[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
ALASKA BYPASS MAIL DELIVERY: A BROKEN SYSTEM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON FEDERAL WORKFORCE,
US POSTAL SERVICE AND THE CENSUS
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
MARCH 4, 2014
__________
Serial No. 113-90
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
DARRELL E. ISSA, California, Chairman
JOHN L. MICA, Florida ELIJAH E. CUMMINGS, Maryland,
MICHAEL R. TURNER, Ohio Ranking Minority Member
JOHN J. DUNCAN, JR., Tennessee CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona GERALD E. CONNOLLY, Virginia
PATRICK MEEHAN, Pennsylvania JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee MATTHEW A. CARTWRIGHT,
TREY GOWDY, South Carolina Pennsylvania
BLAKE FARENTHOLD, Texas TAMMY DUCKWORTH, Illinois
DOC HASTINGS, Washington ROBIN L. KELLY, Illinois
CYNTHIA M. LUMMIS, Wyoming DANNY K. DAVIS, Illinois
ROB WOODALL, Georgia TONY CARDENAS, California
THOMAS MASSIE, Kentucky STEVEN A. HORSFORD, Nevada
DOUG COLLINS, Georgia MICHELLE LUJAN GRISHAM, New Mexico
MARK MEADOWS, North Carolina Vacancy
KERRY L. BENTIVOLIO, Michigan
RON DeSANTIS, Florida
Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Stephen Castor, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director
Subcommittee on Federal Workforce, U.S. Postal Service and the Census
BLAKE FARENTHOLD, Texas, Chairman
TIM WALBERG, Michigan STEPHEN F. LYNCH, Massachusetts,
TREY GOWDY, South Carolina Ranking Minority Member
DOUG COLLINS, Georgia ELEANOR HOLMES NORTON, District of
RON DeSANTIS, Florida Columbia
WM. LACY CLAY, Missouri
C O N T E N T S
----------
Page
Hearing held on March 4, 2014.................................... 1
WITNESSES
The Hon. Mark Begich, U.S. Senator from the State of Alaska
Oral Statement............................................... 5
Written Statement............................................ 8
The Hon. Don Young, U.S. Representative (At-Large) from the State
of Alaska
Oral Statement............................................... 11
Written Statement............................................ 13
Mr. Ronald S. Haberman, Alaska District Manager, U.S. Postal
Service
Oral Statement............................................... 24
Written Statement............................................ 26
Ms. Tammy Whitcomb, Deputy Inspector General, Office of Inspector
General, U.S. Postal Service
Oral Statement............................................... 30
Written Statement............................................ 32
Mr. Dennis Devany, Deputy Director, Office of Aviation Analysis,
Office of Aviation and International Affairs, U.S. Department
of Transportation
Oral Statement............................................... 40
Written Statement............................................ 42
Mr. Steven Deaton, Senior Vice President, Alaska Central Express
(ACE) Air Cargo, Inc.
Oral Statement............................................... 47
Written Statement............................................ 49
Mr. Jeff Butler, Vice President, Airport Operations and Customer
Service, Alaska Airlines
Oral Statement............................................... 54
Written Statement............................................ 57
APPENDIX
Chairman Darrell Issa, Opening Statement with pictures........... 84
Statement of Senator Lisa Murkowski of Alaska.................... 90
USPS OIG letter to Senator Murkowski, Rep. Young, and Sen. Begich
responds to their Dec. 2 letter regarding USPS OIG............. 93
ALASKA BYPASS MAIL DELIVERY: A BROKEN SYSTEM
----------
Tuesday, March 4, 2014
House of Representatives,
Subcommittee on Federal Workforce, U.S. Postal
Service, and the Census,
Committee on Oversight and Government Reform,
Washington, D.C.
The subcommittee met, pursuant to call, at 1:33 p.m., in
Room 2154, Rayburn House Office Building, Hon. Blake Farenthold
[chairman of the subcommittee] presiding.
Present: Representatives Farenthold, Collins, Issa, Clay,
and Cummings.
Staff Present: Ali Ahmad, Professional Staff Member;
Melissa Beaumont, Staff Assistant; Will L. Boyington, Deputy
Press Secretary; Molly Boyl, Deputy General Counsel and
Parliamentarian; Lawrence J. Brady, Staff Director; Sharon
Casey, Senior Assistant Clerk; John Cuaderes, Deputy Staff
Director; Adam P. Fromm, Director of Member Services and
Committee Operations; Linda Good, Chief Clerk; Tyler Grimm,
Senior Professional Staff Member; Mark D. Marin, Deputy Staff
Director for Oversight; Ashok M. Pinto, Chief Counsel,
Investigations; Jeffrey Post, Senior Professional Staff Member;
Jessica Seale, Digital Director; Peter Warren, Legislative
Policy Director; Rebecca Watkins, Communications Director; Eric
Cho, Detailee; Kevin Corbin, Minority Professional Staff
Member; Devon Hill, Minority Research Assistant; Julia Krieger,
Minority New Media Press Secretary; Lucinda Lessley, Minority
Policy Director; and Mark Stephenson, Minority Director of
Legislation.
Mr. Farenthold. The committee will come to order.
I would like to begin this hearing by stating the Oversight
Committee's mission statement, as we do at every hearing. We
exist to secure two fundamental principles. First, Americans
have a right to know that the money Washington takes from them
is being well spent. And second, Americans deserve an
efficient, effective government that works for them. Our duty
on the Oversight and Government Reform Committee is to protect
these rights.
Our solemn responsibility is to hold the government
accountable to taxpayers because taxpayers have a right to know
what they get from their government. We will work tirelessly,
in partnership with citizen watchdogs, to deliver the facts to
the American people and bring genuine reform to the Federal
bureaucracy. This is the mission of the Oversight and
Government Reform Committee.
I will start today by recognizing myself for a short
opening statement. Today we are here to discuss the Alaska
Bypass mail delivery. Our goal is to see if the current Bypass
system is really the most cost-effective way for the Postal
Service to subsidize the cost of packages for delivery to rural
and outlying areas in the State of Alaska and talk about
whether it is also the most economical way for the Alaskan
people. We will also discuss a number of potential reform
options for the Bypass system that could provide the cost-
effectiveness that the Postal Service needs in able for a
greater benefit to be able to be passed along to rural
Alaskans.
The Bypass system was first designed in 1972 as a way to
save the Postal Service money and improve service to isolated
villages throughout the State of Alaska. Under the system,
instead of large parcel orders being processed through the
normal Postal Service infrastructure, the entire process is run
and managed by private air carriers throughout the State.
Over the last several decades, Bypass mail has evolved into
the most widely used way to ship many foods and commodities to
the rural areas of the State on large several-hundred-pound
pallets that are shrink wrapped. As a result, Bypass mail
doesn't look at all like the mail we have in the other 49
States.
Under the current system, Bypass orders must be at least
1,000 pounds. This differs greatly from the Postal Service
policy outside of Alaska which prohibits parcel post weighing
more than just 70 pounds. Once the 1,000 Bypass order is
placed, it is fulfilled at warehouses in Anchorage or Fairbanks
and completed orders are grouped together on any number of
pallets. From there the pallets are handed off directly to
private air carriers who are then responsible for the
transportation and final delivery of the shipment.
The air carriers are paid for their service based on rates
set by the Department of Transportation. It is one of the last
remaining vestiges of the government setting rates for
airlines. The Postal Service has no control over these rates
and no power to contract with more efficient service providers.
It may only pay the applicable rate to each air carrier that
has met certain statutory qualifications.
With little power to control costs, the Bypass Program only
covers about 30 percent of its cost. In the last fiscal year,
the Postal Service lost more than $70 million operating the
Bypass system. In D.C.-speak that may not sound like a lot of
money, but you multiply it over the 40 years of the program, we
are talking close to $3 billion.
Today's Bypass mail system is tightly governed by lengthy
statutes that create significant barriers for entry for new air
carriers and deliberately discourage competition. The
ostensible goal of this regulation is to allow air carriers to
feel secure in markets and allowing them to feel comfortable in
purchasing larger, more efficient aircraft without fear of
being outcompeted by new, more efficient competitors.
However, a November 2011 report by the IG, inspector
general of the Postal Service, has cast doubt on whether the
Bypass Program is operating ideally for the Postal Service or
for the rural Alaskan. Specifically, the IG audit concluded
that the current system subsidizes the Alaskan aviation
industry, is made up of shipments that would normally be
nonmailable elsewhere in the Nation, and appears to fail at
reducing the cost of goods for rural Alaska, with the savings
to the program largely diverted to a wide variety of other
commercial interests within the State.
Today we will hear testimony from representatives of many
of the key stakeholders in the current system, the Postal
Service, the Department of Transportation, and two
representatives of the Alaska aviation industry. But first we
will hear from some of the elected representatives here in
Washington from Alaska. I thank the witnesses and look forward
to a spirited discussion on how we can make this important
program better.
I will now recognize the distinguished ranking member, I
guess of the full committee, Mr. Cummings.
Mr. Cummings. Thank you very much, Mr. Chairman.
The Alaska Bypass Program is one of the most complicated
systems in the United States Postal Service and is unfamiliar
to those who have never lived or traveled to Alaska. The system
was established in response to a unique local circumstance and
needs.
Unlike other Postal Service programs, the Bypass Program is
just not only to deliver packages and freight, but also to
subsidize passenger air service to remote locations in Alaska.
It is proper for us to examine whether the Bypass Program is
the most efficient way of moving packages in Alaska and whether
it remains the right way to support faster air service there.
In 2011 the Postal Service inspector general issued a white
paper finding that the cost of the Alaska Bypass Program
exceeded the rates paid by shippers by tens of millions of
dollars every year, resulting in significant annual losses to
the Postal Service. The inspector general offered
recommendations to reduce the costs of and increase the
revenues generated by the Bypass Program to make the Postal
Service responsibilities in Alaska more reasonable and
consistent with its current role to provide universal service,
as it does in every other State.
Last month the committee voted to approve H.R. 4011, the
Alaska Bypass Fair Competition Act. During our consideration of
this legislation Chairman Issa stated that the measure would
encourage greater competition and bring savings to the Postal
Service and rural Alaskans. However, the committee considered
H.R. 4011 without first holding hearings or hearing from Alaska
residents.
Before the vote last month, Congressman Don Young of Alaska
wrote to the committee in opposition to this legislation. He
wrote that, ``The passage of H.R. 4011 will undermine successes
accomplished,'' in the Rural Service Improvement Act of 2002.
He also wrote, ``The market pressures would invite the
operations of smaller, less efficient carriers and necessitate
multiple stops. This will increase the operating costs of the
USPS, and these costs will ultimately be passed along to
consumers and taxpayers.''
I am pleased that we are convening a hearing today to
examine the many complexities of the Bypass Program. I am also
pleased that we now have the opportunity to hear from Senator
Begich, as well as Congressman Young, since they represent the
people who would be directly affected by any legislation
reported by this committee.
With that, Mr. Chairman, I yield back and look forward to
the testimony.
Mr. Farenthold. Thank you very much.
And I believe the Chairman of the full committee, the
gentleman from California, Mr. Issa, has an opening statement
as well.
Mr. Issa. Thank you, Mr. Chairman. And I want to associate
myself with the ranking member's statement. This committee does
have an obligation to protect the ratepayers of the post
office, particularly in light of their year-over-year losses.
Additionally, I side with the ranking member in saying that
the earlier bill moved last month or 2 weeks ago was in fact
moved specifically without a hearing. One of the reasons for
that was that when the law was created, it was moved without a
hearing and it was clearly anticompetitive.
Notwithstanding that, Alaskan Bypass Mail is, in fact, a
complex system, carefully constructed as a program designed
purposely to use postal taxpayers--it is designed for the
purpose of having postal ratepayers' funds subsidize Alaska's
aviation industry. Last year alone, that subsidy was $76
million.
I make no attempt to minimize the fact that the situation
in Alaska is different than the lower 48. Additionally, the
situation in Alaska really does beg the question of, are there
places in which universal service is required and promised and
not available by road? The answer, of course, is yes.
There is no question, though, that the bulk ordering system
in Alaska, if it were simply done exactly the same as the lower
48, would still lose money, but it would lose very little
money. If the parcel post rate were applied, the losses to the
post office would be less. That is not to say that I want to
end Bypass mail. Just the opposite. The bill that we are going
to be considering in a markup next week is designed to bring
Bypass mail to a 50 percent self-sufficiency with a 50 percent
subsidy.
Now, going from 30 to 50 percent shouldn't seem like a
lofty goal, nor does it mean that over the coming weeks,
months, or years we are going to fix a system that should be
funded by appropriations, should be funded by the FAA, should
be funded by the transportation bill, but in fact is funded on
the backs of ratepayers. The postal inspector general, though,
deserves to have his recommendations considered and
efficiencies found.
I will give you an example of why Alaskans should be
concerned. If I were to go, as I did, to Anchorage and attempt
to buy a bag of potato chips, the cost of a given bag of potato
chips would be $4.29 in Anchorage, while in Bethel, some 400
miles away, a single plane trip, which I took, the price would
go to $9.99, meaning more than double, more than $5.
The fact is the shipping costs under Bypass mail for that
trip is 35 cents. Alaskans need to understand that the prices
they pay in Bethel or on remote islands often have more to do
with other parts of distribution and profiteering by people in
that system. The difference between 35 cents and $1 in that bag
of chips, if passed on proportionately, would take that $4.29
bag that already goes to $10 and would take it to $10.70. I am
not asking Alaskans to pick up $10.70 cents. I am asking them
to pick up 20 cents or less of that cost.
To give you an example in the lower 48, because today we
will hear arguments undoubtedly that Alaska doesn't have roads,
well, here in Washington, we have roads. In Toledo, Ohio, we
have roads. In you were if you were to ship 150 pounds of goods
some 400 miles, let's say, from here to Toledo via UPS it would
cost approximately 80 cents a pound.
Well, in fact to ship that same distance in Alaska costs
less than half that. In other words, you can ship by air in
Alaska cheaper than you can ship by ground in the U.S. That was
not and should not have been the cost of doing business.
If we go to the most efficient way of delivering this
freight called Bypass mail to Alaskans, we can save money.
Witnesses today will undoubtedly argue that you will destroy
passenger travel in Alaska. If that is the case, the question
is, should postal ratepayers anywhere, but particularly in the
lower 48, subsidize passenger traffic in Alaska or should
Alaska seek to receive, as it might well, some portion of FAA
money, landing fees, or an appropriation to take care of the
need for maintaining subsidized passenger travel in Alaska?
Our bill and the bill that we will consider next week deal
with the ability to try to give the opportunity to be more
competitive. For some reason, Alaska Air, which operates a
fleet of 737-400s, a relatively old aircraft, and only recently
upgraded to that, makes the case that their unique ability to
haul as a preference this freight at a rate the Department of
Transportation sets is essential and that if they have
competition attempting to deliver this freight for the same or
less, that it will somehow disrupt a carefully designed plan
which is working perfectly.
The American people understand this best when one puts it
in perspective. To be clear, the excess capacity of these
airlines is paid for by the Postal Service. More importantly,
the subsidy means that every 6 years the American ratepayer is
buying a Bridge to Nowhere. If one were to look at the so-
called Bridge to Nowhere in Alaska, what you discover is that
in fact it was a bridge to provide access to an airport. I
personally am not a user of the Bridge to Nowhere very often,
but the level of this subsidy every 6 years rises to the cost
of another one of those bridges.
That is why I put forward H.R. 4011, which I believe at a
minimum tries to reduce the preferences given to specific
airlines carefully crafted to lock out new competition. No
American understands why incumbent carriers should be in
perpetuity able to have a preference over other carriers
operating for at least 1 year in Alaska.
Mr. Chairman, thank you for your indulgence. I yield back.
Mr. Farenthold. Thank you very much.
Mr. Farenthold. And other members will have up to 7 days to
submit their opening statements for the record.
Mr. Farenthold. We will now recognize our first panel. We
have the junior Senator from Alaska, Mr. Begich, and we have
the Honorable Don Young, the Representative to the House from
the State of Alaska.
We will start by recognizing Senator Begich.
STATEMENT OF THE HONORABLE MARK BEGICH, UNITED STATES SENATOR
FROM THE STATE OF ALASKA
Senator Begich. Chairman Farenthold of the subcommittee and
subcommittee Ranking Member Lynch and Chairman Issa and Ranking
Member Cummings, thank you for the invitation that the Alaska
delegation can make today in these opening remarks. And, again,
I look forward to the continued discussion on this issue.
I would also like to submit for the record my written
comments, if that is possible, Mr. Chairman.
Mr. Farenthold. They are already part of the record, I
believe.
Senator Begich. Thank you.
As everyone knows, the Postal Service has an obligation
under the Constitution to provide universal service to all
areas of the Nation. I am here today to shed some light on
Bypass mail, a crucial system that allows the Postal Service to
fulfill its universal service obligation to Alaska. I am also
here to tell you the system is not broken.
Chairman Issa, I appreciate your visit to Alaska a couple
of years ago.
There is no doubt Alaska presents some unique challenges to
the Postal Service when it comes to universal service. I want
to note the hard work that the Postal Service employees put in
every day to deliver Alaska mail in a timely manner. In
particular, I single out Alaska's District Manager Ron
Haberman, who is testifying here today.
Ron, I want to thank you for your hard work for Alaska.
Bypass mail is very important to Alaska, but it also is
very important for the Postal Service because it allows
universal service to Alaska in the most cost-effective way
possible. Before Bypass mail existed, Alaskans still relied on
the Postal Service to make shipments. Eighty percent of Alaska
communities are off the road system, so we are forced to ship
groceries and other necessary items through the mail. When it
became clear that the postal facilities couldn't handle the
high volume of postal parcel post, the Postal Service
established Bypass mail. The system relieves the Postal Service
of the need to pay for staff, facilities, and equipment to
process these shipments.
Let me make that point very clear: Bypass mail saves the
Postal Service money. The savings from using Bypass mail and
avoiding the costs of parcel post are estimated to be $45
million annually. Anyone citing the cost needs to make sure
that is factored into the savings.
Last month this committee approved legislation, the intent
of which is to increase competition among mainland carriers
that deliver Bypass mail in rural hubs, to supposedly save
money. However, the bill will actually have the opposite
effect, make the system more expensive and less effective for
the Postal Service and customers.
Here is why. The Rural Improvement Service Act of 2002
purposely limited competition among mainland carriers because
too many carriers were providing mainland service and they
didn't have an adequate share of the mainland market. The
result was unreliable service for Alaskans and high operating
costs for the Postal Service. The bill created an
interdependent relationship between mail and passenger service
to make the system more cost-effective and reliable.
Remember, Alaska is a fifth the size of the continental
United States and has very few roads. When you are covering
that many miles, sometimes you need to kill two birds with one
stone. Something to highlight, the Postal Service has not asked
for the changes that Chairman Issa has proposed. Why is the
chairman pursuing changes that would increase costs for the
Postal Service, especially when the Postal Service has stated
the current process is the most cost-effective way for it to
provide service to Alaska? While the Chairman's proposed
legislation might benefit air carriers that want to enter the
mainland market, it would not benefit Alaskans or the Postal
Service, period.
Let me hit on a couple more points. Chairman Issa has
argued that the system benefits businesses more than it does
rural residents. Wrong again. Just to point out the issue that
we responded to the IG report in regards to your example, on
the potato chip package, it didn't incorporate fuel costs,
utility costs, healthcare costs, housing and wages that are
much more expensive in rural Alaska. It is not as simple as
drawn by the presentation. The cost of living is high in rural
Alaska, plain and simple. If you charge carriers and small
businesses more to provide goods, those expenses will simply be
handed down to the communities in the form of higher grocery
prices.
Chairman Issa has also argued Alaskans need to pay
disproportionately more for their service. This flies in the
face of the Postal Service's universal service obligation. We
should not have to pay more to receive the same service as
other Americans.
While the committee has failed to reach a bipartisan
agreement on much-needed postal reform legislation, here we are
today debating proposals that would actually cost the Postal
Service more money and make the system less effective. These
proposals are counterproductive to the overall postal reform
effort. I just participated in the Senate committee markup of
the postal reform legislation. We need to stay focused on the
comprehensive postal reform legislation for the sake of the
Postal Service and the American people.
Despite the title of this hearing, Bypass mail is not
broken. The system is far from it. Alaskans are open to change
to make the system more effective, but I urge the committee to
reject any changes that would violate universal service for
Alaska or make the Bypass mail system more expensive for the
Postal Service or my constituents.
Finally, I urge the committee to consult both the Alaska
delegation and the Postal Service before proceeding with any
proposed changes.
Thank you, Mr. Chairman. I am happy to answer any
questions.
Mr. Farenthold. Thank you very much, Senator.
[Prepared statement of Senator Begich follows:]
[GRAPHIC] [TIFF OMITTED] T7203.030
[GRAPHIC] [TIFF OMITTED] T7203.031
[GRAPHIC] [TIFF OMITTED] T7203.032
Mr. Farenthold. We will now recognize Representative Young.
STATEMENT OF THE HONORABLE DON YOUNG, UNITED STATES
REPRESENTATIVE (AT-LARGE) FROM THE STATE OF ALASKA
Mr. Young. Thank you, Mr. Chairman. I ask unanimous consent
to submit for the record, if it is not there, my written
statement.
Mr. Farenthold. Without objection, so ordered.
Mr. Young. Mr. Chairman, I again thank you for this
hearing, and because I have a written statement I am not going
to use it because the Senator has covered most of the subject
that I would cover in my written statement, so I will just
speak from the cuff.
Mr. Chairman, I will agree on one thing with the Senator,
the comment of this hearing, ``Alaska Bypass: A Broken
System.'' I don't know where that came from. I don't know why
it was used. It is not broken. It is working. It is working
quite well. And as the Senator mentioned, why this proposal is
before us I don't quite and do not know for sure.
Chairman Issa has a great interest, as I have said before,
in legislating in my State, and he is worried about $70 million
lost, supposedly, which would cost the Postal Service probably
$200 million if they were to have just what we call parcel
post. And there is a $15 billion debt in the post office and
you are worried about $70 million that would cost $200 million.
I don't quite understand that. That is what you call picking up
peanuts when you have a forest fire in your backyard. It
doesn't make a whole lot of sense.
When this system works, it is working well, not only for
the rural community, but again I would like to remind my
colleagues very straightly, because you are reading, I see one
guy up there, Mr. Clay, is on his telephone, and that deeply
disturbs me as a chairman. So I would prefer if you would like
to listen very carefully. Okay. Okay. All right. That is fine.
You take all the land east of the Mississippi River to the
tip of Maine, to the tip of Florida, that is part of Alaska,
and in that area you have got 253 Congressmen and 52 Senators.
And you have more mileage of highway in that area, 10,000 times
more than we do. There are no highways in Alaska. We do have
post offices. And the people as American citizens have a right
for universal service.
Now, if we wish to do so, we will just go back to the
parcel post system. Bypass mail, people don't understand. What
it is, it is the products you are going to ship parcel post
don't go through the post office. That means you don't need to
build more postal buildings. It means you don't have to hire
any more people if you want universal services.
Now, I will say the post office attempted to in fact
eliminate parcel post in Alaska, and that was changed back to
the way it should be.
So we are talking about a situation here that concerns me a
great deal because it doesn't make sense to have this bill or
the bill that was passed last week moved to the House floor
when it has something in it that saves peanuts, when in fact it
costs us money, the taxpayer money, the Postal Service money.
Now, we all know that, very frankly, there were some people
talking about noncompetition. This is not a new subject.
Chairman Issa has gone to Senator Stevens and advocated for one
of his constituents to make it more competitive. The way it was
written into law, and it was Senator Stevens, was in fact it is
very competitive now. It is not just one. But we couldn't have
everybody participating in or you have not enough to make it
work.
Now, people say we are subsidizing the passengers. Now, you
build me some highways, Mr. Chairman, and I will go along with
you. You give me the land back that this Congress took away
from Alaska, I will go along with you. You let us have what the
statehood said and I will go along with you. Do you know that
this Congress took 27 million acres away from the State of
Alaska and hodge-podged our map so we can't build a road if we
wanted to.
In the IG's report--and, by the way, he is full of it, I
mean right up to his eyeballs, and if he is in the room I will
say it again, when he says in fact the State of Alaska ought to
build more roads. That is the dumbest statement I have heard in
my whole life. I doubt if he has ever been to Alaska. If he
has, he knows why we can't build roads.
We need this for the people, in fact, in the rural areas of
Alaska. We don't need to fix something that is not broken. It
does work. We use the potato chip example like we said before.
You go into one of those stores, and I used to be in a little
side store business in Fort Yukon before we had Bypass mail and
I know the what the profit margin is, it is about 1 percent. So
let us think about this before we move this bill.
Three people versus 253 Congressmen. Two Senators. Maybe we
ought to really think about it. This is not good legislation.
It doesn't do what it says it will do. It doesn't fix a system
that is not broke. It meddles, and I don't like meddling.
I yield back.
Mr. Farenthold. Thank you very much, Mr. Young.
[Prepared statement of Mr. Young follows:]
[GRAPHIC] [TIFF OMITTED] T7203.001
[GRAPHIC] [TIFF OMITTED] T7203.002
Mr. Farenthold. We appreciate your testimony, as well as
the Senator's.
I know, Senator, you agreed to answer some questions.
Typically when we have legislators testify, unless they are
willing, we don't question them. We do have some questions if
you all would be willing to entertain them.
I am going to yield my time to the gentleman from
California to ask his questions. Being from Texas, the second
largest State, we are over the fact you all are bigger than us
now. So I yield to the gentleman from California, another large
State.
Mr. Issa. Thank you. That is how the gentleman won his
primary today.
Senator, your statement repeatedly of the guarantee of
universal service, I might note for the record that there is no
such guarantee in the Constitution. However, in my visits to
Alaska, both officially and unofficially, going up to Prudhoe
Bay, obviously looking at Bypass mail going to Alaskan islands,
I am totally committed to the fact that unless we find other
sources of revenue to provide the appropriate subsidy for
reaching those islands, that the post office will continue to
maintain Bypass mail, because as both of you alluded to, it is
more efficient than taking in a bunch of parcels in 70-pound
increments. You don't have an argument with me. Both the
legislation that has already been passed by this committee and
the next legislation deal only with the questions of
efficiency.
Now, I might ask why it is that everywhere else companies
such as Alaskan Airlines sooner or later have to rebid and they
can lose in a rebid, but in Alaska they are guaranteed
effectively in perpetuity to have what effectively is a
legislative earmark for them to get a certain amount of
revenue. Senator, do you have a reason?
And I understand Congressman Young said that we are
meddling and that they can't afford--I think he basically said
you couldn't afford to have additional competition. Is it
additional competition that is objected to, and if that is the
case, then couldn't we name a number of maximum vendors, but
then allow a bid in which a vendor could lose theirs, whether
it is Alaska Airlines or a smaller one?
Senator Begich. Mr. Chairman, let me make it very clear
again. How it is operated, as you know, in 2002 I wasn't here
when the original bill was done. I know Don can--Congressman
Young, can talk to it.
Mr. Issa. You know, Senator, you would not have wanted to
be sitting in the office with Ted Stevens telling me not to
meddle in Alaska when I asked him why he was locking out
existing carriers.
Senator Begich. I would be very happy to answer your
question. Mr. Chairman, the economy of scale, Alaska Airlines
is a dominant player. It creates opportunities to create more
efficiency in the delivery of the system. I fly on those
flights a lot. I know you came up one time and you went up to
Prudhoe. Prudhoe is not a village, okay?
Mr. Issa. Senator, Prudhoe is where I went to look at other
issues. I have been to Alaskan islands on a hydrofoil. I came
up to look at Bypass.
Senator Begich. Right. And when you went up there, going
out to the villages, when we have direct and we have volume
players in there, and Alaska Airlines is a volume player, and I
know you are going to have a representative here, you can ask
more questions, but in order to do it on economy of scale in
Alaska, if you have multiple carriers the odds they will not be
able to create the business necessary to keep the prices
marketable and fair to the consumer at the end of the day.
Now, you may disagree with that. I come from the private
sector just like you. You are much wealthier than me, and I get
it. But I come from the small business world. And you always
want competition, but you also have to understand this delivery
system of parcel post, and I know how you packaged up your
comments when you said they put them in big 1,000 packages.
Well, that is because it is more efficient. If they didn't do
it that way, they would do the 70 pounders and the post office
would pay that bill and that shipping cost and it would be
passed on.
Mr. Issa. Senator, that wasn't the question. Would you be
responsive to the question? And I want to be very fair to you.
You came here to help us. But we are not arguing over changing
the efficiencies that are in Bypass mail.
Senator Begich. Yes, you are, by the conversation.
Mr. Issa. No. What we are talking about is excessive stops,
additional port stops, if you will, of aircraft; the ability
for carriers to bid to do additional work, for additional
carriers to bid; and ultimately the possibility that carriers
might not carry passengers, but might only carry freight. These
are areas we are looking at to try to wrench out 10, 20, 30
million dollars worth of the cost of the existing Bypass mail.
No part of those freight shipments called Bypass mail are
we talking about eliminating. We are asking can you in fact,
tell us that locking out potential bidders of existing Alaskan
airlines that have been doing business in Alaska for more than
a year continuously, locking them out of the so-called
preference, tell us why that is important, that they will in
perpetuity never have an opportunity to replace an incumbent
carrier.
Senator Begich. Again, Mr. Chairman, in all due respect----
Mr. Issa. I don't want due respect. I just want the
question answered.
Senator Begich. That is fine. There is competition in the
market. New carriers can enter the system. The issue is,
especially in Alaska, when you are flying in Alaska several
aspects play into it, not only the competition that we have in
Alaska, but also the safety issues and knowing Alaska pilots
and knowing Alaska flight areas. This is a part of the equation
also. It is not just getting the mail there. It is also the
safety of the passengers and getting mail there. There is
multiple reasons.
You are not going to get the answer you want from me. I
understand that. We are going to disagree on this aspect of
what you are proposing.
Mr. Issa. Senator, the airlines that we are talking about,
the three I understand----
Senator Begich. I disagree with your premise, Mr. Chairman.
Mr. Issa. Well, I understand. I just want you to make sure
we make the record accurate. The airlines that would be added,
I think there are three that under this legislation, there
could be more later, as far as I know they are able to carry
this same freight, they are safe enough to be able to carry.
They are just locked out from the preference. Additionally,
there is, what, $870 per thousand if a plane simply lands one
additional time even if bypassing that might be efficient for
carrying the mail. These are the areas we are dealing with.
And I think it is important that the record be clear. Are
you saying that these other three carriers would not be safe to
carry milk or vegetables or cans of Coke?
Senator Begich. I am saying that safety is part of the
equation. But let me just say this.
Mr. Issa. But what level of safety do you need for a can of
Coke?
Senator Begich. Mr. Chairman, I am not going to go back and
forth with you. Maybe you want to. I have seen how some of
these hearings work. I operate differently in the way we have
conversations. I am not going to go back and forth with you
over the same argument.
I will just tell you this. The Senate has passed out of the
committee in a bipartisan way a comprehensive postal reform
bill that puts the postal reform on the right track with
ensuring Bypass mail stays in the way it is because it is a
small piece of the puzzle and does it efficiently. We have been
able to balance the budget on the Postal Service and doing it
the right way with the Senate bill and looking at all these
issues, and Bypass mail, as it is today, which I will go back
to my original quote, it is not broken, despite this committee
hearing's title. And we were able to do it with Democrats and
Republicans in a bipartisan way on the Senate side.
Mr. Farenthold. Thank you very much.
Mr. Young. May I make a comment?
Mr. Farenthold. If you would like to comment for a moment,
Mr. Young, absolutely. Did you have something you wanted to
add?
Mr. Young. You know, this is about safety and efficiency.
If you open for bid, I can come in, I know on the bill it says
I believe they are supposed to be operating 6 months, I think
that is correct.
Mr. Farenthold. I think it is a year.
Mr. Young. A year before they can bid? But you remember
this system has been working for a period of time where each
carrier now has a system by equipment, loading capability, and,
in fact, if you had another competitor would he guarantee
passengers back to the home base? If he just wants to supply
Bypass mail he would have to raise the rates because there is
no passengers.
Alaska Airlines has passengers. I think that is crucially
important to remember. This is about saving money and making
sure that the planes are safe. Now, that may be up to the FAA.
I don't know. I mean, that is something we have to think about,
the system. We have not had an accident. We have delivered the
mail. There hasn't been any real problems. I mean, that goes
back is it broken? Are we just looking for a problem? That is
all.
Mr. Farenthold. We are a little over on Mr. Issa's time--or
my time--and Mr. Cummings has indicated he would like to go to
Mr. Clay first.
So, Mr. Clay, you are recognized for an equal amount of
time.
Mr. Clay. Thank you, Mr. Chairman.
And thank you, my friend from Maryland, the ranking member,
for yielding.
Senator Begich, welcome to the friendly confines of the
House Oversight and Government Reform Committee. You know, on
December 2, 2011, the Alaska delegation sent IG Williams a
letter requesting the findings within the 2011 inspector
general's report. Could you elaborate on the delegation's
concerns with the report?
Senator Begich. Absolutely. Thank you very much for the
question.
First off, when you look at it, as I mentioned a little bit
earlier in regards to the cost, as I highlighted, that 35 cent
bag of chips, shipping, they didn't incorporate all the other
costs of that product and therefore that is a huge gap. They
also had information regarding the flights, for example,
comparing a 144-seat passenger planes to 36-prop passenger
planes and making them equal, which is incorrect.
We went through a list of items. The infrastructure cost,
how is that incorporated? If I took the position, and I do, and
I would love more roads, as Congressman Young said, if you
suddenly say we don't want Bypass mail, then there is a
substitute, parcel post, like everyone else can get. They can
drive and deliver parcel post. Well, okay, where is that road
construction money, that cost factor? None of these things are
put into this discussion in the IG's report. We detail that, as
you noted, 2-1/2 pages by the delegation, which we think are
legitimate issues that detail out why the system today is not
broken and is efficient. It is very efficient in the delivery
of the system.
So as I said on the costing, the shipping, the amount of
travel, the savings, they never incorporated. They never asked
the post office how much are they saving by not doing this.
Well, it is $35 million bucks. Well, where is that in this
equation? That should be incorporated.
So there are several items that we highlighted that we
think should be taken into account when you are looking at this
system. And that is what it is. It is not a program. It is not
a subsidy in the sense like people like to make other programs.
This is a postal delivery system. I mean, I would just venture
to guess an envelope from California to D.C. costs more than an
envelope going from southern California to maybe a town across
the street, but the postal cost is the same.
Mr. Clay. And I do empathize with your position, having
just finished a recent trip to the North Pole. And I was in a
place called Churchill, Manitoba on Hudson Bay, pretty close to
the North Pole. And it was a remote town. There were no roads
leading in or out. The only way there was through train
service, by rail or by plane. And, yes, the cost of goods and
services were much higher in that town.
Let me move on to Representative Young. I hope you are not
reading your BlackBerry, Representative Young.
Mr. Young. I have never read my BlackBerry in my life. The
day I turn that sucker on is the day I am going to walk out of
these halls, I will tell you that right now.
Mr. Clay. You know, for the life of me I cannot understand
why we are having this hearing on this bill. I mean, maybe you
can shed some light on it, to bring----
Mr. Issa. I can----
Mr. Clay. No, I am talking to the witness now, Mr. Chair. I
am talking to our colleague.
Mr. Young. I really think, in all due respects to the
chairman of the full committee, it was being held because Mr.
Cummings and Mr. Lynch raised this point on the letter I wrote,
and I do think this is why this hearing is being held. I
believe the same provisions are in the major bill that was
voted on, and now we can go to the floor and say we had a
hearing. I think that is the main reason.
But the reality is, this will inform you, I think, a little
bit about the challenges we have in the State of Alaska. I have
said before, if you guys help me build some roads, I will be
all for it. We have a broken infrastructure system in the lower
48. We don't have any infrastructure of any consequence in the
State. Remember how many miles of road.
So we need to have universal service for the post office.
The post office is losing money. There is no doubt about that.
And I hope in the postal reform we will finally solve the
problem and allow them to make some money. But $70 million,
when it is going to cost about $200 million to do what they are
losing on $70 million, to me that is a $130 million profit, any
way you want to cut it. So I don't know.
Mr. Clay. I yield to the gentleman from Maryland.
Mr. Cummings. Congressman Young, the reason why we wanted
to hold a hearing is so we would get a better understanding
about this mail. I understand that there are unique situations
in Alaska, and what we wanted to do was make sure we understood
what we were voting on.
And so as I have been listening to the discussion, I
wondered, you know, we often hear in the Congress the terms
picking winners and picking losers, and I am just wondering,
those carriers that are in already, have we now given them a
license to be there forever, and what about others that might
want to compete? This is just out of curiosity. I mean, this is
a question. And I just wondered, if you were on the outside
looking in, I mean, how would you handle that?
In other words, if you were a carrier and you wanted to
have an opportunity to get in on the action. And I am not
saying. I don't know. I am just curious.
Mr. Young. May I address that? I am not locked into any
airline's permaturity as far as carrying mail, but I am locked
into safety and efficiency. That is what I am locked into. And
when you put up a bid, now, I have seen some of the bids the
post office puts up, and they may go for the cheapest bid. Now,
that is well and good for their bottom line, but that doesn't
protect the person that is flying in that airplane or the lack
of efficiency receiving the mail.
Mr. Cummings. So if they put up the requirements of a bid
were to have the level of safety and the things that you just
talked about in there, your concern is, I take it, first of all
that they would likely not require those things in the bid, and
even if they did, that bidders would, even if they said they
were going to do it, they probably wouldn't perform to the
level of safety and efficiency that you are talking about. Is
that a fair statement?
Mr. Young. That is what I am saying. And by the way, again,
I go back to the post office, they will take the cheapest bid.
That is what concerns me. They will take the cheapest bid. And
in doing so they can jeopardize the efficiency and the safety.
Mr. Cummings. Okay. Senator.
Senator Begich. Very quickly. Also, inherently when you do
freight, for example freight coming out of Anchorage going,
say, to Bethel or Koyukuk or a small village, that goes out
there full up, if it is just a straight freight liner, it comes
back empty. What do you think the costs are going to be? They
have got to pay for that. So the costs go up. That is why there
is this combo. And people who have a combo, they can enter the
market now. But you do the combo so then it becomes a more
efficient system. It is the similar problem we have with our
big boat ships that come up tote. They come up full, they go
back empty because we don't have product that we are exporting
back to Seattle or Tacoma.
Inherently a straight freight shipper will cost more money
in the end product. Now, I know someone will argue differently,
but I am telling you, I have flown on those have known on those
combi planes, Don Young has flown on those combi planes, half
freight, half people. And the reason it is done is because you
have got an efficiency to the system, and that is just a fact,
and that has been proven by the post office in its analysis of
savings.
Mr. Young. Another thing, too. Unless they have the
aircraft available, and that is where the bid would come in, if
you think you are going to be able to carry this freight in a
Caravan, which is a single engine turbo prop, or in a Dash 8,
you are not going to meet the requirement. The efficiency goes
out the door. And to my knowledge those seeking this new
competition within the State don't have any type of aircraft
like that. It will probably come, very frankly, someone leasing
them from the lower 48 bringing the new aircraft in to get in
the direct freight business.
Mr. Farenthold. Thank you very much.
And we will now recognize the gentleman from Georgia for 5
minutes, Mr. Collins.
Mr. Collins. Well, in the midst of all the big States
discussing here, the small State of Georgia is going to yield
its time to the chairman from California.
Mr. Issa. I thank the gentleman for yielding.
Well, I think the round of questioning helped us a lot in
understanding that it is all about passengers. Is that correct,
Representative Young? That in fact, notwithstanding everything
else, this program, what is basically the current rules tie the
hands of the post office, forcing them to give a preference to
airlines who carry passengers. Is that correct?
Mr. Young. No, it is not correct. It is forcing them to
make it more efficient. If you fly empty, you know this, Mr.
Chairman, if you fly empty going back you are going to raise
that price of the potato chips up to $12 a pack.
Mr. Issa. Well, that begs the question, if the post office
has the ability--and I am happy to change this legislation to
make it fit the model that you and the post office seem to
want--if the post office has an obligation to get the lowest
long-term price, does that meet your requirement?
Mr. Young. Lowest long-term price with efficiency. With
efficiency. And you can't be efficient if you don't haul
passengers.
Mr. Issa. Okay. But it is all about passengers.
Mr. Young. No, it is about efficiency.
Mr. Issa. Well, you know, Don, when I went----
Mr. Young. If you can't have passengers, you will not have
efficiency.
Mr. Issa. Well, when I went up to that Aleutian island on a
hydrofoil we went up with freight and we came back without
anything. We didn't bring any passengers back.
Mr. Young. You lost money, too.
Mr. Issa. Well, I didn't, but the hydrofoil, I guess, might
have done that. But let's go through the arithmetic that you
have been giving up until now. The $35 million you say it would
cost more to do parcel post, that is a number you are good
with?
Mr. Young. I think it would.
Mr. Issa. That is fine. I am fine with that number. They
lost $76 million. Had they billed parcel post rate they would
have billed over $100 million. The arithmetic is that they
could raise the price $41 million, pass only on to the
efficiency of the Bypass mail $41 million in discounts, and
everybody walks away happy. The only problem is that is more
than my bill is purporting to charge.
The current cost, let's just say round numbers, it is $100
million, $110 million to ship if you were shipping parcel post.
And by the way, that is almost exactly the number of what it
would take for this program to break even, meaning if they used
Bypass mail but charged parcel post rates the post office would
roughly break even.
And I will take your number, it is a good number, $35
million in savings. I believe the post office needs to pass on
that entire $35 million that they save by not touching the
mail. I am completely in agreement with you. The problem is
they pass on tens of millions of dollars of additional
discount. The problem is that universal service has a price.
The Alaskan who receives parcel post by air, even including
discounting the Bypass savings, is still paying less than a
parcel post person who gets a package delivered over 1,000
miles or 800 miles or whatever in the U.S. The discount is
greater currently than in fact is earned due to Bypass.
And, Senator, I believe Bypass is the most efficient way. I
think it could be more efficient if we allow some competition,
and we could talk about ways to protect against unreasonable
competition. But do you agree that Bypass mail, the portion of
the savings that comes from a more efficient distribution, is
what should be passed on to the ratepayer, not that plus more?
Senator Begich. I will give just a general comment. Not
seeing your numbers, and I like to see stuff written down, but
let me just make it a broad----
Mr. Issa. Senator, I was taking Don Young's numbers.
Senator Begich. Well, let me just make a broader sweep
here.
Mr. Young. He hasn't seen my numbers either.
Senator Begich. That is right. I was looking over his
shoulder here. But let me take a broader. You made the comment
that you will tweak the bill to get it to where it needs to be
to make it work. Well, it is working now. Now, if we want to
argue the point about, for example, if you now want to change
the system of universal service in the sense of making sure it
pays for itself in areas, then we should talking about the
Grand Canyon. I could start taking a list of places across the
board to deliver that mail.
Mr. Issa. Senator, I will tell you, on this side of the
dome I am happy to hear you out as long as you want to talk.
But I asked you a question about the level of discount. I have
already said I believe Bypass mail should be maintained. What I
am looking to do in this legislation is to have as much free
market competition as possible. If there is an explicit subsidy
for passenger, not an efficiency but a subsidy for passenger, I
want that to be measured in a way that everyone knows that it
is open and transparent. But most importantly, if we can find
ways to lower the cost, I want to lower the cost, because
currently the discount given for Bypass mail is greater than
the savings versus parcel post, which it was an alternative to.
Now, to be honest, we are arguing over about $20 million
and three companies that might be able to enter the market, at
least measured under this current legislation. It is not a lot
of money. It is more a matter of principle, that I want to make
sure that the post office is allowed to seek the most
competitive vendors. And if you want to have a discussion about
what those vendors must do and maybe they have to be in
business for 5 years, that is fine.
When I went up to Alaska the first time, I saw tail
dragger, gas burner, they weren't DC-3s, they were more like
DC-5s, but they were cousins, big cousins of a DC-3, and those
were carrying postal freight in some of the oldest planes I had
ever seen. So I have seen a lot of old ragged planes carrying
postal freight.
The question isn't, is Alaska a first class airline? It is.
Is Alaska an efficient carrier? I believe it is. But that is
not the whole system and that is not really what we are talking
about.
Chairman Young, Don Young, quite frankly, he is always
going to be a chairman to me, he made the point about those
single engine props. Well, they will carry a lot of those
locations. Alaska Air carries a relatively few number of
locations but a lot of freight. And as you know, small singles
and light twins are carrying a lot of the freight. That is
really where I suspect that some of the efficiency could be, if
they were to Bypass a stop here or there, deliver more
appropriate for the needs of freight, maybe less appropriate
for the desire of passengers.
That is what this discussion is about, and I hope you could
ask me will I work with you to achieve certain things and then
tell you us what you want to achieve rather than saying there
is no savings here. The post office and the IG are going to get
up after you and they are going to say, yes, there is. I am
quite sure of that.
Senator Begich. Mr. Chairman, I guess my comment back to
you would be that we have done this work on the Senate side I
think with fair deliberation on the overall issue on the budget
of the post office in trying to get a solid bill that pulls the
post office in a broad, back to breaking-even-plus, in order
for it to survive.
Bypass mail, as we are sitting here, to be frank with you,
I will talk Bypass mail forever, but to spend this kind of
amount of time on what you just claimed a $20 million issue
seems why taxpayers are more outraged with us than ever before,
when it is a multibillion dollar issue. We have a bill that we
passed that dealt with Bypass mail and everything else.
Mr. Issa. Senator, as far as we know, your bill didn't
touch Bypass mail.
Senator Begich. Because we don't think it is broken,
Republicans and Democrats.
Mr. Issa. And most of the savings came from a transfer from
the post office to Medicare. It is no net savings to the
unified bill.
Senator Begich. On the overall bill, I beg to differ.
Senator Coburn, who is fairly conservative I would say, who
supported the bill coming out of committee as the ranking
member, I wouldn't think he would pass a bill that, one, cost
money, doesn't show savings, and doesn't solve the problem long
term.
Senator Begich. He even, through the discussions we had in
that committee, saw no need to modify or change Bypass mail
because it wasn't broken. Other elements of the post office are
broken. That is where we should be spending our time.
Mr. Farenthold. We are getting a little beyond the scope of
where we get here overall postal reform versus the more focused
look at the Alaska Bypass mail system. At this point, I think
we do need to move on to our other witnesses, Let
Representative Young and the Senator get back to work for the
people.
Mr. Young. Thank you, Mr. Chairman, and thank you, Mr.
Chairman, two chairman up there. As chairman and chairman, I do
appreciate the hearing. I am still willing to sit down and talk
to people about solving, if there is a problem, if there is
something we can do together. But right now, it ain't broke,
don't fix it.
Mr. Farenthold. Thank you very much. Now we will take a
short recess while the clerks set up for the next panel.
[recess.]
Mr. Farenthold. Well, we are back, and we will now
recognize our second panel.
Mr. Ronald Haberman is the Alaska district manager for the
United States Postal Service. Ms. Tammy Whitcomb is deputy
inspector general for the Postal Service Office of Inspector
General. Mr. Dennis Devany is deputy director of the Office of
Aviation Analysis in the Office of Aviation and International
Affairs at the Department of Transportation. Mr. Steve Deaton
is senior vice president at ACE Air Cargo. And Mr. Jeff Butler
is vice president of customer service, airports, and cargo for
Alaska Airlines.
Pursuant to committee rules, all witnesses will be sworn in
before they testify. Would you please rise and raise your right
hand, please. That was two pleases.
Do you solemnly swear or affirm that the testimony you are
about to give will be the truth, the whole truth, and nothing
but the truth?
Let the record reflect that all the witnesses answered in
the affirmative. You all may be seated.
We've received your written testimony, so in order to allow
time for discussion, please try to limit your testimony to 5
minutes. Your entire written statements are a part of the
record. You should see in front of you a red, yellow, and green
light. Much like when you're driving, green means you're doing
good, yellow means hurry up, and red means stop. So we will now
start our testimony with Mr. Haberman.
You are recognized for 5 minutes, sir.
STATEMENT OF RONALD S. HABERMAN
Mr. Haberman. Good afternoon, Chairman Farenthold and
members of the committee. My name is Ronald Haberman, and I
serve as the district manager of the Postal Service's Alaska
District. I have been employed by the Postal Service for 29
years, and I have been a resident of Alaska for nearly 18
years.
Thank you, Mr. Chairman, for calling this important hearing
on Alaska Bypass service. I am pleased to be here today to
provide a historical overview of Bypass mail delivery in Alaska
and to explain how the current system works. I will also
discuss the differences between Alaska Bypass mail and standard
post, previously known as parcel post, and some of the costs
associated with bypass service.
The State of Alaska is vast in geography with no roads
connecting the majority of its communities. Mail is transported
via airplanes, helicopters, hovercraft, and ferries. While a
very limited road system allows some areas to be reached by
surface vehicles, nearly all mail must at some point be
transported by air in order to reach its final destination.
Bypass mail service came into existence in the early 1970s
when increased parcel post volume, which at that time included
mail delivered to bush communities, began to exceed the Postal
Service's operational facility and infrastructure capacities.
Bypass mail is prepared by an authorized shipper, tendered
directly to mainline and bush carriers, and then delivered to
the addressee at final destination. Items that flow through the
Bypass process are not collected, transported, or delivered by
the Postal Service. These items bypass originating and
designating postal operations, thereby incurring no cost for
Postal Service infrastructure, such as labor, facilities,
processing, and equipment.
The Department of Transportation is the sole rate-making
authority for all intra-Alaska mail transportation. Alaska is
the only remaining regulated air environment, which means the
Postal Service is not authorized to negotiate rates directly
with air carriers except under limited circumstances.
There are stark differences between Bypass mail and
standard post. Standard post consists of single packages that
must adhere to weight and size restrictions and enters the
Postal Service system via contact with postal retail or
delivery employees. The packages are processed and delivered
within the Postal Service's infrastructure.
Alaska Bypass service consists of goods and commodities
that are similar to freight and cargo that is shipped in bulk
on pallets to rural communities. The pallets far exceed the
Postal Service's maximum weight limit of 70 pounds and are
prepared in a warehouse and inducted into air carrier
facilities for transportation and delivery.
Alaska Bypass service allows businesses, which typically
include popular big box wholesalers with locations in Anchorage
and Fairbanks, to ship directly to rural customers, usually
retail merchants, schools, and medical clinics using a hub-and-
spoke system. These recipients order goods and supplies from an
approved Bypass shipper who processes the order and tenders it
to an approved Bypass air carrier based at acceptance point
airports in Anchorage or Fairbanks. The assigned Bypass air
carrier transports the order to a hub community where the large
pallets are tendered to bush air carriers who deliver the items
to the recipients.
Goods shipped via Bypass mail must be ordered from
authorized shippers in minimum quantities of 1,000 pounds, and
Bypass pallets generally travel the same routes and in the same
planes as Priority Mail, Priority Mail Express, and First Class
mail. The minimum shipping price for a Bypass mail order is
$365. Last year, 87.5 million pounds of Bypass mail was
delivered.
The Postal Service incurred $109 million in transportation
costs and $32 million in revenue for Bypass mail service in
fiscal year 2013. This means that Bypass mail costs exceeded
revenue by $77 million. However, transporting mail to customers
and post offices in remote areas of Alaska is a part of the
Postal Service's universal service obligation. Although the
measures the Postal Service takes to deliver to remote areas of
Alaska are unique, operating delivery services to some
locations at a loss are not. For instance, the Postal Service
loses money transporting mail to customers at the bottom of the
Grand Canyon using mule trains. Nonetheless, as part of the
Postal Service's statutory mission to provide prompt, reliable,
and efficient service to all communities, these addresses must
receive the same level of commitment to delivery as all others
across the United States.
Bypass mail is a cost-effective and efficient way to handle
items that would otherwise require processing through the
postal infrastructure. If the Postal Service were to process
Bypass mail through in-house operations, it would incur
substantial transportation, facility, and labor cost.
Mr. Chairman, this concludes my remarks. I would be pleased
to answer any questions.
Mr. Farenthold. Thank you very much, and you gave back some
time. Always a winner with that.
[Prepared statement of Mr. Haberman follows:]
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Mr. Farenthold. We'll now go to the deputy inspector
general for the Postal Service, Ms. Tammy Whitcomb.
You're recognized for 5 minutes.
STATEMENT OF TAMMY WHITCOMB
Ms. Whitcomb. Thank you. Mr. Chairman and members of the
committee, Alaska Bypass is a unique service not provided
anywhere else in the country. It was created in 1972 to ease
operational bottlenecks but has come to resemble a freight
service rather than typical mail or parcel delivery.
As you can see on the screen, under the program, large
orders weighing a minimum of 1,000 pounds are shipped on
pallets via air transportation. The Postal Service's normal
weight limit for parcels is 70 pounds.
The Alaska Bypass pallets of goods travel from the
commercial warehouse via the airline to the merchant's door,
bypassing the Postal Service's infrastructure. The Postal
Service is required to pay for this air transportation;
however, postage is assessed at less than $30 for every 70
pounds and has no relation to the actual cost.
The Postal Service has lost money on Alaska Bypass every
year since its inception. In 2013, the Postal Service paid out
$108 million for Alaska Bypass transportation while it brought
in only $32 million in revenue, losing $76.8 million.
Keeping the program consistent with its original intent has
been challenging. For example, in the late 1980s, the Postal
Service began prohibiting shipments of concrete and certain
building materials after excesses emerged. In 2002, the program
goals were formally expanded to include supporting Alaskan
passenger and freight air transport. Thus the program has
evolved beyond improving Postal Service operations.
The Postal Service is also restricted in how it operates
the program. Changing the Bypass network requires 12 months of
public notice in consultation with the government of Alaska.
Additionally, in a throwback to the days before airline
deregulation, the law mandates that the Postal Service pay air
carriers noncompetitive rates set by the Department of
Transportation. The Postal Service is required to equitably
share Bypass volume among designated carriers, and new carriers
must overcome significant hurdles to participate. These
features burden the Postal Service with additional costs
unrelated to the postal mission.
Alaska is an enormous State with few roads and many
communities accessible only by air. We are sympathetic to
States facing infrastructure challenges, but national and State
infrastructures are typically financed by the Federal
Government and the States. Under the current Bypass program,
significant support to Alaska's transportation infrastructure
is paid for by postage sales outside Alaska.
Postage revenues are collected from postal customers, not
taxpayers, and the Postal Service has a duty to collect only
such revenues as are needed to provide each service. Programs
that do not pay for themselves requires cross-subsidization
from other products and customers, which is normally prohibited
for the Postal Service. Moreover, our research suggests that
Alaskans buying goods shipped through Alaska Bypass do not
appear to benefit from this transportation subsidy. For
example, in the towns our staff visited, a tube of toothpaste
cost $1.10 more than in Anchorage even though shipping costs
through the Bypass program were as low as 14 cents. Also, the
University of Alaska, Fairbanks, has found that the same basket
of groceries can cost more than twice as much in some Bypass
hubs than in Anchorage.
One possible reform is to end Alaska Bypass and return
freight shipment to the private sector. If Congress wishes to
retain Alaska Bypass, we developed several options for
consideration. The Postal Service could be given freedom to
operate Alaska Bypass more efficiently by ending the 12-month
notice and consultation period. Statutory restrictions that
prevent new carriers from entering the market and that restrict
competition could be removed. The Postal Service could charge
higher rates to make the Alaska Bypass self-sufficient and
eliminate its burden on other postal customers.
Alternatively, the Federal Government or the State of
Alaska could reimburse the Postal Service for its Alaska Bypass
losses. The Alaska Permanent Fund, which was established to
invest Alaska's oil and mineral revenues, has a balance of
almost $50 billion that earns interest. The postal losses from
Alaska Bypass would be just 2.6 percent of the nearly $3
billion that the fund earned last year.
Delivering mail and parcels anywhere in the United States,
regardless of geography, is the Postal Service's primary
responsibility to the American people. But this universal
service obligation has no relation to Alaska Bypass. Reforming
the program should not affect universal mail and parcel
services to Alaskans or to any other American. Thank you.
Mr. Farenthold. Thank you very much for your testimony.
[Prepared statement of Ms. Whitcomb follows:]
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Mr. Farenthold. We'll now recognize the deputy director of
the Office of Aviation Analysis for the Department of
Transportation. That would be Mr. Dennis Devany.
Devany is correct, right?
STATEMENT OF DENNIS DEVANY
Mr. Devany. Yes.
Mr. Farenthold. If you could make sure your microphone is
on, please, sir. Press the ``talk'' button.
Mr. Devany. Okay. I'm not good at this.
Mr. Farenthold. And you need to bring the microphone a
little bit closer. We are all dying to hear what you have to
say.
Mr. Devany. Yeah, I'm sure. And I sat on my glasses
yesterday. My wife found 10-year-old glasses, so I can barely
see.
But in any event, thank you, Mr. Chairman and members of
the committee. I appreciate the opportunity to be here. Am I
too loud?
Mr. Farenthold. No, you're great. You're knocking it out of
the park.
Mr. Devany. Okay. I'm not good at this, so I don't know.
DOT is required by statute to set intra-Alaska mail rates.
I can read what the statute says, but you guys probably already
know it. I've done written testimony. It's fairly detailed and
boring, and so I'll try and kind of just do an overview here.
First of all, the rates we set have nothing to do with the
price of stamps. It doesn't have anything to do with you put a
stamp on a mail. The rates we set are what the Postal Service
pays to the airlines to carry a ton of mail a mile or whatever
distance.
When Congress deregulated the airlines in 1978 and they
said anybody can fly wherever they want, charge whatever they
want, an exception was made for intra-Alaska mail rates. The
mail system in Alaska comprises both what we consider regular
mail, which is where you put a stamp on a mail, and Bypass,
which is the focus, obviously, of this hearing.
And Bypass takes its name from the fact that it bypasses
the Postal Service. They don't take physical possession of the
mail. If a shipper from a big box store, as I think Mr.
Haberman mentioned earlier, wants to send something from
Anchorage to Bethel, they contact the Postal Service, the
Postal Service will say give it to Carrier A or Carrier B,
depending on who had the last shipment.
There's two elements to the mail rate. Basically what we
call the terminal charge and the linehaul charge. The terminal
charge means how much does it cost to get a ton of mail on this
airplane, irrespective of distance. You know, you got to get a
forklift, you got to do something to get it on the plane. The
linehaul is how far does it fly, and that costs fuel, that
costs pilots, maintenance, and so on. And those are the two
rates we set. It's the terminal and the linehaul.
Originally, when we took this responsibility over, and it's
been a number of years, we conducted an exhaustive study to try
and differentiate between the cost to carry mail, the cost to
carry cargo, passengers. Passengers walk onto an airplane, mail
doesn't. Mail can offload cargo if the plane is overloaded.
In any event, we went through an exhaustive study,
established what we call base rates. Since then, we have done
an update, much like you'd update with the Consumer Price Index
or any other index. We don't use CPI. We use cost per available
ton mile. The assumption in our methodology is that if the unit
cost of flying an airplane in Alaska goes up 2 percent, the
mail rates go up 2 percent. If you go down 1 percent, the costs
go down 1 percent.
The only other refinement, if I can call it that, we've
done to that, I think it was in 1999, we did a fuel surcharge
when fuel was going up steadily. Now we do quarterly fuel
surcharges, so we adjust the rate.
Other than that, we set the rates every year, and it's a
fully transparent process. We issue, we call it a show cause
order. It says this is what we think the rates should be, we
have all the underlying data, costs, unit costs, and people can
say, they have an opportunity to object if we have done our
arithmetic wrong, if we have done something else wrong, and
then we take those comments, of course, into consideration. And
then we issue a final order, and that's it for the next year,
and then we do it annually.
So I hope I helped.
Mr. Farenthold. That's a great overview of the process. We
appreciate your enlightening us.
[Prepared statement of Mr. Devany follows:]
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Mr. Farenthold. Our next witness is Mr. Steve Deaton,
senior vice president at ACE Air Cargo.
Mr. Deaton.
STATEMENT OF STEVEN DEATON
Mr. Deaton. Thank you, Mr. Chairman. Thank you, members of
the committee, for allowing me to come have this opportunity to
talk to you today. I've submitted my written testimony, and I
have decided to take a little bit of a different tack in my
summary. I wouldn't want to bore you with continuing to talk
about the uniqueness of Alaska. No doubt it is unique. I think
the committee recognizes that, and the people have been
pointing that out because it's very important.
I think one of the things that I'd like to talk about is
the fact that it sounds like the committee and Congressman Issa
and even the Senate through Senator Begich's comments, the goal
here isn't to do away with the Bypass mail program. It has the
support of the committee and the Congressman and the Senator.
And therefore I'd like to talk a little bit about the
efficiencies, the competition, the ways to make the system
better. And while I agree that the Bypass mail system is not
broken, I do have some thoughts on the Rural Service
Improvement Act, what it's accomplished and what it is
currently doing to the system and the Postal Service as a
whole.
A lot of the testimony today is focused on what I would
call mainline air carriers. I was involved for 30 years as a
retired Postal Service person now. I was around when Bypass
mail was rolled out, when the Bethel experiment happened. I
managed that process for 25 years. I have submitted my bio. I'm
here today as senior vice president of ACE, but I'm talking to
you more as from my postal and my 50-year residency in Alaska
as my base rather than my current career job.
The issues, as I see them, ensuring passenger service,
ensuring freight service for the residents of Alaska, and
trying to create efficiencies and cost savings or loss
avoidance for the Postal Service, seem to be what's the
important thing today. Most of the discussion being mainline
carriers, the Rural Service Improvement Act. When it was
enacted, there were three mainline carriers up to that point
that carried passengers, Reeve Aleutian Airways, Era Aviation,
and Alaska Airlines. Today, under the Rural Service Improvement
Act, there are still three mainline passenger carriers carrying
mail and Bypass mail, Era Alaska, Alaska Airlines, and Penair.
I think it's important to know that the majority of the
Postal Service losses don't come from the mainline side. They
come from the bush air carrier side, the small carriers that
fly mail around the State of Alaska.
Prior to the Rural Service Improvement Act, there were as
many as 35 air carriers. The Rural Service Improvement Act came
in, was enacted to protect the passenger freight service, and
it's done its job. There are now nine Bypass bush carriers left
carrying mail in the State. There are still three mainline
passenger carriers. In addition, there are three mainline cargo
carriers. The mainline industry, in my opinion, is not the
issue.
On the bush side, where the majority of postal losses
occur, there are some things in the Rural Service Improvement
Act that could be improved to provide competition, increase it,
and to provide efficiencies. One of those things is called the
pool concept. As the congressman referred to earlier, the
Postal Service has to give the majority of its mail on the bush
side to over 200 destinations to the carriers that carry and
qualify for passenger carriage who have the least amount of
capacity to move it. Currently today there is more mail
transfer from bush carrier to freight carrier or bush carrier
to bush carrier than there was before the Rural Service
Improvement Act.
If the pool concept were either eliminated or altered, then
it would allow for greater competition, there would not be
monopoly markets, which there are today in bush Alaska, and the
unit cost for bush carriers that is used by the DOT to set
rates would have a downward pressure on the Postal Service's
cost.
Another element that could be improved would be the
equalization policies of the DOT, either straight equalizations
or composite equalizations, the latter which brings an
immediate savings to the Postal Service by eliminating one of
the terminal handling fees that Mr. Devany talked about.
Equalizations bring more competition, both from acceptance
point to hub and certainly from acceptance point to bush point,
and more efficiencies, along with better service to the
communities and lower cost to the Postal Service.
I thank you for this opportunity to share some of my
thoughts.
Mr. Farenthold. Thank you very much, Mr. Deaton.
[Prepared statement of Mr. Deaton follows:]
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Mr. Farenthold. We will now hear from the vice president of
customer service of airports and cargo for Alaska Airlines, Mr.
Jeff Butler.
STATEMENT OF JEFFREY BUTLER
Mr. Butler. Good afternoon, Chairman Issa, Ranking Member
Cummings, Chairman Farenthold. My name is Jeff Butler, and I do
serve as the vice president of customer service, airports, and
cargo and reservations for Alaska Airlines, and I am genuinely
appreciative of the opportunity to testify today on the
importance of the Bypass mail system to the State of Alaska.
It's been interesting listening to the deficit conversation
thus far this morning because I agree with Mr. Deaton, 75
percent of that issue really is between the hub locations and
the bush, not mainline, which has been the testimony thus far
and the crux of this bill.
Nonetheless, the vital importance of this program really
can be summarized in one sentence: It provides rural Alaskans
with access to fresh food and basic supplies which otherwise
they could not afford to pay if they had to pay higher air
freight prices. Statements to this subcommittee by the Yukon-
Kuskokwim Health Corporation, the mayor of the North Slope
Borough, and other native organizations confirm the dire
consequences in these remote communities if there are changes
to the Bypass mail system.
Alaska Airlines, the largest air carrier in the State of
Alaska, has been a significant mainline Bypass carrier and
respectfully disagrees with H.R. 4011. That legislation could
create negative effects among all of the mainline Bypass
carriers' stakeholders, most importantly the residents of the
State's most isolated villages and regional communities, as
well as the United States Postal Service and the existing
Bypass mail carriers.
The only beneficiaries of H.R. 4011 would be the three or
so new entrant Bypass mail carriers that the legislation would
make eligible. It would transform the entire Bypass mail system
and lead to reduced Bypass mail and passenger service levels.
It would jeopardize the rural communities' fragile
transportation infrastructure and drive the United States
postal costs even higher.
The economic reality is that the Bypass mail market has
been shrinking because of out migration from the rural
communities and other recent changes in the program itself.
Alaska Airlines' January 2014 Bypass mail volumes were 13
percent lower than January, 1 year ago. The resulting reduction
in revenue is already straining the ability to maintain the
level of regularly scheduled mail, freight, and passenger
service we have long operated to rural communities. The
significant Bypass mail revenue diversion resulting from
additional new Bypass mail carriers would almost certainly
oblige Alaska to materially reduce the level of both its
passenger as well as Bypass mail service within the rural
communities. The Alaska native organizations emphasize the
serious negative effects on the rural communities from such
service reductions.
We strongly encourage this subcommittee to bear in mind
that an important objective of the 2002 Rural Services
Improvement Act expressly provided that the use of the Bypass
mail system be used to support passenger as well as mail
service to the isolated rural communities. Operating Bypass
service is costly. The towns do not maintain their own airport
terminals like most of the lower 48. In Nome, Kotzebue, Barrow,
Bethel, Alaska Airlines built those terminals. Alaska Airlines
maintains those terminals on both the passenger, cargo, and
mail facilities.
These are really small towns of 2,000 to 4,000 residents
serving even smaller outlying villages. The resulting economic
challenges of operating to these communities long ago
established a clear need for a program like Bypass mail.
The suggestion that the system is broken that we spoke of
earlier and would somehow benefit with the addition of more
carriers just simply does not comport with the facts. The
Bypass mail market is not a typical aviation market which
positively responds to the addition of new carriers. It is a
market that is declining, and there appear to be few prospects
for meaningful growth.
There is no possibility of market growth from price
stimulation. Parcel post rates are set by the USPS with the
approval of the Postal Rates Commission. It is these parcel
post rates that the shippers pay directly to the United States
Postal Service and which the rural residents then indirectly
pay in the form of commodity prices. With a flat to declining
market and price uniformity, the addition of three or so new
Bypass mail carriers could only lead to one result, the
decrease in each of the four Bypass mail carriers' approximate
market share from 25 percent to just 14. That substantial
Bypass mail reduction has to translate into reduced levels of
Alaska Airlines' passenger and freight service, in addition to
reduced Bypass mail service among the four existing mainline
Bypass carriers
The United States Postal Service would also experience
significantly worse financial results if new operators of
smaller, less efficient aircraft became Bypass mail
participants. Those negative results would directly flow from
the application of the DOT's longstanding rate-making formula
establishing the rates the USPS must pay the Bypass mail
carriers for transporting mail.
The proliferation of new entrants' smaller, less efficient
aircraft would unquestionably increase flying costs. The
magnitude of that substantial increase is apparent. A simple
comparison of the flying capacity unit cost of Era Aviation,
one of the prospective new entrants, and the same cost of
Alaska Airlines shows that Era's available ton mile cost for
its smaller propeller aircraft is $1.92, in sharp contrast to
Alaska's Boeing 737 ton mile cost of just 57 cents, a 236
percent spread.
The fixed warehouse cost component would also increase
because of the corresponding reduction in each carrier's Bypass
mail volume. Under DOT's formula, warehouse costs are computed
on the basis of the number of tons of Bypass mail each carrier
transports. A 42 percent reduction in per carrier Bypass mail
volume means that the same fixed warehouse costs have to be
spread over far fewer tons, thus driving up the per ton
warehouse-related expenses. The result will only further weaken
USPS' financial condition.
So on behalf of the people of rural Alaska, we urge this
subcommittee to not advance H.R. 4011. Thank you.
Mr. Farenthold. Thank you very much.
[Prepared statement of Mr. Butler follows:]
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Mr. Farenthold. To express my gratitude for everybody for
their testimony. We'll now take a few moments for questions.
I'll start out by recognizing myself for 5 minutes. And I'd
like to say up front, I really do appreciate this group
enlightening this committee, and me in particular. The last
time I was in Alaska was 5 years before I was elected to
Congress, and I was much more interested in where the salmon
were biting than how the mail and goods got delivered to rural
areas.
I'd like to start with Mr. Haberman. I'm going to take the
30,000-foot view of this. This Bypass mail system is something
that's completely different than the Postal Service offers
anywhere else. Our idea of universal service is you get your
bills, you get your catalogs, and you get your packages
delivered anywhere in the U.S., and there's a 70-pound limit on
what the Postal Service will deliver through the regular mail.
Is that correct?
Mr. Haberman. Yes, sir
Mr. Farenthold. And Bypass mail is only available in
Alaska. And would you say it's more akin to something like a
truck line or a freight company or even an air freight company
like, you know, FedEx or Atlas or somebody might do?
Mr. Haberman. Well, Mr. Chairman, I think it's important to
remember that, even though it's called Bypass, it is mail. The
pieces in those pallets that you see have to be prepared per
our DMM regulations.
Mr. Farenthold. Right, but we could say we are not going to
play this game anymore and Alaska would have no different
service than everybody else from the mail system if we
completely got out of Bypass mail. This is something special we
are doing for Alaska.
If I were to walk into the post office with that, I
couldn't mail it from Corpus Christi to Washington.
Mr. Haberman. That is correct, sir, but you have to
remember that each one of those individual pieces you could
mail, and those were the pieces that were in the parcel post
lines going through the postal infrastructure prior to Bypass
mail. They are simply combined on the pallets for ease of
transportation.
Mr. Farenthold. Right. All right, so 40 years ago there
might not have been as many options for getting that. But we're
getting away from it. I just wanted to make sure we were clear
that this is something that's unique to Alaska. We don't offer
it in Hawaii, where it's difficult to get from island to
island, or to Guam. It's only within Alaska.
Mr. Haberman. Bypass mail service, yes, sir.
Mr. Farenthold. Okay.
Let me go to Mr. Devany from the Department of
Transportation. You guys set these rates for this. I mean, you
all used to set rates for passenger air travel. It was all
regulated. What happened when you all quit regulating that? Did
rates go down and lots of new service come up and good things
generally happened? Microphone, please. Microphone, please,
sir.
Mr. Devany. How do I do it. Is it on?
Okay. Yeah, I was at the Civil Aeronautics Board when
airlines were deregulated. We used to tell airlines where to
fly, how much to charge for passengers, how much to charge for
cargo, how much to charge for mail, and so on, and it was
deregulated. They didn't just flip a switch. But intra-Alaska
mail rates were unique.
Mr. Farenthold. Sure. It's a statutory creation.
Mr. Devany. Yes.
Mr. Farenthold. I get that. Part of what we've heard is
that this was designed also to help out passenger service.
Aren't there other programs that the Department of
Transportation has to subsidize air service to remote airports?
Mr. Devany. Yes, there is the Essential Air Service
program, which I'm also----
Mr. Farenthold. Right. And so this is basically subsidizing
Alaska Airlines at the expense of postal customers. So when I
go buy a Forever stamp and put it on my Valentine card to my
wife, a small portion of that is going to subsidize delivering
Diet Coke to remote Alaska?
Mr. Devany. Well, I don't know.
Mr. Farenthold. Okay.
Mr. Devany. First class mail is----
Mr. Farenthold. Right. But I mean it's coming from the
Postal Service.
I guess I can ask that to Ms. Whitcomb. Is that an accurate
statement that, you know, one whatever of a cent of every stamp
I buy goes to help subsidize this?
Ms. Whitcomb. Right. Yes, I think it's fair.
Mr. Farenthold. I'm going to just say, I think Congress, if
we wanted to appropriate money for this, that's great, but do
we really need to hide it within what folks do for stamps.
One of the other things we heard earlier was there was a
concern about the safety of these new carriers. Mr. Devany,
you're in the DOT. I mean, there's a news story whenever
there's an airline accident, whether it's passenger or freight.
I mean, there's usually a news story. Do we have a problem with
safety of any of our carriers in this country?
Mr. Devany. Mr. Chairman, I don't work for FAA. I'm in DOT.
Is this on.
Mr. Farenthold. Yeah, it's on.
Mr. Devany. I still don't know how this thing works.
Mr. Farenthold. Mr. Butler, you work for Alaska Airlines.
Mr. Issa. You need to get the mic closer to you there.
Mr. Devany. I'm sorry. I'm not in FAA.
Mr. Farenthold. I'll go to Mr. Butler. He's in the
industry. I'm sure you all watch accidents for every carrier
for lessons learned. I mean, do we have a safety problem
anywhere within the U.S. aviation system?
Mr. Butler. I wouldn't necessarily say so. But I do believe
that the conversation earlier this morning was more focused on
the very unique climate and terrain that you do fly within the
State of Alaska, and that does take a particular skill level.
Mr. Farenthold. We certainly found that some of the
carriers coming into Washington don't have that skill level,
based on the number of flights that have been canceled over the
past couple of days.
Mr. Butler. I think where I was headed with that was that
there is certainly any number of navigation systems that are on
a lot of those airplanes that in fact our planes do have, and
not all of those types of aircraft that Chairman Issa was
referencing earlier have that. And all of that affects the
delivery time and delivery strain or timeline of how you get--
--
Mr. Farenthold. But I mean, if that becomes necessary, the
NextGen stuff, the NTSB type stuff, they're pretty much
available for any airplane. I mean, you can buy it.
Mr. Butler. They're not available for usage at all of the
mainline airports in Alaska yet. But that's true.
Mr. Farenthold. That's a problem we can deal with over on
the Transportation Committee, and believe me, that's something
they're working on.
I see I have already gone over time, and I will apologize
to Mr. Cummings and give him an extra minute-40 for his
questions.
Mr. Cummings. Thank you very much, Mr. Chairman.
According to the inspector general, Congress passed the
Rural Service Improvement Act of 2002 because carriers in
Alaska were focusing on providing services to the Bypass routes
that were the most profitable rather than on providing broad
passenger service. That created the equitable tender system and
gave statutory preferences to those mainline carriers providing
service before January 2001. The act also set high barriers to
entry to any new carriers seeking to enter the mainline market.
Mr. Haberman, just so we have the basic facts, can you
quickly explain how these provisions work, what advantages do
carriers that were providing Bypass service before January 2001
how over new entrants, and what are the specific conditions new
entrants must meet to carry Bypass?
Mr. Haberman. Congressman, I think the best way to answer
that is there in RSIA there are some hurdles that a carrier
would have to live up to in order to enter that pool. And if I
recall correctly, they are they have to provide service for 36
months in the marketplace, they also have to have a passenger
load capability of 75 percent of the other carriers. Does that
answer your question?
Mr. Cummings. Yeah, that's a pretty high hurdle? Would you
consider that a pretty high hurdle to get over?
Mr. Haberman. I couldn't comment on that, sir. I'm not----
Mr. Cummings. All right. Well, why don't we go to the
inspector general. The inspector general's white paper
criticized this provision of the Rural Service Improvement Act,
saying that it provided protection for the five existing
mainline carriers. Ms. Whitcomb, does the IG still stand by
that position?
Ms. Whitcomb. Yes, we do
Mr. Cummings. And why is that?
Ms. Whitcomb. We believe that the situation, as it stands,
results in increased cost to the Postal Service because of the
limitations of the five air carriers and the hurdle that you
spoke of earlier.
Mr. Cummings. Well, now, the IG report is recommending
changing the law to eliminate the statutory restrictions placed
on new entrants to both the mainline and bush markets.
Ms. Whitcomb, is it your contention that allowing
additional carriers to enter this market would drive down the
cost to the Postal Service?
Ms. Whitcomb. We believe that it would, there would be some
impact to the reductions in the cost to the Postal Service. And
that was one of the options, one of the suggestions in the
report. We had several others as well that could be considered.
Mr. Cummings. What effect might the entry of additional
carriers to the Bypass market have on passenger service in
Alaska, particularly with regard to the remote regions?
Ms. Whitcomb. It's a complex system, as you know, and as
we've discussed here on the panel. We talk about, I think, in
the report about how the increased competition in the
international rates has resulted in reduced cost, and so we
were kind of looking to that as a model. But, again, it's a
complex system, and this was one suggestion as a possible
option to look at related to Bypass mail, Bypass.
Mr. Cummings. Is it the inspector general's position that
we shouldn't have a Bypass system?
Ms. Whitcomb. I don't think we've stated that that's our
position.
Mr. Cummings. I'm asking you, what time do you think? I'm
just curious. I mean, I understand that the system was put
together because of a unique situation.
Ms. Whitcomb. Right.
Mr. Cummings. And there have been allegations earlier that
the Constitution requires that we have this. Do you agree with
that, some kind of system like this?
Ms. Whitcomb. We believe universal service is an
appropriate role for the Postal Service. This, though, in many
cases resembles more of a freight type of service versus a mail
kind of service. So that's the way that we looked at it in our
paper and how we did our evaluation.
Mr. Cummings. Go ahead.
Ms. Whitcomb. I think asking about whether we believe it's
appropriate to have an Alaska Bypass at all, program at all,
I'm not sure that we came down on whether that is appropriate
or that we have a position on the appropriateness. We believe
it serves a purpose for the citizens of Alaska, but it's
evolved into a very important role in the State of Alaska. We
do have many concerns, though, about the Postal Service's role
in kind of subsidizing the system.
Mr. Cummings. Now, You were in the room when the Senator
and the Congressman testified a little bit earlier, were you
not?
Ms. Whitcomb. Yes.
Mr. Cummings. Were you here?
Ms. Whitcomb. Uh-huh.
Mr. Cummings. And you heard them say that the legislation
that we passed out of our committee a week or so ago, they
claim that what it would do is it would cost more, a lot more.
And do you agree with that? Obviously, you don't.
Ms. Whitcomb. We have not done a thorough analysis of it.
It's a very complex system, as I said. We don't believe that it
would cost more. But again, I'm not certain as to what they're
relying on, what numbers they're relying on to come to that
conclusion.
Mr. Cummings. Now, Mr. Haberman, in February 2014 the
committee did consider H.R. 4011, the Alaska Bypass Fair
Competition Act of 2014. What is the Postal Service's
understanding of exactly what this legislation would do?
Mr. Haberman. I believe the Postal Service attorneys are
still looking at that legislation, sir, so I can't offer an
opinion at this time
Mr. Cummings. Well, is the Postal Service aware of air
carriers that are seeking to enter the Bypass market?
Mr. Haberman. We believe there are some carriers that would
like to be in the Bypass market, yes, sir
Mr. Cummings. I mean, have they approached you all? I'm
just curious
Mr. Haberman. They have talked to some of our
representatives in the Alaska District. I don't know who they
are specifically.
Mr. Cummings. And could the carrier or carriers meet the
36-month performance standard?
Mr. Haberman. I can't answer that, sir. I can certainly go
back and verify that and provide an answer for the record.
Mr. Cummings. And, Mr. Butler, what is Alaska Air's
position on H.R. 4011?
Mr. Butler. As I stated earlier----
Mr. Cummings. Keep your voice up, please.
Mr. Butler. Yes. As I stated earlier, we disagree with it.
And I think Mr. Haberman's paper that he submitted in advance
where it says this is the most cost-effective process and
program there is, is our opinion. It works today.
Mr. Cummings. And, Mr. Deaton, what is ACE Air's position
on the legislation?
Mr. Deaton. ACE believes that there are sufficient barriers
in entry to intra-Alaska Bypass mail transportation, other than
requiring 36 months or having a 12/1/2001 date. The requirement
is 12 months service, not 36 months service between any two
points within the State of Alaska, and there is also a
requirement of performing that 12 months with equipment of the
size, either mainline or bush, that you're going to be
continuing once you qualify for.
Those hurdles, along with the certification process by the
FAA, are extremely strenuous both from a certification and
regulatory process, as well as from an economic process,
because even once a mainline carrier gets past its 12-month
hurdle of intra-Alaska service, which was written in there
specifically to give it the experience from a safety standpoint
of flying within Alaska, that carrier then needs to provide 75
percent of the seats in whatever market it's determined it
wants to begin carrying passengers in for matching 75 percent
of the ensured seats offered by the incumbent. That economic
barrier, in addition to 12 months of flying within the State of
Alaska, make it extremely difficult, and to my knowledge there
are no mainline carriers that are seeking Bypass mail entry.
Mr. Cummings. Thank you very much.
Mr. Farenthold. Thank you, Mr. Cummings.
We'll now go to the chairman of the full committee, the
gentleman from California, Mr. Issa.
Mr. Issa. Thank you.
There has been a lot of talk about killing Bypass mail, as
though there's anything in either of these bills that intends
do it. Mr. Haberman, you talked about this being the most
efficient system. What does that have to do with this
legislation? Aren't we attempting to make this system more
efficient? In other words, you contrast, in your opening
statement seemingly parcel post or the post office getting
involved in this delivery versus not getting involved. Nothing
in this legislation puts the postal system back into the
picture, does it?
Mr. Haberman. Not that I'm aware of, sir.
Mr. Issa. So I was a little perplexed, because from a
postal standpoint you simply take the bill that Mr. Devany
gives you indirectly and pay it. You collect a fraction of the
revenues that it takes to operate it, so you collect $36
million and you pay out $100-and-some million. That's really
all you're doing, right?
Mr. Haberman. That's the way the system is.
Mr. Issa. Okay. So you're calling this an efficient system,
and I'm a little perplexed that you're calling it an efficient
system.
Mr. Devany, when you look at the cost of the various
carriers, do the cost of operation of the various carriers
vary?
Mr. Devany. Yes, Mr. Chairman, they do.
Mr. Issa. Okay.
Mr. Devany. And what we do----
Mr. Issa. Well, let's just go through real quickly, because
I want to allow a lot of time for you to answer, but I'm
looking at revenue ton prices. You pay Alaska Airline, from
what I can tell, $2.13 or $2.14 per ton mile as of March 4,
2014, because they're a mainline nonpriority Bypass carrier, I
believe. Mainline priority, you would pay them $3.53 per ton
mile. A bush pilot under Part 121, which is a scheduled airline
bush pilot, you pay $5.74 a ton mile, and then a Part 135 you
pay $14, almost $15 a ton mile. And a bush seaplane--now, I
suspect that these guys don't have advanced equipment and fancy
terminals when they land on the lake or the ice--you pay $32.59
per ton mile. Those figures sound familiar?
Mr. Devany. Yes, sir. Yes, Mr. Chairman
Mr. Issa. Okay. So you've got all kinds of levels of
efficiency in Alaska. Isn't that true?
Mr. Devany. Yes.
Mr. Issa. Additionally, if I take a bush pilot, every time
that bush pilot makes a terminal stop you pay him $850 per ton
that he's carrying. Is there any way that you can see that we
could save money? For example, if they made less stops at
terminals, wouldn't you save $850 per ton on a bush pilot?
Mr. Devany. Well, Mr. Chairman, the DOT is responsible for
setting what we believe are the best fair and reasonable rates.
It costs more to operate seaplanes than big planes on a per
unit basis.
Mr. Issa. Right.
Mr. Devany. Because there's salt and whatnot.
Mr. Issa. So you take what actually occurs and you measure
it, right?
Mr. Devany. Yes, sir
Mr. Issa. And if somebody were to come in, I don't know
what it is, let's just say with an Embraer small jet, freight
only, and they could do it for less money than a 737, I'm not
saying they would, but if they could, you would measure a lower
amount of cost and put that into your rate calculations, right?
Mr. Devany. That's exactly correct, sir. What we do is we
set--and I don't want to get too technical here--but we set
what is called a class rate. We take the mainline, for example,
there's a mainline class rate, and there's four or five
airlines, we put all the cost into the pot, divide it by all
the units, and we say, okay, it's X dollars per ton and X
dollars per mile that you fly the mail.
Now, if your costs are above average, you're not going to
make out so well. If your costs are below the average, you're
going to make out fairly well, and that's the whole concept of
a class rate.
Mr. Issa. So with the current rating system if you let
three additional--300 additional, doesn't matter--amount of
competitors in, the only way it would drive up price is if
those competitors came in and were less efficient, right?
Mr. Devany. Yes, I think, is the answer. It gets a little
more complicated, Mr. Chairman, because then you get into
equalization and bush rates and so on. But, yes, I mean, if
you're going to introduce someone who has higher unit costs,
that would raise the cost for the entire class.
Mr. Issa. Okay. So I think going back to Ms. Whitcomb's
report, the report that the IG gave us, it sounds like--and
we're doing legislation and it's early on to a certain extent.
We've got a long time to go to pass the bill, pass it out of
the full House, get with the Senate, conference it, it appears
as though the Senator from Alaska could have comments.
But, Mr. Deaton, let me go through a couple of the things
that you've seen in the way of efficiencies. If we were to
allow the post office to look for efficiencies, in consultation
with Department of Transportation's numbers, and then make
selection on all carriers based not on a bid rate, so to speak,
but based on a bid rate based on efficiency, thus choosing more
efficient carriers or more efficient routes, in your opinion,
would that save us money? You have 25 years of watching the
system. Could we use systems like that, empower the post office
to save money by making the network more efficient?
Mr. Deaton. Are you referring to moving the environment
from regulated tender to actual contract bid?
Mr. Issa. Well, contract bid is certainly something that I
envision as a lower 48 person. But even if we accepted for a
moment this theory that you have so many people who all get
access to pick up the freight, but you pay them based on a
calculation of average cost, is it possible to drive down
average cost by getting more efficient carriers, meaning that
the carrier gets the same rate?
I mean, you're with ACE, next to you is Alaska. If you try
to compete with Alaska with your aircraft, my assumption is
that if they pay you the same as they pay Alaska for the same
route, you wouldn't make money, or you certainly wouldn't make
what they make. Is that right.
Mr. Deaton. That's correct.
Mr. Issa. Okay. So by definition you're only going to want
to pick up freight if you can be competitive and you have a
reason to be below the average against other carriers you're
competing with, right?
Mr. Deaton. Correct.
Mr. Issa. So now the question goes back, and this goes back
to--and I'll go to the IG--when the IG looked at the
inefficiencies and the ability to fix this, my understanding is
what they wanted to see was the opportunity to look for cost
savings. Now, Alaska Air is here, and you, without a doubt,
with your 737 mixed cargo, if that cargo plane is full, you
have the most efficient carrying capability, and actually both
ways because you carry salmon back and so on.
The real question is, are we picking all the most efficient
carriers for each route and then routing in the most efficient
fashion? Mr. Deaton, you've operated there for longer than some
people on the dais have been alive. Are we doing it as
efficiently as we could or can we increase efficiency, thus
causing Mr. Devany the ability to calculate a lower rate as a
result of efficiencies?
Mr. Deaton. I believe that could be accomplished, Mr.
Chairman. I think it's first important to understand, to
separate out mainline efficiencies from bush efficiencies.
Mr. Issa. And that's been made abundantly clear that we are
dealing with three to four different submarkets, Anchorage to
Bethel, you know. I've been to those places. They have big
runways, big aircraft land. To be honest, the State capital may
be a small, isolated place, but it has a big runway
Mr. Deaton. That's correct. Alaska Airlines is the
predominant passenger carrier on the mainline side. There are
two other passenger carriers. But it's important to understand
that the mainline tender of Bypass mail is a straight equitable
tender. All the carriers that are qualified and are in markets
receive an equitable or equal share of mail. This allows them
to maximize their flight schedules, their combi versus full
passenger versus all cargo, and is quite an efficient mix. The
issue there in that mainline market becomes a factor of numbers
in terms of bringing more mainline carriers in, would that be
more competitive.
On the bush side, it's a different----
Mr. Issa. But let me switch it around before you go off of
that, because I'm a big fan of Alaska Air, I've flown them,
frequent flier and all that. But let me ask the question. The
equitable question is, if we lock out alternate carriers, which
current law does, and Alaska is making money on theirs, but the
other carriers are not able to have access to what is
effectively lucrative freight, are we in fact putting Alaska at
an advantage in the passenger and other miles? You know, the
locking them out of the ability to carry that, Alaska would
say, well, if they can't carry all of that mail on the mainline
for the most part, then somehow prices are going up. The
question is, wouldn't you end up with all three carrying the
same amount of mail and adjusting their aircraft accordingly?
Mr. Deaton. I believe so, that's correct. You know, the
issue of mail getting on a passenger airplane, whether it's
Alaska or Era or Penair, after passengers and bags, means that
the more efficient carrier, the higher carrier with the higher
ridership usually carries the least amount of mail because they
can't enplane it.
So that becomes transfer functions and moves around to
carriers, the other passenger carriers that may not have the
ridership, and they end up carrying the mail that was
originally given to, for instance, Alaska Airlines. So it
spreads itself out over an equitable basis based on who has the
capacity, and at the mainline level it tends to lend itself to
a flow of mail that increases the efficiency of each carrier.
There's three passenger carrier, three cargo-only carrier
at the mainline level. Quite frankly, in my experience and
opinion, the markets, the economy in Alaska would not support
anymore than those. Actually, I would argue that there's
probably too many as there are. There's too many freight
carriers for sure.
When you go to the bush side, the issue becomes the pool
concept. If you're looking for efficiencies, to give 75 percent
of the mail to those carriers with the least capacity to carry
it and to restrict entry into monopoly markets because other
passenger carriers can't get the ridership to enter or freight
carriers cannot get enough mail to enter, it not only hurts the
residents of that community from a freight and passenger
standpoint, but it restricts competition. So it goes in both
directions.
Mr. Farenthold. I'm going to do a couple more questions. We
will do a second round of questions. Chairman Issa has done a
good job getting down into the bush or the weeds of this. I
want to get back up to 30,000 feet, because quite a few people
reading this record may not have the level of familiarity with
the system that Chairman Issa has.
Mr. Haberman, I want to go back for a second on the history
of the Bypass mail. I know in my first line of questioning I
was pointing out that it was something unique to Alaska. But it
was actually born to bring Postal Service costs down, if I'm
not mistaken. Is that correct?
Mr. Haberman. Yes.
Mr. Farenthold. I mean, rather than to meet the 70 pound
limit, I could probably mail, to go back to my Diet Coke
example, a dozen 12 packs of Diet Coke is about all you can get
in 70 pounds. Well, if I am a retailer selling Diet Coke I
would have to do twenty or thirty 70-pound packages of 12 packs
of soft drink to get what I want, and the Postal Service would
have to process each one of those individually, probably
palletize them themselves, contract with an air carrier to get
them there. So actually in Alaska I would imagine normal parcel
post would be a huge loss leader for the post office. Is that
correct?
Mr. Haberman. I would agree with that statement, Mr.
Chairman, yes.
Mr. Farenthold. So it actually does hold some of the costs
down for the Postal Service. I wanted to get that side of the
issue into the record.
I also wanted to ask Ms. Whitcomb, there was some testimony
that the legislation we are talking about would result in a
smaller market share as we let more carriers in. Couldn't what
we do be crafted in such a way that we limit the number of
carriers but have some competition among the carriers? So
rather than having 25 Bypass carriers, we have five, but they
bid for it competitively over a reasonable amount of time. Or
we could create something that wouldn't flood the market and
make it fail. Now, is that not correct?
Ms. Whitcomb. Yes, I think that would be correct.
Mr. Farenthold. Quite frankly, I am not sure it is the
government's responsibility to protect businesses from their
own stupid mistakes, bidding on a contract that they can't keep
or an industry overbuilding its capacity. A lot of times that
actually results, I think, in lower costs for consumers as they
look for more efficiencies and ways to do that.
So those are my personal final two 30,000-foot questions. I
will now go to Mr. Cummings for a second round of questioning.
Mr. Cummings. First of all, Mr. Chairman, I ask for
unanimous consent to enter into the record letters from
citizens and interest groups from Alaska concerning H.R. 4011
and the vitality of the Bypass Program to their community.
Mr. Farenthold. Without objection, so ordered.
Mr. Cummings. Mr. Devany, how often does the DOT visit
Alaska and audit the carriers?
Mr. Devany. Typically, I think we go up about once a year.
Whether it is officially what you would call an audit, I don't
know.
Mr. Cummings. Well, why don't you tell me what you do?
Mr. Devany. Okay. All airlines, whether they are Alaska
Airlines or United Airlines or any airline, are required to
submit data to the Department. It is called the Bureau of
Transportation Statistics. They are auditable, just like your
income taxes. I am not sure every single one is audited, but
they are subject to audit, and the airlines have to swear and
declare that the data are accurate. And we use those data to
set the mail rate.
Mr. Cummings. And how does the DOT ensure there is no
collusion between the airlines to keep the costs high?
Mr. Devany. Well, again, all the data are subject to audit.
It is in a different department of DOT. It is the Bureau of
Transportation Statistics. They have audit checks, edit checks,
and so on. The inspector general at DOT does audit carriers. I
don't know what their schedule is and they probably don't want
me to know what their schedule is. But it is audited.
Mr. Cummings. And the purpose of the audit again is what?
Mr. Devany. I'm sorry, I didn't hear your question.
Mr. Cummings. The purpose of the audit is what?
Mr. Devany. Would be to make sure that the data are
accurate. And this goes far-reaching beyond Alaska mail rates.
This could have to do with airline mergers, international
alliances, all kinds of financial and passenger and traffic
data.
Mr. Cummings. At the end of fiscal year 2013, the Postal
Service estimated the cost of the Bypass Program to be
approximately $108 million. Mr. Haberman, how much of the total
cost of the program goes directly to the carriers?
Mr. Haberman. Those are the costs that go to the carriers,
sir, so it would be 100 percent.
Mr. Cummings. One hundred percent goes to the carriers?
Mr. Haberman. Yes, sir, I believe that is the correct
answer.
Mr. Cummings. And, Mr. Devany, can you explain to the
committee what the Essential Air Service program is and can you
tell us how many of the airlines participating in the Bypass
Program also participate in the Essential Air Service program?
Mr. Devany. Yes, sir. The Essential Air Service program was
created as part of the Airline Deregulation Act of 1978 to
ensure that communities that receive air service under
regulation would receive it for at least 10 years after
deregulation. It was extended. So that was 1978 to 1988. It has
been extended a couple of times.
The current program is roughly 160 communities where we pay
an airline to provide service where the community would
otherwise not have any air service, roughly 160. I think it is
about 117 in the lower 48 and 43 in Alaska. Our total bill is
roughly $250 million a year. In Alaska it is $18 million, $15
million to $18 million. Frequently we pay a small airline to
provide one or two, maybe three round trips a week to Bethel or
to Juneau or to some acceptance point where people can then go
to doctors appointments and get medicine and food and so on. So
there is a little bit of interplay between the mail rates and
the Essential Air Service program. Not a lot.
Mr. Cummings. Mr. Butler, does the Alaska Airlines receive
subsidies under the EAS program?
Mr. Butler. We do. None of the mainline Bypass markets are
EAS markets.
Mr. Cummings. So on average how much does it receive?
Mr. Butler. I do not know the answer to that question.
Mr. Cummings. Can you get that to us, please?
Mr. Butler. I certainly can.
Mr. Cummings. Very well. I yield back.
Mr. Issa. [presiding] Mr. Devany, would you repeat the
essential air subsidy in Alaska for delivering passengers to
areas that otherwise wouldn't be served is how many dollars a
year roughly?
Mr. Devany. It is 43 communities currently and it is
between $15 million and $18 million. I can get you the precise
figure----
Mr. Issa. Okay.
Mr. Devany. --including Diomede and Adak.
Mr. Issa. So some of the same communities that the post
office is losing money delivering Bypass mail to?
Mr. Devany. There is some overlap, I believe.
Mr. Issa. So if there is an Essential Air Service subsidy
would it be fair for this legislation to say that we are not
going to subsidize passenger service for those communities? In
other words, the post office should be able to pick the low
bidder freight-only in those communities that are already
subsidized--their passengers are subsidized by passenger?
In other words, if a freight-only carrier can underbid on a
competitive basis the rate that would otherwise exist, should a
freight-only carrier, Mr. Deaton, be able to bid for those
lines, since obviously we are funding the passengers through
another means? Because whether the Senator or the House Member
Mr. Young said so, we all understand, and I understand directly
from the late Ted Stevens, that this program is intended to
keep passengers getting access to communities. He made it very
clear when he did the legislation that he didn't like a number
of companies, including the one you work for, because you were
trying to game the system by not carrying passengers. I mean, I
don't want to speak ill of the dead, but he understood, this
was why he did it, and he told me so in no uncertain words in
his own office.
So the question is for each of you, including Mr. Butler,
if essential service is being paid for by the Department of
Transportation providing a subsidy for passengers, is there any
reason that we shouldn't pick a less expensive carrier if they
are willing to carry freight-only to those locations?
Mr. Butler, I will start with you.
Mr. Butler. I just want to go back to my comment before. In
my world it doesn't apply because EAS is not in any of the
mainline markets.
Mr. Issa. Right. So it wouldn't affect your carrier. But do
you see any reason that a freight-only carrier shouldn't be
able to bid freight-only in those markets where there is a
subsidy? You are not receiving a subsidy for essential service,
is what you are saying, in the mainline markets.
Mr. Butler. I think there were other opportunities that we
talked about earlier that perhaps we should explore instead.
For instance, the rate-making authority, that doesn't require
legislation to do that. I would prefer to go down that path
before I would answer that question.
Mr. Issa. Okay. Well, you know, one of the reasons we are
having this hearing today is because in 2002 with no hearings
Senator Stevens locked out future competition as a matter of
statute. And today you are objecting to H.R. 4011, which simply
undoes a portion of the mandate put in by the late Senator
Stevens.
Mr. Butler. What I would also say, in that 2002 model, that
the DOT and the State of Alaska and the Northern Economic Study
said that the mainline Bypass mail product is more stable, more
efficient than it was prior to 2002.
Mr. Issa. Okay. The reason for that lockout had to do with
people who were trying to not carry passengers. That was the
reason Senator Stevens did it.
Mr. Butler. I understand that.
Mr. Issa. And so I understand as a passenger carrier your
preference is not to have something that might allow
nonpassenger carriers to compete more effectively. But I still
go back to the same point. What share of the market did you
have in 2001?
Mr. Butler. The market in the State of Alaska is flat.
Mr. Issa. What share of the market did you have?
Mr. Butler. Of the freight market?
Mr. Issa. Freight or passenger, I will take either one.
What was your passenger share in 2001, what is your passenger
share today?
Mr. Butler. They are pretty much the same.
Mr. Issa. What was your freight share in 2001, what is your
freight share today?
Mr. Butler. They are pretty much the same.
Mr. Issa. Okay. So this legislation didn't affect Alaska
Air.
Mr. Butler. Bypass mail is dropping for us. Freight is----
Mr. Issa. People are drinking less Diet Coke? Why is it
dropping? Is it just less people living in the outer areas?
Mr. Butler. The volume year over year is down. The out-
migration out of the rural communities, yes.
Mr. Issa. Or in-migration into the cities?
Mr. Butler. Somewhat. The State of Alaska is not growing
greatly.
Mr. Issa. Right. So people are leaving rural Alaska,
leaving Aleutian islands, leaving Alaskan native islands, and
coming into cities where they are better served.
Mr. Butler. There is certainly out-migration from the bush.
Mr. Issa. You know, they did that in the lower 48 some
years ago, too.
So I guess the question is, legislation in 2002 didn't seem
to do anything for you except lock out competition, but your
market share is roughly where it was. Your complaint is your
market is smaller, right?
Mr. Butler. The market share is what it is, and the
interior market has never made money for Alaska Airlines.
Mr. Issa. Okay. Do you carry mail in the lower 48?
Mr. Butler. Very limited. Los Angeles to Mexico, Los
Angeles to Vancouver.
Mr. Issa. So you do carry mail.
Mr. Butler. A limited amount.
Mr. Issa. Do you have a monopoly on those two lines?
Mr. Butler. We do not.
Mr. Issa. So you do it with a rate schedule and you do it
because it makes you money.
Mr. Butler. Yes.
Mr. Issa. So competition isn't the problem in those two
routes. I just want to understand that you can carry to Mexico
and to Vancouver and other people can carry and you are happy
to take the mail and have it as part of your profit analysis.
Mr. Butler. My concern in the State of Alaska is all on the
mainline portion, the portion that Alaska Airlines is
responsible for out to the hub location.
Mr. Issa. Okay. But if you had to bid for Bypass mail,
which is freight basically, because you also bid for freight, I
assume, in those aircraft. Now, Alaska Air 737-400s, which are
split cargo-passenger versions, you carry mail, you carry
people, you carry Bypass mail, and you carry freight.
Mr. Butler. You're correct.
Mr. Issa. Okay. And you get paid, let's say, $1 a pound for
freight, you get paid $1 a pound for Bypass mail, and you get
paid whatever you get paid for your passengers, roughly. Okay.
The difference is that, Mr. Haberman, you get paid 32 cents
a pound, so to speak, to carry freight that is costing you
$1.08 because of Mr. Devany's rates on a blended basis, is that
right? I have got my numbers roughly right. But you have about
$32 million of income and $108 million of outflow, and that is
how you get a $76 million loss on this program, right?
Mr. Haberman. Yes, Mr. Chairman, that is accurate.
Mr. Issa. So the only thing we are dealing with is not the
efficiency of the program, we will assume for a moment that the
efficiency was perfect, but you are only getting paid a
fraction, about 30 cents on the dollar of what it costs to do.
Mr. Haberman. That is correct.
Mr. Issa. It is actually slightly less than 30, but close
to 30. And I want to make sure, Mr. Devany, your testimony
today is there are some ways that we could structure or allow
to be structured Alaskan Bypass that would lead to your
calculations being lower because of less expensive blended
rates. Is that correct?
Mr. Devany. Mr. Chairman, we are agnostic on who should be
included in the rate pool and who not. Obviously----
Mr. Issa. No, no, I am not asking that. I am asking that
you calculate it, and you said that some carriers cost less and
some cost more, right?
Mr. Devany. Yes, sir.
Mr. Issa. And you said under oath that if you take the less
expensive carriers and you give them more and you take the more
expensive carriers and you take them out, then your rate would
drop on a blended basis, right?
Mr. Devany. I believe the blended rate would drop. There is
also this equitable tender issue. So it is not like if a good
restaurant opens up in your city and it is cheap and they have
good food and everybody goes there. The statutes require an
equitable tender. So everybody, every airline gets an equal----
Mr. Issa. Every airline that is allowed in.
Mr. Devany. Yes.
Mr. Issa. Okay. But they are locking people out, right? And
they are not locking out the least efficient, they are locking
out ones after a certain date of incorporation or operation,
right?
Mr. Devany. Yeah, I believe it is 2001 or whatever it is.
Mr. Issa. Okay. I just want to understand that the Senator
and Congressman Young, they talked about how this whole system
would fall apart and there would be all this inefficiency and
it is going to collapse if we change anything, that it is a
perfect system. Mr. Butler effectively said the same thing from
Alaska Airlines, you can't change anything, it would only get
worse, everything is going to cost more money.
This committee is not interested in destroying Bypass mail.
We would love to find somebody else to pay for it. We would
love Essential Air Service to pay for it. But given that that
is not likely to happen and it is not within our jurisdiction,
all we are looking for in H.R. 4011 and in follow-on
legislation we are working on today is, can we enable, not Mr.
Haberman but the people broadly behind him and so on at the
Postal Service, to be empowered to find ways to authorize
greater competition leading to greater efficiency, greater
efficiency in structure leading to lower cost? If we can't,
then this exercise is a lot of work for $20 million in savings.
We are hoping to be able to do that.
My question to you is, do you see carriers that are more
efficient and as a result, if they were the only carriers in
the world, would we have lower costs. And your answer is?
Mr. Devany. I mean, we would have to look at the numbers,
Mr. Chairman. Yes, if their unit costs are lower, then the----
Mr. Issa. But some carriers unit costs are lower. Okay.
Mr. Devany. Perhaps. I don't know.
Mr. Issa. Right. So a process of selecting those who had
the lowest unit cost, either by having them bid because they
are able to do it for less or having them--for example, if we
were to allow three other carriers that as a result of changing
dates or the leading dates in H.R. 4011, if we were allowing
them only to enter if they could show that their costs would be
favorable to the pool, in other words they would be at or below
the average, then contrary to Mr. Butler's statement, it
actually would lower costs. Is that right?
If only people could enter who could prove that they would
not be adverse to the rate pool were allowed to enter, your
calculation--what was Kevin's name--your functionary, the
person that works for you who actually does the calculations.
Mr. Devany. Yes, that is arithmetically correct.
Mr. Issa. I wish I had had him. But I get the idea. I mean,
that is one of the things in the legislation, is we don't want
to open up competition to get higher prices. I am a pro-
competition person because it normally leads to innovation,
better products, better services, and so on. I understand
aviation even in the lower 48 is more complex than just open it
up, get better service. Anyone who has flown knows that
deregulation wasn't all about better service.
I saw you didn't leave, Blake.
Okay, so we have established there are at least ways in
which the way you calculate cost we could have a favorable
result as a result of giving the post office certain guidance
capability.
Mr. Devany. I think that could be the result. I don't know
that it necessarily would be.
Mr. Issa. Mr. Butler, would you agree that if somebody
could carry freight and have a lower cost of delivering it,
whether it is on the mainline or in the bush or a hydrofoil to
a remote island, that we should be able to consider adding them
if they are a more efficient carrier?
Mr. Butler. I think you absolutely want to look for
efficiency. I totally agree with you on that statement.
Mr. Issa, I keep thinking about your time in Alaska and the
instability that that industry has been through, whether it be
Reeve Air Aleutian, whether it be Wien, whether it be Alaska
Airlines.
Mr. Issa. Well, let me go through a little of the history--
--
Mr. Butler. The market is a bit unstable, I guess is what I
am trying to say.
Mr. Issa. Well, I understand it is not stable. The post
office lost $16 billion if calculated under GAAP last year and
5-point-some billion the way government calculates. That is a
lot of money. We are doing a long hearing on a small part, but
I am doing it separately because I want to be fair to the
Alaskans rather than the lower 48 problems, which the President
has addressed better than Congress.
But going back to parcel post, and I just want to make sure
we get this in the record, Mr. Haberman, do you know when
parcel post began in the United States?
Mr. Haberman. I don't know the date, sir. I can certainly
get that for you.
Mr. Issa. No, it is 1913. And it was in reaction to the
1887 international convention where the world began looking at
the idea of transporting packages, and they worked out a
convention, and the United States entered a domestic route.
Prior to that time, we didn't ship freight through the post
office. The post office was a letter carrier for over 100
years. So I just want to make sure that we leave that as part
of the record.
I had two distinguished Members of the House and Senate in
front of me and they talked about freight/package delivery as
some sort of a universal entitlement. It's not. If the post
office to survive is going to carry only letters and UPS and
FedEx and all these other folks have to worry about freight,
that's okay. That's consistent with the Constitution and over
100 years of our--all of our Founders were dead by the time we
carried the first parcel post, at least based on my calculation
of their longevity.
Mr. Butler, since Alaska Airlines was nice enough to come
here, let me go through a couple more things. You are in charge
of freight for Alaska Airlines, right?
Mr. Butler. The Cargo Division reports to me, yes.
Mr. Issa. Is the 737-400 your most efficient aircraft?
Mr. Butler. It is not.
Mr. Issa. But that is the one you use in Alaska?
Mr. Butler. It is the one that we are currently flying in
the State of Alaska.
Mr. Issa. So when I fly Alaska in the lower 48, I fly a
newer, more efficient aircraft, isn't that correct?
Mr. Butler. For passenger traffic, that is true.
Mr. Issa. Okay. And Boeing, I understand you are from
Seattle, they would make you a new combo aircraft, wouldn't
they?
Mr. Butler. We are in the process of looking at that today.
Mr. Issa. And if you bought probably a 737-800 type
airframe combo you would have a cap cost, but you would have a
lower cost of operation, wouldn't you?
Mr. Butler. That is a true statement. That airplane would
not fly to all of those mainline Bypass markets, however.
Mr. Issa. I understand there is a right plane for every
runway. But, Mr. Devany, your people, if they were calculating
a more efficient airplane, would in fact pay Mr. Butler and
everyone else less, right?
I just want to understand that the current system rewards
inefficiency to a certain extent, that if it costs more to
operate, the rate goes up. And the only reason that you drive
down your cost is that you want to make sure that whatever the
rate is you then make money on it, right?
Mr. Devany. Yes, Mr. Chairman, I think that is essentially
right. I analogize it to spaghetti sauce. You throw everything
in there, you put in the spices and everything and stir it up,
and then there is an average price. And if you can keep your
costs below average, you make out fairly well; if your costs
are above average, you don't make out so well.
Mr. Issa. Right.
Mr. Butler, you would agree with that?
Mr. Butler. Yes.
Mr. Issa. Okay.
Now, where else do you operate in which you operate based
on that system, other than Alaska, where you get compensated
based on the average cost of multiple carriers?
Mr. Butler. The Bypass mail products is the only one.
Mr. Issa. The only one. Give me your biggest run. Your
biggest run would be Anchorage to Fairbanks?
Mr. Butler. For Bypass mail?
Mr. Issa. Yes.
Mr. Butler. Nome or Bethel.
Mr. Issa. Bethel. Okay, I have taken that run. So 400
miles, Anchorage to Bethel. How many carriers carry Anchorage
to Bethel.
Mr. Devany, in the pool, and you can check with your staff,
in the pool that you calculate for the run Anchorage to Bethel,
how many carriers are there?
Mr. Devany. I don't know the answer, Mr. Chairman. I can
certainly get that.
Mr. Issa. Okay. If you would give us for the record sort of
a calculation of at a given time and a given span who the
carriers were, A, B, C, D, I don't even care about the names,
and what their average cost is so we could see the difference
in the cost calculated based on people all carrying tonnage on
the same route.
Mr. Devany. I would be happy to get that to you, Mr.
Chairman.
Mr. Issa. Okay.
Mr. Deaton, we are considering legislation that would
encourage or prioritize or try to have carriers basically skip
ports which are presently costing us money and try to have them
go from point to point without an interim stop. Does that save
money on the route?
Mr. Deaton. When authorized the Postal Service can tender
mail to a composite carrier that flies direct from an
acceptance point to a bush point and immediately, day in and
day out, saves the terminal handling fee for every pound of
mail that is tendered to that location. Consequently, also that
community, the residents there, also receive direct service,
better mail service, better product that goes through the
Bypass mail. So all of those things are correct, yes.
Mr. Issa. Okay. I obviously have a keen interest in this.
Between the late Ted Stevens and myself I am the only one left
to hold a hearing on this. I have asked a lot of questions. Do
any of you have any additional closing things that you think
should be made for the record? Do any of you have any
additional items that we didn't ask that you want to make sure
were in the record?
Mr. Deaton.
Mr. Deaton. I would just like to make sure the record
reflects that there are multiple components, I think we have
all established. The Rural Service Improvement Act and Bypass
mail is a very complex system. I would totally agree, because I
was involved in the development of the Rural Service
Improvement Act, with the chairman's position on why it came
about and what the purpose of it was. The role was to favor
passenger carriers over all other carriers. The role was to
restrict entry. The role was to award bush passenger carriers
more favorable mail tender than they did others. And, quite
honestly, it was aimed specifically, in the equalization
portion, was aimed specifically at one carrier at the time.
That carrier is a freight carrier at the time and remains so.
Your comment about efficiencies and unit costs, I would
like to also get on the record that the current law requires
the DOT on the bush side to only consider passenger carrier
costs when it sets rates and it does not consider when it sets
rates the cost and the lower unit costs of efficient freight
carriers. So I would like to make sure that that is a part of
the record also.
Mr. Issa. I appreciate that.
Mr. Butler?
Mr. Butler. You know, my only comment is that I don't
necessarily believe that the Bypass mail product requires
anywhere near the surgery that this bill particularly
contemplates, nor the enormous----
Mr. Issa. Wait a second. The bill only undoes the 2002
restrictions, as far as I know. We do have some additional
legislation we are looking at, and that may be more surgery
than you want. But what in 4011 was so onerous to allow
additional competitors that were able to be in prior to 2001?
Mr. Butler. A number of the things that we talked about
earlier that allow for the potential for the commodity product
in the bush to go high, sky high, for one, I guess primarily
that one.
Mr. Issa. So your point on 4011 is that we should make sure
that we put protections in, in the selection, that would be
allowed to prevent that. In other words, the post office in
consultation with Department of Transportation would be allowed
to select carriers based on preventing the price from going up
due to an adverse cost. Is that what you are saying?
Mr. Butler. No. My point is that I believe that 4011 causes
a number of disruptions.
Mr. Issa. But it certainly means that people can compete
against you for mainline, right?
Mr. Butler. That is true.
Mr. Issa. Is there anything you don't like about this bill
other than that?
Mr. Butler. Well, I would suggest based upon the
conversation earlier that there is an opportunity for the rate-
making formula to be looked at, and that doesn't require
anything related to legislation to make that happen, and that
is one of the potential opportunities here.
Mr. Issa. How would the post office affect Mr. Devany's
absolute ability to look at price, set it, and then they have
to pay it. You understand, they don't write a purchase order,
they just write the check.
Mr. Butler. File a petition with the DOT.
Mr. Issa. Okay. So you are telling me that the post office
could beg the DOT to come up with a rule to change something,
but there is no legislation required.
Mr. Butler. I think that's a potential.
Mr. Issa. Mr. Haberman, have you been contemplating begging
the ability to reduce the cost to the post office?
Mr. Haberman. I am not aware of any ability for us to
lobby.
Mr. Issa. Would it be reasonable that you should have been
begging for years for that?
Mr. Haberman. Yes, sir.
Mr. Issa. Do you think that the postmaster could get back
to us and see if he has ever thought about trying to pay less?
Mr. Haberman. Absolutely, sir.
Mr. Issa. I am astounded that we are only discovering that
here today. But, Mr. Butler, I certainly will be working with
the postal system to see if they believe there is any
reasonable way that they could simply pay less. Something tells
me that I wouldn't be here if it wasn't for $76 million worth
of cross-subsidy going on.
Mr. Butler. I believe that the DOT has routinely changed
some of those parameters, but you will discover that yourself.
Mr. Issa. Okay. Anyone else?
Mr. Devany. Chairman, there are provisions in statute and
regulations that either party, either the Postal Service or
airlines, can request to reopen----
Mr. Issa. Have the airlines ever requested to reopen, try
to get more money?
Mr. Devany. No, sir.
Mr. Issa. They must be doing okay, right? They are not
dissatisfied apparently.
Mr. Devany. In our world, Mr. Chairman, we want both sides
to be mad at us. We want the post office and the airlines to be
mad at us. Because if one side is happy, then maybe the rates
are too high or too low. If they are both kind of unhappy----
Mr. Issa. But your testimony today is you simply measure
the world as it is. You are not in the business of creating
efficiencies or even lobbying for efficiencies, isn't that
correct?
Mr. Devany. That is correct.
Mr. Issa. And doesn't that create an odd situation in which
the post office cannot force efficiencies. You are not in the
business of creating efficiencies. Mr. Butler is in the
business of being efficient enough to make money, but not
necessarily to drive down the cost to the post office. There is
no particular incentive to him, is there?
Mr. Devany. It is an unusual situation where we play
referee between the airlines----
Mr. Issa. And I understand we could have called in the bush
pilot that is costing us $32 per ton per mile, plus $850 per
ton every time he lands. We oddly enough had Alaska Airlines
volunteer to come here when without a doubt you are flying the
most efficient aircraft, large capacity aircraft, to these
large airports in Alaska. I mean, in a sense, Mr. Butler, I was
a little surprised that you were worried as an incumbent that
you wouldn't continue to compete successfully and have the
lion's share of the load. But, you know, I still was happy to
have you come here and make the case on behalf of your airline.
Mr. Butler. It isn't just the airline, it is the State and
our commitment to the State. There is a reason why there is an
Eskimo on that tail. We represent the State and the people
within the State.
Mr. Issa. Ms. Whitcomb?
Ms. Whitcomb. The only additional comment I would like to
make is that earlier, in the earlier panel, there was a
reference to concerns with the report that we issued. We
provided a response to the concerns that were addressed by the
Alaska delegation at the time that that report was issued. So
that might be of interest.
Mr. Issa. We will make sure that is included in the record,
since I suspect that you were not in agreement with their
position.
Ms. Whitcomb. Right.
Mr. Issa. Okay. The last thing is I am going to ask each of
the other potential carriers to submit statements for the
record, particularly as to the allegation of safety. I am going
to invite all Alaskan potential carriers of all sort, including
bush pilots, to submit anything they want for the record
relative to their ability to safely carry passengers. We will
send a letter to the FAA asking about carriers in Alaska.
Mr. Issa. Mr. Butler, if you have concerns about the three
potential entrants to the market, if you want to tell us about
their safety records and concerns that they would be unsafe for
carrying Diet Cokes on the mainline, I would appreciate it.
Mr. Issa. Those are areas that obviously our goal is not to
disrupt the ability to carry freight in Alaska at an affordable
rate. It is just the opposite. It is to drive down the cost,
not the price but the cost, since it is being borne by the
ratepayer.
If there are no other comments, I will keep the record open
for 5 days for any of your comments in addition to what I had
described.
Mr. Issa. And with that, we stand adjourned.
[Whereupon, at 4:10 p.m., the subcommittee was adjourned.]
APPENDIX
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Material Submitted for the Hearing Record
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