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 Myers

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 briefly address the new arguments presented by Penair in its August 30 

filing.

Penair’s continuing insistence of form over function in setting mail rates has set new 

levels for twisted logic. Penair has never explained why including aircraft that do not 

transport any mail at Part 135 mail rates is beneficial to establishing a fair and 

compensatory mail rate, encouragement of efficient and adequate mail 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 going to improve rural air service?

The Consolidated Carriers proposed two solutions to the problems 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 maximum 
certificated seating capacity of 19 or more would be 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 based on the significantly 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 legally 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 operations which are clearly 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 little if any mail is transported at bush rates. The RSIA was 

concerned that the bush rates would be affected by the different operating economies of 

the mainline routes.

Penair argues that a decision not to exclude the expenses of Part 135 operations in 

markets where Part 121 service is offered requires including all Part 135 costs in a single 

rate. To begin with, the Department only ruled that there was no legal mandate to 
exclude those data, and second, keeping track of the various changes would be 

burdensome. The Consolidated Carriers agreed that exclusion would be burdensome, 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

hypothetical argument. Frontier Flying Service was awarded an exemption from the 

market share requirements of the RSIA by the Postal Service, based on the promise that it 

would operate the first Part 121 service in several northwest Alaskan markets. It 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 only two passenger carriers and the Postal Service 

pays the Part 135 mail rate in the markets, but one of those carriers is now Frontier.

The predatory practices argument does not apply to Penair. All of the non-mainline 

markets where 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 lowest cost SAAB 340 aircraft in the Part 121 rate.
Penair is simply saying 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 argument 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 system and 

continue to support it as the best long term solution, but in any case the irrelevant data of 

the operations of Penair’s Metroliners 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 case 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 Myers

August 31, 2011
CERTIFICATE OF SERVICE

I hereby certify that I have this date served a copy of the Response of the Consolidated

Carriers to the August 30, 2011 Filing of Peninsula Airways, Inc. upon all parties to 

Docket DOT-OST-2003-14694 by electronic mail.

____________________

Hank Myers

August 31, 2011