JOHNNY

## L. DUPREE, PH.D. MAYOR Council

-Ward 1 Council

-Ward 2 Council

- Ward 3

Kim Bradley Deborah Denard Delgado CarterCarroll 

### May 7, 2012

Mr. Dennis DeVany CouncU -Ward4 Dave J. Ware, 11 Council -Ward S Henry Naylor

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### Chief, Essential Air Service Division Office ofAviation Analysis Department ofTransportation 1200 NewJersey Avenue SE, Washington, D.C. 20590

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### Reference:

Dear Dennis: DOT-OST-2008-0209, 2001-10685, 2009-0305, 2000-7856 ·· Greenville, MS, Laurel/Hattiesburg, MS, Tupelo, MS, and Muscle Shoals, AL, EA$ 

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### This letter is the joint response ofthe Cities ofGreenville, MS, laurel/Hattiesburg, MS, Tupelo, MS and Muscle Shoals/Florence/Sheffield, AL, to the Department's request for community comments in the matterofthe Cities Essential Air Service and air carrier EAS bids received on AprillO, 2012. The Cities wish to begin their comments by thanking the Department for its patience in allowing EAS biddingto extend tofour rounds. Given the extra time, the Cities were finally able, in the fourth round, to recruit an adequate replacement carrier, equipment and route proposal. The Cities spent agreat deal oftime, work and money on recruiting adequate replacement air service and this work has finally been rewarded. Our Endorsement: The Cities unanimously and without reservation endorse Silver Airways as our replacement carrier. Silver proposes to operate service from all four cities to Atlanta, the largest airline hub in the world, using 34-seat SF-340 turboprop aircraftthat have been a mainstay ofsmall community air service for manyyears. Silver also has a complete set ofTicket and Bag Agreements with all major airlines and extensive and successful experience in EAS service (13 current EAS contracts). Finally, Silver is, atthis writing, close to signing an enhanced interline agreement with Delta Air Lines. Delta is the largest carrier at Atlanta and the dominant airline brand across Mississippi and Alabama. The enhanced interline agreement will be similarto the one between Delta and Great Lakes Airlines. That agreement is facilitating a smooth transition between Delta and Great lakes at nine EAS cities in the upper Midwest. The agreement includes display ofthe replacement carrier'sflights on Delta

.com and a variety ofother business partnership elements.

Telephone (601) 545-4501 • Fax (601) 545-4608 Email mayor@hattiesburgms.com • Website www.hattiesburgms.com.

### Mr. Dennis DeVany Page 2 May 7, 2012

Specifically, the Cities endorse Silver Airways Option 1, providing for 24 weekly nonstop flights between Atlanta and Hattiesburg and between Atlanta and Muscle Shoals, plus 36 weeklyflights on a paired routing between Greenville, Tupelo and Atlanta. The total annual subsidy requirementforthis proposal is $12,613,827. Silver has associated Option 1 with an EAS proposal for service from Atlanta to Greenbrier/White SulphurSprings (Docket DOT-OST-2003-15553}. While peripheral to the combined service patterns of the Cities, to the extentthis additional route is necessary forSilver Airways to economically perform its proposed services atthe Cities, the Cities fully support and endorse SilverAirways service at Greenbrier. Other Bids: Multi-Aero, Inc., dba AirChoiceOne, submitted a six option bid to provide EAS service atthe Cities. While the Cities appreciate the interest ofAirChoiceOne in providing EAS service at our airports, we reject all carrier bids as inadequate on multiple counts. General Comments Regarding AirChoiceOne and Its EAS Bids: N.one ofthe carrier bids break out atraffic forecast foreach city, rather each offers a projection oftotal passengers forthe total (two-cityorfour-city) operation. This makes it impossible foreach individual City to understand the carrier's anticipated traffic and load factor by city. Aircraft seating capacity on several bids is unclear. We assume the Caravan bid (option 2) to be with a nine passenger aircraft. There is no clarification as to aircraft size on the Navajo bids, although the ASM totalsfor one ofthose bids are 77.77% ofthe Caravan bid for the same routings, thus we assume the Navajo is a seven passenger aircraft (7 divided by 9 is 77.77%). The bids involving aJetstream aircraft do not clarify ifaJ31 orJ32 type is envisioned. There is a huge difference in payload and reliability (and lease orownership costs) between the two variations. The carrier'sJetstream bids, regardless ofvariation, assume the carrierwill gain a Part 121 air carrier operating certificate (18 passenger capacity) within 12 months of initial operations undera Part 135 certificate (8 passenger capacity). It is our understanding that gaining a Part 121 certification is a significant undertaking, requiring significant capital and investment in personnel and equipment in order to demonstrate tothe FAA the abilityto operate underthe heightened standards of Part 121. The carrier states in its "Market Growth Strategy- Connectivity" statement (page 3 ofits bid document) that it is workingto secure interline ticket and bag (lET) agreements with majorairlines, including Delta. The carrieroffers no firm commitments ortimeline from any network carrierto enter into an lET. This is ofgreat concern to the Cities in that an lET is essential for any Delta replacement service to have a chance to generate traffic. Without appropriate lETs all the AirChoiceOne options amountto aircraft (of three differenttypes) flying around empty because they lack the fundamental mechanisms of connectivity to Delta orany otherairline at Memphis orAtlanta (Option 5).Mr. Dennis DeVany Page 3 May7, 2012 The Department apparently shares our concerns aboutthe carrier's lack of lET. In Order 2011-12-17 the Department awarded AirChoiceOne a new EAS term at Burlington and Decatur, butfor only one year (the carrier bid two years orfouryears), with a proviso thatthe carrier must "fully implementan electronic ticketing and baggage agreement with a major airline with a hub operation at Chicago O'Hare and/orSt. Louis byJanuary 31,2013." The Department also recently rejected aAirChoieeOiie 

### NaVajo bid

___ _ atAlpena, Michigan, with a lack of lET apparently a consideration in that decision. The carrier's "estimated flight operations" schedule examples in each Option cause us concern. Delta is the dominant carrier at Memphis and the carrier operates three distinct banks offlights duringthe day. The representative schedules ofthe carrierdo notappearto match up with these Delta banks in any consistent way. Given thatthe carrier is bidding fourtrips to Memphisfrom each city and there are only three Delta banks to connect to it is essential that considerable attention be paid to the detail of schedule timing. There appears to be little attention to this detail in the carrier's representative schedules. Building on that concern, a review ofT100 block time data forthe Delta Connection Mesaba SF340 services between each city and Memphis during 2010 (different periods in the case of Muscle Shoals) indicates actual block times for thatfast turbopropthat are significantly greaterthan whatthe AirChoiceOne appears to expect to accomplish with much slower Caravan, Navajo and Jetstream aircraft. For some reason AirChoiceOne believes its relatively slow Caravan, Navajo and Jetstream aircraftwill fly the Greenville, Muscle Shoals and Tupelo routes in significantly less time than the much faster Mesaba SF340s aircraft did. At Hattiesburg the carrier appears to believe its much sloweraircraft will cover 250 miles to Memphis injust a slightly longer block time. This notonly suggests a lack ofattention to detail in preparing the bids, it also calls into question the carrier's cost estimates since many costs are based on block hours and the carrier appears to have underestimated the block hours actually needed to operate its various proposals.

BlOCKTIME COMPARJSJON: MEMPHIS &ATLANTAROUTES
BlkTime ACO Bid Blod<Times Route Distance Period XI SF340 Caravan Navajo**~etstream** MEM/

GLH U2 2010 :52 :45 :45 :45 PIS 250 2010 1:22 1:40 1.:40 1:30 TUP 88 2010 :45 :30 :30 :30 MSL 134 2008-2009 1:03 :40 :40 :40 ATL/

MSL 198 2009-2010 1:18 1:00
Soott:l!::X)btodttlnMUi perOOTTlOO;ACObk><kthMSiJel' bld documant

AirChoiceOne currentlyoffers service at Burlington, Iowa, Decatur, Illinois and Jonesboro, Arkansas, all with EAS subsidy. All three markets are served with Caravan equipmentwhile the carrier appears to have one Navajo on its Part 135 certificate. Current EAS service at Burlington and Decatur is subject to the Department's concerns (noted above} aboutthe carrier's lack oflET agreements, with a deadline for some sort ofcarrier progress on gaining lET agreements byJanuary2013. Furthermore, the carrier faces anotherchallenge in retaining its current subsidy atJonesboro in thatthe service must show progress in generating traffic sufficientto keep subsidies under$200 per passenger. Based on the traffic historyofMr. Dennis DeVany Page4 May7, 2012 Jonesboro and the carrier's subsidy amount, this appears nearly impossible. Thus the carrier's entire existing route system appears to be subject to re-bid or subsidy termination by early 2013, only eight months from now. The carrier's limited fleet ofthree Caravans and one Navajo is in striking contrastto the fleet size needed to operate proposed services at all four ofthe Cities. We estimate, given the age and mechanical nature ofthe Navajo and Jetstream aircrafttypes, thatthe carrierwould have to acquire and provision for parts and maintenancefor six aircraft (four lines offlying and tWo spares) in orderto reliably operate the four new markets. This also means that pilots and mechanics sufficientto staffthat number of routes, flights and aircraftwould have to be hired, trained and placed into line service. Given the carrier's small scope ofcurrent operations, which are almost exclusively with the Caravan, the ability of the carrier to promptly begin service and replace Delta with reliable service is open to question. Furthermore, we are to then believe in carrier options 3, 4, 5 and 6thatthe carrier will not only achieve all ofthat dramaticexpansion in a prompt manner, but will follow it up with the rapid achieving ofa FAA Part 121 Operating Certificate. We also note that atthis time there does not appear that asingle Piper Navajo orJetstream is in scheduled air service anywhere in the lower48. Comments on Each Specific AirChoiceOne Bid: Option 1 Inaccurate Block Times- As is detailed on the previous page, the carrier is assuming exceptional block time performance from itsaircraft, achieving blocktimes to and from Memphisthat are measurably fasterthan those documented in DOTT100 data for Mesaba SF340s in recent years. On the Greenville route the carrier suggests it will operate 7 minutes faster perflight than Mesaba did (56 minutes per day faster), atTupelo 15 minutes per flightfaster {120 minutes perday faster), at Muscle Shoals 23 minutes faster {184 minutes per dayfaster). Even ifthe Navajo could perform the services atthe same block speeds the SF340 has historically demonstrated, and somehow only be 18 minutes slower onthe long 250 mile route from Hattiesburgto Memphis, this would mean aboutsix block hours perday additional flying, above and beyond whatthe carrier has projected in Option 1. Six additional block hours perday is roughly 1,800 additional block hours peryear added to the Option 1 cost structure. Atthe $988 per block hour in cost the carrier has projected forthe Navajo in Option 1 this equatesto some $1,778,400 in added cost, which would move the carrier's 5% profit of$415,562 to an annual Joss ofover$1,300,000. Extremely Optimistic Load Factors- While the carrier has not detailed traffic and revenue by market in Option 1 it has projected 42,500 annual passengers or4.33 perflight on 9,811 annual segments. This equatesto a 61.9% load factoron a 7 passenger Navajo. A review ofactual AirChoiceOne load factors using 9 passenger Caravan aircraft on its existing mature Decatur and Burlington routes showsthat inthe first year ofservice on these routes (2010) the carrier achieved a 24.1% load factor with the best performing route achieving a 38.2% load factor. Even in the second year ofservice only one ofthe routes achieves a load factor above 60% and that is a route to Chicago ORD.

### Mr. Dennis DeVany Page 5 May 7, 2012

ACO lOAD FACTORS 2010/2011 loadFactor Route 2010 2011 Period ORO BRl 38.2% nB 59.8% ORODEC 20.1% 59.8% 41.2% STLBRl 25.4% 56.8% 42.5% STLOEC 14.4% 36.0% 25.8% System 24.1% 58.2!!(. 42.5% 

### Memphis is notChicago ORD. It is actually less a connecting hub than St. Louis fora carrierwithout a network code or even lET since it lacks the fare options and competition generated 

### by large scale LCC operations. While Memphisdoes have a declining Delta hub {150 daily departures to 58 cities), St. Louis has over 90 daily departures by Southwest Airlines, its largestcarrier, to 31 cities. Memphisgeneratedjustover3 million local O&D in 2011 at an average domesticfare of$219. St. louis generated over 9.5 million O&D at an average fare of$158. The very high average fare paid at Memphis does not bode well for a sum oftwo locals pricing strategy such as AirChoiceOne proposes to employ at Memphis. Thus, based on both the carrier's actual experience on its mature route system and the pricing environment at Memphis in comparison to St. louis, the carrier's forecast load factor of61.9% using Navajo aircraft at Memphis operatingfour round trip daily patterns into athree bank Delta hub is at best, wildly optimistic. The carrier projected a Memphis system average fare of$64.36 with 42,500 O&D generating$2.735 million in annual revenue. A more realistic load factorof40% would generate 27,471 annual O&D. Even given the carrier's high average fare assumption (into a high fare hub) this would reduce carrier revenue from $2.735 million to $1.768 million, a loss of nearly a million dollars in annual revenue. Ability to Scale Up Operations and Make a Profit- We have already noted that, given the age and mechanical nature ofthe Piper Navajo, we believe the carrierwould need six to operate Option 

### 1. The carrier has one Navajo in operation. Acquiring five additional aircraft and outfitting same with spares plus the hiring of requisite pilot and mechanic staffwill require a large capital investment by the carrier. Atthe same time we believe there is a clear underestimation ofcost ofoperation (due to blocktime miscalculations) totaling nearly $1.8 million and aclear overestimation oftraffic and revenue totaling nearly $1.0 million. Thus, on top ofa perhaps insurmountable capital expenditure in orderto achieve the scale needed to operate Option 1, we believe thatthis small carrier will encountera $2.8 million dollargap between its bid cost and revenue assumptions and itsfinancial reality in attemptingto begin Option 1 service. Furthermore, like all carrier options, Option 11acks lET. The carrier has no timeline for implementation and the Department itselfis concerned enough aboutthis to hold existing carrier EAS awards on a short leash toJanuary 2013.Mr. Dennis DeVany Page 6 May 7, 2012 Option 1 should be rejected bythe Department as unrealistic. Indeed, award ofOption 1to the carrier would likely result in some combination ofafailure to start up, carrier financial difficulties during startup orcarrierfiling for additional subsidy within ayear ofstartup. Option 2
Option 2 is rejected by the Cities due to the proposed use ofsingle engine aircraft. Option 3 and Option 4 Option 3 is a Memphis service bid forGreenville and Hattiesburg using Jetstream aircraftwith an assumed year one of Part 135 operation with eight passenger seats and an assumed yeartwo and beyond Part 121 operation with 18 passenger seats. Option 4 is a Memphis service bid forTupelo and Muscle Shoals using Jetstream aircraft and the same Part 135 start and Part 121 evolution as in Option 3. Taken together, the two Options total $9.8 million in annual subsidy, only $700,000 less in subsidy than SilverAirways Option 2. Taken together, the combined Option 3/4 calls for an amazing 49,950 annual O&D during year one (eight passenger capacity) and a 64% load factor. Once Part 121 is achieved annual passenger totals are forecast to growto an even more amazing 

### 63,000 O&D. While we appreciate the carrier's faith in our markets, we are deeply concerned thatthe carrier's productwill not be embraced to that extent. Ourcomments on Option 1 regarding the practical passenger generating ability ofan airline that lacks lET and uses asum oflocals pricing strategy at a high air fare hub like Memphis apply here even more so than theydo in regard to Option 

### 1. Our comments on Option 1 regarding the carrier's abilityto acquire sixJetstream aircraft, the necessary maintenance housing and spares, and the needed pilots and mechanics also stand in regard to Option 3/4, only more so. Furthermore, at leastwith the Navajo, the carrier has actual operating experience with the aircraft type. The Jetstream would be totally newtothe carrier's operational team and would involve supporting a new turbine engine type with which the carrier has no experience. Ourcomments in Option 1 regarding inaccurate block times also applyto Option 3/4. While the Jetstream is a faster aircraftthan a Caravan or Navajo, it is not as fast as a SF340, thus there is some significant error in the carrier's estimate oftotal block hours needed to operate the proposed service pattern. Combining a clear overestimation oftrafficand revenue with an underestimation ofoperating costs due to blocktime estimate errors with the huge financial commitment required by a small companyto acquire sixJetstreams and necessary spares and adequate operational staffand then operate them under Part 135, while in the same timeframe acquiring Part 121 certification strains credibility.Mr. Dennis DeVany Page 7 May7, 2012 Option 3 and Option 4, eitheralone orcombined, should be rejected by the Department as unrealistic on multiple counts. The carrier needs to acquire a Part 121 certification and operate Jetstream aircraft before it boldly proposes to essentially double the size ofits operation while adding four new markets, a new hub, a new aircrafttype and a Part 121 certification, all in ashorttimeframe. Option 5 Option 5 proposes Tupelo to Memphis service and Muscle Shoals to Atlanta service, all withJetstream aircraft in the Part 135 yearone, Part 121 thereafter scenario already addressed in comments on Option 3/4. The bid becomes confusing in that in yeartwo and beyond (with Part 121) the bid becomes a dual hub bid with Tupelo having one stop service via Muscle Shoals to Atlanta and Muscle Shoals one stop service to Memphisvia Tupelo. The bid document describes the service as 24 round trips perweek in year one and that is illustrated in the schedule and borne out in the year one statistics. However, the year two and beyond sheets describe an 18 round trip perweek plan and have statistics forsuch a plan. The schedule plan foryear two and beyond shows a four round trip pattern at Atlanta and at Memphis plus the fourdailytag flights linkingTupelo and Muscle Shoals. Thus the schedule plan foryeartwo and beyond ofOption 5 does not match the projected operating statistics. The carrier's block time between Muscle Shoals and Atlanta is listed as one hourwhile Mesaba's faster SF340s recorded a 78 minute block on the same route in recentyears. This implies that everyJetstream operation will incur perhaps 20 additional block minutes. On an annual basis this is 800 additional block hours in year one (eight seat operation and fourtrips per day) and 600 additional block hours in year two and beyond (18 seat operation and three trips per day). The carrier's block time betweenTupelo and Memphis is listed as 30 minutes whereas the Mesaba SF340s required 45 minutes. This means 600 additional block hours in yearone and perhaps 450 additional block hours in yeartwo and beyond, assuming the Jetstream can accomplish the operation with the same speed as the SF340. The carrier assumes a 68.9% load factor in year one. Given the disparity between the illustrated schedule and the operational statistics plus the lack ofa breakdown oftraffic by marketorcity pair it is impossible to estimate the carrier's load factorforyear two and beyond. For all the reasons previously noted related toJetstream bids Option 5 should be rejected bythe Department. Beyond that, the year two forecast ofOption 5 does not matchthe illustrative schedule and 

### it is notclear what exactly the carrier is proposing to operate in year two and beyond. One further note is thatthe carrierappears to assume access to Atlanta can be gained at reasonable cost forthree orfour daily Jetstream flights. Othercarriers have advised the Cities thatgaining reasonably priced access toAtlanta is difficult, ifnot impossible, especially ifthe scale ofoperation is only three orfour daily trips.

### Mr. Dennis DeVany Page 8 May7, 2012 Option 6 Option 6 proposes Tupelo and Muscle Shoals service to Memphis with a Navajo the first year and a Jetstream in years two and beyond. As is the case with previous Options, block times appearto be significantly underestimated and traffic forecasts can be described as bold, given the high average fares at Memphis and the sum oftwo locals pricing strategy. Previous comments about lack of lET and the ability ofthe carrierto expand, add a new aircrafttype and transition to Part 121 apply here as well. Summary The Cities again wish tothank the Departmentfor granting us four rounds ofbidding. That extra time gave us the chance, working together, to successfully recruit an adequate replacement air service in the form ofSilverAirways. We repeat ourendorsement ofthat carrier as our replacement. We recommend SilverAirways and Option 1for our replacement carrier and service. To the extent that Silver Airways may require award ofthe Atlanta- Greenbrier EAS designation in order to have the economic scope to provide the services ofOption 1 orOption 2 at our cities, we endorse Silver for Greenbrier service as outlined in their proposals. We appreciate the interest ofAirChoiceOne in our markets howeverwe reject all AirChoiceOne bids as inadequate forthe numerous reasons listed in this letter. We urge the Department to promptlyselect SilverAirways as our replacement carrier to allowthat carrier to begin the repla mentprocess and to ensure a smooth transition during 2012.

JLD/kmh