Swanson, Brian (OST) 

From: 

Sent: 

To: 

Cc: 

Subject: 

Devany, Dennis (OST) 

Thursday, February 23, 2012 9:30 AM 

Manistee Airport 

Swanson, Brian (OST); <jg727@aol.com> 

RE: Subsidy payment schedule 

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While I fully understand fixed costs/variable costs, I do have concerns 

splitting the payments into a fixed portion and a variable portion. One 

of the common, and somewhat legitimate, criticisms of the program is that 

carriers do not have incentives to provide the best service possible. The 

payout is our only real incentive to do that and by splitting it into a 

fixed and variable element, it dilutes any incentive to operate as many of 

the flights as possible. 

-----Original Message-----

From: Manistee Airport [mailto:manisteeairport@gmail.com] 

Sent: Thursday, February 23, 2012 9:21 AM 

To: Devany, Dennis (OST) 

Cc: Swanson, Brian (OST); <jg727@aol.com> 

Subject: Re: Subsidy payment schedule 

Dennis, 

The actual numbers I quoted in this email come from the original proposal 

which was 2.4M which was for 500 yearly flights (1000 segments). 

75000*12 + 1500*1000 = 2400000. 

We haven't put together similar numbers to reflect the two alternative 

proposals since we don't know what direction you are heading with this. 

I sent this email to basically ask if we are on the same page at a high 

level and if we are we can move forward to work on the details. If however 

you are going to propose something different than what we have proposed 

then we will have to evaluate and react. 

--Barry 

On Feb 23, 2012, at 8:20 AM, <Dennis.DeVany@dot.gov> wrote: 

> Barry, 

> 

> The whole premise of Alternate EAS is that we do not pay more than we 

would in traditional. We do not pay upfront $s to EAS carriers. But 

setting that aside, 12 mo x $75K + $1500/flt x 20 flights/week x 52 weeks 

1 
= $2.46M. Your last email had a $1.94 option (all 19 seat) and a 2.112 

option (6 mos of 30 seaters). I can't reconcile. 

> 

> DO 

> 

> -----Original Message-----

> From: Manistee Airport [mailto:manisteeairport@gmail.com] 

> Sent: Thursday, February 23, 2012 8:05 AM 

> To: Devany, Dennis (OST); Swanson, Brian (OST) 

> Cc: Jim Gallagher 

> Subject: Subsidy payment schedule 

> 

> Dennis, Brian, 

> 

> During this process there is one set of questions I have been 

> expecting you to ask as it relates to our Alternate EAS proposal, but 

> so far they have not come up. Those questions are in relation to how 

> in our proposal we were requesting that the subsidy be paid (or 

> eligible grant expenses be reimbursed depending on how you structure 

> this). While this may be a detail to be worked out later, it is a 

> very important detail that causes some concern and nervousness on my 

> side not knowing where this stands. 

> 

> Specifically the proposal as submitted stated: 

> 

> 3. Manistee requests that subsidy be paid as follows during the first 

year: 

> - $75,000 monthly in arrears to cover fixed costs incurred by the 

> Indirect Air Carrier including, but not limited to, aircraft leases, 

> station rents and leases, personnel wages and salaries, insurance, 

> etc. 

> - $1,500 per completed flight to cover flight costs incurred by the 

> Indirect Air Carrier including, but not limited to, fuel, crew costs, 

> other per block hour expenses, etc. 

> - A $200,000 one time startup deposit be paid upon execution of the 

> Grant Agreement to cover startup costs incurred by the Indirect Air 

> Carrier including, but not limited to, pre-service marketing, station 

> startup costs, personnel training, etc. This deposit would be applied 

> towards the last 

> month(s) of service. 

> - The cap on subsidy costs would be $2,400,000 in year one (not 

> including the deposit). 

> - The payment structure for the second year is to be mutually agreed 

> upon by DOT, the Indirect Air Carrier and the Airport Authority with a 

> limit on subsidy costs of $2,200,000 in year two. The goal being to 

> structure on going payments in such a way as to encourage the 

> enplanement of more passengers, thus reducing the subsidy level per 

passenger. 

2 
> 

> While the exact final details may need to differ (especially since 

> there are now different Alternative proposals on the table at 

> different subsidy levels), the overall structure is based on three 

> points: 1) Separate billings to cover Fixed Costs vs. Per Flight 

> Costs, 2) Need for a Deposit/Advance, 3) A declining subsidy year 1 

> vs. year 2. 

> 

> Let me go into more detail as to why each of these items is important 

> to us in this proposal. 

> 

> 1) Separate billings for Fixed Costs vs. Per Flight Costs The 

> traditional EAS program simply uses a per flight subsidy as the means 

> for the subsidy payments. That simple model works even though the 

> costs of providing service are not all associated with per flight 

> costs. The reason it works is that standard EAS service provides the 

> same level of service week to week year round. So any fixed costs can 

> be rolled into the per flight subsidy. However in our proposal we are 

> asking for the flexibility under the Alternate EAS program to provide 

> service that matches the seasonality of demand at Manistee with more 

> service during peak summer periods and less during off peak winter 

> periods. However the fixed costs largely are consistent year round 

> (rents, salaries, etc) even though the number of flights might be 

> different. To reflect this reality, we have requested splitting the 

> subsidy into two parts, a reimbursement monthly to cover fixed costs, 

> plus a reimbursement per flight operated to cover those expenses 

> (fuel, crew, etc.). 

> 

> 2) Deposit. The proposal requests a $200,000 deposit/advance to be 

> applied to the last month(s) of service. There are a lot of up front 

> startup costs, training, station setup, advertising, etc. These are 

> costs that the airport within its financial ability is not able to 

> front and which for Public Charters, Inc. as a small company are also 

> difficult to cash flow. Therefore we are asking for this deposit in 

> order to help cover the startup expenses. 

> 

> 3) Varying subsidy rates year 1 vs year 2. In all the proposals 

> (original and the two alternatives) we have provided an average 

> subsidy rate (2.3M, 2.1M, 2.0M). However in each case we would like 

> to see that average arrived at with a slightly higher rate year 1 vs. 

> year 2. In the original proposal that was achieved by requesting 2.4M 

> year 1 and 2.2M year 2. In the two alternatives no specific break 

> down was given, but the intention would be something similar. The 

> reason for this is that we fully expect that in year 2 passenger 

> revenues will be higher than in year 1. Year 1 will be about 

> building. With a new hub, new carrier, new model it is going to take 

> some time to build the passenger numbers as the public is being 

> informed/educated on what is now available, this is especially true 

3 
> since this will be starting after a hiatus in service. In year 2 we 

> will not be facing those same issues and therefore fully expect that 

> passenger numbers and therefore revenues in year 2 will be higher than 

> year 1. At this point it is nearly impossible to accurately predict 

> exactly how those passenger numbers will evolve, however in light of 

> this reasonable expectation of increasing numbers, we see the need for 

> slightly more subsidy in year 1 vs. year 2. 

> 

> In summary, we are asking for these items in order that the payment of 

> subsidy reflects the timeline of expenses (and anticipated revenue) 

> associated with undertaking this endeavor. While the total level of 

> subsidy is the most important number, we request within reason the 

> flexibility to request subsidy/reimbursement in a manner that reflects 

> the costs associated with providing the service. 

> 

> While what is being asked for may seem complicated in light of how 

> standard EAS operates, we think that this provides us enough 

> flexibility while providing the DOT with enough rational to justify 

> the subsidy requests. The easiest thing for all parties would be for 

> us to request the entire subsidy up front as one large sum, that would 

> give us the most flexibility in how to use it and it would be easiest 

> for you to manage. However, it is obvious why that wouldn't be 

> feasible for all parties involved. Therefore we believe what we are 

> asking for to be reasonable in that it still has some flexibility for 

> us, but isn't too difficult for DOT to manage. 

> 

> thanks, 

> --Barry 

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