NORTHERN AIR CARGO

June 26,2012

Dennis DeVany Chief, EAS & Domestic Analysis Division Office of Aviation Analysis U.S. Department of Transportation 1200 New Jersey Avenue, S.E. Washington, D.C. 20590 RE : "Proposals to Provide Essential Air Service at Adak, Docket 2000-8556"
Dear Mr. DeVany: Northern Air Cargo, Inc
. hereby submits this propo s al to the Department of Transportation (DOT) to provide essential air service to the community of Adak, Alaska. This proposal contains our subsidy request to provide this service and it includes the following certifications: I. Nondiscrimination Assurance 2
. Certification Regarding Influencing Activities

. 3. Certification Regarding Drug-Free Workplace Requirements On behalf of Northem Air Cargo, Inc. we appreciate the opportunity to part1c1pate m the Essential Air Service program and pl e ase contact me if you need additional information. Sincerely, 

# (\**~** )

# ty~'t).~~~ David W
. Karp Pre s ident & CEO
Attachments

i\l O P T H E R N A ! R C A RGO , I Nc, 3900 OLD INTERNATIONAL A I RPORT Ro. ANCHORAGE , AK 99502 (907) 243-3331 (800) 727-2141 FAX (907) 249-5190 WWW.NAC .A ERO

# "Proposals to Provide Essential Air Service at Adak, Docket 2000-8556"

Due Date: July 12, 2012

# "Proposals to Provide Essential Air Service at Adak, Docket 2000-8556 July 

# 12, 2012
Table of Contents
Transmittal Letter Narrative
..............................................................................................Page 1 

## Subsidy Request
..................................................................................

## Page 2 Certifications
.......................................................................................Page 7 Nondiscrimination Assurance Certification**Regard~ng** 

### Influent:Lng Activities Certification Regarding Drug-Free Workplace Requirements

### "Proposals to Provide Essential Air Service at Adak, Docket 2000-8556" Narrative Northern Air Cargo, Inc. (NAC) is ple ased , in response to Order 2012-5-24 , to submit its Essential Air Service (EAS) proposal for cargo-only air service , inclusive of freight and mail , to Adak, Alaska with a requested subsidy of $1 ,017 ,790 annually, with a proposed subsidy mitigation strategy that could result in annua.l refunds ranging from $67,000 to $475 ,000.
Northern Air Cargo, Inc., established in 1956 , provides a wide variety of air cargo delivery services, domestic and international mail handling and delivery services , aircraft maintenance services, ground service operations and cargo agent ground handling for a wide variety of governmental and multi-national and regional companies- including the United States Postal Service , the United States Department of Defense, Shell Oil, BP Global, Continental Airlines , Frontier Airlines and Japan Airlines. Northern Air Cargo , Inc. proposes to provide thirty-four (34) B737-200 cargo jet service air flights per year to Adak, Alaska from its Anchorage hub , located at the Ted Stevens Anchorage International Airport (ANC) , utilizing the following schedule:
Non-Peak Fishing Season: During the months of April , May , September, October, November, December and January, Northern Air Cargo , Inc. proposes to fly two (2) times per month round-trip service from Anchorage to Adak. One of the t1ights is proposed to be an Anchorage- Bethel

- Adak- Anchorage flight ·and one of the flights is proposed to be an Anchorage

- Adak

- Anchorage flight. The Bethel leg is proposed as a strategy to reduce the required EAS subsidy to Northern Air Cargo , Inc
. • Peak Fishing 5 Months: During the months of February , March, June , July and August, Northern Air Cargo , Inc. proposes to f1y four (4) times per month round-hip service from Anchorage to Adak. Two of the flights are proposed to be Anchorage- Bethel- AdakAnchorage ±lights and two of the tlights are propos ed to be Anchorage- AdakAnchorage t1ights. Again , the Bethel leg is proposed as a strategy to reduce the r equired EAS subsidy to Northern Air Carg o , [nc. Not1hem Air C argo . In c . .Jul y 12 , 2012 EAS Propo s al at Adak

### Northern Air Cargo, Inc. commits to providing the highest possible degree of service to the Department of Transportation and the community of Adak and, to the best of our ability, to provide the services and capacities as proposed
. Although Northern Air Cargo , Inc
. is not required to report on-time performance to the Department of Transportation (DOT); as a quality control measure Northern Air Cargo, Inc. tracks its on-time performance to DOT and Federal Aviation Administration (FAA) standards. During the past 12 months, Northern Air Cargo, Inc. has had a 92.5% on-time record according to DOT 

### I

F

AA guidelines. 

### Subsidy Request Northern Air Cargo , Inc. is requesting an EAS subsidy in the amount of$1,017 ,790 per the following flight schedule:
.

Months Flights Per Month Flights (ANC·ADK-ANC) Flights (ANC-BET-ADK-ANC)



### Revenue Proje ctions Peak Seasons Non Peak Seasons 

### 5 7 4 

### 2 2 1 

### 2 1



### Northern Air Cargo, Inc.'s subsidy request assumes that freight volumes remain flat at 2011 levels and that mail volumes continue to decline at an estimated ten percent (1 

### 0%) annually. Additionally, NAC has assumed that it will achieve an average thirty percent (30%) share of the freight/mail market from Anchorage to Adak and that the remainder will be carried on another carrier selected to provide EAS passenger /cargo air service.
Therefore , NAC's revenue projections per flight are:

Northern Air Cargo
. Inc
. July 12
. 2012 EAS Propos a l at Adak. . ... 

### -
Revenue Estimate (per flight) Rate Volume (lbs) Revenue Outbound Freight 

### $ 1.50 2,925 

### $ 4,388 Outbound Mail 

### $ 1.56 1,274 

### $ 1,987 Inbound Freight 

### $ 0.50 1,849 

### $ 925 Inbound Mail 

### $ 1.56 106 

### $ 165 Total 6,154 

### $ 7,465 

### Expense Projections 

### Northern Air Cargo, Inc.'s subsidy request is based upon the following expense assumptions; the**Anchorage~Bethel-Adak-Anchorage** 

### flights have an estimated cost of $33,622 per flight and the Anchorage-Adak-Anchorage flights have an estimated cost of$37,616 per t1ight.

Per Flight Estimated Expenses
Variable Costs Cost of Fuel (ANC) Cost of Fuel (ADK) Landing Fees Ground Handling (ADK) (per pound) Ground Handling (AN C) (per flight) MX Flight Hour (per Bhr) Engine Costs (per cycle) Fixed Costs Capital Costs (per Bhr) Mechanic Labor (per Bhr) MX Admin 

### I Overhead (per Bhr) Flight Crew Labor (per Bhr) Flight Ops Admin 

### I Overhead (per Bhr) Insurance (per Bhr) Admin Overhead (per Bhr) Total

Northern Air Cargo
. Inc
. Jul y 12.2012 Assumptions Weighting AnchorageBethel -AdakAnchorage ( 4.5167 Bhr) AnchorageAdakAnchorage (5.1667 Bhr) !-- -- - --- ,---- - -- -· · · ·· ···· - . .. ··--·· ···· ·--·-·--· ·· - --·- .. 50.0% 1. $ ·. 6,342 $ 7,139

- 1

---- ---- - --- - - - ·- . ... ... . ···- ·····- -····· -· ······ .. 50.0% ! $ 12,684 $ 14,278**1-'-----~"-1----~~~-'-----== ..:::** **-=---r--- --** **·** -- · $ 148 $ 148 1--'------t--------"--'------·- ----- - -· -- ---- ------ -- 0.05 

### !_ $'**!_ 6_QO**  _ _ $
_____ 1,§()() $

_

_ _ _ ___ _ __ _**1,~** ---- -- - - - -- -- --- -- - . . $

- ... . 1,400 $
_ 1,400 

## ?
____ 262_,___

_ ___ __ _ 

## ?

_

_ ____ 1,188 $

- ··· ·**~,359** $ 150 $
.. 

### }_f!l

_ _ $

__ ____ ______**~og** 

## _**---~--.-----'------- --** **-· -!---** **----- --** **-· ···** **·-· ·** **$~_~1~,0~2~4-~-------~$**____**~4,~6=25 ~**  $**5!_~~** ..c. $
____**2_75-+--- ------** **'-- --** **-'- ,2~.?**  _ _ $

_ __ _ _ _**1,~2~** $ 50 $ 226 $ 258 -'--- - ···· · ... .. . . .... . ··- - -- ·· ···- - -·· ·· - ·-··· ... ... ... . . $ 667 $**?~9 !?.**  

## .?

_______ _

3 _,4.L!:§
_ $ 50 $ 226 $ 258



### ----- -- - .· · ·· +

-- - ..---- - - - - -- -- · · $ 89 

### $ 402 

### $

--- - -- - - - - - . ... -· !-- ·- - ----- - - . -- · ·-- ··-- · 460 $ 50 $ 226 $ 258 

### $ 33,622 

### $ 37,616

3 E AS Proposal at Adak

### Profit Projections Northern Air Cargo, Inc.'s subsidy request is based upon a tive percent (5%) profit, based upon the following per flight estimates: Anchorage- Anchorage

### Per Flight Profit Bethel -Adak- AdakAnchorage Anchorage Estimated Expenses 

# : s 33,622 

### $ 37,616 I 

# I S Profit 1@5% 1,681 

### $ 1,881


### Requested Per Flight Subsidy Northern Air Cargo , Inc.'s subsidy request per flight is as follows:Anchorage- Anchorage

### Per Flight Subsidy Bethel- Adak- AdakAnchorage Anchorage Estimated Revenues 7,465 !**7,~~** Estimated Expenses ' 33,622 

# ! 37,616 Operating Profit (Loss) ! (26,157)1 (30,151l Profit @5% 1,681 1,881 Re queste d Subsidy Per Fli ght 

# I 27;838 32,032


### Annual Requested Sub s idy Based upon the above assumptions, Northern Air Cargo Inc.'s requested annual subsidy to provide the propose? thirty-fo ur (34) 8737 -2 00 cargo jet service flights per year to Adak, Alaska from its Anchorage hub , located at the Ted Stevens Anchorage International Airport , is $1,017,790 , per the following schedule:


### Annual Subsidy Flights Per Year Subsidy Per Flight Annual Subsidy

Northern Air Cargo. Inc. Jul y 12 , 2012 

### Total Annual 'Subsidy · Anchorage- AnchorageBethel-Adak- AdakAnchorage Anchorage 

### I 171 17 

# : s 27,838 

### $ 32,032 

# ' s 473,246 

### I $ 544,544 

### $ 1,017,790

EAS Propo sa l at Adak

### Proposed Subsidy Mitigation Northern Air Cargo's requested annual subsidy is calculated based upon Northern Air Cargo, Inc. realizing approximately a thirty (30) percent share of the 2011 actual ANC-ADK-ANC freight and mail volumes. We recognize that the projected market share of thirty (30) percent is a significant variable ; and, therefore, we propose a subsidy mitigation strategy . The proposed subsidy mitigation strategy is based upon an annual reconciliation of actual total

... 

# .. realized revenues for ANC-ADK-ANC (on both the non-stop and one-stop segments). NAC will remit to the DOT eighty (80) percent of the difference between the per flight subsidy paid to NAC by DOT and the actual realized revenue up to $25,000 per flight , which is based upon 100% of the 2011 actual mail and freight volumes. NAC will retain twenty (20) percent of the variance to account for increased variable expenses due to larger cargo load factors.
The following table presents the potential subsidy refund at various mail/freight levels:

Estimated Revenue at 30% Realized Annual Re
. venue 10% 20% Proposed Subsidy Mitigation $ 7,464 $ 7,464 $ 7,464 $ 7,464 $ 7,464 $

---- -- -- ----- - --- -- - - --- - - - - - - -- -

- - - - -- -

- -- -- --- --- - ---

- --- --

- -- - - -- - --- - - 7,464 $ 7.464 $ 7,464

--------=-30%

_ ::_:__:_•- t-$"---'--'-7,_:_:: 4644------:-----+- - - - +-- -- l-

--- f--

- --:- . - --..-- ,----- - - - - - - - --- --- - - - -- -

-- -- 40% $ 9 , 953**--- ---** **--- ---** **+- --** **1-** 2._

_12,44!
_r- ---- - -- 1-------

--- - - -- - --- --**r-- ---** **~--- --**  60% $ 14,929

______ 7

_ 0%

_ · - -t--
-- t-
--- +- ----- - $ 17.417 1-

- -- - - - - -- -- --- - - -**~** $**~~** ,-------- - ------ -- - - - - - - ----- -- - - - -

-- ------ ------ --- -· - - -- --

_ ______**__:__ 90%::..:..•** **:..___ -+---+----+----+-----+-----t-----+-$** **---** _ _**~~ r-----** **--- --**  100% $ 24,881 Variance Variable Expenses@ 20% Per flight refund to DOT Assumed flights 34 Annual subsidy refund $ $ $ $ $ $ (2 , 488) $ 498 $ (1,991) $ (4,976) $ 995 $ (3,981) $ (7,464) $ 1,493 $ (5,972) $ (9,953) $ 1,991 $ (7,962) $ (12,441) 2,488 (9,953) $ (14,929) $ (17,417) $ 2, 986 $ 3, 483 $ (11,943) $ (13 , 934) i......; $ 167.6nl $ (135.3541 $ 1203.0311 $ 1270.708) $ 133§.3851 $ 140§.0§21 $ 1473.7391 

### Conversely, should the annual revenue reconciliation reveal that Northern Air Cargo, lnc. realized less than the estimated revenue of $7 ,464 per flight; then, the DOT would remit to Northern Air Cargo, Inc. the difference between the $7,464 per tlight and the actual realized r evenue.

Northern Air Cargo , Inc. Jul y 12.2012 5 EA S Propo sal at Adak

### The following chart details the revenue assumptions included in the above chart:

Revenue/ Flight

Pound Segment Pounds Total Per flight 

### _L**!:~ ~C-ADK**  43,307 1,274 L_l.SQ ANC-ADK 99,452 2,925 

### i
..__!;2?_**~~~:~** -· 3,606 106 $ o.so ADK-ANC 62,852 1,849 Total 209,217 6,153 Pounds Total Per Flight



### .. ?

-**!~** ANC-ADK

- 101,051 2,972 

### i. !·?Q. ANC-ADK
. 232,054 6,825 r---- j_
...!:56 ADK-ANC

-- 8,4_!2
__ 247 r------ $ 0.50 ADK-ANC 146,655 4,313 Total

.**~8§,174** 14,358

Northern Air Cargo, Inc. July 12,2012 30% Revenue Total Per Flight $ 67,560 $ 1,987 $ 149,177 

### L 4,388 $ 5,626 $ 165 $ 31,426 $ 924 $ 253,789 $ 7,464**~** Revenue

Total Per Flight $ 157,§_L $ 4,636 $ 348,080 $ 10,238 $ 13,127 $_ 386 $ 73,327 $ 2,157 $ 592,174 $ 17,417 40% Pounds Revenue Total Per Flight Total Per Flight

57,743 1,698 $ 90,080 $ 2,649

- 132,601___ 3,900 $ 198,903 _$ 5,850

---- 4,8CJ:9._**--~----** 141 $ 7,501 ____ $
__ 221 83,803 2,465 $ 41,901 $ 1,232 278,957 8,205 $ 338,385 $ 9,953 110% Pounds Revenue Total Per Flight Total Per Flight 115,48?._ 3 397 $ 180,159 $ 5,299

--**265,2~----** .. 7,800 $ 397,806 $ 11,700

... _2-_61? --------. 283 $ 15,003 $ 441

- 167,606 4,930 $ 83,803 $ 2,465 557,913 16,409**~** 676,770 $ 19,905



## .:6 

# I\IPC**i'.li.~Jf.-{ rr-~.>1-<i'J** **;:..!>,;c.:""'~** <r.;u

50'.$' 60Xo Pounds t Revenue Pounds Revenue Total Per Flight' Total Per Flight Total Per Flight Total Per Flight

72179 2,123 $112,599 $ 3,312 86,615 2,547 $135,119 $ 3,974 165,753 4875 $248,629 $ 7,313 198,903 5,850 $298,355 $ 8,775

6,011 177 $ 9,377 $ 276 7,213 212 $ 11,252 $ 331 104,754 3,081 $ 52,377 $ 1,540 125,704 3,697 $ 62,852 $ 1,849 348,696 10,256 \ $422,982 $12,441 418,435 12,307 $507,578 $14,929

. ': . 90%' l.Oim Pounds Revenue Pounds Revenue Total Per Flight! Total Per Flight Total Per Flight Total Per flight 129,922 3 821 j $202,679 $ 5,961 144,358 4,246 $225,199 $ 6,623 298,355 8,775 $447,532 $13,163 331,505 9,750 $497,258 $14,625.

10,819 318 $ 16,878 $ 496 12,021 354 $ 18,753 $ 552 188,556 5,546 $ 94,278 

## s 2,m 209,507 6,162 $104,754 $ 3,081 627,652 18,16() $ 7§1,}6Z_ j**g~3_** -**_6'll,~92** 20,512 $845,963 $24,881

>\
·'

EAS Proposal at Adak