Order 2011-10-3 

Served: October 11,2011 

UNITED STATES OF AMERICA 

DEPARTMENT OF TRANSPORTATION 

OFFICE OF THE SECRETARY 

WASHINGTON, D.C. 

Issued by the Department of Transportation 

onthe 11* of October, 2011 

INTRA ALASKA BUSH MAIL RATES Docket OST-2003-14694 

Order Setting Final Busli Mail Rates 

SUMMARY 

By this order, the Department makes final the rates tentatively set by Order 2011-6-14, and 

extends those rates and the Seaplane and terminal rates made final by Order 2011-6-14 for one 

year beyond the effective date of this order. 

BACKGROUND 

By Order 2010-12-28, the Department proposed a routine annual update to intra-Alaska 

bush mail rates. Consistent with longstanding program practice, we proposed the rates on 

a show-cause basis to allow for all parties to comment before making any rates final, but in 

this instance we received many objections. 

Those objections focused on the ten percent decrease in the Part 135 mail rate due to 

Peninsula Airways, hic. (PenAir), removing a sufficient number of seats firom its very lowcost, very long-haul Metro aircraft. Those aircraft had previously been included in the 

lower-cost, larger-aircraft Part 121 cost pool, but were reassigned to Part 135 in response 

to PenAir's removing seats. FAA rules require that aircraft with 10 or more seats operate 

under Part 121, while aircraft operating with 9 or fewer seats may operate under Part 135. 

As a result the Part 135 rate tentatively set by Order 2010-12-28 decreased by ten percent. 

In response to the numerous objections. Order 2011-6-14 proposed significantly different 

Part 121 and Part 135 linehaul mail rates from those proposed in the earlier show-cause 
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order. ^ The more recent order noted that the PenAir aircraft at issue had a 515-mile 

average stage length compared to the 70-mile average stage length for the other Part 135 

operators. 2 We tentatively found that this difference in stage length caused PenAir to have 

much lower unit costs than the other Part 135 operators, resulting in a mail rate that would 

be inappropriately low for the other carriers. For that reason we added a mileage "taper" to 

the Part 135 mail rate, developed by applying a linear regression to the Part 135 operations 

of all the bush carriers, including PenAir. 

Given the significant change in the Part 135 rate structure contemplated by Order 2011-6-14, 

we also issued that order on a show-cause basis. It directed parties to show cause within 10 

days, i.e., June 20, why the Department should not make final the resulting Part 135 and 

Part 121 linehaul rates. On June 14, PenAir requested an extension to July 7 to submit 

objections, which we granted by Notice dated June 16. On July 5, the Consolidated Carriers 

(CC), requested an extension until July 18, which we granted by notice dated July 5. On 

July 18 we received objections from two parties, PenAir and CC. 

On August 3, we received from PenAir a motion for leave to file a late-filed response to 

CC's objection, which PenAir duly filed, and on August 11 we received a response from 

CC. On August 26 we received a motion form CC to exclude the data of PenAir. On 

August 30, we received an answer from PenAir to that motion. On August 31, we received 

a response from CC to the August 30 filing of PenAir. On September 8 we received a 

reply from the Postal Service to Order 2011-6-14 and subsequent comments by CC. On 

September 12, we received a response by CC to the Postal Service's filing on September 8. 

CC Objection 

In its July 18 response CC agrees with the Department that some adjustment should be 

made for the "undeserved windfall" PenAir would receive by including its large aircraft, 

long-haul service with the historical small aircraft, short-haul operations of the Part 135 

carriers. However, CC believes the Department's mileage taper is not a sufficient 

response, and, to support this proposition, it states that "The most significant fact about the 

2011-6-14 rate is that it would pay the bush industry $10,299,152 less for linehaul costs 

alone compared to Order 2010-12-28." 

CC argues that the Department's mileage taper, reflecting higher costs for short-haul 

segments, is inaccurate because traffic "loads are weighted toward the entry segment, and 

do not reflect the split between actual markets."^ Also, it maintains that any regressionbased taper is doomed to fail because of the distinct differences in aircraft types and 

market conditions affecting the historical Part 135 and Part 121 rates. CC notes that the 

1 Order 2011-6-14 also finalized both the terminal rate applicable to ail bush carriers tentatively set by 

Order 2010-12-28, and the Seaplane linehaul rate, to which there were no objections. 

2 See Order 2011-6-14 for a complete discussion of the objections to Order 2010-12-28. 

^ In Alaska, there is generally much more mail and fi^eight shipped out from regional hubs to bush villages 

than in the other direction, i.e., fi-om bush villages back to regional hubs. Thus, with multi-stop, linear 

service, the first segment leaving fi-om a regional hub typically has a much higher load factor than later 

segments, and this higher load factor produces lower imit costs per revenue ton mile. 
results of the regression in Order 2011-6-14 used to determine the mileage taper could be 

significantly improved by adding another variable, namely aircraft size. 

CC continues to believe that the Department should reconfigure the Part 121 rate to 

include all bush operations with aircraft that can be configured with up to 19-seats, 

regardless of whether it operates under Part 135 or Part 121. However, it recognizes that 

Order 2011-6-14 rejected creating such a cost pool for statutory reasons: the Rural Service 

Improvement Act of 2002 (RSIA) specifically required the Department to construct a 

Part 121 rate based exclusively on the costs of aircraft having 19 or more seats and 

operating under Part 121. CC now proposes that the Department carve out an additional 

linehaul class rate, namely one that is limited to aircraft capable of being configured with 

19 or more seats while operating under Part 135, leaving in place the statutorily required 

rate for 19-seat or larger aircraft operating under Part 121 that we have calculated since the 

passage of RSIA.'* CC notes that this issue will be of increased importance in the fiiture, 

as Frontier Flying Service, the other 19-seat Part 121 operator in the current mail pool, has 

announced that it will soon follow PenAir's lead and "bifiircate" its 19-seat operations, 

which had previously operated only under Part 121, between Parts 135 and 121. 

PenAir Objections 

PenAir continues to strongly object to a mileage taper. "There is no need, and absolutely 

no reliable evidence to support, layering another taper on top of the pre-existing taper."^ 

Nor, PenAir argues, is there any substantial, reliable evidence or empirical, legal, or other 

justification to support imposing an additional taper on the current rate methodology. 

The heart of PenAir's argument is as follows: 

"The cost calculations underpiiming the Department's theoretical Part 135 bush 

mail rate mileage taper regression are based on assumptions about average 

aircraft operating expenses on a system-wide basis that cannot be relied upon to 

reasonably predict costs on specific long-haul routes. There is simply nothing 

'average' about the varied long-haul bush operations. Real-world operational 

constraints on long-haul bush routes in the harsh Alaska operating environment 

reduce effective payloads, require additional fiiel consumption to tanker fiiel for 

distant altemate airports, and often require additional technical stops, flight 

returns, and/or diversions - all of which substantially increase the actual costs of 

those flights." 

^ As CC discusses, Order 2005-1-18 determined that while RSIA required the Department to establish a 

Part 121,19-seat rate, it did not take away the Department's authority to add additional class rates fi-om the 

three explicitly contemplated by RSIA - Part 121, Part 135, and Seaplane. 

^ PenAir is referring to the fact that for almost 30 years for both the bush and mainline cost pools, the 

Department has developed separate linehaul and terminal elements. The terminal element reflects the cost of 

loading mail onto the aircraft, and thus does not vary by distance. The linehaul element reflects the cost of 

flying the mail, once it has been loaded on the aircraft— pilot, ftiel, maintenance, and aircraft ownership ~ to 

its destination. Order 2011-6-14 proposes to split the linehaul expenses fiirther between a fixed linehaul 

element, which does not vary by distance, namely landing and take-off, and an element that does vary by the 

distance actually flown. 
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PenAir also notes that when Order 2011-6-14 estimated the impact of the taper on the 

Postal Service, there was an inadvertent transposition error, using $7.1492 vs. $7.4192 per 

mail ton mile. "The net effect of that error was to understate the costs to the Postal Service 

of the proposed taper by nearly $1 million a year." ^ PenAir estimates that instead of 

costing the Postal Service 1% less, the proposed taper would cost the Postal Service 2% 

more. 

Late-Filed Responses 

On August 3, 2011, PenAir requested leave to file a Reply to CC's timely-filed comments. 

We will grant that request. PenAir notes that it has since disposed of all of its Metro 

aircraft, whether Part 121 or Part 135. Because it was those aircraft that precipitated the 

development of the mileage taper, PenAir suggests the taper "should no longer be an issue 

for the purpose of calculating the Part 135 bush mail rate going forward." It notes that the 

only large aircraft it continues to operate under Part 135 is a single Saab 340 aircraft. 

PenAir opposes separating the Part 135 rate into large and small aircraft cost pools, as 

proposed by CC, because of the Department's traditional reluctance to carve out additional 

class rates, especially if such rates are not dictated by operational necessity and because 

there would be only a limited number of segments operated by such aircraft. 

On August 11, 2011, CC responded to PenAir's August 3 filing, and requested that their 

unauthorized filing be accepted. CC characterizes PenAir's concern as being that not all of 

its operating costs on some of its long-haul routes would be fiilly compensated by a 

mileage taper. CC reiterates earlier pleadings by Frontier that rates should be based on the 

mail rate actually paid carriers. ^ CC also reiterates that there should be a separate rate for 

large bush aircraft operating under Part 135. 

On August 26 CC filed another motion to exclude the data of PenAir's Metro 23 and 

Saab 340 aircraft operated under Part 135. CC states that it only recently confirmed that 

those aircraft only operated in city-pair markets where either the Part 121 or Mainline rates 

were being paid. It fiirther states that excluding such operations from the Part 135 cost 

pool is "consistent with all precedent and methodology in this docket."^ 

On August 30 PenAir responded to CC's August 26 filing stating that "It would not be 

appropriate to carve out just one carrier's costs [i.e., PenAir's] for certain 

equipment/operations from its proper rate class." 

° We note that because Part 135 carriers sometimes equalize the rates they receive on some segments to the 

much lower Part 121 rate, the reliability of this estimate is uncertain. 

' The Department has consistently established rates based solely on the operating characteristics of the 

aircraft and whether they operate under Part 121 or Part 135. Under tb« Department's equalization policy, 

carriers operating smaller aircraft with typically higher costs per revenue ton mile can equalize to the lower 

rate in a market, but the costs and traffic on those segments are not excluded from the calculation of the rate. 

° We have never excluded operations from the various bush costs pools based on the rates actually being 

paid by the Postal Service. Consistent with law, we have excluded bush operations in markets where 

mainline service existed, defined as those city-pair segments where more dian seven mainline departures 

operated during the quarter ended June 30 of each year. See Appendix E of Order 2011-6-14. 
On August 31 CC responded that while it preferred a two-tier Part 135 mail rate (as 

discussed previously),^ in any case, the Department must exclude the irrelevant costs and 

operations data for PenAir's Metro and Saab aircraft in markets where Part 121 bush rates 

or mainline rates prevail." 

On September 8 the Postal Service filed a response, and proposed that the Department 

make the mail rates from Order 2011-6-14 effective for a twelve-month period after those 

rates actually became final, rather than for the brief period from when the rate would first 

become final until the end of calendar year 2011. The Postal Service also expressed its 

support for the Department's proposed mileage taper. 

On September 12 CC responded to the Postal Service's filing. CC notes that mail rates, 

"once made final, apply until a rate based on the next data set are made final. Examination 

of the mail rate orders shows that the term of the armual rates range from a few months to 

well over a year The Department has in hand all data for the 12 months ended June 30, 

2011, and could compute the most current rate levels once the policy issues related to large 

aircraft are decided." CC notes that Order 2007-4-25 stated that it was the Department's 

goal to set "reasonable rates that reflect the cost of carrying mail in the forthcoming 

year [emphasis by CC] while at the same time providing increased certainty to the parties 

as to what rates they will pay or receive at any given time. The costs of the Metros [flown 

by PenAir] obviously do not reflect the costs of carrying mail in the forthcoming year 

because they have been entirely eliminated from use." 

DECISION 

We have decided to finalize the mail rates tentatively proposed in Show Cause 

Order 2011-6-14. Notwithstanding all of the burdens that PenAir outlines ~ tankering 

ftiel, bad weather in the Aleutians, technical stops, diversions, reduced payloads ~ the 

average costs for its Mefro aircraft are, in fact, significantly lower than those for other 

Part 135 operators, so much so that they produce a ten percent reduction in the linehaul 

mail rate across all mileage segments unless an adjustment such as the mileage taper is 

made. PenAir has chosen not to address our finding in Order 2011-6-14 that there are 

unavoidable fixed costs to short-haul operations, which drive up the costs of such 

operations compared to longer haul service. It also has ignored our finding that the 515-

mile average stage length of its Metro aircraft has lower average costs per mail ton mile 

than other carriers operating similar 19-seat aircraft over much shorter average stage 

lengths. Instead, PenAir argues that because the mileage-based taper reflects an average 

rate, and does not "reasonably predict costs on specific long-haul routes" that it would be 

underpaid on those long haul routes and therefore a taper is inappropriate. The carrier 

ignores the fact that all of the mail rates set by the Department - Seaplane, Part 135, and 

Part 121 ~ reflect average costs. There are undoubtedly many routes where other carriers 

receive less than their actual costs. In fact, class rates are designed to force carriers with 

higher than average costs to compete by reducing their costs to levels that are in line with 

^ In other words, splitting the Part 135 cost pools between those aircraft capable of being configured to more 

than 9 seats, and those not capable of operating with more than 9 seats. 
their competitors. In brief, once an average rate is set, carriers with higher than average 

costs incur losses (or generate fewer profits) until they can adjust. This problem could 

only be avoided were the Department to establish a large number of mail class rates 

tailored to every carrier and operational constraint rather than the three historical statewide 

rates. 

PenAir is concerned with the additional costs it incurs by tankering fiiel or making 

technical stops as a result of its long-haul service, but ignores the very real costs incurred 

by short-haul operators. With long haul operations, carriers can at least choose between 

tankering fiiel and making technical stops; operators in short-haul markets must incur the 

very high fixed costs of short stage length operations outlined in Order 2011-6-14 without 

recourse. In brief, we find that the mileage-based taper provides a better, albeit not perfect, 

fit for the average costs of Part 135 operators than a rate that is not so refined. 

PenAir's filing on August 3, submitted two weeks after the deadline, develops a new 

argument. PenAir now suggests that we abandon the mileage taper because the carrier has 

recently disposed of all of its Metro aircraft - the immediate cause of our tentatively 

introducing the taper. However, PenAir's suggestion begs the question of what to do with 

the drop in unit costs that occurred in the period at issue, the year ended June 30, 2010, as 

a result of PenAir converting its low cost Mefros from Part 121 to Part 135 operations. If 

we simply excluded those very low costs we would inappropriately harm the Postal 

Service; if we simply included them without a taper, we would improperly harm PenAir's 

short-haul competitors. The Postal Service made it clear in its earlier objection that it was 

strongly opposed to arbitrarily excluding data simply to help particular carriers, and we 

find that the average costs of short-haul operations are generally higher than those of longhaul operations, so we find that good cause exists to maintain the mileage taper. 

The thrust of CC's main objection to the mileage taper ~ that it decreases payments to the 

Part 135 bush carriers by about $10 million a year compared to the rate proposed by 

Order 2010-12-28 —is the mirror image of PenAir's argument that the same taper would 

increase those payments by $1 million. Those mutually exclusive results cannot both be 

correct, and the discrepancy was caused by a CC error: CC compared the proposed 

Part 135 rate to the rate set by Order 2010-9-24. However, the rate in Order 2010-9-24 is 

the current rate and excludes PenAir's lower cost Metro aircraft, the point at issue. The 

rate in Order 2010-9-24 was depicted on the first page of Order 2011-6-14 only for 

comparison purposes. No party is proposing that we finalize that rate going forward. '^ 

The Part 135 rate in Order 2010-9-24 is of course higher than either the rate tentatively 

proposed in Order 2010-12-28 or the rate from Order 2011-6-14 that we are finalizing here 

because it does not include the very low unit costs of PenAir's Metro aircraft. 

' " CC indicates that the pivot point - the distance at which the mileage taper produces the same rate as one 

without a taper is 64 miles. The linehaul rate in Order 2010-9-24 cited in 

Order 2010-12-28 is $13.2559 per ton mile, while the linehaul rate actually proposed is 

$371.45 per ton plus $7.4622 per ton mile. Equating the two produces the 64-mile pivot point cited by CC. 
CC proposes that the Department carve out an additional bush class rate, splitting the 

current Part 135 rate between a small-aircraft cost pool (9-seats or fewer) and a largeaircraft cost pool (aircraft capable of having 10 or more seats). This would be a significant 

change from the way we currently calculate the rates, and we will dismiss the proposal 

without prejudice, due to the long delay already experienced in setting final rates. 

It has been our goal to have final rates in place for the bush carriers on or about January 1 

of each year. Because of the many objections and the various extensions requested by the 

parties, that goal will obviously not be achieved this year. Because the mileage-based 

taper represented a significant change from historical ratemaking, we issued two show 

cause orders and granted several extensions. It would certainly be inappropriate for us to 

make such a significant change as proposed by CC without affording all of the parties 

sufficient time to comment. 

We are concerned with the delay in finalizing these rates. As a result of the delays, the 

current Part 135 rate (about ten percent higher than the rates we are setting here) will have 

been in place for about a year and nine months rather than the typical one-year period. The 

delay in setting a final rate in this case due to the numerous pleadings has cost the Postal 

Service a significant amount of money. The Department's policy is to make all rates final 

and not provide for retroactive adjustment to rates, and we find that that continues to be the 

appropriate policy. However, we cannot ignore the losses incurred by the Postal Service 

due to the delay in setting a final rate. 

The Department's policy to make all rates final and eliminate retroactive adjustable rates 

was precipitated more than a decade ago by the carriers having to repay the Postal Service 

a significant amount of money because a temporary, retroactively adjustable rate was set at 

too high a level for an extended period of time. Only when the final order was issued was 

that fact discovered, but in the meantime a large debt had been incurred which the carriers 

could not repay. After meeting with all of the parties, the Department resolved the 

immediate issue by providing that the carriers could "work off this debt by being paid at a 

slightly lower rate than provided for by the final order. Both the Postal Service and the 

carriers agreed that the longer term solution was to end the practice of having temporary, 

retroactively adjustable rates in effect for semi-annual periods, and to make all rates final 

with a six-month lag between the end of the reporting period and the effective date of the 

new final, annual rate. See Orders 96-2-2, 96-12-41, 97-1-12, and the Final Report on the 

Review of the Alaska Ratemaking Methodology, September 2, 1997. 

As is clear from the issues raised by the carriers in this order, significant changes to our 

rate structure need to be examined - a taper may not be necessary in fiiture rates because 

PenAir has since disposed of most of its Metro aircraft that operated under Part 135 during 

the period at issue, the year ended June 30, 2010. In addition, parties have raised the issue 

of our setting Part 121, Part 135, and Seaplane rates based only on operations where the 
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Postal Service pays the Part 121, Part 135, and Seaplane rates.' 1 These are significant 

departures from our current methodology, and unless they are resolved before we issue 

another show-cause order, we anticipate there would be delay in finalizing the next annual 

update corresponding to what has occurred here, and we therefore will have our staff meet 

with the parties to resolve these issues. 

Besides discussing those issues, we note that the Rural Service Improvement Act had the 

express goal of increasing operations with larger. Part 121 aircraft, and also reducing 

Postal Service expenditures. Those twin goals have not been realized, because PenAir and 

Frontier are either disposing of their 19-seat aircraft or operating them under Part 135, such 

that there may soon be fewer Part 121 operations in Alaska than when RSIA was enacted. 

Likewise, CC mentions in its August 11 pleading that there are 53 airports in Alaska 

having long runways, sufficient to support large aircraft operations, but that 33 of those 

airports have not received Part 121 bush service under RSIA. Those are issues we wish to 

address with the parties as well. 

On September 8 the Postal Service, recognizing that it would lose the ten percent reduction 

in rates proposed by Order 2010-12-28 because of the delay in this proceeding, proposed 

that rates tentatively set by Order 2011-6-14 be made final for a twelve-month period from 

the issuance of a final order, not for the brief period from the issuance of that order until 

December 3tpor approximately three months. CC objects that while mail rates are 

typically effective for only one year (the current rate will have been in effect for about 21 

months), there have been some rates that were in effect longer than twelve months, and 

that the Department has indicated that its goal is to have rates in place at any time that 

reflect the cost of carrying mail in the forthcoming year. However, as a matter of equity 

the Department cannot ignore the losses the Postal Service has incurred because of the 

delay in flnalizing these rates. ^^ Consistent with our earlier approach when we eliminated 

retroactively adjustable rates, we will extend these lower rates for an annual period while 

we discuss with all the parties the best way to address the outstanding issues. This 

adjustment recognizes that the counterpart to having no retroactively adjustable rates is the 

need to have rates established in a timely manner, which has not been the case this time, 

albeit through no fault of any of the parties. 

^ ^ Since the advent of the Department's equalization policy, there has been a dichotomy between how the 

various class rates are calculated and how those rates are applied by the Postal Service. For example, if a 

lower cost Part 121 carrier enters a market where until then only Part 135 carriers operate, the Part 121 

carrier gets all of the mail, unless the Part 135 carriers choose to equalize to the lower-cost Part 121 rate. 

Once they equalize, they will receive an "equitable" share of the mail from the Postal Service, even though 

the equipment and operations they use in that market are Part 135, albeit at a lower rate than what they 

otherwise would be entitled to. Essentially, those Part 135 carriers are faced with a choice of receiving some 

mail at the Part 121 rate, or no mail. For ratemaking purposes, the Department has never excluded the costs 

and traffic of those city-pair markets where the Part 135 carriers operate but receive the Part 121 or mainline 

rates. CC and other carriers are now advocating a change in that policy. As discussed in footnote eight of 

this order, there has been some limited exclusion of traffic and expenses in city-pair markets served by 

mainline aircraft operating seven or more departures in the June quarter of the reporting period. But that 

exclusion has focused on the presence of mainline operations in a city-pair segment operated by bush 

carriers, never on whether the mainline rate, in fact, applied in that segment. 

'2 Rates that would be based on data for the year ended June 30,2011, are likely to be higher because 

PenAir has since disposed of its lower cost Metro aircraft. 
Based on all of the above, we will make the rates set by this order final for an annual 

period, rather than the three months remaining until December 31, when the next annual 

update would typically be in place. We will instruct our staff to set up an informal mail 

conference with the parties to discuss the issues. The one-year effectiveness of this rate 

will provide the parties with increased certainty and be more equitable to the Postal Service 

while we attempt to resolve the aforementioned issues. 

ACCORDINGLY, 

1. We make final the Part 121 and Part 135 linehaul rates tentatively set by 

Order 2011-6-14; 

2. The Part 121 and Part 135 mail rates made final by this order, and the Seaplane mail rate 

made final by Order 2011-6-14, will extend until on-or-about one year from the service 

date of this order, subject to quarterly fiiel adjustments. The terminal rate made final by 

Order 2011-6-14 will terminate at the same time as those other three rates; 

3. We direct the staff to set up an informal rate conference with the parties to discuss these 

issues; 

4. We delegate to the Director, Office of Aviation Analysis, the authority to determine the 

effective date of the rates contemplated in ordering paragraph one, so that those rates can 

be adjusted for the most recent quarterly fiiel costs; 

5. This docket shall remain open until fiirther order of the Department; and 

6. We will serve this order upon all parties on the Service List for this Docket. 

By: 

Susan Kurland 

Assistant Secretary for 

Aviation and International Affairs 

(SEAL) 

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