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Trans World Airlines Inc. v. Civil Aeronautics Board

decided: November 7, 1980.


Petitions for review of orders of the Civil Aeronautics Board establishing final rates of compensation payable by the United States Postal Service for the transportation by United States flag air carriers of international air mail on and after March 8, 1974. Affirmed.

Before Lumbard, Mansfield and Mulligan, Circuit Judges.

Author: Mulligan

The Civil Aeronautics Board (CAB) in proceedings captioned Transatlantic, Transpacific and Latin American Service Mail Rates Investigation by orders dated December 21, 1978 (Final Order, Order 78-12-159) and July 3, 1979 (Order on Reconsideration, Order 79-7-17) established rates of compensation for the transportation of air mail by United States air carriers in the Transatlantic, Transpacific and Latin American regions for the period beginning March 8, 1974. Petitioners Trans World Airlines, Inc. (TWA) and Pan American World Airways, Inc. (Pan Am) together with intervenors, Northwest Airlines, Inc. (Northwest) and Braniff Airways, Inc. (Braniff) (hereinafter collectively referred to as the carriers)*fn1 have submitted a joint brief on consolidated petitions for review of these two orders pursuant to Section 1006 of the Federal Aviation Act (FAA), 49 U.S.C. § 1486. The carriers challenge the CAB orders on two grounds:

(1) That they are violative of Section 4 of the International Air Transportation Fair Competitive Practices Act of 1974 (FCPA), 49 U.S.C. § 1376(h)(3).

(2) That the cost methodology employed by the CAB was arbitrary and capricious and unsupported by substantial evidence.

The Department of Defense (DOD) and the United States Postal Service (Postal Service) have also challenged the same Board orders in a petition to review, filing a joint brief in this proceeding. Primarily they attack the refusal of the CAB to apply its final rates retroactively from the date the proceeding was instituted, March 8, 1974, instead of prospectively from the date of the final order, December 21, 1978. The Government petitioners also urge that the addition of a ten percent factor by the CAB to the all-cargo capacity costs allocated to the combined class of priority mail and military official mail for all-cargo aircraft was not justified by substantial evidence. Intervenor Flying Tiger Line, Inc. (Flying Tiger) contends that this ten percent upward adjustment for all-cargo aircraft was a "well reasoned exercise of agency judgment."

Finally, intervenor Northwest argues that the CAB incorrectly allocated capacity costs on the basis of space rather than a combination of space and weight factors. It also attacks the CAB's application of a cargo load factor adjustment which assigned a greater share of unused aircraft capacity to passenger service than to freight or mail.

For the reasons hereinafter set forth the orders of the CAB challenged by the petitioners are affirmed in all respects.


A. Factual Background

The three basic categories of international mail involved in this proceeding are priority mail, MOM and SAM. Priority mail consists of civil and military personal mail bearing air mail postage and official military mail marked for air mail treatment. Since April 1, 1975 air carriers have been required to accept all air mail possible and air mail is afforded priority over all loadings except confirmed passengers. MOM consists primarily of official military mail endorsed "MOM" or "First Class Mail." The boarding priority of MOM is equal to that of commercial air freight, on a first-in, first-out basis. Transportation Handbook, Series T-1, § 642.2. SAM is largely military personal mail to and from Armed Forces post offices located outside the 48 contiguous states which is transported between these offices and destination or origin points within the United States on scheduled United States air carriers on a space available basis in accordance with specific statutory provisions. See 39 U.S.C. § 3401. Since December 13, 1975, the Postal Service has merged the tender of military air mail, MOM and SAM letters, flats and tapes, not exceeding thirteen ounces. This letter mail is transported at the MOM priority and rate level. Also at issue are the rates to be paid for "foreign transit mail," which is mail with foreign origins and destinations which passes through the United States and the hands of the Postal Service, and is placed on a United States air carrier for the rest of its journey. Thus a letter from Peru to Paris may be redispatched in New York on a Paris bound United States air carrier. DOD reimburses the Postal Service for payments to air carriers for the international transportation of military mail.

It is undisputed that foreign air carriers obtain mail from the Postal Service but only as a last resort. Under Postal Service regulations, military airmail is exclusively reserved for United States commercial air carriers to the maximum limit of their capabilities unless it is directed to points they do not serve, Transportation Handbook Series T-1, § 616, and other priority mail can be routed on other foreign flag carriers only with Postal Service approval and only when American service does not exist or is limited. Id. at § 253.3. In the proceedings below it was established that in 1974 the Postal Service paid foreign postal services or foreign carriers a total of only $4.8 million while paying the six United States carriers involved in this litigation some $114 million for transporting United States international air mail. These American carriers also received almost $8.8 million for the carriage of foreign mail.

International mail rates paid to foreign carriers to some extent at least are fixed by the Universal Postal Union (UPU), an agency of the United Nations which has 154 member countries including the United States.*fn2 Regardless of the number of foreign carriers receiving UPU rates, the rates are admittedly higher than those received by American carriers under CAB rates. This disparity in part prompted the existing litigation.

B. The Proceedings Below

By order dated March 8, 1974 (Order 74-3-40) the CAB instituted an investigation to determine the fair and reasonable air mail rates for the transportation of priority mail and MOM in the Transatlantic, Transpacific, and Latin American rate areas established by the CAB. The proceeding was consolidated with an ongoing investigation of the fair and reasonable rates for the transportation of SAM which had been initiated by a Pan Am petition filed on March 8, 1973. Thus the rates for all of the previously described categories of international mail were under consideration.

The rate period for all these classes of mail was to commence on March 8, 1974. In February 1975 the CAB fixed temporary rates which provided increases for the carriers to compensate for fuel price increases as well as other putative cost rises. After due notice public hearings were commenced before the CAB on December 8, 1975 to establish permanent rates. See 49 U.S.C. § 1376(a). The hearings were adjourned on December 9 at the request of the interested parties to allow negotiation of the issues under investigation. In all prior cases such negotiation had been successful but unfortunately in this case no agreement could be reached. Thus for the first time in the CAB's forty year history air mail rates for international transportation would be determined by formal investigation of their reasonableness instead of by agreement.

Hearings resumed on January 6, 1976 before Administrative Law Judge Arthur S. Present and were concluded on January 12, 1976. Later statements of positions and briefs were filed by the parties now involved in this appeal. The Administrative Law Judge made his Initial Decision on March 17, 1977. The CAB sua sponte decided to review the decision on March 30, 1977 (Order 77-3-170). On September 28, 1977 the CAB heard oral argument and then issued its opinion and the order now under review on December 21, 1978. That order was supplemented by its Opinion and Order on Reconsideration of July 3, 1979.


Governing Statutes

Section 406(a) of the Federal Aviation Act (49 U.S.C. § 1376(a)) empowers the CAB "to fix and determine from time to time, after notice and hearing, the fair and reasonable rates of compensation for the transportation of mail by aircraft ...."*fn3

Faced with what it viewed as the discriminatory treatment of United States international air carriers in foreign air transportation, Congress in 1975 amended Section 406 by adding subsections (h)(2) and (3), grouped together as Section 4 of the International Air Transportation Fair Competitive Practices Act of 1974 (FCPA), 49 U.S.C. § 1376(h)(2) & (3). Hereinafter those subsections will be referred to for the sake of simplicity as Section 4, FCPA. The initial version of that section, S. 3481, was introduced in the Senate on May 13, 1974 by Senator Cannon, Chairman of the Senate Commerce Committee, Subcommittee on Aviation. The proposed legislation would have required the CAB to fix international mail rates payable to American air carriers at the UPU rate, which was the rate paid to foreign carriers by the Postal Service.*fn4 Hearings were held by the Subcommittee in July, 1974. Predictably the CAB and the Postal Service opposed and the carriers favored the proposed legislation. The Commerce Committee reported an amended form of S. 3481 to the Senate on October 9, 1974. As revised Section 4 eliminated the mandatory requirement that UPU rates be paid to American carriers but required that the Secretary of State and the Postmaster General negotiate for UPU rates no higher than the actual costs of transportation of the mail, including a reasonable rate of return on investment. S.Rep.No. 93-1257, 93d Cong., 2d Sess. 13 (1974). The Committee Report indicated that it had rejected mandatory application of UPU rates because they represented an indirect subsidy which many foreign nations had elected to pay regardless of realistic costs, and their adoption for all United States international airlines would result in a windfall for financially healthy American carriers. Id. at 7. The bill as amended was passed by the Senate on October 10, 1974 by a 74-2 vote.

The identical version of the initial Senate Bill was introduced into the House on April 11, 1974 (H.R. 14266) by Congressman Staggers, Chairman of the House Committee on Interstate and Foreign Commerce. After hearings the House Committee amended its bill to eliminate mandatory UPU rates. Instead it adopted provisions substantially the same as the amended Senate Bill, but with an additional requirement that in establishing rates the CAB "shall take into consideration" the UPU rates. H.R.Rep.No. 93-1475, 93d Cong., 2d Sess. 1-2 (1974), U.S.Code Cong. & Admin.News 1974, p. 7461. Congressman Murphy dissented, claiming that the amended version had emasculated Section 4 by not mandating payment to United States carriers at the UPU rate as initially proposed. He argued that no subsidy was involved in the UPU rates because they are essentially cost based. Id. at 25-28. After debate Congressman Murphy introduced an amendment which again would have required that American carriers receive UPU rates. The amendment carried and the House approved the bill as amended by a vote of 221 to 54. 120 Cong.Rec.H 11898. The Senate Commerce Committee refused to accept the mandatory application of the UPU rates and instead drafted the version of the statute which is now the law. 120 Cong.Rec.S 21807. On December 18, 1974, the House concurred in the Senate version. 120 Cong.Rec.H 12277-78. The President signed the bill on January 3, 1975. Section 4, FCPA now provides:

(2) The Secretary of State and the Postmaster General each shall take all necessary and appropriate actions to assure that the rates paid for the transportation of mail pursuant to the Universal Postal Union Convention shall not be higher than fair and reasonable rates for such services. The Secretary of State and the Postmaster General shall oppose any present or proposed Universal Postal Union rates which are higher than such fair and reasonable rates.

(3) The Civil Aeronautics Board shall act expeditiously on any proposed changes in rates for the transportation of mail by aircraft in foreign air transportation. In establishing such rates, the Board shall take into consideration rates paid for transportation of mail pursuant to the Universal Postal Union Convention as ratified by the United States Government, shall take into account all of the ratemaking elements employed by the Universal Postal Union in fixing its airmail rates, and shall further consider the competitive disadvantage to United States flag air carriers resulting from ...

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