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									I 62213
                               Informal DOT Meeting on International Container
                                                 March 12,2002


          DOT                     USPS                             Air Carriers Industry
          Kevin Adams             Terri Ballard                    Denny Aeschlimann (NW)
          Dennis DeVany           Bill Jones                       Rick Banks (CO)
                                  Charlie Kalbaugh                 Blair Berselli (EV)
                                  Ken McFadden                     Frank Black (ATA)
                                  Dwight Young                     Kevin Broome (US)
                                                                   Dell Chavis (NW)
                                                                   Sam Ciccosillo (DL)
                                                                   Mark Gilbert (AA)
                                                                   Joe Puccia (CO)
                                                                   Megan Rosia (NW)
                                                                   Joe Samudovsky (UA)
                                                                   Bob Uttmark (UA)
                                                                   Dick Wehman (AA)
          Opening remarks:

          Mr. DeVany and Mr. Adams welcomed everyone and mentioned that DOT was here to listen and
          learn from all the ideas. DOT wants out of the rate making process, but that hasn’t happened for
          10 years. However, DOT does not want a base rate investigation. The discussions should be
          between the USPS and the carriers, however this meeting is under the auspices of DOT at the
          airlines’ request since international mail rates are still regulated.

          Mr. McFadden: Welcome and introductions. We will address the issues as we go.

          Mr. Aeschlimann: Northwest Airlines also has a presentation to make.

          USPS Presentation
          Mr. Kalbaugh:
              Even with the Civil Aviation Authority in 7938, rates were established via negotiations
              between the carriers and the Postal Service. When this process broke down in the late
              sixties and early seventies, we ended up with a rate methodology.
              Transborder rates for containers are already established, probably carried over from
              Container rates exist in ASYS contracts. Since container rates are published for the
              Transborder area, we believe container rates are a discrete rate making unit that is separable
              from loose sack mail. It is a natural extension to have container rates for the other areas.
              ISC capabilities - Designed for and dedicated to the receipt, distribution and processing of
              foreign and military mail. Plans included an area for containerizing mail. Basis also
              established in US Code, Title 39. Container rates are a method to reduce costs, improve

          USPS Objectives
             Have container rates established for Atlantic, Latin America, and Pacific areas using similar
             methodology to Transborder.
             Rates would apply to postal-built containers only. Containers improve operational
             efficiencies, increase security, and reduce administrative work (e.g. Bulletin of Verification
             reduction). With a container rate, it will reduce the number of pieces in a dispatch.

          Mr. Chavis: How many Transborder containers are you currently using?

Mr. Kalbaugh: None, but we are currently looking at using the established rates when we can.

Mr. Samudovsky: What carriers are eligible: international or domestic?

Mr. Kalbaugh: Both.

Mr. McFadden: This is not a change in how we tender mail today.

Mr. Chavis: Would a wide-body international carrier have preference over a narrow body

Mr. Kalbaugh: No

Mr. Gilbert: For Canada and Mexico mail, the ISC facilities do not make it easy to collect loose
load because of off-airport location of the ISCs.

Mr. McFadden: This is not pertinent to today’s issue, but must be factored into his cost figures.

Mr. Gilbert: The question of off-airport lSCs is pertinent. Although AA agrees in principle with
some of the efficiencies potentially offered by USPS built containers, the situation proposed is not
as straightforward as it might appear on the surface. Direct container tender for most but not all
of the mail necessitates carriers to staff two tender sites as opposed to one (with inherent added
costs). Further, there are a number of international mail markets that are either served
exclusively by non-containerized aircraft, or with total daily volumes insufficient to containerize.
The design of the lSCs and their “off-airport” locations directly affect carrier costs and handling.

Mr. Gilbert: Is the intention of the Postal Service to offer to foreign flag but only when there is
insufficient service provided by a domestic carrier?

Mr. Kalbaugh: The use of foreign flags would not change from the situation today; we do not plan
to change tendering procedures. We would still recognize code shares.

Mr. Uttmark: Why do you feel a need for foreign flags in the SFO to TYO solicitation when there
is enough US carrier lift?

Mr. Young: We are not addressing that solicitation today; just a container rate procedure.

Presentation continues:
Mr. Kalbaugh:
Air Carrier Issues
         Savings provide to airlines is a component of reported terminal handling costs
         Occasional practice of using pre-built containers benefits USPS and the air carrier
         Reduced costs are passed back to USPS in lower non-capacity related costs
         The remaining bulk (loose sack) rate be revised to reflect the higher labor activity
         Container inventory may have to be increased
         Liability for damage; USPS would accept liability for damage while in USPS possession.
         Need to come up with a procedure to inspect and sign for containers when delivered.
         USPS needs a container rate to help control transportation costs.

Mr. Chavis: Is it safe to assume that any container rate discussion pertains only to the terminal
handling costs?

Mr. Kalbaugh: Yes.

Mr. Gilbert: I suggest that the current rate making methodology accounts for the savings of
USPS container make-up and is reflected in lower loose sack rates today.

Mr. Adams’ response: Form 41 costs are used just to update rates. DOT only indexes based on
the current percent change.

Mr. Kalbaugh’s response: We do not want to burden the Department or open a base rate study.

Desired Outcome
   Consensus to proceed
   A TNUSPS working group to identify proposed methodology
   Show Cause order
   Published rates

Mr. Samudovsky: All carriers here today are US flag carriers. If USPS is going to fall back on
Title 39 to provide efficiencies, we can chastise you for not using it in its entirety, because it is in
contradiction to what the USPS is doing domestically.

Mr. McFadden: We are not doing this because of Title 39, but because it is the best business
decision to do this. The law just happens to mention this provision.

Mr. Young: It makes good business sense to go in this direction.

Northwest Presentation
   Aesc hlimann:
    Using a logical non-argumentative approach.
    Concern: Three months ago the USPS sent A TA a letter requesting a meeting with the
    airlines to discuss container mail rates. NW declined because DOT was not involved. The
    1974 international mail rate investigation provided the current ratemaking base and process.
    International rates are still regulated by the DOT. This is the first time in 30 years that we are
    attempting to negotiate international rates and NW believes the DOT must still be involved.
    NW recognizes that the USPS Int’l Division desires a lower terminal handling rate similar to
    that established by the USPS Domestic Division when postal personnel load an airline owned
    ULD. NW acknowledges that, since the USPS is doing work that the airline is compensated
    for in the terminal handling rate for sack mail, some adjustment is should be considered by
    the DOT.
    In the domestic ASYS contract, when the USPS loads the ULD in its facility and unloads the
    container at destination, the USPS established a four-cent terminal charge differential
    between the sack and container rate ($.20574476Ab sack vs. $. 16574476Ab USPS loaded
    containers). Each LD3 container is subject to a 1,350 pound minimum charge pivot weight
    based on 9 pounds/cubic foot density. For example: 9 Ibs/cu ft X 7 50 cu WLD-3 = I , 3501bs
    minimum charge. The four-cent differential was established as a reasonable discount for
    domestic mail by the USPS using the pivot weight and the $.04 “discount”produces a $52
   per LD-3 container rate reduction for the USPS. This equates to about two hours of labor
    expense for a NW employee. NW did not oppose the discount even though it does not take a
    N W or USPS employee two hours to load an LD-3.
    The airline saves the same amount of labor expense whether the USPS loads a container
    with domestic or international mail.
    The airline savings are minimal when containers are loaded by the USPS because the airline
    must still provide staffing to receive other non-containerized loose sack mail and to process
    the containers and the paperwork. There is no savings in capacity costs or aircraft loading
    expense because the same mail will be flown on the same aircraft in the same container
    whether it was loaded by an airline or USPS employee.
    Density must be considered in setting any container rates. Commercial carriers no longer
    receive domestic USPS parcels and the 7,350 pound pivot weight can easily be achieved
    since only letter mail is being containerized.

   International densities reflecting a mix of parcels and letters will generally be lower than
   domestic densities and N W proposed a seven pound density be applied to international mail.
   This would produce a 7,050 Ib pivot weight4D-3. (7lb/cu f7 x 750 cu ft) The $. 04Ab terminal
   charge reduction would result in a discount of $42/USPS loaded LD-3. (7050 Ibs. X $. 04Ab).
   This would equate to 7.6 hrs of labor and NW is willing to accept a pivot weight/LD-3 of no
   less than the 7,050 IbdLD-3. Proportionate pivot weights would be applicable to other airline
   owned container types based on the 7 pound density applied to internal cubic capacities.
   The rate proposed above would require that the USPS load containers at its off-airport ISC
   facilities and deliver them to the on-airport airline cargo facility and that airlines would provide
   empty containers for USPS pickup at their airport cargo docks. At on-airport postal dispatch
   facilities such as ORD, SEA and JFK, NW would agree to pickup postal loaded units at the
   on-field USPS facility.
    The Transborder container rate was established in 7974 because UA flew DC-70’s from
   Chicago to Vancouver and Toronto and the USPS wanted to build containers at ORD. The
   terminal rate differential was also $.043Ab ($. 0824Ab sack vs. $. 0390Ab for USPS loaded
   containers). Because there was also a 25% reduction in the line haul rate element that UA
   did not feel was justified, containers were never offered and widebody service was eventually
   discontinued. NW is not aware that the Transborder container rate has ever been applied to
   mail flown to Mexico or Canada.
   Since 7975 NW believes the annual adjustment factors have been improperly applied to the
    Transborder container rate. While the airline savings are still about $. 04Ab or $52/LD-3 at
   best, the container mail terminal charge has been erroneously inflated from $.039Ab to
   $. 7 7 6Ab while the base terminal rate for sack mail has correctly grown to $. 274Ab reflecting
   inflation and cost increases. The line haul “discount” that was improperly applied has also
   increased from $. 027/ton-mile to $. 7 7 7/tOn mile even though there is no difference in the cost
   of flying the mail whether the container was loaded by airline or USPS personnel. Just the
   annual adjustments to the terminal charge alone incorrectly suggest that an airline is saving
   at least $273/LD-3 ($. 753Ab x 7,3501bs) when a postal employee loads the container. NW
   cautioned that the errors in annually adjusting the Transborder container rates should not be
   reflected in setting rates for containerized Atlantic, Pacific And Latin mail.

Mr. Aeschlimann concluded by stating that because the USPS felt the $.04/pound spread it
established is appropriate for containerized domestic mail, NW felt the DOT should also apply the
same $.04 discount to the current terminal handling sack rate for international mail. He again
acknowledged the lower average density for international vs. domestic mail and indicated NW
was willing to accept a seven pound density for use in establishing international container pivot

Mr. McFadden: We need a consensus that we can have a container rate. If we do, then we can
have some further dialog on the rate making process.

Mr. Aeschlimann: Can we form a USPS/air carrier group without DOT participation?

Mr. DeVany’ response: No, DOT representative must be present.

Mr. Ciccosillo: There are other issues. Do we have to stop at multiple USPS facilities to pick up
containers? Will there be transfer volumes within a container?

Mr. Aeschlimann: The four-cent savings on domestic includes the USPS both loading and
unloading the containers. So how does this relate when the containers are not unloaded by
foreign postal administration? There the $.04 rate is overly generous.

Mr. Kalbaugh: There is no pivot weight (minimal charge) for containers in the 1974-75
Transborder rates. There is one on the domestic side.

Mr. Ciccosillo: There is a problem when a container cannot be loaded on full flight, yet the mail
could be loose loaded. How will the USPS pay the airlines for this situation?

Mr. Kalbaugh: This will be covered in terms and conditions.

Mr. McFadden: We do not want to solve all the potential operational scenarios today. We can
address these later. It is not the intent today to solve all operational problems.

Mr. Gilbert: Can we get agreement that we will work together to address these issues and not
have USPS work unilaterally on these?

Mr. Aeschlimann: Is it DOT’Sobjective to just show a show cause order?

Mr. Samudovsky: UA is in agreement with NWs approach.

Mr. Broome: I don’t see what is in it for the airlines, only an effort for the USPS to get lower rates.
The USPS approach should be one of partnering with the domestic carriers to create win-win
situations for everyone by making its business case to include the US Flag carriers’ interests as
well. For example, if lowering the rates becomes necessary for USPS, then negotiations should
be worked out to benefit both parties.

Mr. McFadden: We are down 20% in volume; everything that we can do benefits both parties.

Mr. Gilbert: A lower rate for USPS built containers is only rational with corresponding process
improvements and tighter USPS procedures.

Mr. Aeschlimann: USPS can now load containers. The question is should the USPS be
compensated for the work. We have to acknowledge that the USPS should be compensated for
their work. We just need to determine the appropriate rate.

Mr. Broome: I prefer that USPS say that we need to become competitive than just say we want a
lower rate. Process improvements made by USPS and the resulting cost savings are not related
to the transportation rates that USPS must pay. NW presented the case of why USPS process
improvements don’t necessarily translate to carrier savings. Simply diluting the revenue the
carriers earn just because USPS thinks that’s what needs to happen is not in and of itself fair or
equitable thinking. Although we discussed the competition from the foreign postal administrations
and those rates, we know that rates alone are not the cause of USPS’ decreasing international

Mr. Ciccosillo: How do you address the desirable container size to be used? And how do you
address equitable tender (ET) with one carrier with a container rate and another with only a loose
sack rate?

Mr. Jones: You can have the same problem today.

Mr. McFadden: Again, these can be discussed and worked out later.

Mr. Chavis: We only need to come to an agreement on the container rate issue today.

Mr. Puccia: CO is in support.

Mr. Berselli: Yes, the difference should be reflected in the rates.

Mr. Aeschlimann: I was hoping that we could get an agreement and that DOT would just issue a
show cause and indefinitely suspend the current solicitation.

Mr. Gilbert: We need to.

Mr. Chavis: We don’t need to have a show cause at this time, but maybe for next year.

Mr. McFadden: There is proposal on the table and not much opposition to the four-cent
discussion. We need to convene an operations group to define the rules. We don’t need to wait
a year.

Mr. Uttmark: We support the four-cent proposal but only at 1050-pound density (LD3). Both
must be considered together.

Mr. Aeschlimann: Are we permitted to meet with USPS if the rate already decided?

Mr. DeVany: I don’t know. We would want to be there.

Mr. Kalbaugh: USPS has authority to set rules and conditions so we could meet without DOT if
we don’t discuss a rate.

DOT concurred.

Mr. Aeschlimann: I have a spreadsheet of the numerous ways mail is presently tendered by each
ISC to the airlines; delivered by USPS, picked-up by carrier, etc.

Mr. Uttmark: On the freight side, container rate containers are delivered to the air carrier,
however mail is all over the place.

Mr. Chavis: I believe there is a rule that mail must be tendered on the airport.

Mr. McFadden: You have concerns with inconsistencies across sites. Our future discussion will
provide an opportunity to address all these points.

Mr. McFaddenIMr. Aeschlimann: Discussion on whether or not ATA can represent the airlines in
the future discussion of this nature. Only six carriers represented today, which probably carry
80% of the mail.

DOT recommendation: Only three carrier representatives meet with USPS and then send
minutes of the meeting.

Mr. McFadden: We will document issueskoncerns and send it out to all. We won’t restrict
attendance. This will culminate in a show cause order. Individual carriers can then object to the
show cause order. Let’s sit down and hammer out the processes. We will come back to you with
a date for the next meeting by the end of the week. We will want to get together in the next
couple of weeks.

Mr. Gilbert suggested that the airlines provide their suggested available dates for the meeting.

This concluded the meeting.

I. These minutes are intended to be a general summarization of the meeting. They are only
   meant to provide an overview of the discussions. Presentations, questions, and responses
   stated above are not verbatim.
2. A copy of these minutes is being provided to DOT for inclusion as “Correspondence” in their
    Docket Management System.

The following comments pertaining to the informal DOT meeting of March 12 on international
container rates were also received in response to the circulation of the draft minutes. Additional
comments not directly contributed at the informal meeting have been omitted from the final
version of the minutes.

AA comments concerning the SFO-TYO solicitation:
      Short of the DOT’Sauthority to set the fair and reasonable mail rate for international
      “priority” mail, there is nothinq more pertinent to the prospective container discount than
      the SFO-TYO solicitation.

AA additional comments about working together:
       AA is not willing to invest in a discount with any customer just for the sake of a lower
       price with no return on that investment. AA willing to work collectively with USPS and
       the other carriers present on process improvements, clearly defined procedures, and
       increased efficiencies to mutually grow USPS’ business and the carriers’ business. I
       think the carriers present unanimously expressed the need for inclusion, as part of a
       team with USPS to arrive at procedures together. The carriers do not want to be
       excluded from the development of terms and conditions necessary to make this process
       work for everyone’s benefit.

US comments on a lower rate and the USPS becoming more competitive:
      I believe I also said that I didn’t think that we could separate the activities on the foreign
      side from those on the domestic side.

NW comments on the opening remarks:
      30 years ago rates were regulated by the CAB and established through an
      INTERNATIONAL MAIL RATE SERVICE PROCEDING with all parties presenting
      evidence as to airline transportation costs and USPS service requirements.

Additional NW comments:
        Whether the USPS loads a container with domestic mail or with international mail, the
        airline savings is identical because it did not have to load a fixed amount of mail,
        domestic or international, in the container.


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