Defense Transportation: Status of U.S. Transportation Command Savings
Initiatives (Letter Report, 05/08/1998, GAO/NSIAD-98-99).

In a February 1996 report (GAO/NSIAD-96-60), GAO found that customers
using defense transportation services provided through the U.S.
Transportation Command and two of its component commands paid relatively
high overhead costs. GAO noted that fragmented traffic management
processes, a modally oriented organizational structure, and mobilization
costs are major factors driving higher transportation costs. GAO
recommended that the military ensure that the efforts to reengineer
defense transportation address both process and organizational structure
improvements. In response, the Defense Department indicated that the
U.S. Transportation Command would undertake an array of organizational
and process-related improvements to reduce overhead and improve
efficiency. In a December 1996 report to Congress, the U.S.
Transportation Command identified more than $500 million in savings that
it attributed to such improvements. In March 1997, the U.S.
Transportation Command announced that savings had increased to nearly
$780 million and that the savings through fiscal year 1999 will be
passed on to peacetime customers in the form of incremental rate
reductions. This report reviews the extent to which savings are or are
projected to be reflected in the form of lower charges to defense
customers. GAO focuses on (1) the extent to which the U.S.
Transportation Command expects to achieve long-term savings in its
operating and infrastructure costs and (2) charges regarding
transportation rates and customer charges.

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

 REPORTNUM:  NSIAD-98-99
     TITLE:  Defense Transportation: Status of U.S. Transportation
	     Command Savings Initiatives
      DATE:  05/08/1998
   SUBJECT:  Defense cost control
	     Freight transportation operations
	     Transportation costs
	     Reengineering (management)
	     Program management
	     Cost effectiveness analysis
	     Common carrier operations
IDENTIFIER:  DOD Working Capital Fund
	     Fast Sealift Ship
	     Navy Working Capital Fund
	     C-141 Aircraft
	     C-17 Aircraft
	     C-5 Aircraft
	     C-130 Aircraft
	     Army Afloat Prepositioning Program

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

Report to the Chairman, Subcommittee on Military Readiness, Committee
on National Security, House of Representatives

May 1998

DEFENSE TRANSPORTATION - STATUS OF
U.S.  TRANSPORTATION COMMAND
SAVINGS INITIATIVES

GAO/NSIAD-98-99

USTRANSCOM Savings Initiatives

(709245)

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

  AMC - Air Mobility Command
  DOD - Department of Defense
  MSC - Military Sealift Command
  MTMC - Military Traffic Management Command
  TWCF - Transportation Working Capital Fund
  USTRANSCOM - U.S.  Transportation Command

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

B-279252

May 8, 1998

The Honorable Herbert H.  Bateman
Chairman, Subcommittee on
Military Readiness
Committee on National Security
House of Representatives

Dear Mr.  Chairman:

In February 1996, we reported that customers using defense
transportation services provided through the U.  S.  Transportation
Command (USTRANSCOM) and two of its component commands--the Army's
Military Traffic Management Command (MTMC) and the Navy's Military
Sealift Command (MSC)--pay relatively high overhead costs.\1 Our
report noted that fragmented traffic management processes, a modally
oriented organizational structure, and mobilization costs are major
factors driving higher transportation costs.  As such, we recommended
that the Secretary of Defense should ensure that defense
transportation reengineering efforts simultaneously address process
and organizational structure improvements.

In response to our report, the Department of Defense (DOD) stated
that USTRANSCOM would implement a wide range of organizational and
process improvements to reduce overhead and improve efficiency.  In a
December 1996 report to Congress, USTRANSCOM identified over $500
million in savings it attributed to such improvements.  In March
1997, USTRANSCOM reported that savings had increased to almost $780
million and that the savings achieved from fiscal year 1993 through
fiscal year 1999 will be passed on to peacetime customers in the form
of incremental reductions to rates it charges for transportation
through the rest of the decade.

As requested, we reviewed the extent that the savings are, or are
projected to be, reflected in the form of lower charges to defense
customers.  Specifically, this report focuses on the (1) extent to
which USTRANSCOM expects to achieve long-term savings in its
operating and infrastructure costs and (2) changes regarding
transportation rates and customer charges.  As agreed with your
office, because we are continuing to review issues related to
streamlining and reengineering the defense transportation system, we
are not making any recommendations in this report.

--------------------
\1 Defense Transportation:  Streamlining of the U.S.  Transportation
Command Is Needed (GAO/NSIAD-96-60, Feb.  22, 1996).

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

The mission of USTRANSCOM, which is DOD's single manager of all
defense transportation services, is to provide global air, land, and
sea transportation to meet national security needs, both in time of
peace and time of war.  USTRANSCOM executes its mission through three
component commands:  (1) MTMC for land transportation and port
operations (2) MSC for sea transport, and (3) the Air Force's Air
Mobility Command (AMC) for air transport.  Within this report,
defense transportation refers to common-user transportation, defined
by DOD as transportation and transportation services provided on a
common basis for two or more DOD agencies.

USTRANSCOM's responsibilities include financial management of all
defense transportation.  USTRANSCOM and its component commands
operate under the Working Capital Fund system of financial
management.  Its budget, which includes the component commands, is
submitted within the Air Force's Working Capital Fund budget,
separated and identified therein as the Transportation Working
Capital Fund (TWCF).  Under the TWCF concept, DOD customers place
orders with the component commands, which then contract for the
services and/or provide the services using their own resources.  In
turn, the component commands charge customers for their services.
Customers predominantly use funds from their operations and
maintenance appropriations to reimburse component commands, which use
these reimbursements to pay their suppliers and to fund their
operating costs.  (See fig.  1.)

USTRANSCOM's operating costs were approximately $4.0 billion in
fiscal
year 1997, and in fiscal year 1998, its budget submission estimate is
$4.2 billion.  In fiscal year 1997, AMC accounted for about 60
percent of total TWCF operating costs, MSC was about 30 percent, and
MTMC was about
10 percent.  The congressional defense committees have raised
concerns regarding USTRANSCOM's infrastructure.  Therefore, the
fiscal year 1996 appropriation included a reduction of $52 million
and the fiscal year 1997 appropriation included a reduction of $100
million due to these high infrastructure costs.  The committees
believed immediate action was necessary to consolidate and streamline
transportation operations in a manner that reduced the amount of
transportation overhead passed on to customers without adversely
affecting mobilization capability.

   Figure 1:  TWCF Process

   (See figure in printed
   edition.)

   Note:  For purposes of this
   report, the USTRANSCOM
   surcharge is defined as the
   difference between what
   USTRANSCOM pays commercial
   carriers for basic underlying
   transportation services and
   what it charges its customers,
   illustrating the costs
   customers pay for USTRANSCOM
   and component commands'
   operating expenses.

   (See figure in printed
   edition.)

   Source:  GAO.

   (See figure in printed
   edition.)

Consistent with working capital fund policy, component commands
charge for services using rates that must cover costs USTRANSCOM and
its component commands incur for the commercial services plus their
other direct, indirect, and overhead costs.  Each component command
must develop a budget and determine how much to charge its customers
for each service.  MSC is responsible for negotiating the cargo rates
and terms of carriage with the ocean carriers and paying carrier
invoices.  MTMC is responsible for booking service for individual
shipments, preparing shipment documentation, clearing customs, and
supporting MSC's payment processes.  AMC is responsible for booking
cargo shipments and passenger moves, billing customers, and providing
airlift.

Multiple factors affect the ability to reduce rates charged to
customers, including inflation, the way the rates are calculated,
declining workload, and customer satisfaction.  In addition, due to
the budget process, there is a lag time of up to 18 months between
when rates are first estimated and when they are effective.  While
most rates are supposed to recover actual cost of the operations,
some rates do not.  For example, the customer rates AMC charges for
airlift are supposed to cover only those operating and maintenance
costs directly related to providing the airlift service.  However,
training and readiness, which are not always directly related to
providing airlift services and are AMC primary missions, make up much
of AMC's operating costs.  In accordance with a DOD directive, the
Air Force pays or subsidizes\2 the costs of training and readiness,
which are in addition to the portion of costs AMC recovers from its
customers through the rates it charges for services directly related
to providing airlift.  This payment, generally referred to as the Air
Force subsidy, was about $420 million in fiscal year 1997 and
USTRANSCOM estimates it will be about $514 million in fiscal year
1998.  Reducing costs that are covered by the subsidy would not
reduce customer rates, rather, it would reduce the amount of the Air
Force subsidy.

Another factor impacting the ability to reduce rates charged to
customers is declining workload.  According to the Under Secretary of
Defense (Comptroller), DOD has been unable to reduce infrastructure
costs as fast as customer budgets have been reduced.  Faced with a
finite amount of funds, customers are consequently paying higher
prices for needed goods and services while overall demand for work is
decreasing.

Customer satisfaction is another element that impacts the ability to
reduce transportation costs.  The less satisfied a customer is with
the quality, timeliness, or cost of the service, the more likely they
will seek alternate transportation resources outside the defense
transportation system.  For example, in USTRANSCOM's fiscal year 1998
TWCF budget submission, AMC notes that it has been losing peacetime
airlift customers to the commercial sector because the commercial
sector provides a better service.  Similarly, because the military
exchanges and commissaries were concerned over high costs of ocean
transportation, they received legislative authority to obtain
transportation services outside MTMC and MSC in fiscal year 1996.  In
a May 17, 1997, policy memorandum, DOD stated that this authority may
only be exercised to the extent that the military exchanges and
commissaries can demonstrate that it would be more cost-effective to
DOD to do so, and readiness would not negatively be impacted.  The
determination of the overall cost-effectiveness and impact on
readiness would be made by the Under Secretary of Defense
(Acquisition and Technology) in conjunction with the Under Secretary
of Defense (Comptroller), the Under Secretary of Defense (Personnel
and Readiness), and the Commander in Chief, USTRANSCOM.  According to
USTRANSCOM officials, this authority has not been exercised.

--------------------
\2 Using funds from its direct appropriations for operations and
maintenance, the Air Force makes a yearly payment to TWCF to finance
the amount not recovered through charges to its customers.
USTRANSCOM refers to the subsidy as the Airlift Readiness Account in
its budget submissions.  The subsidy process allows any losses to be,
in effect, reimbursed through appropriated funds.

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

The U.S.  Transportation Command and its components have sought to
reduce costs and improve operating efficiencies in the defense
transportation system, while at the same time preserving its
readiness capabilities and effectiveness.  We recognize that reducing
transportation charges to defense customers is complicated by
multiple factors that impact the ability of the Command to affect
transportation charges.  The lag time, for example, between reducing
operating costs and realizing reductions in customer charges means
that the impact of some of the Command's savings initiatives has yet
to occur.  At this time, however, it appears that the savings
initiatives identified by the Command will not yield as great a
result as initially reported.  Consequently, the reported savings are
not likely to have a significant impact on lowering infrastructure
and long-term operating costs, which is key to reducing customer
charges.  Further, available data indicate that many costs the
Command charges its customers are rising at a rate greater than
inflation\3 and that surcharges may remain high, even when underlying
transportation charges have declined.

Specifically, only about $260 million of the $780 million reported
savings represents reductions to infrastructure and long-term
operating costs--savings that could more readily result in lower
charges over time to defense customers for transportation services.\4
The impact of some of these savings is yet to be realized.  A small
portion of the reported savings ($120 million) actually involves
improved revenue collections rather than efforts to reduce long-term
operating costs.  However, most of the reported savings, over $400
million, would not reduce long-term operating costs because the
reported savings either (1) were offset by related increases to
operating costs, (2) reduce requirements for appropriated funds but
do not directly affect customer transportation rates, or (3) will not
materialize.  The reported savings that are to occur between fiscal
years 1993 and 1999 represent less than 3 percent of the Command's
$27 billion working capital fund operating costs during that time
period.  Thus, the extent to which total operating costs might be
affected raises questions about the ability of these savings to
substantively reduce customer transportation charges.

Further, customer rates have been increasing and the Command projects
increases to continue through the end of the decade.  The increases
are at or above the rate of inflation and some common user rates show
increases well above inflation.  In addition, the Command's
surcharge, which is the amount the Command charges customers over and
above the underlying transportation costs, continues to be
substantially higher than the amount component commands (primarily
MTMC and MSC) pay commercial carriers.  Finally, there where
instances where surcharges were increasing significantly even when
underlying transportation costs had declined.

--------------------
\3 For the purposes of this report, "inflation" represents the price
growth factor shown for budget purposes by the component commands.

\4 Although many of the reported savings were not well documented, we
assumed, for purposes of this analysis, that the savings were fully
realized.  The extent to which the savings were not well documented
is discussed in greater detail in the Scope and Methodology section
of this report.

   OUR ANALYSIS OF USTRANSCOM
   REPORTED SAVINGS AND EFFECT ON
   REDUCING INFRASTRUCTURE AND
   OPERATING COSTS
------------------------------------------------------------ Letter :3

USTRANSCOM and the component commands have taken action to improve
customer service, reduce costs, and improve operational efficiency.
In March 1997, USTRANSCOM reported that nearly a $780-million savings
occurring during the fiscal years 1993 through 1999 time period are
expected to incrementally reduce customers' rate charges for
transportation through the rest of the decade.  Specifically,
USTRANSCOM reported that its budget submissions between fiscal years
1993 and 1999 reflect over $500 million in savings resulting from
productivity and cost avoidance initiatives, over $200 million in
cost reductions due to fewer flying hours, and over $70 million in
streamlining-related savings.  According to USTRANSCOM, about 65
percent of the reported savings has been achieved and about 35
percent are projected to occur through fiscal year 1999.

Table 1 shows the savings USTRANSCOM reports by component command.

                                     Table 1

                      Savings Reported by Component Command

                              (Dollars in millions)

                                    Reported savings by fiscal year
                                ----------------------------------------
Component command               1993  1994  1995  1996  1997  1998  1999   Total
------------------------------  ----  ----  ----  ----  ----  ----  ----  ------
AMC                              0.0  $210  $37.  $142  $31.  $70.  $50.  $541.8
                                        .2     4    .6     1     2     3
MSC                              0.0  43.2  51.5  20.6  24.8  24.1   9.2   173.4
MTMC                             0.0   3.1   1.9   0.0  15.9  18.2  22.9    62.0
USTRANSCOM-Headquarters          0.0   0.0   0.0   0.0   0.0   1.4   0.0     1.4
================================================================================
Total                            0.0  $256  $90.  $163  $71.  $113  $82.  $778.6
                                        .5     8    .2     8    .9     4
--------------------------------------------------------------------------------
The total savings reported by USTRANSCOM represent about 3 percent of
the $27 billion in TWCF costs that it has incurred or expects to
incur during the 6-year period covered by the savings.

To the extent that these savings are expected to be realized, we
found that most of the reported savings, over $400 million, would not
reduce long-term operating costs, and that only a relatively small
portion of the savings, about $260 million, was apt to result in
reductions to transportation rates for users of the defense
transportation system.  Another $120 million actually involved
improved revenue collections rather than efforts to reduce long-term
operating costs.

Table 2 summarizes our categorization of the reported savings.

                                Table 2

                    Analysis of Savings Reported by
                               USTRANSCOM

                         (Dollars in millions)

                Summary of our categorization of reported savings
Amount          ------------------------------------------------------
$258    (33%)   Savings that should affect rates

                $149(19%) Savings that could affect rates affecting
                all
                USTRANSCOM customers

                $109(14%) Affects rates charged to single-service
                customers

$120    (15%)   Savings involves increasing revenues not reducing
                long-term operating costs

$401    (52%)   Savings not likely to affect rates over the long term

                $209(27%) Offset by related cost increases

                $114(15%) Reduces need for appropriated funds but
                does
                not affect customer rates

                $78(10%)Will not materialize

======================================================================
$779    (100%)  Total
----------------------------------------------------------------------
It should also be noted that for purposes of our analysis, we assumed
that the cost reductions would be fully realized.  However, in doing
our analysis we found that many of the reported cost reductions were
not well-documented and some will not materialize.  The extent to
which the savings are not well-documented is discussed in greater
detail in the Scope and Methodology section of this report.

      SOME REPORTED SAVINGS REDUCE
      INFRASTRUCTURE AND LONG-TERM
      OPERATING COSTS
---------------------------------------------------------- Letter :3.1

About $149 million, or 19 percent, in reported savings result from
USTRANSCOM initiatives to reduce infrastructure and operating costs.
These efforts are a step in the right direction and should have a
positive impact by lowering costs that are passed on to common user
customers.  Table 3 shows a breakdown of the savings resulting from
initiatives to reduce infrastructure and operating costs by command.

                                Table 3

                Infrastructure and Operating Savings by
                                Command

                         (Dollars in millions)

Command                                                         Amount
--------------------------------------------------------------  ------
AMC                                                               $ 58
MSC                                                                 28
MTMC                                                                62
USTRANSCOM Headquarters                                              1
======================================================================
Total                                                             $149
----------------------------------------------------------------------
Some actions that the commands have taken, or are taking to reduce
infrastructure and long-term operating costs and to achieve these
savings follow.

  -- AMC has reduced the number of civilian personnel employed,
     improved operations by combining previously separated air
     traffic management functions into one Tanker Airlift Control
     Center, and implemented better airlift loading processes.

  -- MSC is in the process of reinvention, assessing its key business
     lines and establishing an organization that it believes will
     better meet the needs of its diverse customers.  Its reinvention
     plans include a reduction in size and a relocation of its two
     largest area commands from Bayonne, New Jersey, and Oakland,
     California, to Norfolk, Virginia, and Pearl Harbor, Hawaii,
     respectively.

  -- MTMC is consolidating its Eastern and Western Area Command
     headquarters into one headquarters.  In taking this action, MTMC
     is not only complying with the decision of the 1995 Base Closure
     and Realignment Commission to relocate its Eastern and Western
     Area Commands, but also is consolidating the two area command
     headquarters into a single MTMC Continental U.S.  Command
     headquarters at Fort Eustis, Virginia.

  -- MTMC has closed or is planning to close port facilities at
     Baltimore, Maryland; Compton, California; New Orleans,
     Louisiana; Iskenderun, Turkey; and Lisbon, Portugal.  The
     closure of its Bremerhaven, Germany, facility is under study.
     Other downsizing actions have been taken or are planned at
     Oakland, California; Bayonne, New Jersey; the Azores; Greece;
     Germany; and Panama.  In addition, USTRANSCOM directed the
     establishment of the Joint Traffic Management Office at MTMC.
     This office combines cargo and passenger missions and
     consolidates separate MTMC and MSC traffic management staff.

  -- USTRANSCOM reduced the number of headquarters personnel in the
     Joint Transportation Corporate Information Management Center.
     The Center's primary objective is to improve the efficiency and
     effectiveness of defense transportation information systems.

      SOME REPORTED SAVINGS AFFECT
      PRIMARILY A SINGLE CUSTOMER
---------------------------------------------------------- Letter :3.2

Reported savings of $109 million would reduce costs to programs that
serve basically single customers and should reduce rates charged to
them.  About $44 million of the savings was achieved by changing
maintenance procedures, shore support, and operating status, for
example, in the Fast Sealift Ship program.  The Fast Sealift Ship
program consists of eight high-speed, roll-on/roll-off ships that are
kept in reserve for surge capability and is funded almost entirely by
one customer, the Navy.  Another $33 million of the savings was
achieved by changing delivery methods, numbers of ships employed for
delivery of fuels, and types of ships employed, for example, in the
sealift Tankership program.  This program uses government and
chartered ships to deliver petroleum around the world and is funded
almost entirely by the Defense Logistics Agency's Defense Fuel Supply
Center.  An additional $9 million was attributed to renegotiation of
contracts for ships in the Maritime Prepositioning Ships program.
This program consists of 13 prepositioned ships loaded with tanks,
ammunition, fuel, and other materials for operations involving the
U.S.  Marine Corps and is funded by, and primarily benefits, the Navy
through the Navy Working Capital Fund.  Finally, $23 million of the
savings was attributed to savings initiatives in the three programs
mentioned above, but MSC did not provide data on the exact amount
attributed to each specific program.

      SOME REPORTED SAVINGS WOULD
      INCREASE REVENUES NOT REDUCE
      LONG-TERM OPERATING COSTS
---------------------------------------------------------- Letter :3.3

Reported savings of $120 million is actually revenue increased by
charging customers for services not billed to them in prior years.
One example is an ongoing initiative to locate missing manifests and
to charge customers for transportation services not previously
billed, resulting in $55 million in additional revenue.  Another is
the inclusion of new charges to customers for unused space, resulting
in an additional $65 million in revenue through fiscal year 1999.  By
collecting for services not previously billed and charging for unused
space, USTRANSCOM will not have to raise rates or increase the amount
of the Air Force subsidy in order to cover the losses it may have
incurred because those costs had not been previously passed on to
customers.  At the same time, total customer charges for the same
services may actually increase because customers will now pay for
costs not previously billed to them.  According to DOD, the process
of charging customers for unused space should provide an incentive to
the customer to reduce or eliminate some airlift requirements, which
could also result in some cost savings.

      LARGE PORTION OF REPORTED
      SAVINGS OFFSET BY RELATED
      COST INCREASES
---------------------------------------------------------- Letter :3.4

In two instances, we found that reported savings of $209 million were
more than offset by directly related cost increases.  AMC reported a
total savings of nearly $173 million as a result of reduced flying
hours and MSC reported over $36 million in savings from renegotiated
container agreements.  However, neither of these initiatives
considered related cost increases.  AMC, for example, attributed the
$173 million savings primarily to the retirement of aging C-141
aircraft and a transfer of some C-141 training hours to flight
simulators.  However, AMC is replacing the C-141 with new C-17
airlift aircraft, and C-5 flying hour costs have been increasing.
The reported flying hour cost savings do not reflect increased C-17
and C-5 flying hour costs.  Since AMC's estimate includes only
reductions for three of the years between fiscal years 1993 and 1999,
we recalculated the total C-141 flying hour costs, which actually
decreased by $420 million during that period.  However, the combined
C-17 and C-5 cost increases were over $500 million during the same
period, which more than offsets the cost decreases that USTRANSCOM
projects will occur in the C-141 program.

MSC's reported savings showed that costs related to container rate
agreements would be decreased by $36 million, mostly for fiscal
years 1994 and 1995.  This is an accurate statement; however, the
statement does not give a complete analysis of rate changes through
fiscal year 1999.  For example, the same container agreements were
renegotiated in fiscal
year 1996.  As a result, in many cases, rates in fiscal years 1997
and 1998 are higher.  For example, the negotiated rate for moving a
40-foot dry cargo container from the Military Ocean Terminal,
Oakland, California, to Seoul, Korea, dropped about 20 percent from
June 1993 to June 1994 but increased by 40 percent in December 1996.
The impact of the higher renegotiated rates was not considered in the
savings calculation.

      SOME REPORTED SAVINGS REDUCE
      NEED FOR APPROPRIATED FUNDS
      BUT DO NOT AFFECT CUSTOMER
      RATES
---------------------------------------------------------- Letter :3.5

Reported savings of $114 million would reduce the subsidy the Air
Force pays to TWCF but would not affect rates.  As previously
discussed, the purpose of the Air Force's yearly subsidy to TWCF is
to cover readiness and training costs that are not recovered by the
rates AMC charges customers for services directly related to
providing transportation services, such as airlift.\5 AMC officials
told us that the Air Force subsidy to TWCF, in effect, reimbursed the
AMC portion of TWCF for the costs attributed to the closure of Norton
Air Force Base ($55 million) and for the transfer of C-130
fixed-costs ($42 million).  As a result, savings achieved by
eliminating those costs would reduce the Air Force subsidy but would
not lower customer rates.  An additional $17 million in savings
relate to costs that were reimbursed through the subsidy.  This
amount is calculated using the percentage of operating costs that
were reimbursed by the Air Force subsidy between fiscal years 1994
and 1999 from approximately 10 to
44 percent of all AMC TWCF costs during that period.  Thus, a total
of $114 million reduces appropriated funds but not TWCF costs.

--------------------
\5 This subsidy may not provide an incentive to decrease customer
rates because any losses can be, in effect, reimbursed through
appropriated funds.  Working capital funds are supposed to provide an
incentive to control costs and maximize efficiency.  The rates
charged for services should cover the expenses incurred for the
commercial services plus all other direct, indirect, and overhead
expenses.

      SOME REPORTED SAVINGS WILL
      NOT MATERIALIZE
---------------------------------------------------------- Letter :3.6

According to AMC representatives, about $78 million in reported
savings for AMC will not occur.  Although AMC reported $23 million in
savings was achieved in fiscal year 1996 by reducing the number of
regularly scheduled C-5 and C-141 overhauls at depots, those
reductions never materialized.  Representatives of AMC told us that
the Air Force decided it would be unsafe to decrease maintenance on
those aircraft because of their age.  The remaining savings--about
$55 million in fiscal years 1998 and 1999--is associated with
performing an intermediate level of maintenance for C-5 aircraft
engines located at Dover Air Force Base being performed at the base
instead of the depot level.  However, these savings will not
materialize because, according to AMC representatives,
intermediate-level maintenance for Dover C-5 engines has never been
done at the depot level.

   MANY TRANSPORTATION RATES
   CONTINUE TO INCREASE
------------------------------------------------------------ Letter :4

USTRANSCOM reported that the savings discussed previously will be
passed on to peacetime customers in the form of lower rates for
transportation through the rest of the decade.  Therefore, to
determine the extent that the savings are, or are projected to be,
reflected in the form of lower rates to common user customers, we
examined the trends in customer rates as reported by USTRANSCOM in
its budget submissions.  We also examined surcharges in two common
user transportation areas to determine whether the difference we
previously reported between underlying transportation costs and
USTRANSCOM surcharges continues to occur.  We found that USTRANSCOM
and the component commands project increases in most common user
transportation rates at or above the rate of inflation through fiscal
year 1999, indicating that total customers' charges are continuing to
increase as well.

While in total, the TWCF budget submission includes unit cost
projections, workload assumptions, and rate changes for 10 separate
transportation areas, 6 of the areas are for common user
transportation.  These common user areas provide more than 50 percent
of USTRANSCOM's revenue and include airlift channels for both
passengers and cargo, special assignment airlift and joint exercise
missions, sealift cargo for both breakbulk and containerized cargo,
and port operations.  The remaining four transportation areas are
primarily single customer oriented programs and include MSC's Fast
Sealift, Tankership and Afloat Prepositioning Programs, and the
Trained Crews Program, which serves the Air Force almost exclusively.
USTRANSCOM projects that rates for the Fast Sealift Ships and
Tankership programs will be below the projected rate of inflation.
Those lower rates will affect rates for a few select customers but
will have little effect, if any, on what most common user customers
pay for defense transportation.  See appendix I for figures showing
rate changes as compared to inflation during the fiscal years 1995
through 1999 time period for each of the 10 transportation areas.

Of the six common user transportation areas, half are projected to
substantially increase above the rate of inflation and half will
remain generally level with inflation during fiscal years 1995
through 1999.  Specifically, USTRANSCOM projects rates for the
combined area of special assignment and joint exercise airlift
missions to increase 20 percent over the rate of inflation during
that time period.  According to USTRANSCOM officials, this increase
is not due to price growth but rather to a DOD policy change that
passes more of the operations costs to special assignment and
exercise airlift users.  Furthermore, according to the same
officials, the rationale behind the policy decision was that, unlike
channel cargo and passenger areas, special assignment mission and
exercise services are often military-unique services that do not
require a billing rate that approximates private industry.

USTRANSCOM projects breakbulk and container cargo rates to increase
about 40 percent during the same period.\6 On the other hand, it
projects that rates for both passenger and airlift channels during
the same time period will remain about even with inflation because
these rates are set at a commercially competitive level and any costs
not recovered by rates in these areas are reimbursed through the Air
Force subsidy.  Even though USTRANSCOM projects the port operations
rate to remain about even with inflation during this period,
reflecting cost decreases affecting common user customers, those
decreases are more than offset by increases noted for sealift cargo.

As mentioned previously, various factors contribute to rate changes.
Moreover, within each transportation rate area there are many rate
categories and rates within categories.  Separate categories often
apply to specific types of service provided, types of cargo, and
location.  For example, the MTMC port handling rate area has separate
rate categories for export and import cargo and within those
categories are rates for each of 14 types of cargo and 6 locations.
Thus, the actual change for any given category or any individual rate
may vary significantly from the composite rate change.

In addition, since rates are based on actual costs and are first
estimated up to 18 months in advance of their effective date, some
lag time will occur before the rates are changed to reflect actual
cost changes.  As previously mentioned, $258 million of reported
savings are likely to impact customer rates.  Of that amount, about
$80 million of savings were actually achieved between fiscal year
1993 and 1995.  Thus, the impact of those savings should be reflected
in rates for fiscal years 1996, 1997, and 1998.  The balance, about
$180 million of the $258 million in savings, would not likely affect
rates until fiscal year 1999 or beyond.

Transportation composite rate changes in the February 1998
President's Budget submission show significant reductions in some
rate areas, differing from the 1999 rate estimates in the February
1997 President's Budget submission and depicted in our rate trend
analysis, which we submitted to DOD for comment on March 3, 1998.
Although data was not available for us to review the 1999 composite
rate changes released after our draft report, we are hopeful that
these changes indicate that USTRANSCOM may be successful in reducing
charges to its customers in fiscal year 1999 and beyond.

--------------------
\6 Any customer moving cargo via surface transportation (land and
sea) is billed the appropriate MSC sealift cargo rate (breakbulk or
container), plus the applicable MTMC port handling or seavan handling
rate.

      USTRANSCOM SURCHARGES
      CONTINUE TO BE HIGH
---------------------------------------------------------- Letter :4.1

In our February 1996 report, we examined charges to customers in two
of the common user transportation areas:  MSC cargo/container and
MTMC port handling.  We have updated those examples to identify
changes in underlying (contractor) transportation costs and
surcharges being passed on to USTRANSCOM customers.  We acknowledge
that some potential reductions in rates associated with expected
savings are yet to occur.  At the same time, the savings that will
likely reduce rates in future years represents only a small portion
of total USTRANSCOM operating costs.  These savings represent less
than 1 percent of USTRANSCOM's estimate of $27 billion in total TWCF
operating costs for fiscal years 1993 through 1999.  Accordingly,
this raises significant questions about the ability of these savings
to substantively reduce charges.

The updated examples identify changes in customer charges for the
same service in fiscal year 1995 and in fiscal year 1997.  The
examples also show the costs USTRANSCOM incurred in contracting for
commercial transportation, with remaining costs representing
USTRANSCOM surcharges.  The previous amounts charged customers were
from 24 to 201 percent higher than the basic contractor
transportation costs and the updated examples show that customers are
now charged from 56 to 200 percent higher.\7 In two examples, the
actual contractor charges showed a decrease between fiscal year 1995
and 1997, indicating that USTRANSCOM negotiated more favorable
container agreements.  However, at the same time, the USTRANSCOM
surcharge showed an increase between the two fiscal years in both
examples.  Table 4 cites changes in rates for four of these
shipments.  All 15 examples using updated data are shown in appendix
II.

                                     Table 4

                      Examples Comparing Contractor Charges
                              With Cost to Customers

A. Port-to-Port Example (no local drayage\a at origin destination)
--------------------------------------------------------------------------------
Example A
 From: U.S. East
 Coast (any port
 in range)
 To: Europe (any
 port in range)
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,552.88       Contractor charges       $1,664.98
USTRANSCOM               1,739.60       USTRANSCOM                3,322.82
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost           112 percent      Percent cost            200 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
--------------------------------------------------------------------------------
\a Drayage is any required truck or rail transportation within the
port area or commercial zone to or from the ship.

B. Port Area-to-Port Area Example (local drayage at origin and destination)
--------------------------------------------------------------------------------
Example B
 From: Military
 Ocean Terminal,
 Bayonne, N.J.
 To: Bremerhaven,
 Germany
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,712.18       Contractor charges       $1,863.81
USTRANSCOM               1,580.30       USTRANSCOM                3,123.99
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost            92 percent      Percent cost            168 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
--------------------------------------------------------------------------------

C. Port Area-to-Inland Point Example (local drayage at origin and line-haul
transportation at destination)
--------------------------------------------------------------------------------
Example C
 From: Norfolk
 (Zone 2), Va.
 To: Giessen,
 Germany
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $2,361.18       Contractor charges       $2,001.87
USTRANSCOM                931.30        USTRANSCOM                2,985.93
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost            39 percent      Percent cost            149 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
--------------------------------------------------------------------------------

D. Inland Point-to-Inland Point Example (line-haul transportation at origin and
destination)
--------------------------------------------------------------------------------
Example D
 From: Atlanta/
 Forest Park, Ga.
 To:
 Kaiserslautern,
 Germany
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $2,650.87       Contractor charges       $2,240.23
USTRANSCOM                641.61        USTRANSCOM                2,747.57
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost            24 percent      Percent cost            123 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
--------------------------------------------------------------------------------
The extent that TWCF rates, including the USTRANSCOM surcharge, can
be reduced is directly related to the extent that long-term operating
costs can be reduced.  Although nearly $80 million in TWCF savings
were reported as occurring by fiscal year 1995, about $180 million in
savings expected in fiscal year 1996 through fiscal year 1999 may
have a future impact on rates.  Nevertheless, the USTRANSCOM
surcharge continues to remain relatively high in the two fiscal
years--1995 and 1997--we examined.  Using MTMC data, we verified that
these examples were representative using MTMC data by comparing the
costs and charges of the same examples at the rates (fiscal year
1995) used in our February 1996 report with the more current rates
(fiscal year 1997).

To obtain additional information regarding the examples and to ensure
all relevant factors were considered in our calculations, we
presented the examples to MTMC, MSC, and USTRANSCOM in July 1997.
USTRANSCOM responded that the examples ".  .  .  describe the optimal
situation of shipping port-to-port cargo," and ".  .  .  focused on
shipping rates of the lowest cost carrier for ocean transportation
only--not all the applicable charges." We believe our examples
demonstrate a variety of shipping points, give consideration to other
than the lowest-cost carrier, and include all applicable charges.

Only 5 of the 15 examples describe a port-to-port situation, and
those examples, according to MTMC traffic data, indicate that they
are illustrative of a significant number of containers handled in the
defense transportation system.  The other 10 examples represent port
area-to-port area, port area-to-inland point, inland point-to-port,
and inland point-to-inland point-type shipments.  Each type
encompasses large numbers of containers moving in the defense
transportation system.

Our examples include what MTMC charged its customers for shipment
booking, cargo manifesting, customs clearance, and shipment receipt.
MTMC could not provide us with any additional costs for any other
services it may have provided.  However, in many cases, defense
customers perform their own shipment booking and have their own
documentation and would not require MTMC to provide any additional
services.

As stated in our February 1996 report, the total USTRANSCOM surcharge
for each shipment in our analysis was substantially higher than DOD's
carrier costs even though the charges for an individual component
command may not always be higher than what the component command pays
the carriers.  Our examples highlight the USTRANSCOM surcharge, that
is the difference between what USTRANSCOM pays commercial carriers
for basic underlying transportation services and what it charges its
customers, illustrating the costs customers pay for USTRANSCOM and
component command operating costs.

We continue to believe the USTRANSCOM surcharge as shown in our
examples is excessively high.  We did not attempt to determine what
USTRANSCOM surcharge would be reasonable; we have reported, however,
the surcharges passed on to customers in other defense business areas
were generally much lower.  For example, the Defense Logistics
Agency's surcharge for hardware items in fiscal year 1996 averaged
about 39 percent, which covered the cost of the hardware item, plus
supply center and distribution expenses, inflation, and
material-related expenses such as inventory losses.  The Agency also
lowered the surcharge for medical supplies from 21.7 percent to 7.9
percent using best management practices.\8

--------------------
\7 The percentage difference increased in 9 of the 15 examples and
decreased in 6 examples.

\8 Defense Inventory Management:  Expanding Use of Best Practices for
Hardware Items Can Reduce Logistics Costs (GAO/NSIAD-98-47, Jan.  20,
1998).

   CONCLUSIONS
------------------------------------------------------------ Letter :5

USTRANSCOM has taken some positive steps attempting to reduce
transportation rates that may be passed on to customers in the form
of lower charges for transportation.  However, overall only about one
third of the reported savings would directly reduce long-term
operating costs, which could affect transportation charges to defense
customers.  Even if all the reported savings directly affected
long-term operating costs, the $780 million in savings represents
only about 3 percent of $27 billion in estimated TWCF operating costs
during the same period.  Furthermore, the USTRANSCOM surcharge
continues to remain high in the 2 fiscal years--1995 and 1997--we
examined, most transportation rates have increased since fiscal year
1995, and USTRANSCOM projects that transportation rates will continue
to increase through fiscal year 1999.  Further measures to reduce
long-term operating costs, such as additional infrastructure
reductions, will likely be required to reduce customer charges.
Otherwise, peacetime customers will likely continue to pay prices for
some defense transportation services that are often two to three
times higher than the cost USTRANSCOM pays for the underlying
transportation service.  Because we are continuing to review the
overall issues related to streamlining and reengineering the defense
transportation system, we are not making any recommendations at this
time.

   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :6

In commenting on a draft of this report, DOD expressed concern with
our conclusions because they believe our report minimizes the
efficacy of overall savings to DOD and the taxpayer.  Specifically,
DOD disagreed with (1) our categorization of its reported savings,
(2) the examples we used to show the impact of rate changes and our
use of the term surcharge, and (3) the starting year of our rate
trend analysis.  Our evaluation of these points is discussed below.

We noted that USTRANSCOM and component command actions to improve
customer service, reduce costs, and improve operational efficiency
are positive steps.  We recognize that, as USTRANSCOM points out,
some of the reported savings will, or have, reduced subsidies that
customers pay, offset rate increases, and improved revenue collection
efforts.  As stated in our report, however, these savings will not
directly impact customer rates because they do not reduce
infrastructure and long-term operating costs.  Even if all the
reported savings directly affected long-term operating costs, the
total dollar savings represent a very small portion of estimated TWCF
operating costs during the time period in which the command expects
the savings to occur.  Further, only about one-third of the reported
savings would result in reductions to transportation rates.  As our
categorization shows, nearly two-thirds of the reported savings would
not reduce long-term operating and infrastructure costs and are not
likely to affect rates over the long term.  Consequently, we remain
concerned that transportation charges to its military customers are
unnecessarily high.

DOD also stated that the examples in our draft report comparing TWCF
to USTRANSCOM-negotiated commercial transportation costs do not
portray the results of efforts to reduce costs and increase operating
efficiency.  As stated in our draft report, the examples are
representative of what USTRANSCOM actually pays for commercial
transportation compared with what it actually bills its customers.
The examples are also representative of actual shipments in fiscal
years 1995 and 1997 and payments for commercial carrier contracts
USTRANSCOM was reimbursed at actual point-to-point billing rates.
Since we were advised by MTMC that contract negotiations for fiscal
year 1999 commercial carrier contract prices are still being
negotiated and that reimbursement point-to-point rates will not be
finalized and published until about August 1998, we used actual
available data.  Using projected or estimated prices and rates, based
on composite rate changes, would be speculative and the results would
be subject to change.  Our analysis is based on the most current
actual data available.  As our work continues, we will assess new
cost data as it becomes available.

DOD also questioned our use of the term "surcharge", which we defined
as the difference between what USTRANSCOM pays commercial carriers
for basic underlying transportation and what it charges its
customers.  DOD was concerned that we were indicating that the
services provided for the surcharge are of little or no value.  This
was not our intent.  We used the term surcharge and the amounts
represented by it in each of our examples to show the differences
between underlying commercial transportation charges, and the total
amounts billed.  We recognize, as DOD pointed out, that the amount
shown as surcharge is for contract negotiation and administration,
cargo booking, customs clearance, cargo receipt, automated in-transit
visibility systems, port management, and surge and readiness
programs.  We have modified this report to clarify that point.

Finally, DOD stated that fiscal year 1994 transportation composite
rate changes should be included in our rate trend analysis as opposed
to using fiscal year 1995.  We acknowledge that had we used fiscal
year 1994 as the baseline there would be less of an upward trend in
some rates.  However, we chose fiscal year 1995 because it was the
first year that reflected USTRANSCOM-managed transportation rates.
DOD stated that using fiscal
year 1994 was more appropriate because that was the first year
USTRANSCOM submitted rate changes for approval by the DOD Comptroller
and was the first time a unique budget was developed for USTRANSCOM.
However, Command officials told us that it was not until fiscal year
1995 that USTRANSCOM developed customer rates for defense
transportation.  Accordingly, we chose fiscal year 1995 as the
baseline for our rate trend analysis.  Also, 1995 rates were the
basis for the examples comparing contractor charges with customer
charges as we reported in February 1996.  We agree that, due to the
cyclical nature of rates, the selection of any particular fiscal year
as a baseline would likely change the rate trend.  In addition, it is
important to note that comparing one's rate with another and
determining the reasons for the shift in rates is difficult because
of the various factors that comprise the rate changes.

DOD also provided several technical comments, which we incorporated
into the text of our report as appropriate.  DOD's comments are
reprinted in appendix III.

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To determine the extent to which USTRANSCOM expects to achieve
long-term savings in its operating and infrastructure costs, we
assessed the savings it reported to Congress in December 1996,
including subsequent testimony that reported $780 million,
cumulatively, in savings initiatives.  We met with officials and
obtained briefings and documents from USTRANSCOM on the reported
savings initiatives, as well as supplemental information from the
component commands--AMC, MSC, and MTMC.  We also analyzed available
data on reported productivity savings/cost avoidance initiatives and
streamlining initiatives and assessed fiscal year 1993 through fiscal
year 1999 TWCF budget estimates and submissions.  We attempted to
trace the savings to the affected budget accounts with the supporting
documents and to validate the amount of the savings and their
applicability to reducing transportation charges to defense
customers.  In most cases, USTRANSCOM or the component commands
reconstructed information to show how they best recalled having
calculated the amount of savings reported.  However, supporting
documentation was generally insufficient to track and validate the
savings to source and budget documents.  Also, because DOD's
accounting systems, like all accounting systems, are oriented to
tracking expenses and disbursements, not savings, we could not
validate or track savings reported to specific budget lines.
According to USTRANSCOM officials, most of the reported savings were
not traceable to corresponding reductions in specific budget lines
because budget adjustments include several factors such as workload,
pricing, program changes, and other adjustments that make it
difficult to track discreet savings by budget line items.
Additionally, USTRANSCOM officials said that many of these
initiatives cross several line items.  Nevertheless, since it was the
only data available, we used the information USTRANSCOM and the
component commands reconstructed as the basis for assessing whether
the reported savings are likely to result in lower rates for defense
customers.

To assess changes in transportation rates and customer charges, we
met with officials at USTRANSCOM, AMC, MSC, and MTMC; reviewed budget
documents and other supporting documentation; estimated the extent
that rates paid by defense transportation customers have changed and
are likely to change; and recalculated the examples of customer
charges used in our February 1996 report.

We assessed the extent defense transportation rates changed between
1995 and 1999 by first obtaining approved rate changes shown in the
fiscal years 1998 through 1999 TWCF budget submissions.  For each
rate category, we started with a base of 100 for fiscal year 1995,
then made adjustments to that amount for each fiscal year with
approved rate changes.  We compared these changes in approved rates
to the annual changes in the price index used to measure inflation,
where we also used fiscal year 1995 as the base of 100.  We used the
same inflation factor shown for budget purposes by the component
commands as our measure of inflation to compare the approved rate
changes against.  For fiscal years 1995 through 1999, the average
yearly inflation is 2.56 percent for AMC, 2.48 percent for MSC, and
2.36 percent for MTMC.

The changes in each rate category by fiscal year in appendix I use a
baseline year of fiscal year 1995.  Rates for fiscal year 1995
represent the first year in which USTRANSCOM established rates on
behalf of its component commands.  The fiscal year 1995 rates are
also comparable to the baseline we used for comparisons of the
shipment examples noted in appendix II.  Specifically, rates for
fiscal year 1995 were formulated by the component commands around
January 1993, submitted by USTRANSCOM to the Assistant Secretary of
Defense (Comptroller) in a budget document dated October 1993,
approved by the Assistant Secretary of Defense (Comptroller) in a
program budget decision in December 1993, and published in the
President's "Budget Estimates" support materials in February 1994.

It is important to note that comparing one year's rate with another
and determining the reasons for the shift in rates is difficult
because of the various factors that comprise the rate changes.  For
example, reasons for changes in the rates include changes in
customers' workloads, contractor prices, policy, and congressional
directives to include, or not include prior years' operating results,
costs to maintain mobilization capability, military pay, and movement
of programs into or out of TWCF.

We also assessed changes in customer rates and charges for the
examples cited in our February 1996 report by first obtaining the
most current MTMC and MSC rates data available (using fiscal year
1997 published rates).  We then recalculated our examples and
compared the results with those developed in our 1996 report.  We
provided the recalculations to USTRANSCOM and its component commands
to solicit their review and comment and addressed their concerns in
this report.

The examples used in table 4 and appendix II are based on charges for
typical DOD shipments, each consisting of general (dry) cargo,
47 measurement tons each, transported in commercial carrier 40-foot
containers, at rates for the low-cost carrier on each route.  The
examples reflect charges MSC and MTMC bill their customers for the
costs they incur for negotiating rates with commercial carriers used
to move DOD shipments, for contracting with the underlying carrier
and paying its charges, and for the administrative expenses incurred
to document the shipments and handle booking, manifesting, receiving
and clearing customs.  In every case, all applicable drayage and/or
line-haul trucking costs to and from a ship's side were included in
our cost calculations.  Cost comparisons are based on using the
low-cost carrier because MSC advises us that it uses the low-cost
carrier in most instances.  However, we also examined the costs of
other than low-cost carriers and in each example found the higher
cost carrier was not significantly more expensive.

The examples show a comparison of contractor charges with the costs
to USTRANSCOM's defense customers for containerized dry cargo
shipments.  Each example shows two points in time:  (1) the first
point is described in our February 1996 report and is based on fiscal
year 1995 USTRANSCOM-negotiated prices and charges and (2) the second
point is calculated based on fiscal year 1997 USTRANSCOM-negotiated
prices and charges.  We did not use projected prices and charges
because the purpose of the analysis was to show what USTRANSCOM
actually paid for contracted services and what it actually charged
its defense customers for the service.

We conducted our work between July 1997 and March 1998 in accordance
with generally accepted government auditing standards.

---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Secretaries of Defense,
the Army, the Navy, and the Air Force; the Commander in Chief, U.S.
Transportation Command; the Director, Office of Management and
Budget; and other interested congressional committees.  Copies will
also be made available to others upon request.

Please contact me on (202) 512-8412 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix IV.

Sincerely yours,

David R.  Warren, Director
Defense Management Issues

CHANGES IN RATE CATEGORIES BY
FISCAL YEAR COMPARED TO INFLATION
=========================================================== Appendix I

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

   (See figure in printed
   edition.)

EXAMPLES COMPARING CONTRACTOR
CHARGES WITH COST TO CUSTOMERS
========================================================== Appendix II

A. Port-to-Port Shipment Cost Comparisons (no local drayage at origin or
destination)
--------------------------------------------------------------------------------
Example A.1
 From: U.S. East
 Coast (any port
 in range)
 To: Europe (any
 port in range)
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,552.88       Contractor charges       $1,664.98
USTRANSCOM               1,739.60       USTRANSCOM                3,322.81
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost           112 percent      Percent cost            200 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
Example A.2
 From: U.S. Gulf
 Coast (any port
 in range)
 To: Europe (any
 port in range)
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,552.88       Contractor charges       $1,664.98
USTRANSCOM               2,064.10       USTRANSCOM                3,225.47
 surcharge                               surcharge
Cost to customer        $3,616.10       Cost to customer         $4,987.80
Percent cost           133 percent      Percent cost            194 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
Example A.3
 From: U.S. West
 Coast (any port
 in range)
 To: Korea (any
 port in range)
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,280.89       Contractor charges       $1,815.00
USTRANSCOM               2,534.18       USTRANSCOM                2,214.05
 surcharge                               surcharge
Cost to customer        $3,815.07       Cost to customer         $4,029.05
Percent cost           198 percent      Percent cost            122 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
Example A.4
 From: U.S. West
 Coast (any port
 in rage)
 To: Japan (any
 port in range)
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,280.89       Contractor charges       $1,794.00
USTRANSCOM               2,528.28       USTRANSCOM                2,202.60
 surcharge                               surcharge
Cost to customer        $3,809.17       Cost to customer         $3,996.60
Percent cost           197 percent      Percent cost            123 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:

Example A.5
 From: U.S. West
 Coast (any port
 in range)
 To: Okinawa (any
 port in range)
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $2,204.29       Contractor charges       $2,215.00
USTRANSCOM               1,607.88       USTRANSCOM                2,020.55
 surcharge                               surcharge
Cost to customer        $3,632.17       Cost to customer         $4,235.55
Percent cost            79 percent      Percent cost             91 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
--------------------------------------------------------------------------------

B. Port Area-to-Port Area Shipment Cost Comparisons (local drayage at origin and
destination)
--------------------------------------------------------------------------------
Example B.1
 From: Military
 Ocean Terminal,
 Bayonne, N.J.
 To: Bremerhaven,
 Germany
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,712.18       Contractor charges       $1,863.81
USTRANSCOM               1,580.30       USTRANSCOM                3,123.99
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost            92 percent      Percent cost            168 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
Example B.2
 From: Military
 Ocean Terminal,
 Bay Area,
 Oakland, Calif.
 To: Pusan, Korea
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,267.32       Contractor charges       $2,004.00
USTRANSCOM               2,547.75       USTRANSCOM                2,054.55
 surcharge                               surcharge
Cost to customer        $3,815.07       Cost to customer         $4,058.55
Percent cost           201 percent      Percent cost            103 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
--------------------------------------------------------------------------------

C. Port Area-to-Inland Point Shipment Cost Comparisons (local drayage at origin
and line-haul transportation at destination)
--------------------------------------------------------------------------------
Example C.1
 From: Military
 Ocean Terminal,
 Bayonne, N.J.
 To: Mannheim,
 Germany
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $2,142.88       Contractor charges       $2,294.51
USTRANSCOM               1,149.60       USTRANSCOM                2,693.29
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost            54 percent      Percent cost            117 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
Example C.2
 From: Norfolk
 (Zone 2), Va.
 To: Giessen,
 Germany
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $2,361.18       Contractor charges       $2,001.87
USTRANSCOM                931.30        USTRANSCOM                2,985.93
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost            39 percent      Percent cost            149 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
Example C.3
 From: Military
 Ocean Terminal,
 Bay Area,
 Oakland, Calif.
 To: Yokosuka
 (Yokohama-Zone
 2), Japan
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,607.16       Contractor charges       $2,315.00
USTRANSCOM               2,202.01       USTRANSCOM                1,681.60
 surcharge                               surcharge
Cost to customer        $3,809.17       Cost to customer         $3,996.60
Percent cost           137 percent      Percent cost             73 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
--------------------------------------------------------------------------------

D. Inland Point-to-Port Shipment Cost Comparisons (line-haul transportation at
origin and no drayage at destination)
--------------------------------------------------------------------------------
Example D.1
 From: Barstow,
 Calif.
 To: Naha, Okinawa
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $2,136.39       Contractor charges       $2,559.00
USTRANSCOM              1,495.78 U      STRANSCOM                 1,676.55
 surcharge                               surcharge
Cost to customer        $3,632.17       Cost to customer         $4,235.55
Percent cost            70 percent      Percent cost             66 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
--------------------------------------------------------------------------------

E. Inland Point-to-Inland Point Shipment Cost Comparisons (line-haul
transportation at origin and destination)
--------------------------------------------------------------------------------
Example E.1
 From:
 Mechanicsburg,
 Pa.
 To: Frankfurt,
 Germany
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $2,380.65       Contractor charges       $2,508.09
USTRANSCOM                911.83        USTRANSCOM                2,479.71
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost            38 percent      Percent cost             99 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
Example E.2
 From: Atlanta/
 Forest Park, Ga.
 To:
 Kaiserslautern,
 Germany
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $2,650.87       Contractor charges       $2,240.23
USTRANSCOM                641.61        USTRANSCOM                2,747.57
 surcharge                               surcharge
Cost to customer        $3,292.48       Cost to customer         $4,987.80
Percent cost            24 percent      Percent cost            123 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
Example E.3
 From: Defense
 (Texarkana),
 Tex.
 To: Mannheim,
 Germany
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $2,644.38       Contractor charges       $2,721.67
USTRANSCOM                972.60        USTRANSCOM                2,168.78
 surcharge                               surcharge
Cost to customer        $3,616.98       Cost to customer         $4,890.45
Percent cost            37 percent      Percent cost             80 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
Example E.4
 From: Lyoth,
 Calif.
 To: Seoul, Korea
Fiscal Year 1995                        Fiscal Year 1997
Contractor charges      $1,721.03       Contractor charges       $2,277.00
USTRANSCOM               2,094.04       USTRANSCOM                1,452.05
 surcharge                               surcharge
Cost to customer        $3,815.07       Cost to customer         $4,029.05
Percent cost           122 percent      Percent cost             56 percent
 exceeds                                 exceeds
 contractor                              contractor
 charges:                                charges:
--------------------------------------------------------------------------------

(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.

Barry W.  Holman, Associate Director
Nomi R.  Taslitt, Assistant Director
J.  Kenneth Brubaker, Evaluator

KANSAS CITY/ST.  LOUIS FIELD
OFFICE

John G.  Wiethop, Evaluator-in-Charge
David J.  Henry, Evaluator

*** End of document. ***