**UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION**  **OFFICE OF THE SECRETARY WASHINGTON, D.C.** 

__________________________________________ ) In the matter of the ) ) **INTRA -**  **ALASKA BUSH MAIL RATES** ) **Docket OST -**  **2003 -**  **14694** ) __________________________________________)

**RESPONSE OF THE CONSOLIDATED CARRIERS TO THE AUGUST 30, 2011 FILING OF**  **PENINSULA AIRWAYS, INC.**

Communications with respect to this document should be addressed to: Hank M yers MTC P.O. Box 7142 Bellevue, WA 98008
- 1142 (425) 830
- 4265 (office) hank@mtcworld.com August 31, 2011**UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION**  **OFFICE OF THE SECRETARY WASHINGTON, D.C.** 

___________________________________ _______ ) In the matter of the ) ) **INTRA -**  **ALASKA BUSH MAIL RATES** ) **Docket OST -**  **2003 -**  **14694** ) __________________________________________)

**RESPONSE OF THE CONSOLIDATED CARRIERS TO THE AUGUST 30, 2011 FILING OF**  **PENINSULA AIRWAYS , INC.**  The Consolidated Carriers request leave to file an otherwise unauthorized document as necessary to briefl y address the new arguments presented b y Penair in its August 30 filing.
Penair’s continuing insistence of form over function in setting mail rates ha s set new levels for twisted logic. Penair has never explained why including aircraft that do not transport an y mail at Part 135 mail rates is beneficial to establishing a fair and compensatory

mail rate, encouragement of efficient and adequate m ail service, or the promotion or enhancement of the goals stated in the Rural Service Improvement Act. That is the big question; how is the proposal of Penair goi ng to improve rural air service?
The Consolidated Carriers proposed two solutions to the pro blems created by including large bush aircraft in the Part 135 mail rate. The first solution was to create a large aircraft bush rate regardless of the operating regulations. All aircraft with a maximumcertificated seating capacity of 19 or more would b e put in a single rate. The Department found that under the RSIA such a rate was not legally permissible. The Department did not rule out, however, the Carriers’ second proposal which was to establish a two
- tiered rate structure for Part 135 operations b ased on the significantl y different costs and operating capabilities of the two strata of aircraft. Those arguments have been well discussed, and Penair agrees that such a distinction is legall y permissible.
Subsequently , Penair supported its single rate theory by saying that the Carriers had overstated the impact of the damage. Penair revealed that it had eliminated all service with Metroliners, and that it planned to operate only one SAAB 340 in a freight configuration under Part 135. In other words, 0% of the mail in the period in which the rate would be in effect would be carried on Metroliners , and 0% of the mail transported by the SAAB 340’s would be carried at Part 135 mail rates. This created the third option, which is to exclude data for operat ions which are clearl y irrelevant to the provision of Part 135 mail service in the effective period. This is the principal legally imposed in the RSIA which excludes data for bush carrier operating in the long haul, high density mainline routes where litt le if any mail is transported at bush rates. The RSIA was concerned that the bush rates would be affected b y the different operating economies of the mainline routes.
Penair argues that a decision not to exclude the expenses of Part 135 operations in
mar kets where Part 121 service is offered requires including all Part 135 costs in a single rate. To begin wi th, the Department onl y ruled that there was no legal mandate toexclude those data, and second, keeping track of the various changes would be

burden some. The Consolidated Carriers agreed that exclusion would be bur densome, but a bigger concern was market manipulation by carriers who can choose whether to operate a particular aircraft under Part 121 or 135. Such a carrier could use its 121 operation to reduce mail rates and inflict economic harm on its Part 135 competitors. Once its goals are achieved, the 121 operations could be converted to Part 135, and the carrier would reap the twin rewards of higher market share and higher mail rates. This is not an hy pothetical argument. Frontier Fl yi ng Service was awarded an exemption from the market share requirements of the RSIA b y the Postal Service , based on the promise that it would operate the first Part 121 service in several northwest Alaskan markets . I t became the third passenger carrier in those markets, receiving a full share of mail. Subsequently , Frontier purchased its competitor Hageland Aviation, and reconfigured its Beech 1900’s to Part 135 service. Today , there are onl y two passenger carri ers and the Postal Service pay s the Part 135 mail rate in the markets, but one of those carriers is now Frontier.
The predatory

practices argument does not appl y to Penair. All of the non
- mainline markets wh ere Penair operates its SAAB 340’s in both Part 121 and Part 135 configurations are monopoly markets. The benefit that Penair receives is that by excluding the Part 135 configured large aircraft, the Part 121 mail rates will increase over those routes. Penair’s unit costs for its large aircraft are the lowest in the industry , and it carries the lion’s share of mail revenue ton miles of all the large bush aircraft. Because mail rates are weighted based on the percentage of mail rtm’s in the class, Penair is seeking to reduce the weighting of its lowes t cost SAAB 340 aircraft in the Part 121 rate.Penair is simply say ing that the Department is not absolutely required to exclude the data of its large aircraft simply because there are no Part 135 rate markets served, and the Carriers agree. It is the ar gument of the Carriers, with acknowledgement from Penair, that the Department has the discretion to choose between sound ratemaking philosophy and clever legal argument. The Carriers are not abandoning the two tier s ystem and continue to support it as the best long term solution, but in any case the irrelevant data of the operations of Penair’s M etroliners and SAAB 340’s must be excluded.

**WHEREFORE** , While the Consolidated Carriers prefer a two tiered Part 135 mail rate (as discussed previously), in any ca se the Department must exclude the irrelevant cost and operations data for Penair’s Metroliners and SAAB’s in markets where Part 121 bush rates or mainlines rates prevail. Respectfully

submitted, The Consolidated Carriers
By Hank M ye rs August 31, 201 1**CERTIFICATE OF SERVICE**

I hereb y certify

that I have this date served a copy of the R esponse of the C onsolidated C arriers to the August 3 0 , 2011 F iling of P eninsula A irway s , In c . upon all parties to Docket DOT
- OST
- 2003
- 14694 by electronic mail.

__ __________________ Hank M yers August 31, 2011