**---~-~~r·/~['·JT t~~~**  Notes ofKevin Adams to the Meeting in Anchorage on December 1and

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1. Review ofRatemaking: Kevin spoke extensively onhow bush mail rates are calculated, using ahistorical order as a template. Worth noting, the first task is that DOT filter out those traffic segments ofbush operators where seven ormore scheduled mainline operations were operated in the last quarter ofthe annual period. (See Order2011-6-14, AttachmentA, Appendix E.) This is different from the proposal in #6 below, which proposed to also filter out the traffic and expenses ofbush segments where USPS paid a mail class rate different from the class ofaircraft actually operated by the carrier. 2. USPS vs. DOT responsibilities: Under current statute USPS is the lead agency for administering the tender ofmail, i.e., USPS determines which carriers get how much mail; DOT is the lead agency for determining the rates USPS pays for the carriage ofthat ·mail. "Good fences make good neighbors." 3. Mileage Taper: PeninsulaAirways (PenAir) continued to oppose the mileage taper, and prefers that DOT simply end it. Failing that, the carrierurged DOT to carve out an exception for PenAir's longest haul markets, such as Dutch Harbor to Anchorage, because it asserts its mail costs are higher in those markets. Kevin indicated that: 1. PenAircould file notice at Dutch Harbor and be compensated for its losses underthe EAS program; 2. Having DOT devise a special mail rate at, for example, Dutch Harbor, would invite othercarriers to ask for "special treatment" on routes where they felt the mail rates were not remunerative, thereby adding to the complexity ofmail rates. 4. Creating Additional Class Rates: We discussed breaking out the three currentbush class
rates (Part 121, Part 135, and Seaplane) into four ormore. The Departmenthas authority
to carve out additional class rates over and above the current four (one mainline class rate and three bush), as we have done so in the past. (See Order2005-1-18, January 21, 2005.) The meeting reached no consensus on developing additional class rates. 5. One proposal for additional class rates was to divide the current single Part 135 rate into two separate classes, one for aircraftcapable ofbeing configured with 19 or more seats, the otherclass for the remainder ofthe Part 135 costpool. Underthis proposal, whether

acarrier chose to place the maximum number ofseats allowed bythe FAA on its 19-seatcapable aircraft or, alternatively, zero seats (all-cargo service with a 19-seatcapable aircraft), the costs and traffic ofthat aircraft would continue to be placed in the 19-seat Part 135 costpool. There was no consensus supporting this proposal. 6. Anotherproposal would increase bush mail rates, consistent with several recentpleadings in the docket, but increase the amount ofmail tendered to mainline carriers. DOT would exclude the costs and traffic ofany segment where a mail rate class is paid that is different from the aircraft class the bush carrieroperates. (Under "equalization" a carrier may be paid a mail rate in a particular segment inconsistent with the class ofaircraft a particularcarrier actually operated. Seediscussion ofthis complicated issue in Order2011-10-3, especially footnotes seven and eight.) The bush carriers are happy with equalization, which allows them to receive "halfa loafrather than none." Ifthey were not allowed to equalize, the bush carriers would receive no mail at all on some segments because all ofit would be tendered to mainline operators. Kevin noted that DOThad no information as to what rates USPS pays in any particular city-pair market, and would need that information to effect this proposal. There was no consensus supporting this proposal. 7. Essential Air Service (EAS): There are approximately 200 communities in Alaska, from the smallest villages up to and including Anchorage, all ofwhich are eligible for subsidy support. Only about 50 ofthem are currently receiving subsidized air service pursuant to

anEAS contract. Under EAS procedures, the last carrier serving a subsidy-free community eligible for EAS cannot leave until it files a 90-daynotice. Within that 90- day period the Department is required to issue an ordereither letting the carrier leave or, alternatively, simultaneouslyrequiring the incumbent carrierto maintain air service and issuing a request for proposals (RFP). After initially confidential proposals are received and then made public, the community submits comments regarding which carrier/proposal itprefers, DOT selects a carrierbasedprimarily ontwo separate and sometimes conflicting criteria: a community's stated preferences and the amount of subsidythe different proposals request. The contract is typically for a two-yearperiod. Once a contract is issued, DOThonors that contract and continues to pay subsidyuntil the contract expires, even ifa new carrierchooses to operate in that market (Note: ifa carrier says it can provide EASona subsidy-free basis before a contract is issued, DOT terminates the carrier-selectionproceeding andrelies onthat subsidy-free service.) 8. Variation on EAS: Warbelow's Air Ventures proposes to use EAS procedures as a template for tendering mail. The carrier selected in aparticular market would receive all ofthe mail for the contractperiod, providing the service (frequency, schedule, aircraft type, intermediate stops) ithadpromised to do, but other carriers could continueto provide competitivepassenger and freight service. While carriers could continue to compete for passengers and freight, consistent with deregulation, they would compete for mail tender on the basis ofcompetitivebids. Warbelows anticipates that this proposal would drive up load factors thereby reducing mail rates, would improve aircraft schedules for the benefit ofpassengers, and give a bigger voice to USPS and the communities onthe service they were to receive. The parties recognize that this proposal would require statutory changes, and there was no consensus supporting it. 9. Postal Service Proposals: It should be noted that Postal Service staffremained largely silent on how it would revise the Alaskabypass mail system.In Attendance Alaska Airlines: JeffMunro, Eric Howat Alaska Central Express, Steve Deaton Alaska DOT & PF, Steve Hatter Calista Corporation, Christine Klein Consultant, Ken Acton Era Alaska, Bob Hajducovich, Paul Henderson, Mike Hageland Everts Air, SusanHoshaw FAA, Cathy Howell Grant Aviation, Bruce McGlasson Jansen Contracting, Jerry Rock Northern Air Cargo, Helen Swisher, Pat Page, Dave Squier Office ofSenator Begich, ShawnaThoma PenAir, DannySeybert, Scott Bloomquist,AI Orot Ryan Air, Wilfred Ryan, Jim Hjelm ServantAir, Wes Osowski USPS, Bob Lochmann, Joy Doby, Kevin Hoomer, Warbelows AirVentures, ArtWarbelow Wings/Alaska Seaplane, Mike Steadman Wright Air Service, Bob Bursiel