Order 2011-10- 3 Served : October

11,201 1 UNITE D STATE S O F AMERIC A DEPARTMEN T O F TRANSPORTATIO N OFFIC E O F TH E SECRETAR Y WASHINGTON , D.C
.

Issue db y th e Departmen t

o f Transportatio n onth e 11 * o f

October , 201 1

INTR A ALASKA BUS H MAI L RATE S Docke t OST-2003-1469 4

Orde r Settin g Fina l Busl i Mai l Rate s SUMMAR Y B y thi s order , th e Department make s final th e rate s tentativel y set b y Order 2011-6-14 , an d extend s thos e rate s an dth e Seaplan e an d terminal rate s mad e final b y Orde r 2011-6-1 4 fo

r on e yea r beyon dth e effectiv e dat e o f thi s order
. 

### BACKGROUN D B y Order 2010-12-28 , th e Departmen t propose d aroutin e annual updat e t o intra-Alask a bus h mai l rates . Consisten t wit h longstandin g progra

mpractice , w e propose d th e rate s o n ashow-caus e basi s t o allo w for al l partie s t o comment

befor e makin g an y rate s final, bu t i n thi s instanc e w e receive dman y objections
. Thos e objection s focuse don th e te n percen t decreas e in th e Par

t 13 5 mai l rat e du e t o Peninsul aAirways , hic
. (PenAir) , removin g asufficien t number o f seat s firomit s ver

y low

cost , ver y long-hau l Metro aircraft
. Thos e aircraf t had previousl y bee n include d i n th e lower-cost , larger-aircraf

t Par t 12 1 cos t pool , bu t were reassigne d t o Par

t 13 5 i n respons e t o PenAir' s removin g seats . FAA rule s require tha t aircraf t wit h 1 0 o r more seat s operate under Par t 121 , whil e aircraf

t operatin g wit

h 9 o r fewe r seat s ma y operate under

Par t 135
. A s aresul t

th e Par t 13 5 rat e tentativel y set

b y Orde r 2010-12-2 8 decrease d b y te n percent . I n respons e t o th e numerou s objections
. Order 2011-6-1 4 propose d significantl y differen t Par t 12 1 an dPar

t 13 5 linehau l mai l rate s fromthos e propose d i n th e earlier show-caus e- 2

order
. ^ Th e more recen t

orde r note d tha t th e PenAi r

aircraf t a t issu e had a515-mil e averag e stag e lengt

h compare dt o th e 70-mil e averag e stag e lengt h fo r th e other Par t 13 5 operators . 2 W e tentativel y foundtha t thi s differenc e in stag e lengt h cause d PenAi r

t o hav e muc h lower

uni t cost s tha n th e other

Par t 13 5 operators , resultin g i n amai l rate tha t woul d b e inappropriatel y lo w fo

r th e other carriers
. Fo r

tha t reaso n w e adde d amileag e "taper " t o th e Par t 13 5 mai l rate , develope db y applyin g alinea r regressio n t o th e Par

t 13 5 operation s o f al l th e bus h carriers , includin g PenAir
. Give n th e significant

chang e i n th e Par

t 13 5 rat e structure contemplate d b y Order 2011-6-14 , w e als o issue dtha

t orde r o n ashow-caus e basis
. It directe d partie s t o sho w caus e withi n 1 0 days , i.e. , Jun e 20 , why th e Department shoul d no t

make final th e resultin g Par t 13 5 an d Par t 12 1 linehau l rates . O n Jun e 14 , PenAi r requeste d a

n extensio n t o Jul y 7 t o submi t objections , whic h w e grante db y Notic e date d Jun e 16
. O n Jul y 5 , th e Consolidate d Carrier s (CC) , requeste da

n extensio n unti l Jul y 18 , whic h w e grante d b y notic e date d Jul y 5
. O n Jul y 1 8 w e receive dobjection s fromtw o parties , PenAir an d CC
. O n Augus t

3 , w e receive dfromPenAi r amotio n fo

r leav e t o file alate-file d respons e t o CC' s objection , whic h PenAi r dul y filed, an d o n Augus t 1 1 w e receive d arespons e from CC
. O n Augus t

2 6 w e receive damotio n for mC C t o exclud e th e dat ao f PenAir
. O n Augus t 30 , w e receive da

n answer fromPenAi r

t o tha t motion
. O n Augus t

31 , w e receive d arespons e fro

mC C to th e Augus t

3 0 filing o f

PenAir
. O n September

8 w e receive d a repl y fromth e Postal Servic e t o Order 2011-6-1 4 an d subsequent comment s b y CC
. O n September 12 , w e receive darespons e b y C C t o th e Postal Service' s filing o n September 8
. C C Objectio n I n it s Jul y 1 8 respons e C C agree s wit h th e Departmen t

tha t some adjustment

shoul d b e mad e fo r th e "undeserve dwindfall " PenAi r woul d receiv e b y includin g it s larg e aircraft , long-hau l servic e wit

h th e historical smal l aircraft , short-hau l operation s o f th e Par t 13 5 carriers
. However , C C believe s th e Department' s mileag e taper i s no t asufficien

t response , and , to suppor

t thi s proposition , i t

state s tha t "Th e mos t

significant

fac t abou t th e 2011-6-1 4 rat e i s tha

t i t woul dpa y th e bus h industr

y $10,299,15 2 les s fo

r linehau l cost s alon e compare dto Order

2010-12-28. " C C argue s tha

t th e Department' s mileag e taper , reflectin g highe r cost s fo r short-hau l segments , i s inaccurate becaus e traffi c "load s ar e weighte d toward th e entr y segment , an d d o no t reflec t th e spli t betwee n actual markets." ^ Also , i t maintain s tha

t any regression

base dtaper

i s doome dt o fai

l becaus e o f

th e distinc t

difference s i n aircraf

t type s an d marke t condition s affectin g th e historical Par t 13 5 an d Par

t 12 1 rates . C C note s tha

t th e

1 Order 2011-6-1 4 als o finalizedbot h th e terminal rat e applicabl e to ai l bus h carrier s tentativel y set b y Orde r 2010-12-28 , an d th e Seaplan e linehau l rate , t o whic h there were n o objections
. 2 See Order

2011-6-1 4 fo

r acomplete discussio n o f

th e objection s t o Order

2010-12-28
. ^ In Alaska , there i s generall y muc h mor e mai l an d fi^eight

shippe dout

fro mregional hub s to bus h village s tha n i n th e other

direction , i.e. , fi-ombus h village s bac k to regional hubs
. Thus , wit h multi-stop , linea

r service , th e first

segment leavin g fi-omaregional hu b typicall y ha s amuc h higher loa d factor tha n later segments , an d thi s higher

loa dfactor produce s lower

imi t cost s pe r revenu e to n mile
.result s o f th e regressio n in Order

2011-6-1 4 use d t o determin e th e mileag e taper coul d b e significantl y improve db y addin g another variable , namel y aircraf

t size
. C C continue s t o believ e tha t th e Departmen t

shoul d reconfigure th e Par t 12 1 rate t o includ e al l bus h operation s wit h aircraf t tha t ca n b e configure d wit

h up t o 19-seats , regardles s o f

whether i t operate s under

Par t 13 5 o r Par t 121
. However , i t

recognize s tha

t Orde r 2011-6-1 4 rejecte dcreatin g suc h acos t poo l fo r statutor y reasons : th e Rura

l Servic e Improvement

Ac t o f 200 2 (RSIA ) specificall y require d th e Department t o construc t

a Par t 12 1 rate base dexclusivel y o n th e cost s o f aircraf t havin g 1 9 o r

more seat s an d operatin g under

Par t 121
. C C no w propose s tha t th e Department

carv e out a n additional linehau l clas s rate , namel y on e tha t i s limite d t o aircraf

t capabl e o f

bein g configure d wit

h 1 9 or more seat s whil e operatin g under Par t 135 , leavin g i n plac e th e statutoril y require d rat e fo r 19-sea t o r larger aircraf t operatin g under

Par t 12 1 tha t w e hav e calculate d sinc e th e passag e o f

RSIA.' * C C note s tha

t thi s issu e wil l b e o f

increase d importanc e i n th e fiiture, a s Frontier

Flyin g Service , th e other

19-sea t Par t 12 1 operato r

i n th e current

mai l pool , ha s announce dtha

t it wil l soo n follo w PenAir' s lead an d "bifiircate " it s 19-sea t operations , whic h hadpreviousl y operate donl y unde r Par t 121 , betwee n Part s 13 5 an d 121
. PenAi r Objection s PenAi r continue s t o strongl y objec t t o amileag e taper . "Ther e i s n o need , an d absolutel y n o reliabl e evidenc e to support , layerin g another taper o n to p o f th e pre-existin g taper." ^ Nor , PenAi r

argues , i s there any substantial , reliabl e evidenc e o r empirical , legal , o r

other justificatio n t o suppor

t imposin g a

n additional tape r

o n th e current

rat e methodology
. Th e hear t o f PenAir' s argument

i s a s follows : "Th e cos t calculation s underpiimin g th e Department' s theoretical Par t 13 5 bus h mai l rat e mileag e tape r

regressio n ar

e base d on assumption s abou t average aircraf t operatin g expense s o n asystem-wid e basi s tha t canno t b e relie d upo n t o reasonabl y predic t

cost s o n specifi c long-hau l routes . There i s simpl y nothin g 'average ' about

th e varie dlong-hau l bus h operations
. Real-worl d operational constraint s o n long-hau l bus h route s i n th e hars h Alask aoperatin g environment reduc e effectiv e payloads , require additional fiiel consumptio n to tanker fiiel fo r distan t altemat e airports , an dofte n require additional technical stops , flight returns , and/o r

diversion s - al l o f

whic h substantiall y increas e th e actua l cost s o f thos e flights."

^ A s C C discusses , Order

2005-1-1 8 determine d tha t whil e RSI A require d th e Departmen t t o establis h a Par t 121,19-seat

rate , i t di d no t take awa y th e Department' s authorit y to ad d additional clas s rate s fi-omth e thre e explicitl y contemplate db y RSIA - Par t 121 , Par t 135 , and Seaplane
. ^ PenAir i s referrin g to th e fact

tha t fo r almos t 3 0 year s fo

r bot h th e bus h an d mainlin e cos t pools , th e Department

ha s develope dseparate linehau l an dtermina l elements
. Th e terminal element reflect s th e cos t

o f loadin g mai l onto th e aircraft , an dthu s doe s no t var y b y distance
. Th e linehau l element reflect s th e cos t

o f flying th e mail , onc e i t

ha s bee n loade don th e aircraft

—pilot , ftiel, maintenance , and aircraf t ownershi p ~ to it s destination
. Order

2011-6-1 4 propose s to spli t th e linehau l expense s fiirther betwee n afixed linehau l element , whic h doe s no t

var y b y distance , namel y landin g an d take-off , an d a n element tha t doe s var y b y the distanc e actuall y flown.- 4 -

PenAi r als o note s tha

t whe n Order

2011-6-1 4 estimate d th e impac t o f th e taper on th e Postal Service , there wa s a n inadvertent

transpositio n error , usin g $7.149 2 vs . $7.419 2 pe r mai l to n mile
. "Th e ne t

effect o f tha t erro r wa s to understate th e cost s t o th e Postal Servic e o f th e propose dtape r

b y nearl y $ 1 millio n ayear. " ^ PenAir estimate s tha

t instea d o f costin g th e Postal Servic e 1 % less , th e propose d taper woul d cos t

th e Postal Servic e 2 % more . Late-File dResponse s O n Augus t

3 , 2011 , PenAi r

requeste d leav e t o file aRepl y t o CC' s timely-file d comments . We wil l grant

tha t request . PenAi r

note s tha t i t ha s sinc e dispose d o f

al l o f it s Metro aircraft , whether

Par t 12 1 o r Par t 135
. Becaus e i t

wa s thos e aircraf

t tha t precipitate d th e development

o f th e mileag e taper , PenAi r suggest s th e taper

"shoul d n o longer

b e a n issu e fo r th e purpos e o f

calculatin g th e Par

t 13 5 bus h mai l rat e goin g forward. " I t note s tha t th e onl y larg e aircraf

t it continue s t o operate under Par t 13 5 i s asingl e Saa

b 34 0 aircraft
. PenAir oppose s separatin g th e Par t 13 5 rat e int o larg e an d smal l aircraf t cos t pools , a s propose db y CC , becaus e o f th e Department' s traditional reluctanc e t o carv e out additional clas s rates , especiall y i f

suc h rate s are no t

dictate d b y operational necessit y an d becaus e there woul db e onl y alimite dnumber o f segment s operate d b y suc h aircraft
. O n Augus t

11 , 2011 , C C responde d t o PenAir' s Augus t 3 filing, an d requeste d tha t thei r unauthorize dfiling b e accepted
. C C characterize s PenAir' s concer n a s bein g tha

t no t al l o f it s operatin g cost s o n some o f it s long-hau l route s woul d b e fiill y compensate d b y a mileag e taper . C C reiterate s earlier pleading s b y Frontier

tha t rate s shoul d b e base d o n th e mai l rat e actuall y pai dcarriers
. ^ C C als o reiterate s that there shoul d b e aseparate rate fo r larg e bus h aircraf

t operatin g under

Par t 135
. O n Augus t

2 6 C C filedanother

motio n to exclud e th e dat ao f PenAir' s Metr o 2 3 an d Saa b 34 0 aircraf

t operate dunder

Par t 135
. C C state s tha

t it onl y recentl y confirme d tha t thos e aircraf

t onl y operate di n city-pai r market s where either

th e Par t 12 1 o r Mainlin e rate s wer e bein g paid
. It

fiirther state s tha t excludin g suc h operation s fromth e Par t 13 5 cos t poo l i s "consisten t

wit h al l precedent

an d methodolog y i n thi s docket." ^ O n Augus t

3 0 PenAi r

responde dt o CC' s Augus t 2 6 filing statin g that

"I t woul d no t

b e appropriate t o carv e ou t

jus t on e carrier' s cost s [i.e. , PenAir's ] fo r certai n equipment/operation s fromit s proper rat e class. "

° We note tha

t becaus e Par

t 13 5 carrier s sometime s equaliz e the rate s the y receiv e o n some segment s t o th e muc h lowe

r Par t 12 1 rate , th e reliabilit

y o f thi s estimate i s uncertain
. ' Th e Departmen t

ha s consistentl y establishe drate s base d solel y o n th e operatin g characteristic s o f th e aircraf t andwhether

the y operate under

Par t 12 1 o r Par t 135
. Under

tb « Department' s equalizatio n policy , carrier s operatin g smaller

aircraf t wit h typicall y higher

cost s per revenu e to n mil e ca

n equaliz e to th e lower rate i n amarket , bu t

th e cost s andtraffi c o n thos e segment s are no t exclude d fromth e calculatio n o f th e rate . ° We hav e never

exclude d operation s fromth e variou s bus h cost s pool s base d on the rate s actuall y bein g pai db y th e Postal Service
. Consisten t wit h law , w e hav e exclude d bus h operation s i n market s where mainlin e servic e existed , define da s thos e city-pai r segment s where more dia n seven mainlin e departure s operate d durin g th e quarter ende d Jun e 3 0 o f

eac h year . See Appendi x E o f Order 2011-6-14
.O n Augus t 3 1 C C responde dtha

t whil e i t preferre d atwo-tier

Par t 13 5 mai l rat e (a s discusse dpreviously), ^ i n any case , th e Departmen t mus t exclud e th e irrelevan t

cost s an d operation s dat afo

r PenAir' s Metro an d Saa

b aircraf t i n market s where Par

t 12 1 bus h rate s o r mainlin e rate s prevail. " O n September

8 th e Postal Servic e filed aresponse , an dpropose d that th e Departmen t make th e mai l rate s fromOrder 2011-6-1 4 effectiv e fo

r atwelve-mont

h perio d afte

r thos e rate s actuall y becam e final, rather tha n fo r th e brie f perio d fromwhe n th e rat e woul d first become final unti l th e en do f calenda r yea r 2011
. Th e Postal Servic e als o expresse d it s suppor t fo r th e Department' s propose d mileag e taper . O n September

1 2 C C responde dt o th e Postal Service' s filing. C C note s tha t mai l rates , "onc e mad e final, appl y unti l arate base d on th e nex t dat aset ar e mad e final. Examinatio n o f th e mai l rat e order s show s that th e ter mo f th e armua l rate s rang e fromafe

w month s t o wel l ove r ayea r Th e Department

ha s i n han d al l dat afo

r th e 1 2 month s ende d Jun e 30 , 2011 , andcoul dcompute th e mos t current rat e level s onc e th e polic y issue s relate d t o larg e aircraf t are decided. " C C note s tha t Order 2007-4-2 5 state d tha

t i t wa s th e Department' s goa l t o set "reasonabl e rate s tha t

reflec t th e cos t of carryin g mai l i n th e forthcomin g yea r [emphasi s b y CC ] whil e a t th e same tim e providin g increase d certaint y to th e partie s a s to wha t rate s the y wil l pa

y o r receiv e a t any give n time
. Th e cost s o f th e Metro s [flown b y PenAir ] obviousl y d o no t reflec t th e cost s o f

carryin g mai l i n th e forthcomin g yea r becaus e the y hav e bee n entirel y eliminate d fro muse. " DECISIO N We hav e decide dt o finalize th e mai l rate s tentativel y propose d i n Sho w Caus e Order 2011-6-14
. Notwithstandin g al l o f th e burden s tha

t PenAi r outline s ~ tankerin g ftiel, ba dweathe r

i n th e Aleutians , technical stops , diversions , reduce d payload s ~ th e averag e cost s fo

r it s Mefr o aircraf t are , i n fact , significantl y lower tha n thos e fo r othe r Par t 13 5 operators , s o muc h s o tha t the y produc e ate n percen t reductio n i n th e linehau l mai l rat e acros s al l mileag e segment s unles s a n adjustment

suc h a s th e mileag e tape r i s made
. PenAi r

ha s chose n no t

t o addres s ou

r finding i n Order

2011-6-1 4 tha

t there ar e unavoidabl e fixedcost s t o short-hau l operations , whic h driv e u p th e cost s o f suc h operation s compare dt o longer hau l service
. I

t als o ha s ignore d our

finding tha

t th e 515

- mil e averag e stag e lengt

h o f it s Metro aircraf

t ha s lower

averag e cost s per

mai l to n mil e tha n other carrier s operatin g simila

r 19-sea t aircraf t over muc h shorte r

averag e stag e lengths
. Instead , PenAi r

argue s tha

t becaus e th e mileage-base d tape r reflect s a n averag e rate , an ddoe s no t

"reasonabl y predic t

cost s o n specifi c long-hau l routes " tha t i t woul d b e underpai do n thos e lon g hau l route s an d therefor e ataper i s inappropriate
. Th e carrie r ignore s th e fact

tha t al l o f th e mai l rate s set

b y th e Department

- Seaplane , Par

t 135 , an d Par t 12 1 ~ reflec t

averag e costs . There are undoubtedl y man y route s where other carrier s receiv e les s than thei r

actua l costs . I n fact , clas s rate s ar e designe d t o forc e carrier s wit h higher than averag e cost s t o compete b y reducin g thei r cost s t o level s tha

t are i n lin e wit

h

^ I n other words , splittin g th e Part

13 5 cos t pool s betwee n thos e aircraf t capabl e o f

bein g configure d t o more tha n 9 seats , andthos e no t

capabl e o f

operatin g wit

h mor e tha n 9 seats .thei r

competitors
. I n brief

, onc e a n averag e rate i s set , carrier s wit h highe r than averag e cost s incur

losse s (or generate fewe

r profits ) unti l the y ca

n adjust
. Thi s proble mcoul d onl y b e avoide dwere th e Department t o establis h alarg e number o f mai l clas s rate s tailore dt o ever

y carrier an d operational constrain t rather tha n th e thre e historical statewid e rates . PenAi r i s concerne dwit

h th e additional cost s i t

incur s b y tankerin g fiiel or makin g technical stop s a s aresul t

o f it s long-hau l service , bu t

ignore s th e ver

y real cost s incurre d b y short-hau l operators . Wit h lon g hau l operations , carrier s ca n a t leas t choos e betwee n tankerin g fiiel an d makin g technical stops ; operator s i n short-hau l market s mus t incur th e ver y hig h fixed cost s o f

shor t stag e lengt

h operation s outline d i n Order 2011-6-1 4 withou t recourse . In brief

, w e findtha

t th e mileage-base d taper

provide s abetter , albei t

no t perfect , fit fo r th e averag e cost s o f

Par t 13 5 operator s than arat e tha t i s no t s o refined
. PenAir' s filing o n Augus t

3 , submitte d tw o week s afte r th e deadline , develop s ane w argument . PenAir

no w suggest s tha

t w e abando n th e mileag e tape r becaus e th e carrier

ha s recentl y dispose do f

al l o f it s Metr o aircraf

t - th e immediate caus e o f

our tentativel y introducin g th e taper . However , PenAir' s suggestio n beg s th e questio n o f wha t t o d o wit h th e dro p i n uni t

cost s tha t occurre d in th e perio d a

t issue , th e yea

r ende d Jun e 30 , 2010 , a s aresul t o f PenAi r convertin g it s lo w cos t

Mefro s fro

mPar t 12 1 to Par

t 13 5 operations
. If w e simpl y exclude dthos e ver y lo w cost s w e woul d inappropriatel y har mth e Postal Service ; i f w e simpl y include dthe mwithou t ataper , w e woul d improperl y har mPenAir' s short-hau l competitors
. Th e Postal Servic e mad e i t clea r i n it s earlier

objectio n tha

t i t wa s strongl y oppose dt o arbitraril y excludin g dat asimpl y t o help particula r carriers , an d w e findtha t th e averag e cost s o f

short-hau l operation s are generall y highe r tha n thos e o f long

hau l operations , s o w e findtha t goo d caus e exist s t o maintai n th e mileag e taper . Th e thrus t o f CC' s mai n objectio n t o th e mileag e taper ~ tha t i t decrease s payment s t o th e Par t 13 5 bus h carrier s b y abou t $1 0 millio n ayea

r compare d t o th e rat e propose d b y Orde r 2010-12-2 8 —i

s th e mirro r

imag e o f PenAir' s argument

tha t th e same taper

woul d increas e thos e payment s b y $ 1 million
. Thos e mutuall y exclusiv e result s canno t bot h b e correct , an d th e discrepanc y wa s cause d b y aC C error : C C compare d th e propose d Par t 13 5 rate t o th e rat e se t

b y Order 2010-9-24
. However , th e rate i n Order 2010-9-2 4 i s th e current

rate an d exclude s PenAir' s lower cos t Metro aircraft , th e poin t

a t issue
. Th e rate i n Order

2010-9-2 4 wa s depicte d o n th e first pag e o f Order 2011-6-1 4 onl y fo

r compariso n purposes . N o part y i s proposin g tha

t w e finaliz e tha

t rate goin g forward
. ' ^ Th e Par t 13 5 rat e i n Order

2010-9-2 4 i s o f

cours e higher

than either

th e rat e tentativel y propose di n Order

2010-12-2 8 o r

th e rat e fromOrder

2011-6-1 4 tha

t w e are finalizing here becaus e i t doe s no t includ e th e ver

y lo w uni t cost s o f PenAir' s Metro aircraft
.

' " C C indicate s tha

t th e pivo t poin t - th e distanc e a

t whic h th e mileag e taper

produce s the same rat e a s on e withou t ataper i s 6 4 miles
. Th e linehau l rate in Order 2010-9-2 4 cite d i

n Order 2010-12-2 8 i s $13.255 9 per to n mile , whil e th e linehau l rat e actuall y propose d i s $371.4 5 per

to n plu s $7.462 2 per

to n mile
. Equatin g th e tw o produce s the 64-mil e pivo t poin t cite d b y CC
.C C propose s tha t th e Department

carv e out a n additional bus h clas s rate , splittin g th e current Par t 13 5 rate betwee n asmall-aircraf t cos t poo l (9-seat s or

fewer ) an d alarge

aircraf t cos t poo l (aircraf

t capabl e o f

havin g 1 0 or

mor e seats)
. Thi s woul d b e asignificant chang e fro mth e wa y w e currentl y calculate th e rates , an d w e wil l dismis s th e proposal withou t prejudice , du e to th e lon g delay already experience d in settin g final rates . I t ha s bee n our

goa l to hav e final rate s i n plac e fo r th e bus h carrier s o n or

abou t Januar y 1 o f eac h year . Becaus e o f

th e many objection s an d th e variou s extension s requeste d b y th e parties , tha

t goal wil l obviousl y no t

b e achieve d thi s year . Becaus e th e mileage-base d taper represente dasignificant

chang e fromhistorical ratemaking , w e issue d tw o sho w caus e order s an dgrante dsevera l extensions
. I

t woul d certainl y b e inappropriate fo r u s t o mak e suc h asignificant

chang e a s propose d b y C C withou t affordin g al l o f

th e partie s sufficien t tim e to comment . We ar e concerne dwit

h th e dela y i n finalizin g thes e rates . A s aresul t o f th e delays , th e current Par t 13 5 rate (abou t

te n percen t

highe r than th e rate s w e are settin g here ) wil l hav e bee n in plac e fo

r abou t ayea r an dnin e month s rathe r

than th e typical one-yea

r period
. Th e dela y in settin g afinal rat e i n thi s cas e du e t o th e numerou s pleading s ha s cos t th e Postal Servic e asignificant

amount o f money . Th e Department' s polic y i s t o make al l rate s final an d no t provid e fo

r retroactiv e adjustment

to rates , an d w e find tha

t tha t continue s t o b e th e appropriate policy
. However , w e canno t ignore th e losse s incurre d b y th e Postal Servic e du e t o th e delay i n settin g afinal rate . Th e Department' s polic y to mak e al l rate s final an d eliminate retroactiv e adjustabl e rate s wa s precipitate dmore than adecad e ag o b y th e carrier s havin g t o repa y th e Postal Servic e asignificant

amount o f mone y becaus e atemporary , retroactivel y adjustabl e rat e wa s set a t to o hig h aleve l fo

r a n extende dperio d o f

time
. Onl y whe n th e final order wa s issue d wa s tha t fact discovered , bu t

i n th e meantim e alarg e deb t had bee n incurre d whic h th e carrier s coul d no t repay . Afte

r meetin g wit

h al l o f th e parties , th e Department resolve d th e immediate issu e b y providin g tha t th e carrier s coul d "wor

k of f thi s deb t b y bein g pai d a

t a slightl y lower

rat e than provide dfo

r b y th e final order
. Bot

h th e Postal Servic e an d th e carrier s agree dtha

t th e longer

ter msolutio n wa s t o end th e practic e o f havin g temporary , retroactivel y adjustabl e rate s i n effect fo r semi-annual periods , an d t o make al l rate s final wit h asix-mont

h lag betwee n th e en d o f

th e reportin g perio d an d th e effectiv e dat e o f th e ne w final, annual rate . Se e Order s 96-2-2 , 96-12-41 , 97-1-12 , an d th e Final Repor t o n th e Revie w o f th e Alask aRatemakin g Methodology , September 2 , 1997
. A s i s clea r fro mth e issue s raise db y th e carrier s i n thi s order , significant change s t o our rate structure nee dt o b e examine d - ataper ma y no t b e necessar

y i n fiiture rate s becaus e PenAi r ha s sinc e dispose do f

mos t o f it s Metro aircraf

t tha t operate d unde r

Par t 13 5 durin g th e perio da

t issue , th e yea

r ende dJun e 30 , 2010
. In addition , partie s hav e raise d th e issu e o f ou r settin g Par

t 121 , Par t 135 , an d Seaplan e rate s base d onl y o n operation s where th e8 -

Postal Servic e pay s th e Par t 121 , Par t 135 , an d Seaplan e rates. ' 1 Thes e are significant departure s fromour

current methodology , an d unles s the y ar e resolve d before w e issu e anothe r show-caus e order , w e anticipat e there woul d b e dela y i n finalizing th e nex t

annual update correspondin g t o wha t ha s occurre d here , an d w e therefor e wil l hav e our

staf f meet wit h th e partie s t o resolv e thes e issues
. Beside s discussin g thos e issues , w e not e tha t th e Rura l Servic e Improvement

Ac t had th e expres s goa

l o f increasin g operation s wit

h larger
. Par

t 12 1 aircraft , an d als o reducin g Postal Servic e expenditures
. Thos e twi n goal s hav e no t bee n realized , becaus e PenAi r an d Frontier ar e either disposin g o f

thei r 19-sea t aircraf t or operatin g the munde r

Par t 135 , suc h tha t there ma y soo n b e fewe

r Par t 12 1 operation s i n Alask atha n whe n RSIA wa s enacted
. Likewise , C C mention s i n it s Augus t 1 1 pleadin g tha

t there are 5 3 airport s i n Alask a havin g lon g runways , sufficien t t o suppor t larg e aircraf

t operations , bu t

tha t 3 3 o f thos e airport s hav e no t

receive dPar

t 12 1 bus h servic e under

RSIA
. Thos e are issue s w e wis h t o addres s wit

h th e partie s a s well
. O n September

8 th e Postal Service , recognizin g tha t i t woul d los e th e te n percen t reductio n i n rate s propose db y Orde r 2010-12-2 8 becaus e o f

th e delay i n thi s proceeding , propose d tha t rate s tentativel y set

b y Order 2011-6-1 4 b e mad e final fo r atwelve-mont

h perio d from th e issuanc e o f

afinal order , no t

fo r th e brie f perio d fromth e issuanc e o f tha t order unti l December 3tpo r approximatel y thre e months
. C C object s tha t whil e mai l rate s ar

e typicall y effectiv e fo

r onl y on e yea

r (th e current

rat e wil l hav e bee n i n effect fo r abou t 2 1 months) , there hav e bee n some rate s that were i n effect

longer than twelv e months , an d tha t th e Department

ha s indicate dtha

t it s goa l i s t o hav e rate s i n plac e a t an y tim e tha

t reflec t th e cos t o f carryin g mai l i n th e forthcomin g year . However , a s amatte r o f equit y th e Department

canno t ignore th e losse s th e Postal Servic e ha s incurre d becaus e o f th e dela y i n flnalizing thes e rates . ^ ^ Consisten t

wit h ou r earlier approac h whe n w e eliminate d retroactivel y adjustabl e rates , w e wil l exten d thes e lower rate s fo r a n annua l perio d whil e w e discus s wit

h al l th e partie s th e bes t

wa y t o addres s th e outstandin g issues
. Thi s adjustment

recognize s tha

t th e counterpar

t t o havin g n o retroactivel y adjustabl e rate s i s th e nee dto hav e rate s establishe di n atimel y manner , whic h ha s no t bee n th e cas e thi s time , albei t throug h n o fault

o f any o f th e parties
.

^ ^ Sinc e th e advent

o f th e Department' s equalizatio n policy , there ha s bee n adichotom y betwee n ho w th e variou s clas s rate s ar e calculate dan dho w thos e rate s are applie db y th e Postal Service
. Fo r example , i f

a lower cos t Par t 12 1 carrie r

enter s amarke t

wher e unti l the n onl y Par t 13 5 carrier s operate , th e Par t 12 1 carrier get s al l o f

th e mail , unles s th e Par

t 13 5 carrier s choos e t o equaliz e to the lower-cos t Par t 12 1 rate . Onc e the y equalize , the y wil l receiv e a n "equitable " share o f

th e mai l fromth e Postal Service , eve n thoug h the equipment

an doperation s the y us e in tha t marke t are Par t 135 , albei t

a t alowe r rat e tha n wha t the y otherwis e woul db e entitle dto . Essentially , thos e Par t 13 5 carrier s ar e faced wit h achoic e o f

receivin g som

e mai l a t th e Par t 12 1 rate , o r

n o mail
. For

ratemakin g purposes , th e Department ha s never exclude d th e cost s and traffi c o f

thos e city-pai r

market s where th e Par

t 13 5 carrier s operate bu t

receiv e th e Par

t 12 1 o r mainlin e rates . C C an dothe r

carrier s are no w advocatin g achang e in tha t policy
. A s discusse d in footnot e eigh t o f thi s order , there ha s bee n some limite dexclusio n o f traffi c an dexpense s in city-pai r market s serve d b y mainlin e aircraf

t operatin g seve n o r

more departure s i n th e Jun e quarte r o f th e reportin g period
. But

tha t exclusio n ha s focuse d o n th e presenc e o f mainlin e operation s in acity-pai r segment operate d b y bus h carriers , never

on whether

th e mainlin e rate , in fact , applie di n tha t segment . ' 2 Rate s tha

t woul d b e base do n dat afo r th e yea r ende d Jun e 30,2011 , are likely to b e higher becaus e PenAir ha s sinc e dispose do f

it s lowe r cos t Metr o aircraft
.Base d o n al l o f th e above , w e wil l make th e rate s set b y thi s order

final fo r a n annual period , rather

tha n th e thre e month s remainin g unti l December 31 , whe n th e nex t

annua l update woul dtypicall y b e in place
. W e wil l instruc t ou r staf f t o set u p a n informa l mai l conferenc e wit

h th e partie s t o discus s th e issues
. Th e one-yea r effectivenes s o f

thi s rate wil l provid e th e partie s wit h increase d certaint

y an d b e more equitabl e t o th e Postal Servic e whil e w e attemp t

t o resolv e th e aforementione d issues
. ACCORDINGLY , 1
. We make final th e Par

t 12 1 an dPar

t 13 5 linehau l rate s tentativel y set b y Order 2011-6-14 ; 2
. Th e Par t 12 1 an dPar

t 13 5 mai l rate s mad e final b y thi s order , an d th e Seaplan e mai l rat e mad e final b y Order

2011-6-14 , wil l exten d unti l on-or-abou t on e yea r fromth e servic e date o f thi s order , subjec t

t o quarterl y fiie

l adjustments
. Th e terminal rat e mad e final b y Order 2011-6-1 4 wil l terminate a t th e same tim e a s thos e other thre e rates ; 3
. We direc t

th e staf f t o se t u p a n informa l rat e conferenc e wit

h th e partie s t o discus s thes e issues ; 4
. We delegate to th e Director , Offic e o f Aviatio n Analysis , th e authorit y t o determin e th e effectiv e date o f

th e rate s contemplate d i n orderin g paragrap h one , s o tha t thos e rate s ca

n b e adjuste dfo

r th e mos t recent quarterl y fiiel costs ; 5
. Thi s docke t

shal l remai n ope n unti l fiirthe r orde r o f th e Department ; an d 6
. We wil l serv e thi s order upo n al l partie s o n th e Servic e Lis t fo r thi s Docket
. By :

Susa n Kurlan d Assistan t Secretar y fo r Aviatio n an d International Affair s (SEAL ) An electroni c versio n o f

thi s document

i s availabl e o n th e Worl d Wid e We b a t http://www.regulations.go v