The plaintiffs alleged that the Postal Service breached real, or implied, contracts with the mailers of Priority Mail items, and further alleged that the Postal Service was "unjustly enriched" by receiving higher fees for Priority Mail service without providing more expedited service than it provides to non-priority First-Class Mail items. The other two counts were based on California state statutes.

The Postal Service filed a motion to dismiss, taking the position that there is no contract, in law or in fact, between the Postal Service and mailers of Priority Mail, and further arguing that Congress's scheme for postal ratemaking preempts plaintiffs' claims. It also argued that the Supremacy Clause barred any claims under these state laws. The plaintiffs subsequently decided to dismiss their claims voluntarily.

12. Rulemakings

During 2004 the PRC initiated several notice-and-comment rulemaking proceedings to consider amendments to its Rules of Practice and Procedure. On January 16, 2004, the PRC proposed new rules to incorporate a definition of postal services (as distinguished from nonpostal services, over which it has no jurisdiction) into its rules (Docket No. RM2004-1). The Postal Service did not oppose this initiative but suggested several refinements to the proposed definition. On March 5, the PRC proposed to expand the amount of information regarding nonpostal services that the Postal Service would need to submit when filing a request (Docket No. RM2003-2). The Postal Service opposed this proposal, instead taking the view that the amount of information regarding nonpostal services currently required is fully sufficient to allow PRC review and evaluation of proposed postal rates and fees. Initial and reply comments from interested parties have been submitted in both dockets. Finally, in a carryover from last year when the PRC initiated Docket No. RM2003-5, the PRC issued its final rules regarding proposed procedures for NSAs on February 11, 2004. The two NSAs subsequently filed by the Postal Service this year (Bank One and Discover) were filed in accordance with the portion of the new rules relating to "functionally equivalent" NSAs.

E. Transportation Policies

1. General

The Postal Service spent $4.97 billion in 2004 for the transportation of mail, including terminal dues, transit charges, and other international expenses which are discussed below.

This represents a $20.0 million decrease from total 2003 transportation expenses. After the terrorist attacks on September 11, 2001, the Federal Aviation Administration (FAA) placed restrictions on larger mailpieces, which prohibited the Postal Service from using commercial air carriers for such mail. The Postal Service was forced to move virtually all Priority Mail items to shared air and surface networks. During 2004 the consolidation of routes and improved efficiencies in air transportation resulted in an overall decrease in total transportation costs.

2. Domestic Transportation

a. Air Transportation

Air transportation costs in 2004 totaled $1.7 billion, a decrease of 3 percent from 2003. These costs include the use of domestic commercial airlines (passenger and freight) and dedicated networks. As a continued effort to improve the security pertaining to the air transportation industry, the Postal Service is still prohibited from transporting heavier mailpieces on commercial passenger airlines. This is still minimizing the volumes flown on commercial airlines and shifting volume to the shared air network.

The Postal Service has completed the first 15 months of the commercial air transportation system (CAIR-03) contracts. At the onset of the CAIR-03 contract Air Category Management Center awarded 18 individual contracts. Scanning requirements for these contracts began in September 2003. Since then, the Postal Service has been able to track the true performance of all suppliers based on their scans adding both performance and cost into the best value criterion used for routing selection. These contracts enhance competitive positioning by using performance data to manage mail flows.

In addition to the CAIR-03 and Network contracts, the Postal Service also operates alternate methods of transportation (AMOT) and air taxi contracts. These contracts are for point-to-point segments for those markets where there is not sufficient air transportation offered by the CAIR or network contractors. These contracts have been awarded at a significant cost reduction compared to the previous air contracts operating in these markets.

b. Rail Transportation

Postal Service expenses for all rail transportation were $169.5 million for 2004.