improvements, and market-based prices.
Several legal and regulatory issues have surfaced as a result of the
growing competition for the international mail market. Postal
Service officials believed that, among other things, the statutory
requirement to use U.S. flag carriers at rates set by the Department
of Transportation limits the Service's ability to effectively compete
in the international mail market.
Some Postal Service competitors have said the Service benefits
unfairly from (1) its status as a federal entity and (2) its
exclusive access to foreign postal administrations as the sole U.S.
representative to the UPU. For example, the Air Courier Conference
of America (ACCA),\6 a trade association of companies that compete
against the Postal Service for business, charged that the Service
engages in unfair pricing practices. ACCA has stated that Congress
should authorize and require PRC to oversee international postal
rates. ACCA has challenged the Postal Service's representation at
the UPU Congress because ACCA believes that the Service has
represented the United States without necessary consent of the
President, and in violation of the due process requirements of the
Constitution, and that the Service supported and benefited from
certain UPU actions that ACCA considers to be anticompetitive.
The Postal Service disagrees with ACCA's assertions. It considers
the competitors' position on unfair pricing practices and the need
for PRC oversight of international rate-making as "unfounded" and
"aimed at inhibiting the Postal Service's ability to improve service
and to respond to customer demands in a timely manner." The Postal
Service has also defended its responsibility as the representative of
the United States in UPU on the basis of its statutory and treaty
responsibilities, which it says are not borne by its competitors.
These issues are policy issues that require the reexamination of many
complex provisions of the 1970 Act, which was beyond the scope of
this review. Furthermore, the issues surrounding the Postal
Service's competitive role in the international mail market are very
similar to the issues regarding the Service's competitive role in the
domestic mail markets. Because Congress is already considering
proposals for reform of the Postal Service, we are making no
recommendations regarding the Postal Service's role in the
international mail market.
--------------------
\5 The cost to send a 1-ounce letter to Canada and Mexico is less
than $1--52 cents and 46 cents, respectively.
\6 ACCA includes most domestic and international air couriers and air
express companies operating in the United States. In 1995, ACCA had
78 members, including United Parcel Service; Federal Express
Corporation; and many regional, local, and specialty companies.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3
To accomplish the three objectives of our review, we (1) analyzed
international mail revenue, volume, and cost data; (2) reviewed
postal manuals and handbooks on international mail; (3) examined UPU
documents and reports and other international agreements; and (4)
toured the largest air facility (at John F. Kennedy Airport in New
York) and the largest surface facility (the bulk-mail center in
Jersey City) that process international mail. We also reviewed
relevant provisions of the 1970 Act and various regulations, and
court decisions, regarding the Postal Service's participation in
international mail delivery.
In addition, we analyzed the Postal Service's international marketing
data, product and pricing information, and performance statistics.
We also reviewed articles published in trade periodicals about the
Postal Service's international competitors and reviewed related
documents on international mail prepared by PRC and the Departments
of Commerce, Justice, State, and Transportation. Finally, we
interviewed Postal Service officials responsible for international
mail and representatives of ACCA.
We conducted our work in Washington, D.C., from June 1994 to
September 1995 in accordance with generally accepted government
auditing standards. We requested comments on a draft of this report
from the Postal Service, the Postal Rate Commission, and the
International Committee of the Air Courier Conference of America.
Their comments are discussed on pages 27 to 31.
THE POSTAL SERVICE PARTICIPATES
WITH OTHER COUNTRIES TO PROVIDE
WORLDWIDE MAIL SERVICE
------------------------------------------------------------ Letter :4
A UPU international agreement, the Universal Postal Convention, sets
the basic principles and guidelines for the exchange of letter post
mail\7 and to a lesser extent for express mail. Other UPU agreements
and guidelines apply to parcel post and financial services, such as
postal money orders. UPU, one of the oldest intergovernmental
organizations, was founded in 1874 by postal administrations of 22
nations to create a "single postal territory." In 1995, 189 countries
were UPU members. The "supreme" body of UPU is its "Congress."
Comprised of representatives of all member countries, the UPU
Congress meets every 5 years to reevaluate and revise the "Acts" of
the union: the Constitution, the General Regulations, the Universal
Postal Convention, the Postal Parcels Agreement, the Money Orders
Agreement, the Giro Agreement, the Cash-on-Delivery Agreement, the
Final Protocols of the Conventions and the Agreements, and the
Detailed Regulations of the Convention and the Agreements.
Countries that signed the Universal Postal Constitution agree to
accept mail from other countries and to deliver the international
mail to its final destination. Member countries also are obligated
to move each other's mail through its territory and to exchange
international mail where direct transportation or political relations
do not exist. For example, although the U.S. government does not
have diplomatic relations with the Cuban government, an American
resident can send a letter to a Cuban resident. Letter mail to Cuba
transits through Canada and Mexico.
The Universal Postal Convention defines (1) general guidelines on
international postal service and (2) regulations on the operations of
letter post mail. These include the rates (called "terminal dues")
that countries pay each other compensation for processing and
delivering inbound mail, the methods of calculating and collecting
terminal dues, the maximum and minimum weights, the size limits of
letter post mail, and the conditions of acceptance. (See app. I for
further information on terminal dues.) The Postal Service and other
UPU members may also enter into (1) bilateral agreements to exchange
express mail and (2) multilateral agreements to exchange all
categories of international mail under conditions more favorable than
could be negotiated at a global level.
To provide worldwide mail service, the Postal Service uses the
domestic mail system as an integral part of the UPU international
distribution network. Within the United States, inbound and outbound
international mail is processed through the Postal Service's national
transportation, sorting, and delivery network. Under Postal Service
procedures, outbound international mail is to be collected, separated
from domestic mail, and transported to one of the Postal Service's 28
international exchange offices.\8 Outbound international airmail is
to be forwarded to the assigned exchange office regardless of
overseas destination.\9 Outbound international surface mail, on the
other hand, is to be transported to one of the Postal Service's three
international gateway offices (the New Jersey International Bulk Mail
Center and the Miami and Oakland Processing and Distribution Centers)
depending upon the country or overseas region. From the
international exchange office, the mail is to be transported to the
receiving foreign postal administration for processing and delivery.
Inbound international mail enters the United States through one or
more international exchange offices. Each inbound shipment is to be
verified and recorded by postal officials and then submitted to U.S.
Customs Service officers for inspection. The mail is then
"commingled" with domestic mail and transported to mail processing
plants where it is sorted and delivered through the network of post
offices.
--------------------
\7 Letter post mail, also known as "postal union mail," includes the
following two classes of mail: (1) LC, an abbreviation of the French
words Lettres et Cartes (letters and cards), consists of letters,
letter packages, postcards, and aerogrammes (single sheets of
lightweight paper that fold to form their own envelope) and (2) AO,
an abbreviation of the French words Autres Objets (other articles),
encompasses regular printed matter, books and sheet music, matter for
the blind, publishers' periodicals, and small packets.
\8 Of the 28 international exchange offices, 19 are for airmail, 3
are for surface mail, and 6 are for Canadian mail. The Postal
Service is in the process of consolidating certain airmail exchange
offices, reducing the number from 19 to 10. Exchange offices process
both international and domestic mail.
\9 International airmail going to countries with low airmail volume
is to be forwarded from the exchange office to one of the Postal
Service's four international airmail gateways (New York, San
Francisco, Honolulu, and Miami) for final sorting and dispatching
overseas. For mail going to Mexico, the gateways are Dallas and Los
Angeles.
THE POSTAL SERVICE PROVIDES
AN ARRAY OF INTERNATIONAL
POSTAL SERVICES
---------------------------------------------------------- Letter :4.1
Through its agreements with other countries, the Postal Service
provides an array of international postal services. Until the
mid-1970s, the Postal Service provided two basic international postal
services: airmail and surface mail. Although these two services
remain the principal sources of the Postal Service's international
mail revenue, the Service has over the years added several new postal
services. Around 1980, it added Express Mail International Service
(EMS) and International Surface Airlift (ISAL), which it continues to
offer today.\10 In 1986, the Postal Service added International
Priority Airmail (IPA). Revenues from these three services totaled
$184.1 million in fiscal year 1994 or about 14 percent of the $1.3
billion in international mail revenues from delivery services.\11
Airmail accounted for 80 percent of the outbound international mail
pieces, or $883.9 million, and 69 percent of the total revenues.
International surface mail accounted for about 20 percent of the
total international mail pieces, or $221.9 million, and about 17
percent of the international mail revenues from delivery services.
(See fig. 1.)
Figure 1: Sources of
International Mail Revenues
From International Postal
Services, Fiscal Year 1994
(See figure in printed
edition.)
Legend
ISAL = International Surface Airlift
IPA = International Priority Airmail
EMS = Express Mail International Service
Note: This chart does not include the payments the Postal Service
received from other countries as terminal dues and transit fees,
which totaled $287.4 million in fiscal year 1994.
Source: U.S. Postal Service's 1994 International Cost and Revenue
Analysis report.
Like domestic mail, the Postal Service also offers various services
for international mail, such as insurance coverage, registered mail,
and return receipt. (More detailed descriptions of the these
services are presented in app. II.)
The Postal Service publishes its international rates by services,
weight, destination country, or group of countries. For most
services, the rates for Canada and Mexico are established separately
from and are lower than those for other countries. For example, the
rates for a 1-ounce letter to Canada and Mexico are 52 cents and 46
cents, respectively; the 1-ounce letter mail rate is $1.00 for all
other foreign countries.
The Postal Service has also been involved in various UPU-sponsored
efforts to improve worldwide mail service. Examples of these
activities include (1) providing Postal Service managers to assist
postal administrations of developing countries that have requested
technical assistance and (2) participating in studies to examine
delivery service problems.
--------------------
\10 INTELPOST service was also added around 1980. INTELPOST is an
international mail service that permits customers to transmit and
receive facsimile copies of original letters, documents, graphics,
and other correspondence.
\11 The $1.3 billion amount does not include the $287.4 million that
the Postal Service received in nonpostal foreign transactions (such
as terminal dues and transit fees).
THE POSTAL SERVICE, FOREIGN
POSTAL ADMINISTRATIONS, AND
PRIVATE FIRMS COMPETE IN A
GROWING INTERNATIONAL MAIL
MARKET
------------------------------------------------------------ Letter :5
According to Service officials, the Postal Service is losing some
business to private carriers and foreign postal administrations. The
Postal Service's market research data\12 show that total U.S.
outbound international mail revenues for all carriers, including the
Service, grew 12 percent annually from 1987 to 1992.\13 In contrast,
the Postal Service's revenue annual growth rate during the same
period was only 6 percent. In 1987, the Postal Service had 41
percent of the total U.S. international mail revenues; by 1992, it
was down to 32 percent. Postal Service officials said that they
expect that the Service's share of international mail market revenues
will drop as low as 30 percent by the end of this year unless steps
are taken to reverse the trend. (See fig. 2.)
Figure 2: International Mail
Market Revenues, 1987-1996
(See figure in printed
edition.)
Note: 1995 and 1996 market data are estimates.
Source: U.S. Postal Service.
--------------------
\12 The Postal Service's market research data focused exclusively on
market revenues. Data on other market factors, such as volume of
letters carried, quality of service, and customer complaints, were
not readily available.
\13 The most recent year for which data were available on the Postal
Service's share of U.S. outbound international mail market was 1992.
OUTBOUND INTERNATIONAL
LETTER MAIL OPENED TO
COMPETITORS IN 1986
---------------------------------------------------------- Letter :5.1
The Postal Service officially had monopoly protection under PES for
all outbound nonexpedited international letter mail until 1986.
However, when the Postal Service issued regulations\14 suspending the
restrictions for "extremely urgent letters"\15 in 1979, private U.S.
carriers used that suspension to expand a practice called
"international remailing." Through remailing, U.S. mailers bypassed
the Postal Service, using private carriers to deposit U.S. outbound
nonexpedited international letter mail directly into foreign postal
systems either (1) for return to the United States and delivery by
the Postal Service at rates below domestic postage (known as "ABA
remail"); (2) for delivery within the destination country at rates
below U.S. international postage (known as "ABB remail"); or (3) for
distribution and delivery to other countries, also at rates below
U.S. international postage (known as "ABC" remail). In response,
the Postal Service, in 1985, proposed to modify its 1979 regulations
to clarify that the suspension did not allow the practice of ABA or
ABC international remailing.\16 U.S. mailers' comments on the
proposal were overwhelmingly negative toward the Postal Service's
proposal and positive toward continuing to allow ABB and ABC remail.
As a result, the Postal Service withdrew its proposal\17 and issued
regulations formally suspending the operation of PES for
international mail destined for delivery in other countries in
1986.\18 (See app. I for more information on international
remailing.)
--------------------
\14 39 C.F.R. section 320.6.
\15 An extremely urgent letter is a letter whose value would be lost
if not delivered by the next day or for which the public would be
willing to pay at least $3 or double the applicable U.S. postage,
whichever is greater.
\16 50 Fed. Reg. 41,462 (1985).
\17 51 Fed. Reg. 9,852 (1986).
\18 39 C.F.R. section 320.8.
PRIVATE CARRIERS DOMINATE
INTERNATIONAL EXPRESS MARKET
---------------------------------------------------------- Letter :5.2
In 1994, EMS accounted for 1/2 of 1 percent of the Postal Service's
total international pieces and 8 percent of its total international
revenues from international postal services. In terms of market
share, in 1992, the latest year for which the Service compiled market
share data, the Postal Service handled 4.3 million EMS mail pieces.
This volume accounted for $81.7 million, or 4 percent, of the Postal
Service's estimate of $2 billion total U.S. international express
services revenues for all carriers. Express services of all
carriers, including the Postal Service, accounted for about 57
percent of the total $3.5 billion international mail market in 1992.
The leaders in the international express market are the Federal
Express Corporation and DHL Airways, Inc., which together accounted
for over one-half of the total U.S. outbound international revenues.
Other competitors include United Parcel Service (UPS), Emery
Worldwide, Airborne Express Company, KLM Royal Dutch Airlines, and
TNT Express Worldwide. (See fig. 3.)
Figure 3: Market Share of
Competitors in the
International Express Market,
Calendar Year 1992
(See figure in printed
edition.)
Legend
Federal Express = Federal Express Corporation
DHL = DHL Airways, Inc.
UPS = United Parcel Service
Emery = Emery Worldwide
Airborne = Airborne Express Company
KLM = KLM Royal Dutch Airlines
TNT = TNT Express Worldwide
Source: U.S. Postal Service.
Service factors contributed to the Postal Service's inability to gain
a larger market share. According to the Postal Service, it did not
provide certain value-added services offered by its competitors, such
as automated tracking and tracing. Furthermore, the Postal Service
had not matched the competitors' reliability and speed of service,
partly because it does not have end-to-end control of its delivery
systems. According to the Postal Service, it is required to use
scheduled U.S. commercial air flights to transport its mail
overseas. A combination of treaty arrangements and national postal
monopolies compels the Postal Service to rely, for the most part, on
foreign postal administrations for in-country mail delivery.\19 In
contrast, some private carriers, with their own aircraft and ground
transportation, have better control over schedules. For example,
according to Federal Express officials, Federal Express has
experienced growth in its international express market because it
adjusted its flight schedules for faster express service.
--------------------
\19 Because Canada, France, Germany, The Netherlands, and Sweden have
withdrawn from the postal/UPU-coordinated international EMS network
in favor of a joint venture with TNT Express Worldwide, the Postal
Service and many other EMS participating countries use private
contractors to deliver EMS in these countries.
THE POSTAL SERVICE FACES
COMPETITIVE CHALLENGES FOR
LETTER POST SERVICES
---------------------------------------------------------- Letter :5.3
The Postal Service's core international business is the nonexpedited
delivery of letter post mail (letters, small packets, printed matter,
and publishers' periodicals).\20 In 1994, this mail accounted for 99
percent of the Postal Service's total international mail piece volume
and 77 percent of its total international revenues from postal
services.
In 1992, the latest year for which the Postal Service developed
market share data, the Service reported it handled over 1.2 billion
pieces of letter post mail. This volume accounted for $930 million,
or 75 percent, of the Postal Service's estimate of $1.3 billion total
U.S. international letter post mail service revenues for all
carriers. Competitors in this market include remailers, such as KLM
and TNT, and foreign postal administrations, such as the British,
Dutch, Danish, and Canadian post offices. The British post office,
through its subsidiary Royal Mail, and the Dutch post office, through
an international mail joint venture called Interpost, are both,
according to the Postmaster General, "aggressively" seeking business
in the United States. Both postal administrations offer price
discounts for nonexpedited letter post services to some high-volume
U.S. customers. The Danish post office maintains offices in the
United States and collects U.S. customers' international mail for
shipment through its international network. Canada Post has also
contracted with major U.S. mailers, such as L.L. Bean, Inc., to
enter northbound letter post mail directly into Canada.
--------------------
\20 In addition to express and letter post services, the Postal
Service's other international service is parcel post. Parcel post is
an international class of mail, which is generally equivalent to
domestic fourth-class zone-rated parcel post. In 1992, the latest
year for which the Service developed market share data, the Postal
Service handled 7.9 million pieces of parcel post mail. This volume
accounted for $187.2 million, or 73 percent, of the estimated $256.9
million total U.S. parcel post revenues for all carriers. Parcel
post services of all carriers accounted for about 7 percent of the
total $3.5 billion international market revenues in 1992.
International parcel post is regulated under UPU's Postal Parcels
Agreement.
THE POSTAL SERVICE HAS LOST
MARKET SHARE IN THE LETTER
POST MARKET REPORTEDLY
BECAUSE OF LESS COMPETITIVE
SERVICES AND PRICES
---------------------------------------------------------- Letter :5.4
Although the Postal Service still has maintained a large share of the
letter post market over the past decade, it has lost some market
share reportedly because of unreliable delivery service, lack of
value-added service, and substantial rate increases. In 1985, the
New Postal Policy Council, an association of major users of the
Postal Service, complained about the "erratic and unreliable" nature
of the international service provided by the Service, which the
Council said was "inferior to that provided by private companies."
These mailers were among those who successfully lobbied the Postal
Service to suspend PES protection, as previously mentioned, for
outbound nonexpedited international letter mail.
Postal Service officials believed that the Service lost market share
because it did not provide the value-added services that its
competitors offered, such as warehousing, inventory, and customs
clearance. The Postal Service required customers to sort and bag
their bulk mailings by country of destination and to transport the
mailings to an international airport to qualify for the best prices.
In contrast, private companies such as TNT were willing to pick up
unstamped business mail at the customer's location, do some sorting,
and transport the mail to the appropriate place overseas. Using its
overseas facilities, TNT would then sort, stamp, and give the mail to
the local postal authority for delivery to ultimate destinations.
Postal Service officials also attributed the market share loss to the
need to price according to "inequitable" terminal dues systems.
Postal Service officials said that its international treaties
necessitated substantial international rate increases in the 1980s
that hurt its competitive position. For example, the Postal Service
increased its international postage rates in 1981 an average of 39
percent for all of its services. Postal Service officials said this
increase was necessary largely because the UPU Congress increased the
terminal dues by 267 percent during its 1979 meeting.
Furthermore, under the 1970 Act, the Postal Service must set its
rates for all classes of services to cover all direct and indirect
costs attributable to each class of mail plus that portion of other
Service costs reasonably assignable to each class.\21 However, it
does not unilaterally control other postal administrations' payments
to the Postal Service for delivering foreign mail to U.S.
destinations. According to the Postal Service, it is not fully
reimbursed for delivering inbound international letter mail because
these terminal dues\22 are set below the Service's unit cost for
inbound delivery. To cover the shortfall between actual inbound mail
delivery costs and the related terminal dues reimbursements, the
Postal Service charged its outbound customers rates sufficient to
cover the processing costs for both inbound and outbound mail.
In response to the greater competition, the Postal Service expanded
its ISAL service to more countries and introduced its International
Priority Airmail service\23 in 1986. It also began new efforts with
foreign postal administrations to improve delivery times. Beginning
in 1988, the Postal Service changed its pricing policy to reflect the
new market environment. According to the Postal Service, these
changes reversed a downward volume trend for the Postal Service's
international air letter mail. For example, through 1985, the basic
international airmail letter rate had been set at twice the basic
domestic letter rate.\24 In 1988, however, when the domestic rate
increased to 25 cents, the international airmail letter was set at 45
cents instead of 50 cents. Although the decline in the international
outbound volume began to reverse itself, the Postal Service continued
to lose overall market share.
--------------------
\21 International postal service as a whole is considered by the
Postal Service to be a class of mail.
\22 Terminal dues refer to the payments made by one foreign postal
administration to another for delivering inbound international mail.
See appendix I for more information on terminal dues.
\23 See appendix II for detailed information on the Postal Service's
international postal services.
\24 In 1985, the domestic letter rate was set at 22 cents and the
corresponding international letter rate was 44 cents.
THE POSTAL SERVICE SAID IT
PLANS TO COMPETE MORE
"AGGRESSIVELY" IN THE
INTERNATIONAL MAIL MARKET
---------------------------------------------------------- Letter :5.5
The Postal Service believes that it needs to be a competitor in the
international mail market for two reasons. First, the revenue
generated from its international mail services helps to cover
institutional costs, thereby helping to restrain the growth in postal
rates overall. Second, the Postal Service's presence in the market
provides its customers with a broader range of choices when selecting
among the providers of international mail services. Toward that end,
in 1995, the Postal Service announced plans to compete "aggressively"
for international mail delivery. A senior Postal Service official
said that the Service expects to be a "leading provider of efficient,
high value, reliable and secure, full-service international
communication and package delivery services" to "meet the needs of
U.S. citizens and businesses on a worldwide basis." The Postal
Service plans to (1) introduce new services and value-added services,
(2) improve the service quality of its letter mail service, and (3)
pursue a market-sensitive pricing strategy that includes flexible
volume discounts and customized mailing solutions.
NEW SERVICES OFFERED
-------------------------------------------------------- Letter :5.5.1
The Postal Service sees new service offerings as a critical part of
its strategy to become a "global leader" in the international mail
market. One new service is the WORLDPOST Priority Letter (WPL)
service, introduced in March 1995. WPL is an expedited airmail
letter service being pilot-tested for deliveries from 7 U.S. cities
to Canada and 13 Western European and Pacific Rim countries. WPL is
designed to be faster than the Postal Service's regular airmail and
cheaper than its international express mail. A Postal Service
official said that WPL is geared to mail-order companies, colleges,
travel agencies, and manufacturers "with a need to move
correspondence reliably and at low cost."
Another new service is the International Package Consignment Service
(IPCS). IPCS is a bulk-mailing service, with discounts that increase
with each larger volume increment, targeted to these large U.S.
mail-order companies sending merchandise to other countries. The
Postal Service began providing IPCS for delivery to Japan in December
1994. To qualify for this service, a mailer must agree to send at
least 25,000 packages over a 12-month period. IPCS base rates are
lower than single-piece international rates for both airmail and
express services. For example, the Postal Service's individual
parcel post air rate to Japan for a 5-pound package was $37.44 in
July 1995. At that time, however, the base rate was $20.14 for a
5-pound package to Japan using standard air service under IPCS.
According to Postal Service officials, IPCS base rates are lower than
single-piece international rates because of fundamental cost
differences in acceptance, handling, and transportation of IPCS
parcels. As shown in table 1, the base rates may be reduced through
up to four additive discounts (for a maximum discount of almost 21
percent) depending on how many cumulative packages the customer mails
to Japan through IPCS during a 12-month period.
Table 1
International Package Consignment
Service Discount Schedule
Cumulative
Additional percentage
percentage discount from base
Cumulative volume of packages discount rates
------------------------------ ------------------ ------------------
100,001 to 250,000 4.75 4.75
250,001 to 500,000 Additional 5.75 10.23
500,001 to 1,000,000 Additional 6.00 15.61
More than 1,000,000 Additional 6.25 20.89
----------------------------------------------------------------------
Note: This service is currently only available for mailings to
Japan.
Source: U.S. Postal Service.
Postal Service officials believe that IPCS discounts are consistent
with discounts offered for domestic bulk "drop-shipped" parcels.
These domestic discounts have been available to mailers for many
years and reflect the Postal Service's lower cost when larger volume
mailings are handled as a single shipment and/or the mailer absorbs
part of the transportation costs (drop-ships).
The Postal Service also is pilot-testing a value-added service to
complement IPCS. The service, called Customs Pre-Advisory Service
(CPAS), allows customers in Japan ordering from U.S. mail-order
companies to prepay their customs duties when they order U.S.
merchandise using their credit cards.
STEPS TAKEN TO PROVIDE
BETTER LETTER MAIL
SERVICE
-------------------------------------------------------- Letter :5.5.2
In January 1994, the Postal Service, in cooperation with postal
administrations in 20 other countries, implemented an external system
to measure on-time letter mail delivery between the United States and
major industrialized countries. The system, administered by Price
Waterhouse, measures letter mail delivery times from deposit to
delivery. The Postal Service has not publicly released any of the
results.\25
The Postal Service said it is also working with several foreign
postal administrations to improve mail service. For example, the
Service Upgrading Task Force, created in 1994 and consisting of
representatives from the United States, Canada, and eight major
European countries, is tasked with identifying problems and
implementing solutions to improve delivery times between countries
represented on the task force.
--------------------
\25 In a recently issued report (U.S. Postal Service: New Focus on
Improving Service Quality and Customer Satisfaction; GAO/GGD-96-30,
Dec. 20, 1995), we recommended that the Postal Service consult with
Congress to determine the extent that such data on its delivery
performance should be shared with Congress. The Postal Service has
agreed to this recommendation.
PRICES HAVE BEEN
CUSTOMIZED AND DISCOUNTED
-------------------------------------------------------- Letter :5.5.3
In 1993, the Postal Service implemented a customized program for
international mail service known as International Customized Mail
(ICM). ICM is targeted at low cost mailers who can tender large
volume mailings. Under ICM, the Postal Service would negotiate
individual rates with certain large volume mailers--those capable of
offering at least 1 million pounds of international mail or paying at
least $2 million in international postage and of providing all of its
ICM mail to the Service at one location. According to Postal Service
officials, ICM service is not a volume discount mechanism derived
from any existing single piece rates. Rather, ICM is a customized
service wherein the price is based on the specific costs of providing
a combination of specific services requested by the customer. Postal
Service officials added that this pricing approach is commonly used
by private sector service providers and is recognized as a valid
method of responding to the needs of large volume commercial mailers.
Although a federal district court ruled in 1994 that the newly
established ICM service unreasonably discriminated among mail users
and could not be implemented, in September 1995, the U.S. Court of
Appeals for the Third Circuit reversed the district court's ruling
and upheld the authority of the Postal Service to implement ICM
service with its proposed volume discounts.\26
Also, in an effort to increase its EMS business, the Postal Service,
in July 1995, began offering "country-specific" rates for Express
Mail destined for Canada, Mexico, the United Kingdom, China, and
Japan. Rates to these countries, available to all international
mailers, are lower than the rates to all other countries. According
to Postal Service officials, the Service is passing along the cost
savings of serving these high volume destinations to customers
through lower rates for these countries.
--------------------
\26 UPS Worldwide Forwarding, Inc. v. United States Postal Service,
853 F. Supp. 800 (D. Del. 1994), rev'd No. 94-7423 (3rd Cir.
Sept. 15, 1995). The broader implications of the decision of the
court of appeals with respect to the authority of the Postal Service
to provide volume discounts on other international services have yet
to be determined.
THE POSTAL SERVICE AND ITS
COMPETITORS HAVE LONG FACED
CONTENTIOUS LEGAL AND
REGULATORY ISSUES REGARDING
INTERNATIONAL MAIL DELIVERY
------------------------------------------------------------ Letter :6
The Postal Service's efforts to compete for increased shares of the
international mail markets have raised issues for both the Service
and its competitors. These issues evolve from the 1970 Act, various
regulations, court orders that interpret and implement that act, and
related federal laws and regulations. Specifically, the Postal
Service is attempting to overcome what it considers to be statutory
and regulatory barriers that limit its ability to compete for
international mail business. However, competitors contend that the
Postal Service has a competitive advantage from its unique role in
setting international mail rates with limited independent review and
serving as a government agent in conducting negotiations and making
agreements with other postal administrations.
POSTAL SERVICE ISSUES
INVOLVE TRANSPORTATION
CONSTRAINTS
---------------------------------------------------------- Letter :6.1
According to Postal Service and Department of Transportation
officials, the Postal Service is generally required to use U.S. flag
carriers to deliver its international mail overseas and to pay them
in accordance with rates set by the Department of Transportation.\27
In contrast, the Postal Service can set the rates it pays air
carriers for domestic mail delivery. Postal Service officials said
that restrictions over international air routes limit the Service's
ability to minimize transportation costs and impair its ability to
provide fast international service.
In June 1995, the Department of Transportation drafted a bill that
would give the Postal Service authority to negotiate directly with
U.S. airlines for the carriage of international mail. The Postal
Service, responding to a request by the Office of Management and
Budget (OMB) for comments, said that it opposed the draft bill
because the legislation did not address the U.S. flag carrier
preference. According to Postal Service officials, the transfer of
rate-making authority, without elimination of the U.S. flag carrier
preference, could complicate the transportation contracting process,
foster a distortion of contract prices, and create an "informal
cartel" of dominant U.S. carriers. In July 1995, OMB recirculated
the draft bill, along with the Postal Service's remarks, for general
comments but subsequently shelved the draft legislation to allow for
Postal Service and Department of Transportation officials to
negotiate a mutually agreeable compromise. As of January 1996, the
parties were still involved in discussion regarding the details of
the draft bill.
--------------------
\27 This requirement benefits the competitive position of U.S. flag
carriers and their foreign carrier partners.
COMPETITORS HAVE QUESTIONED
POSTAL SERVICE RATES AND
AGREEMENTS WITH OTHER POSTAL
ADMINISTRATIONS
---------------------------------------------------------- Letter :6.2
While the Postal Service maintains that legal and regulatory
constraints hinder its ability to compete effectively in the
international mail market, private carriers argue that the Service
enjoys an unfair competitive advantage because of its
quasi-governmental status.
ALLEGED UNDERPRICING OF SOME
INTERNATIONAL POSTAL
SERVICES
---------------------------------------------------------- Letter :6.3
The Postal Service's competitors have alleged for several years that
rates on some of the Service's international postal services are so
low that they do not cover service costs. The 1970 Act requires the
Postal Service to recover its direct and indirect costs for each
class of mail service, and competitors argue that the Service's
international pricing practices are inconsistent with the act. To
ensure that the Postal Service does not engage in illegal pricing
practices, ACCA has recommended that Congress consider giving the
Postal Rate Commission (PRC) authority to recommend the Service's
international postage rates.
The Postal Service, PRC, and the courts have all agreed that section
407(a) of the 1970 Act permits the Service to set international rates
without approval from PRC. PRC maintains that "postal rates and
services between the United States and foreign nations have a foreign
affairs dimension, which requires presidential review; they are thus
not purely regulatory questions."
Although PRC does not have jurisdiction over international rates, the
Postal Service is required to submit forecasts of international mail
revenues and costs as part of its formal request to PRC for domestic
rate changes to demonstrate that each class of mail bears its direct
and indirect costs attributable to that class of mail. Before 1994,
the Postal Service provided detailed information on how it projected
these estimates and responded to questions about them in public
hearings. However, in requesting rate changes in 1994 (R94-1), the
Postal Service ceased this practice and provided only aggregate
volume, revenue, and cost figures. Prior to the hearings, Federal
Express filed interrogatories seeking information on the costs and
revenues associated with international mail. In its response to the
request, the Postal Service provided some information but said that
the supporting, detailed information requested was irrelevant and
outside the scope of the proceeding, was extremely burdensome to
produce, and contained certain confidential and commercially
sensitive information. The Postal Service further argued that the
then-current detailed information provided on domestic mail estimates
clearly showed any international costs that were incorrectly
attributed to domestic mail.
In August 1994, PRC ruled that supporting data were needed for the
Postal Service's financial forecast of international mail to verify
that (1) the forecasts of international mail costs and revenues were
accurate and reliable and (2) the attributable costs of international
and domestic mail were correctly separated. PRC rejected the Postal
Service's argument that international mail estimates could be
verified by reviewing domestic mail data because, among other
reasons, international mail incurs costs that are not shared by
domestic mail. Furthermore, PRC concluded that the Postal Service's
allegations of commercial harm did not form a legally adequate basis
for applying the trade secret privilege.
Although the Postal Service agreed to provide some of the
information, it would do so only if it were allowed to decide what
international mail data would be considered to be confidential and
thus protected from public disclosure. PRC granted the Postal
Service's request to protect the requested data from public
disclosure but added a provision permitting Federal Express to
challenge the Service's designations of confidential information.
The Postal Service objected to this provision and provided no
supporting details to its financial forecasts of international mail.
Federal Express believes that the Postal Service's refusal to obey
the PRC's ruling is illegal.
The Postal Service had earlier declined to provide detailed
information on international mail revenues, costs, and volumes. In
1992, the former Chairman, Subcommittee on Federal Services, Post
Office and Civil Service,\28 Committee on Governmental Affairs, and
the former Ranking Minority Member asked PRC to conduct a
comprehensive review of international rates and related costs to
determine if the Postal Service covered all appropriate costs under
international rates. Members' concerns were prompted in part by a
1992 ACCA-sponsored study in which the Postal Service's rates for
some international services were asserted to be "significantly
underpriced."
Postal Service officials argued that the 1992 ACCA-sponsored study
was based on flawed assumptions, limited and inaccurate data, and a
misunderstanding of postal rate-making procedures. The officials
added that although some Postal Service international services have
lower markups than some domestic services, international services as
a whole cover their direct costs and contribute to overhead costs, as
required by law. Accordingly, the Postal Service declined to provide
the information requested by PRC, again citing its commercial
sensitivity. PRC revised its study guidelines, with the agreement of
the former Chairman and the former Ranking Minority Member, to ensure
that no data would be made public. The Postal Service still did not
provide the data, again stating that the data were commercially
sensitive.\29
For fiscal year 1994, the Postal Service reported that international
mail revenue was $1.6 billion, which covered its direct (or
attributable) cost and contributed $436 million to overhead costs.
On the basis of our review of the Postal Service's cost and revenue
data, we determined that international mail as a whole covered its
attributable costs and contributed to overhead costs every year from
1990 to 1994. However, international surface mail did not recover
its attributable costs in 1991 and 1992, and international surface
letters and cards as well as surface parcel post did not recover
their attributable costs in 1990.\30 We also noted that both
international mail's contribution to overhead costs and cost coverage
increased every year from 1992 to 1994. According to the Postmaster
General, international mail services make a contribution to overhead
costs comparable with or higher than other postal services that are
provided in competitive environments. International mail total "cost
coverage" (the markup over attributable costs) was 141 percent in
fiscal year 1994. In comparison, domestic express mail service
contributed $148 million to overhead costs, and it had a cost
coverage of 128 percent in fiscal year 1994. Fourth-class (domestic)
parcel service did not cover its attributable costs in fiscal year
1994 because the parcel volume was less than anticipated that year.
The revenue was $98 million less than attributable costs.
--------------------
\28 The subcommittee name has changed to the Subcommittee on Post
Office and Civil Service.
\29 Although subcommittee staff and Postal Service officials
considered several ways to resolve ACCA's allegation, including the
possibility that an independent accounting firm conduct the proposed
study, they could not come to an agreement on how the study would
proceed.
\30 According to a Postal Service official, the Service is not in
violation of the 1970 Act because international surface mail,
international surface letters and cards, and international surface
parcel post are not considered to be classes of mail. The Postal
Service discontinued surface letter and cards service in 1995.
ALLEGED UNFAIR AGREEMENTS
BETWEEN THE POSTAL
SERVICE AND OTHER
COUNTRIES
-------------------------------------------------------- Letter :6.3.1
The Postal Service began negotiating cost-based terminal dues
agreements in the late-1980s with countries with which it exchanges
large volumes of mail.\31 According to the Postal Service, the
purpose of these agreements is to lower terminal dues losses by
making the terminal dues system more consistent with operating and
delivery costs. The Postal Service currently participates in two
such agreements: (1) a 14-country multilateral agreement with
members of the Conference of European Postal and Telecommunications
Administrations (CEPT) and (2) a bilateral agreement with Canada.
According to an ACCA representative, the CEPT agreement's main
purpose is to discourage remail. The ACCA representative argued that
charging a higher uniform terminal dues rate\32 means nothing if the
two countries exchange the same amount of mail because "everything
washes out."\33 (See app. I for further information on cost-based
terminal dues agreements.)
Two federal agencies and the European Commission\34 supported ACCA's
assertion regarding the CEPT agreement. In 1988, the Antitrust
Division of the Department of Justice and the International Trade
Administration of the Department of Commerce responded to a request
by OMB for comments on the proposed CEPT agreement. Both expressed
concerns about the agreement. Justice warned that if the CEPT
terminal dues are set above costs, they may drive remailers out of
the international mail market. According to Justice's documents,
"such a development would injure consumers by eliminating the
competitive market for international mail and could wipe out the
gains we have achieved in the past few years." Similarly, in a letter
to OMB, Commerce officials stated that the agreement would strengthen
the competitive position of the national postal administrations at
the expense of the private sector. The International Express
Carriers' Conference (IECC), ACCA's international affiliate, filed a
complaint before the European Commission arguing that higher terminal
dues through the CEPT agreement were meant to curtail remail.
Although the European Commission found that the CEPT agreement was
anticompetitive and therefore inconsistent with the Treaty of
Rome,\35 it dismissed IECC's complaint because it believed that
European postal administrations corrected the situation by
negotiating a new terminal dues agreement. IECC had appealed the
decision to the European Court of Justice at the time of our review.
Postal Service officials said that the Service does not consider its
agreements with other postal administrations to be postal treaties or
conventions that require presidential consent under the 1970 Act.
Accordingly, the Postal Service implemented the CEPT agreement
notwithstanding the Commerce and Justice Departments' objections.
Both the CEPT and Canadian agreements will expire in 1996. The
Postal Service and postal administrations from Canada and 19 European
countries were working on a successor to the current agreements at
the time of our review.
--------------------
\31 Since 1989, UPU allows postal administrations to enter into
separate agreements modifying terminal dues rates set by the UPU
Congress.
\32 According to Postal Service officials, the CEPT terminal dues
rate is higher than the UPU flat rate for lightweight pieces but is
lower than the UPU flat rate per piece for heavier weight pieces.
\33 According to Postal Service officials, "everything washes out"
only if two countries exchange the mail with the same average number
of pieces per kilogram.
\34 The European Commission is the European Union's executive arm.
The European Commission is responsible for promoting the interest of
the Union as a whole.
\35 The Treaty of Rome is the agreement that governs the trade of
goods between the members of the European Union. Among other things,
the treaty prohibits member states from engaging in anticompetitive
behavior within the Union.
THE POSTAL SERVICE
ALLEGEDLY GAINED FROM ITS
ROLE IN THE UNIVERSAL
POSTAL UNION AT THE
EXPENSE OF ITS
COMPETITORS
-------------------------------------------------------- Letter :6.3.2
According to ACCA, the Postal Service has benefited from (1) its
official role as a national postal administration and (2) its
exclusive access to foreign postal administrations through UPU, by
receiving special treatment from customs services under both United
States and foreign laws.\36 ACCA has also maintained that the Postal
Service has abused its official role at the UPU Congress, at the
expense of private carriers. Consequently, ACCA challenged the
Postal Service's representation at the UPU Congress saying that the
Service has represented the United States without lawful authority of
the President.
ACCA has long contested the Postal Service's role as the sole U.S.
negotiator of the Universal Postal Convention, arguing that the
Service cannot be both regulator and competitor of international
courier companies. An ACCA representative said that the Postal
Service has agreed, in the name of the United States, to various
anticompetitive provisions at UPU Congresses. In response to a
Department of State's request for comments on the 1989 UPU
Convention, OMB, Justice, and Commerce expressed concerns about the
Convention. OMB considered the following two provisions of the 1989
Universal Postal Convention\37 to be anticompetitive:
(1) a provision (better known as Article 25) that permits postal
administrations to refuse to handle mail brought into their country
by private couriers\38 and
(2) a provision that terminal dues rates need not be directly related
to costs that, according to testimony given by a DHL Airways official
before the House Subcommittee on Postal Service in June 1995, allows
national postal administrations to manipulate international rates.
Although former President Bush signed the 1989 UPU Convention, he did
so with reservations. President Bush said that he was concerned
about "the Postal Service's role as sole U.S. negotiator of
international postal agreements while at the same time a competitor
in the international mail arena" and that "several elements of the
UPU Convention could affect competition in the carriage of
international mail."
ACCA has also said that the Postal Service represented the United
States at the UPU without legally requisite approval of the
President. Because of its belief that this representation is illegal
and its concerns regarding the Postal Service's role in UPU, ACCA
requested that the President appoint ACCA as a member of the 1994 UPU
Congress delegation.\39 In November 1993, the Department of State
denied ACCA's request on the basis of the Postal Service's advice
that it would be inappropriate to include private operators in an
intergovernmental body whose basic purpose is to help postal
administrations fulfill statutory universal service obligations on an
international level. In August 1994, President Clinton officially
appointed the Postal Service to represent the United States at the
1994 UPU Congress. ACCA maintains that the President delegated this
authority without any procedural safeguards to ensure that the public
interests of the United States were represented. Consequently, ACCA
contends that this delegation of authority by the President to the
Postal Service violates the due process requirements of the
Constitution. The Postal Service led the U.S. delegation at the
1994 UPU Congress.
Postal Service officials maintain that 39 U.S.C. 407(a) authorized
the Postal Service to represent the United States at the UPU.
Although President Clinton issued a letter confirming that the Postal
Service had his consent to negotiate UPU agreements, he did so only
to be responsive to ACCA. According to Postal Service officials,
President Clinton's consent had already been given through his
representative, the Secretary of State, with whom the Postal Service
coordinates its UPU activities.
The Postal Service also defends its responsibility as the U.S.
representative in the UPU on the basis of its statutory and treaty
obligations. According to Postal Service officials, the status of
the Postal Service as a federal entity arises from its
congressionally mandated universal service obligations and its
accountability to Congress for the fulfillment of those obligations--
obligations that competitors do not share. Furthermore, the UPU
establishes rules, standards and procedures that apply only to member
postal administrations. Service officials believe that, because
competitors have no duty to provide the services established by the
UPU Acts, they have no special claim to participate directly in UPU
decisionmaking processes relating to what are essentially postal
obligations and services.
To meet the competitors' concern, Postal Service officials said that
the UPU has established a private operators-UPU Contact Committee to
provide for dialogue at a global level and to help determine areas of
common interest where cooperation can be of benefit for both sides.
Postal Service officials also said that, despite their limited access
to the UPU, private operators do have direct access to foreign postal
administrations. They can deposit mail with another postal
administration like any other customer, and they can negotiate more
favorable access arrangements based on the traffic they generate.
--------------------
\36 For example, ACCA believes that the reduced postage rates offered
by IPCS suggest that the Postal Service may be benefiting from
special customs rates or service that Japan Post makes available to
the Service but not to private carriers. ACCA also believes that it
is inappropriate for the Postal Service to benefit commercially from
the anticompetitive practices of foreign post offices, and the United
States should therefore object if the foreign government attempts to
dictate which American organizations are to benefit from trade
restrictions.
\37 According to an International Postal Affairs official, as of
October 1995, the Department of State had not received a certified
copy of the 1994 UPU Convention and therefore had not requested
comments from any federal agency. Neither provision was modified at
the 1994 UPU Congress.
\38 The Postal Service disagrees with the assertion that Article 25
is anticompetitive. According to Postal Service officials, Article
25 has both revenue protection and nondiscriminatory treatment
features that are not anticompetitive. Since Article 25 allows for
the collection of domestic postage rates on "ABA" remail, it both
protects the Postal Service from loss of domestic revenue and ensures
that all U.S. mailers pay the same rates for the same service. See
app. I for more information on "ABA" remail.
\39 In 1991, the Department of State denied ACCA's request for
representation to UPU Executive Council meetings. An official from
the Department of State stated that it believed that ACCA's
participation in the U.S. delegation would be inconsistent with the
UPU General Regulations and Rules of Procedure of the Executive
Council, which only allow "qualified officials of the postal
administration and members of permanent missions" to attend Executive
Council meetings.
CONCLUSIONS
------------------------------------------------------------ Letter :7
The Postal Service is authorized by the 1970 Act to enter into
agreements with other countries regarding international mail rates
and delivery. On the basis of this authority, the Postal Service
over many years has been a part of a universal mail service network
established on an international basis.
Since 1970, however, the Postal Service has assumed an additional
role of competitor in a dynamic international mail market. It sees
this role as appropriate and necessary to (1) assist in reducing the
overall cost of operating the U.S. mail system, since the revenue
from international mail helps pay the Service's institutional cost
and (2) give American citizens and businesses another choice--namely,
the Postal Service--among providers of international message and
package delivery services. While there may be valid reasons for the
Postal Service to compete aggressively with private firms, the 1970
Act does not specify what role the Service and its competitors should
play in the international mail market.
The competition between the Postal Service and private firms has
raised policy issues that could not have been anticipated in 1970.
Consequently, the 1970 Act and its legislative history provide little
guidance to resolve issues involving (1) the Service's required use
of American flag carriers, (2) the appropriateness of the Service's
rates for international mail services, and (3) the Service's
participation with the Universal Postal Union and with governments of
postal administrations of other countries in matters affecting the
Service's commercial interests.
These are policy issues that require reexamination of many complex
and interrelated provisions of the 1970 Act, which was beyond the
scope of our current review. Moreover, issues surrounding the Postal
Service's role in the international mail market are very similar to
issues that we have previously reported on regarding the Service's
role in domestic mail markets. Because of this similarity, and the
fact that Congress is already considering proposals for reform of the
Postal Service, we are making no recommendations regarding the
Service's role in the international mail market.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :8
We obtained written comments on a draft of this report from the heads
of the Postal Service and the Air Courier Conference of America
(ACCA). The Postal Rate Commission (PRC) did not provide written
comments, but we discussed the draft with the Chairman and other
Commission officials on November 20, 1995, and they agreed with our
description of the international mail market and the associated
issues. They suggested several technical and editorial changes to
the draft, which we made where appropriate.
POSTAL SERVICE COMMENTS
---------------------------------------------------------- Letter :8.1
In its written comments on the draft, the Postal Service said that
international mail is an integral part of its statutory mission. The
Postal Service believed that the full range of international services
it provides helps businesses in the United States respond to
developments in global commerce and that its major customers believe
that they are better served by having the Postal Service in the
market. The Postal Service said that the increasingly commercial
dimension of its services requires reconsideration of the 1970 Act
and that it has recently heard views from many parties, including
leaders of foreign postal administrations, on the changes needed.
The Postal Service said it believes that to meet the needs of the
American public and business community, a stronger commercial
capability is important domestically but, more crucially, for its
international services, for which it suspended the protection
afforded by the Private Express Statutes. The Postal Service said
that it established the International Business Unit not only to
develop new international services but also to generate new revenues
to support improvements of the international universal service
network. The Postal Service said that it expects efforts in the
international mail market will lead to better performance and
enhanced service in the domestic market as well.
The Service responded to the criticism made by its competitors that
the Postal Service and the Universal Postal Union (UPU) are
"regulators" of international delivery services by saying that
Congress determines the scope of the Private Express Statutes in the
United States and that the scope of postal monopolies in other
countries is determined by respective national governments.
According to the Postal Service, the role of UPU is to connect postal
administrations with universal service mandates established by
national authorities in a standardized global postal delivery
network. The Postal Service believes that it is inappropriate for
private operators, who have no obligations under UPU agreements, to
participate directly in UPU proceedings. The Postal Service added
that despite the limited access to UPU, private operators have
unlimited direct access to foreign postal administrations and that
they would not be able to offer remail services if they did not have
such access. Although we did not reach any conclusions on the need
for any change in U.S. participation in UPU, we do not agree with
the Postal Service's assertion that Congress, alone, has determined
the scope of the U.S. mail monopoly. Rather, the Postal Service has
issued several regulations implementing the statutes which (1) define
a "letter" for the purpose of administering and enforcing the
statutes, (2) exempt various items from the scope of the statutes,
and (3) suspend entirely the statutes for certain letters.
The Postal Service said that ACCA's position on terminal dues is
without foundation. The Postal Service said that it supports
country-specific cost-based terminal dues. For example, the Postal
Service said that it helped develop and supported the cost-based
terminal dues for bulk mail adopted by the 1994 UPU Congress. The
Postal Service added that ACCA failed to highlight the connection
between terminal dues systems that do not cover the cost of delivery
and remail offered at below-cost prices because the Service believes
that ACCA members have benefited from postage rates based on
below-cost terminal dues. Information we obtained supports the
Postal Service's comment that it has supported cost-based terminal
dues. We did not determine whether ACCA members have benefited from
postal rates that do not reflect cost-based terminal dues.
The Postal Service also rejected ACCA's allegation that the Service
has engaged in unfair pricing practices and that international prices
should be subject to PRC review. The Postal Service said that it
does not price its services below costs. It added that international
mail's contribution to the Service's overhead costs saves money for
the domestic rate payers. Our analysis of Postal Service cost and
revenue data for fiscal years 1990 to 1994 supports the Service's
comment. International services as a whole covered attributable
costs and made a contribution to overhead costs during each of those
5 years. The Postal Service believes that it has provided PRC
sufficient cost data to verify that international services are not
subsidized by domestic services. The Postal Service said that there
is no evidence of cross-subsidization of international mail products
by first-class rate, which the Service said is the second lowest in
the industrialized world, or by international air letter rate, which
it said is the lowest in the industrialized world. We did not
determine whether PRC had received sufficient data for setting
postage rates because this determination was not within the scope of
this review. However, PRC believes that it needed more data than the
Postal Service provided in the most recent rate case, when new rates
became effective in January 1995. The full text of Postal Service's
comments are included as appendix III.
AIR COURIER CONFERENCE OF
AMERICA COMMENTS
---------------------------------------------------------- Letter :8.2
ACCA commented in writing that it believes our report was impartial
and well considered and represented an important first step in a
review of U.S. policy toward the international delivery services
sector. However, ACCA took exception to our use of the Postal
Service's market surveys to describe the international mail market.
ACCA said that a market survey study, which focuses on the Postal
Service's share of the overall market revenues, is inappropriate for
public policy analysis. ACCA said that the surveys tend to disregard
matters such as volume of letters carried, quality of service,
customer complaints, and profitability of the service. ACCA also
believes that the Postal Service has made inappropriate comparisons
of Service and Federal Express market shares and misstated its
overall share of the international mail market. We agree that a
market study based on revenues only does not provide a complete
picture of how well the general public is served by the overall
international mail market. However, the distribution of, and changes
in, market revenue is one measure of how well the Postal Service is
performing, as indicated by the choices among competitors that
existing and potential customers make. Furthermore, neither the
Postal Service nor ACCA provided data to measure the quality of the
overall market and its value to the general public. We described the
market using what we believe are the best data available and have
added qualifiers to the description to clarify the limitations of the
data.
ACCA said that our report presents an excellent overview of Postal
Service and UPU efforts that ACCA believes hinder private competition
in the international mail market. However, ACCA believes that we
understated the magnitude of the anticompetitive effort and provided
what it considered to be additional points not noted in the draft
report on (1) the Postal Service's representation of the United
States at UPU without approval of the President or through
unconstitutional delegation of presidential authority; (2) the Postal
Service's world leadership in efforts to strengthen Article 25 of the
Universal Postal Convention by expanding its application to
"nonphysical remail"; (3) UPU's promotion of special customs
privileges for post offices, preferential rates for large mailers,
and group refusal to deal with private carriers; and (4) the Postal
Service's commercial advantages gained through anticompetitive
practices of foreign governments. A review of presidential authority
to delegate and the alleged anticompetitive and other practices of
UPU and foreign governments were not within the scope of this review.
Rather, this report highlights what is shown, by the evidence we
collected, as the key competitiveness issues confronting both the
Postal Service and its international competitors. ACCA's comments
helped to amplify and emphasize its views on those issues. We did,
however, revise appendix I to include ACCA's allegations of the
Postal Service's role in expanding the scope of Article 25 to
"nonphysical remail."
ACCA also said that we incorrectly reported that the Postal Service
has suspended the postal monopoly for international mail, arguing
that the Postal Service has no legal authority to suspend the postal
monopoly. ACCA also said that the U.S. Customs Service
discriminates against shipments tendered by private delivery
services. A review of the Postal Service's legal authority to
suspend the postal monopoly and the U.S. Customs Service's policy
toward private delivery services were not within the scope of this
review.
Finally, ACCA disagreed with our conclusion that issues in the
international market be resolved within the context of overall postal
reforms. ACCA said that when Congress drafted the Postal
Reorganization Act of 1970, Congress simply failed to consider
international postal policy. ACCA believes the time has come to
apply the principles of the 1970 Act to international postal
services. In light of both ACCA and Postal Service comments
regarding the need to update the 1970 Act, we revised and expanded
our conclusions regarding any future changes to the act. The full
text of ACCA's comments is included as appendix IV.
---------------------------------------------------------- Letter :8.3
We are sending copies of this report to the Senate and House Postal
Oversight Appropriation Committees, the Postmaster General, the
Postal Service Board of Governors, the Postal Rate Commission, the
Air Courier Conference of America, and other interested parties. We
will also make copies available to others upon request.
Majors contributors to this report are listed in appendix V. If you
have any questions, please call me at (202) 512-8387.
Sincerely yours,
J. William Gadsby
Director, Government Business
Operations Issues
SUMMARY OF TERMINAL DUES
=========================================================== Appendix I
HISTORY OF TERMINAL DUES
--------------------------------------------------------- Appendix I:1
From 1875 to 1971, the Universal Postal Union (UPU) authorized postal
administrations to retain all of the charges assessed by them for
outbound international mail. The postal administrations that
received the international mail were not compensated for delivering
the inbound letter items to their final destinations because the UPU
countries operated under the presumption that a letter elicited a
letter in reply and that mail traffic was therefore the same in both
directions. In 1969, the UPU Congress acknowledged that the
"balanced mail exchanges between countries" concept was invalid and
developed terminal dues as the mechanism for compensating postal
administrations for the costs of delivering inbound international
mail.
HOW TERMINAL DUES RATES ARE SET
--------------------------------------------------------- Appendix I:2
Terminal dues charges are established in the Universal Postal
Convention. The charges are increased every 5 years by the UPU
Congress. The rate is based on Special Drawing Rights (SDR).\1
Postal administrations only compensate one another when an
administration sends more mail (based on overall weight) than it
receives.
Until the 1989 UPU Congress, a uniform fee had always applied to both
letter (LC) and printed matter (AO) mail.\2 This fee represented an
averaging of worldwide costs to sort and deliver light and heavier
weight letter pieces. The fee was the same for a kilogram of mail
consisting of one piece destined to one address or for a kilogram of
a number of pieces destined to a number of different addresses.
--------------------
\1 SDR is a weighted average of the principal world currencies, worth
$1.57 in April 1995.
\2 There is a separate, lower fee for printed paper sent to one
addressee by special bags (M-Bags).
TERMINAL DUES RATES DO NOT
CORRESPOND WITH ACTUAL DELIVERY
COSTS
--------------------------------------------------------- Appendix I:3
Postal Service officials believed that a terminal dues system based
only on weight undercompensates countries--like the United
States--that receive many LC pieces. According to Postal Service
officials, it is more expensive to sort and deliver a kilogram of
light-weight mail than of heavy-weight mail because the former
contains more pieces. Conversely, the weight-based terminal dues
overcompensates countries that receive heavier items. Since the
Postal Service sends many heavy items overseas, it considers the
terminal dues rate to be too "high" for outbound mail. Postal
Service officials said that they prefer rates that have both a piece
and a weight charge.
CURRENT TERMINAL DUES STRUCTURE
--------------------------------------------------------- Appendix I:4
The current terminal dues system is a two-tier system. One rate
applies to threshold (developed) countries--those that ship more than
150 metric tons or 330,000 pounds a year. For LC mail, this is 8.115
SDR per kilogram (or $5.79 per pound). For AO mail, this is 2.058
SDR per kilogram (or $1.47 per pound). A lower uniform rate (for
both LC and AO mail) applies to nonthreshold (developing)
countries--those that traditionally have low outbound mail
volume--less than or equal to 330,000 pounds a year. This is 2.940
SDR per kilogram (or $2.10 per pound). In 1994, the Postal Service
exchanged mail with 28 threshold countries and 128 nonthreshold
countries. The receiving postal administrations can ask for an
application of the "correction mechanism" from threshold countries to
adjust the rates upward if they can show that the destinating
country's mail stream has more items per kilogram than the worldwide
averages. This mechanism allows the Postal Service to collect higher
terminal dues from some high-volume countries that send light-weight
mail.\3
--------------------
\3 If the Postal Service can show that it receives more than 55 items
in a kilogram of LC mail or 7 items in a kilogram of AO mail, it can
charge a higher terminal dues rate.
PROBLEMS WITH CURRENT TERMINAL
DUES STRUCTURE
--------------------------------------------------------- Appendix I:5
The two-tier system created opportunities for domestic mailers to
avoid paying domestic postage through a practice called "ABA remail."
ABA remail occurs when remailers take mail prepared for delivery in
the United States (country A) to nonthreshold countries with low
terminal dues (country B) and mail it back to the United States
(country A) at a fraction of the domestic rate. This practice can
result in a large revenue loss for the Postal Service. For example,
when a U.S. resident takes a 1/2-ounce item to a nonthreshold
country, such as the Dominican Republic, for mailing back to the
United States, the Postal Service can receive as little as 6 cents an
item in compensation instead of 32 cents postage.
Postal Service officials also believe that the current system
encourages foreign mailers to route U.S.-bound mail from countries
with which the Postal Service has negotiated cost-based terminal dues
arrangements (discussed below) through nonthreshold countries with
low terminal dues (known as "ABC remail"). The Postal Service is not
fully compensated for the costs of delivering these inbound remailed
items. For example, when a foreign mailer in Great Britain (country
A) takes a 1/2-ounce item to a nonthreshold country (country B), such
as Panama, for mailing to the United States (country C), the Postal
Service can receive as little as 7 cents an item instead of the 26
cents per item that it would have received under the cost-based
terminal dues system (such as the CEPT agreement discussed below).
To reduce the economic incentive of these types of remailing, the
Postal Service, in 1994, amended subchapter 790 of the International
Mail Manual to broaden the definition of a U.S. resident.\4 This
clarification enables the Postal Service to collect domestic postage
on mailings "posted in another country not only by firms organized in
the United States but also by firms organized under the laws of other
countries, which have substantial connection with U.S. businesses."
The amendments also authorized the collection of domestic postage for
mailing "on behalf of persons who reside in countries with which the
Postal Service has negotiated cost-based terminal dues arrangements,
but posted in countries with which the United States has not
negotiated cost-based rates."\5
--------------------
\4 The Postal Service has interpreted Article 25 of the Universal
Postal Convention as authorizing postal administrations to collect
domestic postage on mail posted in foreign countries by or on behalf
of their residents.
\5 ACCA believes that by amending subchapter 790 of the International
Mail Manual and leading efforts to amend the Universal Postal
Convention in 1994 to incorporate a broader interpretation of
"reside" in Article 25 (now Article 26), the Postal Service is
seeking to expand the doctrine of "nonphysical remail." The doctrine
allows postal administrations to use Article 25 of the Universal
Postal Convention to intercept not only mail that is physically
transported to another country for mailing but also mail that is
produced in country B by a mailer said to be a "resident" of country
A for delivery in country A.
CHANGES TO TERMINAL DUES AT THE
1994 UPU CONGRESS
--------------------------------------------------------- Appendix I:6
The 1994 UPU Congress abandoned the two-tier structure and went back
to a single rate for LC/AO mail. The basic rate will be 3.427 SDR
per kilogram (or $2.45 per pound). The new rate was to become
effective in January 1996. The UPU Congress also amended the
correction mechanism. A piece rate will be levied for threshold
countries if the average number of pieces per kilogram exceeds 21.
Rates for threshold countries then would be adjusted to 0.14 SDR per
item plus 1 SDR per kilogram (or 23 cents per item plus 72 cents per
pound). For the first time, rates can also be adjusted downward--for
threshold countries if their average item per kilogram is less than
14.
The UPU Congress also adopted a bulk-mail option, which allows
countries accepting bulk mail to set their own rates. Countries have
the option of charging either a weight-based or an item-based rate.
Bulk mail is defined as 1,500 items per dispatch or per day or 5,000
items over 2 weeks from the same customer. The basic UPU rate is
0.14 SDR per item plus 1 SDR per kilogram (or 23 cents per item plus
72 cents per pound). Starting in 1996, that rate could be 60 percent
of the domestic postage or 27 cents per item plus 89 cents per pound,
whichever is lower. Charges could eventually advance to 80 percent
of domestic postage or 100 percent above the basic UPU bulk rate,
whichever is lower. The UPU Congress also tied compensation for ABC
remail to the 80 percent of the domestic postage rate or to the UPU
bulk rate of 27 cents per item plus 89 cents per pound, whichever is
lower.
OTHER TERMINAL DUES AGREEMENTS
--------------------------------------------------------- Appendix I:7
The Postal Service currently participates in two special cost-based
terminal dues agreements: (1) a 14-country multilateral agreement
with members of the Conference of European Postal and
Telecommunications Administrations (CEPT) and (2) a bilateral
agreement with Canada. Under the CEPT agreement, postal
administrations from the United States and 13 European countries
charge each other 23 cents per piece and $1.06 per pound.\6 Since the
Canadian agreement set charges based on the shape of the envelopes,
different reimbursement rates apply to letters, flats, packets, and
parcels.\7 Both agreements will expire in 1996.
--------------------
\6 The CEPT rate is 0.147 SDR per item plus 1.491 SDR per kilogram.
If an SDR equals $1.57 and 1 kilogram equals 2.2 pounds, assuming
that there are 32 items weighing 1/2 ounce in a pound of mail, this
cost would be $8.45 per pound. This is a higher reimbursement rate
than the current UPU-threshold rate of 8.115 SDR per kilogram (or
$5.79 per pound).
\7 The rates Canada and the United States pay each other are
considered to be commercially sensitive and are not made public.
POSTAL SERVICE'S INTERNATIONAL
MAIL SERVICES
========================================================== Appendix II
In addition to the single-piece products, which make up around 90
percent of the Postal Service's international revenues, the Postal
Service has developed 10 business "products" to address the needs of
its business customers. They include an electronic service, two
expedited mail services, several discounted bulk mail services, and a
business reply mail service. Table II.1 describes the single-piece
and business products in detail.
Table II.1
WORLDPOST Services
Special
Average requirement/
Product Kind of mail delivery time limitation Discount
---------------- -------------- -------------- -------------- --------------
Single-piece service
--------------------------------------------------------------------------------
Air LC --Letters 4 to 7 days None None
--Documents
--Small
packages
Air AO --Printed 4 to 7 days None None
matter
--Small
packages
--Matter for
the blind
Surface AO --Printed 2 to 6 weeks None None
matter
--Small
packages
--Matter for
the blind
--Catalogs
--Books
Publishers' Second-class 2 to 6 weeks None None
periodicals publications
Air parcel post Packages 7 to 14 days None None
Surface parcel Packages 2 to 6 weeks None None
post
Electronic/Facsimile service
--------------------------------------------------------------------------------
INTELPOST Super-urgent 0 to 1 day None None
letters,
documents, and
graphics
Expedited services
--------------------------------------------------------------------------------
Express Mail --General 1 to 3 days Varies by None
International correspondence country
Service
--Printed
matter
--Merchandise
packages
WORLDPOST General 4 days Available only None
Priority correspondence to 14
Letter countries
Service during pilot-
test
Volume/Bulk mailing services
--------------------------------------------------------------------------------
International --General 3 to 7 days --10 pounds Presort by
Priority correspondence minimum per country
Airmail mailing
--Printed
matter --No service
to Canada
International Printed matter 7 to 14 days 50 pounds --Deposit at
Surface minimum per gateway
Airlift mailing
--750 pounds
minimum to a
single
country)
--M-Bag (15
pounds minimum
per bag)
ValuePost/ Printed matter 7 to 14 days --50 pounds None
Canada minimum for
letter-size
mail
--100 pounds
minimum for
flats
--100 pounds
minimum for
letters and
flats
Bulk Letter General 4 days --500 letters None
Service to correspondence minimum, each
Canada weighing 1
ounce or less
--Sort by
postal code
International Merchandise Depends on --25,000 Four
Package packages service option packages additive
Consignment (express, minimum a discounts
Service standard, or year based on
economy air) volume
--Only
available to
Japan
Customized service
--------------------------------------------------------------------------------
International --General Depends on --1 million Varies with
Customized correspondence negotiated pounds of each
Service service/price international negotiated
--Printed agreement mail; or service/price
matter agreement
--$2 million
--Merchandise in
packages international
postage a
year
--Mail must be
provided at
one location
Business reply mail
--------------------------------------------------------------------------------
International Reply cards/ 4 to 7 days None None
Business Envelopes
Reply Mail distributed
for return
without
prepayment of
postage
--------------------------------------------------------------------------------
Source: U.S. Postal Service.
(See figure in printed edition.)Appendix III
COMMENTS FROM THE U.S. POSTAL
SERVICE
========================================================== Appendix II
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)Appendix IV
COMMENTS FROM THE AIR COURIER
CONFERENCE OF AMERICA
========================================================== Appendix II
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
Michael E. Motley, Associate Director
James T. Campbell, Assistant Director
Barry P. Griffiths, Senior Evaluator
Chau Vu Walters, Evaluator
NEW YORK REGIONAL OFFICE
Anne C. Kornblum, Senior Evaluator
*** End of document. ***