**BEFORE THE DEPARTMENT OF TRANSPORTATION**  **WASHINGTON, D.C. OFFICE OF THE SECRETARY** 

__________________________ Essential Air Service at ) ATKA and ) Docket DOT

- OST

- 1995

- 363 NIKOLSKI, ALASKA ) Under 49 USC § 41731 et seq. ) __________________________)

**COMPARISON OF PROPOSALS OF SERVANT AIR, INC.**  **AND GRANT AVIATION TO PROVIDE ESSENTIAL AIR SERVICE**  **AT ATKA AND NIKOLSKI, ALASKA**

Communications with respect to this document should be addressed to: Wes Osowski Servant Air, Inc. 1619 Airport Way Kodiak, AK 99615

- 6977 (907) 487

- 4400
April 19, 2012**BEFORE THE DEPARTMENT OF TRANSPORTATION**  **WASHINGTON, D.C. OFFICE OF THE SECRETARY** 

__________________________ Essential Air Service at ) ATKA and ) Docket DOT

- OST

- 1995

- 363 NIKOLSKI, ALASKA ) Under 49 USC § 41731 et seq. ) __________________________)

**COMPARISON OF PROPOSALS OF SERVANT AIR, INC.**  **AND GRANT AVIATION TO PROVIDE ESSENTIAL AIR SERVICE**  **AT ATKA AND NIKOLSKI, ALASKA**

Two bids have been submitted to provide Essential Air Service to Atka and Nikolski from Dutch Harbor (Unalaska). Both proposals meet the Essential Service requirements, and both propose to use twin

turboprop pressurized Beechcraft King Air 200 aircraft. Both propose to use Peninsula Airways for ground support in Dutch Harbor, and both carrier s would rent a hanger from Penair as well. Despite these similarities, Servant Air seeks a higher subsidy payment. Servant’s request is based on three major differe nces. First, Servant proposes a substantially higher level of safety and operational reliability. Servant will use two

- pilot flight crews. This is particularly important given the convoluted approaches to both Nikolski and Atka. For aircraft, Servant’s bid assumes low time airframes and engines on the Beechcraft King Air 200 they propose to use. These aircraft are more reliable and require less maintenance in the in i tial periods than the initially lower

- cost but higher time and less reliable aircraft p roposed by Grant. The Grant bid is also confusing because the bid requirement is for two years, and Grant does not adjust costs or revenue for a second year. As noted in the Servant bid, traffic has been declining or flat and the communities, and expenses have been increasing at a rate faster than inflation. Even if we assume revenue yields go up as fast as expenses as a percentage, the fact that expenses are much higher than revenue mean that the subsidy need show go up each year. Servant proposes to use dual certificated pilot/mechanics to insure more reliable service by having on

site maintenance that can provide routine repairs and inspections of aircraft. Addition ally, Servant has obtained an agreement from Peninsula Airways to provide backup mainten ance. Servant’s proposes scheduled services that will meet all of the needs of the community and the Essential Service requirement. At Nikolski , Peninsula Airways has used an aircraft stationed at Dutch Harbor to provide service, currently a Grumman Goose. Servant will offer flights consistent with the timing ofcurrent offerings, while maintaining the ability to operate extra sections or flights at different times or

days depending on weather. At Atka, Penair schedules three flights a wee k, all of which are connected to Anchorage service. If a roundtrip to Atka cannot be completed before the return departure to Anchorage, the Atka service is cancelled. By scheduling three flights per week, Penair hopes to complete the required two flight s. Even with the additional schedule, Penair completed an average of 1.96 roundtrips per week in the year ended November, 2011. Those flights had an average passenger load factor of 15.6%. The average total load factor outbound from Dutch Harbor was onl y 42%. Two flights a week actually completed is entirely adequate in most situations, and Servant will be able to operate extra sections without having other schedule commitments to worry about

. Servant’s proposal is more complete and includes reasonable expenses for a high quality Essential Service. For example, Grant Aviation does not plan to compensate village agents in Atka and Nikolski for transporting freight and mail between the airport and recipients and market rates

. Grant assumes monthly housin g costs that are actually below the market rate for apartments in Dutch Harbor, and excludes any cost for telephone or internet connections. Grant’s direct operating costs for Atka service are understated by at least 14 %. The average roundtrip block time for Pe nair’s Metroliners was 3:15, while Grant assumes 3:00 using a marginally slower aircraft. Servant Air obtained is block time and fuel burn estimates from Beech aircraft planning and performance data for late model King Air 200 aircraft. Bot h Atka a nd Nikolski have relatively complex GPS instrucment approache s, and Atka’s requires flying beyond the airport 40 miles offshore to begin a landing approach. There are three significant differences between Grant and Servant that are unrelated to pricing pol icies or underlying unit costs. First, Servant Air proposes to use a two pilot crew and a modern aircraft to operate the service. The two pilot crew is strictly a safety issue related to the complications of flying in the difficult weather of the Aleutia ns and the instrument approaches as Atka and Nikolski. Two pilot crews are the norm for multi

- engine EAS operations in the lower

- 48. The later model King Air is a more capable aircraft, and a newer aircraft means more reliable service and fewer programme d maintenance issues in the first year. The second issue is the cost of housing and transporting the flight crew in Dutch Harbor . While this is not a significant cost element, it reflects the difference in bid philosophy and thoroughness of preparation. Based on conversations with Peninsula Airways, Servant assumed $2,000

- 2,400 in rent plus utilities. Utilities are estimated at $600

- 1,000 /month for heat, electricity, telephone, internet and cable. Grant does not list an away from base per diem, or cost s of rotating crews between Anchorage and Dutch Harbor. The third difference is level of compensation paid for ground services at the bush destinations. At most, Grant proposes to pay bush agents a total of $10,200 per year. The list of expense items tha t Grant ignores is long. Grant does not include expenses associated with a passenger reservations system, ignores crew rotation expenses, does not allow for route proving or aircraft transportation costs. Grant does not assume any telephone or other comm unications expense at the Dutch Harbor airport, no vehicle in Dutch Harbor, or any contingency allowance. In total, Grant excludes nearly $250,000 a year in normal air carrier expenses.The attached appendices show that if Grant’s block times are the same as computed by Servant, the fuel

burn computed from Beechcraft manuals, a modern version of the King Air 200 used , and a two pilot
crew employed , Grant s subsidy need would be $24 5,000 more than Servant’s proposal even with the exclusion of $250,000 in ess ential expenses by Grant

. Adopting Grant’s costs to Servant’s proposal would brin g Servant’s subsidy need to $330 ,000 below Grant’s. The only costs that are changed are those associated with crewing and aircraft operations, housing costs in Dutch Harbor and costs for ground handling in the bush villages. None of these costs are within the direct control of the carrier, and simply reflect the difference in bid philosophy. Whether Grant’s costs are adjusted for Servant’s assumptions, or Servant’s costs a re adjusted for Grant’s assumptions for these three items, the outcome is that Servant has the lower subsidy need. Servant is happy to document its cost assumptions, or adjust its bid if those assumptions are incorrect. In the end, a realistic cost approa ch is the only way to assure continued operation of Essential Air Service at Atka and Nikolski. As a group, the four Aleutian points of Adak, Atka, Nikolski and Akutan will go down. Whether Servant is selected or Grant, either carrier will have to establ ish a new base at Dutch Harbor, rotate crews to and from that base, house them, transport them in Dutch Harbor, provide ground handling in the bush points, and fly the aircraft on approved F.A.A. routings. Servant believes its proposal is the most accurate and complete, and represents a reasonable level of subsidy need to sustain Essential Service over the long run.

Respectfully submitted,

Servant Air, Inc. By Wes Osowski April 19, 2012

## SERVANT AIR, INC. ASSUMING GRANT UNIT COSTS

**ESSENTIAL AIR SERVICE PROPOSAL FOR**  Appendix C 

### ATKA AND NIKOLSKI, ALASKA Page 1 of 1 Submitted March 30, 2012 **MONTHLY MONTHLY FIXED EXPENSES**  Pilot/Mechanic $ 10,555 Crew Housing/Utilties $ 1,800 Away from Base Allowance $

- Telephone/Communications $

- Vehicle/Gasoline/Insurance $

- Personnel Rotation $

- Hangar Rental $ 4,000 Nikolski Agent $

- Atka Agent $

- Reservations/Communications $

- D.O.T. Insurance $ 2,375 Hull Insurance $ 5,000 Aircraft Lease/Depreciation $ 15,000 Contingency $

- General & Administrative $ 7,500 **Group Total $ 35,675**  Profit Margin (5%) $ 1,784 **SUBTOTAL $ 37,459**  **ANNUAL TOTAL $ 449,505** 

## SERVANT AIR, INC. **Assuming Grant Unit Costs**

**ESSENTIAL AIR SERVICE PROPOSAL FOR** Appendix D 

### ATKA AND NIKOLSKI, ALASKA Page 1 of 2 Submitted March 30, 2012 **VARIABLE OPERATIONAL EXPENSE**
**- NIKOLSKI**  Calculations RT Block Time $ per RT **Beechcraft King Air**
Fuel & Oil 110 gph @ $7.30 1.25 $ 1,003.75 A/C Maintenance $ 658.00 1.25 $ 822.50 DUT Grnd Handling $ 300.00 **VARIABLE OPERATIONAL EXPENSE**
**- ATKA**  **Beechcraft King Air** Per B/H B/H per Flight $/Roundtrip
Fuel & Oil 110 gph @ $7.30 3.00 $ 2,409.00 A/C Maintenance $ 658.00 3.00 $ 1,974.00 DUT Grnd Handling $ 300.00

Ground Handling @ Destination Atka Nikolski
Penair Cargo Handling @ DUT **TOTAL VARIABLE OPERATING EXPENSE**

## SERVANT AIR, INC.

**Assuming G**  **rant Unit Costs** Appendix D Page 2 of 2
RT's per week $ per week $ per 52 weeks **Beechcraft King Air** Fuel & Oil 2 $ 2,007.50 $ 104,390 A/C Maintenance 2 $ 1,645.00 $ 85,540 DUT Grnd Handling 2 $ 600.00 $ 31,200 **VARIABLE OPERATIONAL EXPENSE**
**- ATKA**  **Beechcraft King Air** RT's/Week Expense/Week Expense/Year Fuel & Oil 2 $ 4,818.00 $ 250,536 A/C Maintenance 2 $ 3,948.00 $ 205,296 DUT Grnd Handling 2 $ 600.00 $ 31,200
Ground Handling @ Destination Atka $0.06/LB CARGO $

- Nikolski $0.06/LB CARGO $

-

Penair Cargo Handling @ DUT $0.12/LB CARGO $

- **TOTAL VARIABLE OPERATING EXPENSE $ 708,162**  Profit @ 5% $ 35,408 **TOTAL VARIABLE ECONOMIC COST $ 743,570** 

## SERVANT AIR, INC.

**ESSENTIAL AIR SERVICE PROPOSAL FOR ATKA AND NIKOLSKI, ALASKA**  Submitted March 30, 2012
Using Grant Aviation Unit Costs
Projected Revenue (Appendix B) $ 398,606
Fixed Monthly Expenses (Appendix C) $ 449,505 Variable Monthly Expenses (Appendix D) $ 760,308 **TOTAL ECONOMIC EXPENSES PER YEAR**  **$ 1,209,813**

**SUBSIDY NEED $ 811,207** 
Grant Subsidy Bid Using Same Assumptions $ 1,147,440

SERVANT BID IS LOWER BY: $ 336,233

## Atka + **Nikolski EAS Proposal Summary**

ASSUMING SERVANT AIR AIRCRAFT, TWO PILOT CREW AND BUSH POINT EXPENSE Fuel Burn Atka Weekly Round Trips 3 Annual Flights @ 100% completion 156 Per flight Block Time 3.15 Annual Block Hours 491.40 63,882 Distance DUT

- AKB (stat miles) 339 Annual O/W Passengers expected 511 OW fare $ 267.00 Annual mail lbs expected 99,740 Current mail rate / lb $ 1.8491 Annual Freight lbs expected 25,000 Current Freight rates / lb $ 1.91 Nikolski Weekly Round Trips 2 Annual Flights @ 100% completion 104 Per flight Block Time 2.00 Annual Block Hours 208.00 29,120 Distance DUT

- IKO 116 Annual O/W Passengers expected 132 OW fare $ 148.00 Annual mail lbs expected 20,020 Current mail rate / lb $ 0.9926 Annual Freight lbs expected 25,000 Current Freight rates / lb $ 0.65

Total Annual Block Hours 699.40 93,002

## Atka + **Nikolski EAS Proposal Summary**

ASSUMING SERVANT AIR AIRCRAFT, TWO PILOT CREW AND BUSH POINT EXPENSE Revenue Total Revenue Passenger Fares $ 155,973 Mail Revenue $ 204,301 Freight Revenue $ 64,000 Total Revenue $ 424,274 Direct Expense (Base) Base Total Expense Fuel/oil ($/gallon) $ 7.30 93,002 $ 678,915
Aircraft lease expense $ 30,000.00 12 $ 360,000

Maintenance $ 532.00 598 $ 318,136 Pilot labor $ 240,804 Aviation Insurance hull + liability $ 50,895 Total Direct Expense $ 1,648,750 Indirect Expense
Hanger lease / month $ 4,000.00 12 $ 48,000 Ticketing & ground service $ 300.00 520 $ 156,000 DUT Freight & mail Handling $ 0.12 169,760 $ 20,371 Bush Ground Handling ($2,000/mo per location + weight) $ 0.15 169,760 $ 49,464 Pilot housing+utility / month $ 3,000.00 12 $ 36,000 Total Indirect Expense $ 309,835 Sum of direct and indirect costs $ 1,958,585 Burden @ 17.2% 17.2% $ 336,877 $ 2,295,461 Profit @ 5.0% 5.0% $ 114,773 **Total Annual Economic cost $ 2,410,234**  ANNUAL SUBSIDY NEED $ 1,985,960
**GRANT SUBSIDY AMOUNT ABOVE SERVANT NEED $ 244,998**