### Order: 2014-3-14 Served: March 28, 2014



### UNITED STATES OF AMERICA
DEPARTMENT OF TRANSPORTATION
OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation on the 28th of March, 2014

Essential Air Service at

SIOUX CITY, IOWA WATERLOO, IOWA

Under 49 U.S.C. 41731 et seq

. DOCKET DOT-OST-2011-0131
DOCKET DOT-OST-2011-0132

ORDER SELECTING CARRIER

By this Order, the Department is selecting American Airlines (American) to provide Essential Air Service (EAS) at Sioux City and Waterloo, Iowa, for annual subsidies of $611,334 and $945,546, respectively. 1



### Background By Order 2011-12-2, December 8, 2011, the Department selected American Eagle Airlines, a regional affiliate of American Airlines, to provide 13 nonstop round trips per week to each community, Sioux City and Waterloo, from Chicago O’Hare International Airport (ORD). We made the rate effective for a two-year period beginning when it inaugurated EAS at both communities through the end of the 24 th 

### month thereafter. The carrier inaugurated service at both communities on April 3, 2012, thus making the expiration date April 30, 2014. American Eagle was selected to provide service at Sioux City with 50-seat aircraft and 44-seat aircraft at Waterloo, with annual subsidy rates of $1,512,799 and $1,541,824, respectively.

As the end of the contracts were approaching, by Order 2013-11-3, November 1, 2013, the Department requested proposals for EAS at the two communities for a new term. The Order requested proposals consistent with the histori cal service pattern of 13 nonstop round trips per week to Chicago. The Order indicated that ca rriers could also submit proposals with different

1 Such subsidy is calculated and dist ributed on a fiscal year basis, s ubject to the availability of funds.

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aircraft types to different hubs that would accomm odate historical traffic levels. All proposals were to be submitted by December 2, 2013. American submitted proposals at both communities and United Airlines, Inc. (United) at only Sioux City.

Proposals of American at Sioux City and Waterloo American proposes to continue to operate thir teen (13) nonstop round trips per week from Sioux City to Chicago with regional jets for $611,334 annual subsidy and thirteen (13) nonstop round trips per week from Waterloo to Chicago with regional jets for $945,546 annual subsidy.

At each community American requested the flexibility to use either 50-seat CRJ-200 or 44-seat Embraer Regional Jets for the same level of subsidy, and indicated that the actual service provider would be a code-share partner of Amer ican. The carrier stated that both provisions would increase American’s flexibility in providing the service as well as the reliability of that service. Also, both of American’s proposals ar e explicitly predicated on a continuation of a waiver, initially granted by Order 2011-12-2, December 8, 2011, to 49 U.S.C § 41734, which requires an air carrier to provide 90 days’ notice before ending service at an EAS community and requires the Department to hold-in the incumbent carrier for successive 30-day periods until a new carrier begins service. American is reque sting a waiver, but warrants that it would provide 120-days' notice, after which time it would be free to terminate service.

Proposal of United at Sioux City United proposes to operate thirteen (13) nonstop round trips per week to Chicago with 50-seat regional jets for $1,410,678 annual subsidy. United also explicitly requests that the “Department and the Sioux City community waive the right to hold-in United Express service at SUX upon receipt of 120-days’ notice to terminate service.” The carrier indicates its service would be operated by any one of the number of the United Express partners carrying the UA code and providing regional feed.

Community Comments On December 3, 2013, we requested comments from the communities by January 6, 2014.

The Mayor of Waterloo strongly endorsed Ameri can. “We support American’s application to serve Waterloo and the broader Cedar Valley area. We look forward to a long relationship where American can grow their presence at th e Waterloo Regional Airport, supporting economic growth from our region.” The Airport Manager looks “forward to the additional connectivity that will be generated by the [recent US Airways and American] combination. Since American started serving Waterloo in 2011, air fares have become more competitive with other regional airports and ridership has slowly improved. Proof of these improved results is the fact that American’s EAS subsidy proposals dropped by almost 40% [to $945,546] versus their 2011 proposal [requesting $1,541,824]. We believe that this is indicative of good things ahead.”

At Sioux City, the Airport Board of Trustees i ndicates that the service to Chicago O’Hare proposed by both carriers is critical. The Board al so notes that both United and American have at different times contemplated subsidy-free service to an additional hub, either Denver or Dallas. “[W]e are very appreciative that two top tier carriers, United and American, both bid EAS service to ORD for our market, and that both have indicated a desire to explore other hubs

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as well. Our general understanding is that the DOT would traditionally accept the lower bid for Chicago service proposed by American, and we ar e supportive of that outcome. ....We sincerely appreciate the interest and bids from American and United.”

From the general public, there was mixed support for both carriers. One party noted that American had provided good service and so was deserving of being re-selected. Another recommended United because of their good memories of United’s service 15 years ago, and because United currently has a bigger presence at Chicago than American. Several parties mentioned the desire for additional frequencies and service to an additional hub besides Chicago.

Subsequent Developments American’s proposal projected an average block time of 1.25 hours at each community, notwithstanding that the nonstop distance between O’Hare and Waterloo is 234 miles while Sioux City is 436 miles distant. 2 

### Also, our analysis of the proposal indicated projected unit costs per block hour for direct expenses of $3,391.63 at Sioux City and $2,527.14 at Waterloo, while one would expect such unit costs to be very similar for the same aircraft type.

When Order 2013-11-3 requested proposals, it stated, as do all such Orders, that

“Interested carriers should prepare their proposals with every expectation that their initial proposals will also be their final and only proposals. We retain the discretion to negotiate proposals with carriers when we deem it desirable. We also retain the discretion to reject outright all unreasonabl e or unrealistic proposals and, if necessary, solicit a new round of proposals. However, we anticipate that negotiation or rejection will remain only occasional exceptions to the rule.”

Given the above, staff contacted American and, to be fair, United, to see if they wished to revise their proposals. United chose not to revise its proposal. American chose not to revise its bottom line, but it did explain the discrepancies highlighted above. The proposed block times and unit costs per block hour and block times were, in fact, incorrect. However, the carrier explained that while the block times shown on its proposals were wrong, the expenses and bottom line subsidy requests were not. While block hours drive direct expenses, American stated that its projected expenses were developed separately from the erroneous block times shown in its proposal.

“We are standing behind our proposal for the EAS renewals at Waterloo and Sioux City, Iowa. Our price-out model uses actual Ameri can Eagle Finance data from last year’s performance in both cities and is not driven on any kind of block hour calculator for flight operational expenses. We did have a typo in block hours for both cities however this has since been reconciled using T100 data from FATS and AE Finance data from MIRS.”

2 Block time includes flight time and also ground time or taxi time. Flight time is measured on a “wheels up to wheels down” basis. Direct expenses include pilot, fuel , maintenance, aircraft, and some insurance expenses – those expenses that can be directly assigned to an indivi dual aircraft or aircraft type without any allocation.

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Appendix B shows American’s revised proposal. In its revised proposal American’s block times are much closer to the numbers it files on the T-100 Segment Report. 3 

### As a result, the revised unit costs per block hour are $2,783.22 at Sioux City and $2,803.04 at Waterloo, very close to each other, as we would expect, and the revised proposal appears reasonable.

Decision At Waterloo the decision is straightforward: we have only one proposal from one carrier, the community favors the selection of that proposal, and the level of subsidy has decreased substantially. American’s request for subsidy has decreased from the current annual rate of $1,541,824, to $945,546, or $596,278 less subsidy, an almost 40 percent reduction.

At Sioux City, we are confident that either carrier would provide excellent service. Both carriers requested a waiver from the termination-of-service provisions of the law. The civic officials did
not endorse one carrier over the other. As th e Airport Trustee indicated, the difference in requested subsidy is decisional here, and we will, therefore, reselect American.

Because the only bids are from carriers reques ting a waiver of the hold-in provisions of 49 U.S.C. § 41734, and because both communities support American’s proposal, which which was contingent on a 120-day exit provision, we will accept American’s request to cease operating at either community on 120 days’ notice under our authority from 49 U.S.C. § 40109 as being in the public interest. To not do so would risk having the communities lose service as no other carriers submitted proposals without the request for waiver. Under 49 U.S.C. 40101(a)(11), “maintaining a complete and convenient system of continuous scheduled interstate air transportation for small communities and isolated areas with direct financial assistance from the United States Government when appropriate” must be considered as being in the public interest as the Department administers the EAS Program.

Carrier Fitness 49 U.S.C. §§ 41737(b) and 41738 require that the Depa rtment find an air carrier fit, willing, and able to provide reliable service before the Department may subsidize it to provide EAS. American is subject to the Department’s conti nuing fitness requirements, and no information has come to our attention that would cause us to question the carrier’s fitness at this time. EAS staff has contacted the Federal Aviation Administration, and it has raised no concerns that would negatively affect our fitness findings. We ther efore conclude that American remains fit to conduct the operations proposed here.

This Order is issued under authority delegated in 49 CFR Part 1.25a(b).

ACCORDINGLY,

1. We select American to provide EAS at Si oux City and Waterloo, Iowa, as described in Appendix C;

3 The carrier increased its projected block times at Sioux City to 1.52 hours per departure from 1.25, and decreased its block times at Waterloo to 1.13 hours per departure from 1.

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2. We direct American to retain all books, records, and other source and summary documentation to support claims for payment, and to preserve and maintain such documentation in a manner that readily permits its audit and examination by representatives of the Department. Such documentation shall be retained for seven years from the service date of the Order or until the Department indicates that the records may be dest royed, whichever comes first. Copies of flight logs for aircraft sold or disposed of must be retained. The carrier may forfeit its compensation for any claim that is not supported under the terms of this Order;

3. We find that American continues to be fit, willing and able to operate as a certificated air carrier and capable of providing reliable EAS at Sioux City and Waterloo, Iowa;

4. Under our authority in 49 U.S.C. § 40109, we will allow American to cease oeprations at either community on 120 days’ notice as it is in the communities’ interest under 49 U.S.C. § 40101(a)(11).

5. These dockets will remain open until further Order of the Department; and

6. We will serve copies of this Order on the civic officials of Sioux City and Waterloo, Iowa, and
on American Airlines and United Airlines.

By:

SUSAN L. KURLAND Assistant Secretary for
Aviation and International Affairs (SEAL)
An electronic version of this document is available at http://www.regulations.gov

### Appendix A

Nonstop Great Circle Miles to Sioux City (SUX) OMA, Omaha, 80 DSM, Des Moines 152 ALO, Waterloo 204 MSP, Minneapolis, 233 ORD, Chicago, 436

Nonstop Great Circle Miles to Waterloo (ALO) CID, Cedar Rapids 58 DSM, Des Moines 96 MSP, Minneapolis 166 ORD, Chicago 234Appendix B-1

Proposal of American Airlines at Sioux City and Waterloow as Originally Submitted

Dockets 2011-131 and 2011-132

Sioux City Waterloo

Hub ORD ORD

Miles 436 234 Departures 1,325 1,325

Block Time 1.25 1.25
Block Hours 1,656 1,656 Passengers 52,044 40,019
Pax. Fare $114.62 $101.36

Total Revenue $6,410,350 $4,278,179

Flying Ops. $5,309,727 $3,948,849

Aircraft $306,804 $236,088
Directs 1/ $5,616,531 $4,184,937

Pax. Variable $698,340 $494,247

Other $372,447 $295,792
Indirects $1,070,787 $790,039

Operating Expense $6,687,318 $4,974,976

Profit @ 5% $334,366 $248,749
Economic Cost $7,021,684 $5,223,725

Subsidy $611,334 $945,546

1/ As discussed in the body of the Order, the block hours shown above produce a unit cost per block hour of $3,391.63 at Sioux City and $2,527.14 at Waterloo.Appendix B-2

DOT Review of American's Clarified Proposals 1/

Dockets 2011-131 and 2011-132

Sioux City Waterloo

Hub ORD ORD Aircraft Type 2/ 44-seat RJs 44-seat RJs

Miles 436 234
Departures 3/ 1,325 1,325

Block Time 1.52 1.13

Block Hours 4/ 2,018 1,493 Passengers 52,044 40,019
Pax. Fare $114.62 $101.36

Revenue $5,965,122 $4,056,213 Ancillary Revenue $445,228 7.46% 5/ $221,966 5.47% 5/
Total Revenue $6,410,350 $4,278,179

Flying Ops. $5,309,727 $2,631.18 6/ $3,948,849 $2,644.91 6/

Aircraft $306,804 $152.03 6/ $236,088 $158.13 6/
Directs $5,616,531 $2,783.22 $4,184,937 $2,803.04

Pax. Variable $698,340 11.71% 7/ $494,247 12.18% 7/

Other $372,447 5.90% 8/ $295,792 6.32% 8/
Indirects $1,070,787 $790,039

Operating Expense $6,687,318 $4,974,976

Profit @ 5% $334,366 $248,749
Economic Cost $7,021,684 $5,223,725

Subsidy $611,334 $945,546

1/ After discussions with American, the carrier corrected its block times and provided
additional information from its original proposal.
2/ American proposed 50-seat Jets, but requested the flexibility to operate 44-seat regional jets.
Because carriers can always substitute superior equipment, we will assign 44 seats.
3/ 13 trips per week x 2 directions x 52 weeks x 0.98 = 1,325
4/ Block time multiplied by departures. Difference from proposal due to rounding.
5/ Ancillary revenue as a percentage of passenger revenue.
6/ Expenses divided by block hours, providing unit cost per block hour.
7/ Expenses divided by passenger revenue.
8/ Other Expense divided by above expenses.

### Appendix C-1

American Airlines, EAS to be Provi ded to Sioux City, Iowa, Docket 2011-0131

Effective Period: May 1, 2014, through April 30, 2016 Service: Thirteen (13) nonstop round trips per week to Chicago (ORD) Aircraft Type: Regional Jets, 44-50 seats Annual Subsidy: $611,334 Annual Flights: 1,325 1 

### Subsidy per Flight: $461 2 

### Weekly Subsidy Ceiling: $11,986 3

The carrier understands that it may forfeit its compensation for an y flights that it does not operate in conformance with the t erms and stipulations of the rate order, including the service plans outlin ed in the order and any other significant elements of the req uired service, without prior approval. The carri er understands that an aircraft take-off and landing at its scheduled destination co nstitutes a completed flight; absent an explanation supporting subsidy eligibility for a flight that has not been completed, such as certai n weather cancellations, only completed flights ar e considered eligible for subsidy.

In addition, if the carrier does not schedul e or operate its flights in full conformance with the order for a significant perio d, it may jeopardize its entire subsidy claim for the period in question. If the carrier contem plates any such changes beyond the scope of the order during the applicable period of these rates, it must firs t notify the Office of Aviation Analysis in writing and receive written approval from the Department to be ensure d of full compensation. Should circumstan ces warrant, the Department may locate and select a replacement carrier to provide service on these routes. The carrier must complete all flights that can be safely oper ated; flights that overfly points for lack of traffic will not be compen sated. In determining whethe r subsidy payment for a deviatin g flight should be adjusted or disallowed, the Depart ment will consider the extent to which th e goals of the program are met and the ext ent of access to the national air transportation system provided to the community.

If the Department unilaterally, either partially or completely, te rminates or reduces payments for service or changes service requirements at a specific location provided for under this order, then, at the end of the period for which the Department does make payments in the stipulated amounts or at the stipulated servi ce levels, the carrier may cease to provide service to that specif ic location without regard to any requirement fo r notice of such cessation. Those adjustme nts in the levels of subsidy and/or ser vice that are mutually agreed to in writing by the Department a nd carrier do not constitute a total or partial reduction or cessatio n of
payment.

Subsidy contracts are subject to, and incorporate by reference, re levant statutes and Department regulations, as they may be am ended from time to time. However, any such statutes, regulations, or amendments thereto shall not opera te to controvert the foregoin g paragraph.

Funds may not be available for performance under this Order beyond September 30, 2014. The Government’s obligation for performance under this Order beyond September 30, 2014, is subject to the availability of funds from which payment for services can be made. No legal liability on the part of the Government for any payment may arise for performance under this Order beyond September 30, 2014, until funds are made available to the Depart ment for performance. If sufficient funds are not made availabl e for performance beyond September 30, 2014, the Department will provide notice in writing to the carrier.

All claims for payment, including any amended claims, must be s ubmitted within 90 days of the last day of the month for which compensation is being claimed. For example, claims filed for service provided in July must be filed by October 31; August clai ms must be submitted by November 30, and so on.

1 13 flights per week x two directions x 52 weeks x .98 completion = 1,325 flights.

2 $611,334 ÷ 1,325 flights.

3 $461 per flight x 26 flights per week.

### Appendix C-2

American Airlines, EAS to be Provided to Waterloo, Iowa, Docket 2011-0132

Effective Period: May 1, 2014, through April 30, 2016 Service: Thirteen (13) nonstop round trips per week to Chicago (ORD) Aircraft Type: Regional Jets, 44-50 seats Annual Subsidy: $945,546 Annual Flights: 1,325 1 

### Subsidy per Flight: $714 2 

### Weekly Subsidy Ceiling: $18,564 3

The carrier understands that it may forfeit its compensation for an y flights that it does not operate in conformance with the t erms and stipulations of the rate order, including the service plans outlin ed in the order and any other significant elements of the req uired service, without prior approval. The carri er understands that an aircraft take-off and landing at its scheduled destination co nstitutes a completed flight; absent an explanation supporting subsidy eligibility for a flight that has not been completed, such as certai n weather cancellations, only completed flights ar e considered eligible for subsidy.

In addition, if the carrier does not schedul e or operate its flights in full conformance with the order for a significant perio d, it may jeopardize its entire subsidy claim for the period in question. If the carrier contem plates any such changes beyond the scope of the order during the applicable period of these rates, it must firs t notify the Office of Aviation Analysis in writing and receive written approval from the Department to be ensure d of full compensation. Should circumstan ces warrant, the Department may locate and select a replacement carrier to provide service on these routes. The carrier must complete all flights that can be safely oper ated; flights that overfly points for lack of traffic will not be compen sated. In determining whethe r subsidy payment for a deviatin g flight should be adjusted or disallowed, the Depart ment will consider the extent to which th e goals of the program are met and the ext ent of access to the national air transportation system provided to the community.

If the Department unilaterally, either partially or completely, te rminates or reduces payments for service or changes service requirements at a specific location provided for under this order, then, at the end of the period for which the Department does make payments in the stipulated amounts or at the stipulated servi ce levels, the carrier may cease to provide service to that specif ic location without regard to any requirement fo r notice of such cessation. Those adjustme nts in the levels of subsidy and/or ser vice that are mutually agreed to in writing by the Department a nd carrier do not constitute a total or partial reduction or cessatio n of
payment.

Subsidy contracts are subject to, and incorporate by reference, re levant statutes and Department regulations, as they may be am ended from time to time. However, any such statutes, regulations, or amendments thereto shall not opera te to controvert the foregoin g paragraph.

Funds may not be available for performance under this Order beyond September 30, 2014. The Government’s obligation for performance under this Order beyond September 30, 2014, is subject to the availability of funds from which payment for services can be made. No legal liability on the part of the Government for any payment may arise for performance under this Order beyond September 30, 2014, until funds are made available to the Depart ment for performance. If sufficient funds are not made availabl e for performance beyond September 30, 2014, the Department will provide notice in writing to the carrier.

All claims for payment, including any amended claims, must be s ubmitted within 90 days of the last day of the month for which compensation is being claimed. For exampl e, claims filed for service provided in Ju ly must be filed by October 31; August claims must be submitted by November 30, and so on.

1 13 flights per week x two directions x 52 weeks x .98 completion = 1,325 flights.

2 $945,546 ÷ 1,325 flights.

3 $714 per flight x 26 flights per week.