### Order 2012

- 1

- 24 Served: January 26, 2012



### UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION 

### OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation on the 26 th 

### of January, 2012

Essential Air Service at
EAU CLAIRE, WISCONSI N HANCOCK/HOUGHTON, MICHIGAN MUSKEGON, MICHIGAN PADUCAH, KENTUCKY
Under 49 U.S.C. 41731 et seq

. DOCKET DOT

- OST

- 2009

- 0 306 DOCKET DOT

- OST

- 2009

- 0302 DOCKET DOT

- OST

- 2009

- 0301 DOCKET DOT

- OST

- 2009

- 0299

ORDER TENTATIVELY RE

- SELECTING CARRIER Summary By this Order
, the Department is tentatively re

- selecting SkyWest Airlines, Inc. (SkyWest) to provide E ssential A ir S ervice (EAS) with subsidy rates as follows: Eau Claire, Wisconsin, $1,733,576; Hancock/Houghton, Michigan, $934,156; Muskegon, Michigan, $1,576,067; and Paducah, Kentucky, $1,710,775

. 1



### Background By Order 20 11

- 8

- 10
, issued on August 8, 2011, in an t i c ipation of the December 31, 2011, expiration of the current EAS contract s , the Department requested proposals by August 31 , 2011
, for these communities

. We received timely filed proposals from Multi

- Aero, Inc., d/b/a Air Choice One
, for all of the communities except Hancock/Houghton ; from Intrepid International Airlines for Muskegon only ; and from SkyWest and Sovereign Air for all four communities. On September 2, 2011, we requested comments on the proposals from the communities by October 3
, 2011

. All of the communities except Muskegon endorsed SkyWest in the strongest terms. The community of Muskegon a lso endorsed SkyWest, but expressed disappointment that because SkyWest proposed to base its aircraft in Chicago, its proposal would not permit the Muskegon business community to meet the early morning connecting banks for outbound service from Chicago.

1 Such subsidy is calculated and distributed on a fiscal year basis, subject to the availability of appropriated funds.

### - 2

-

On December 11
, 2011, the EAS staff contacted SkyWest because it appeared that the expenses it forecast at three other EAS communities (Aberdeen, Bemidji, and Butte) were higher than those it had submitted on August 31 for these four communities

. 2 

### SkyWest concurred
, but also indicated it had unintentionally understated its expenses when it submitted its bid at the se four communities by relying on unit costs applicable to an earlier time period
, and that it wished to revise those bids ; SkyWest submit ted revised proposals on December 15

. After seeing these revisions, the EAS staff requested that SkyWest renegotiate the rates at all seven of the communities.

On December 22 , 2011, SkyWest agreed to decrease its subsidy request at these four communities f ro m the revised proposal that it file d on December 15 , 2011 , though still substantially more than what it had initially proposed on August 31

. The bas i s for the adjustments w as lower projected fuel expenses

. Also, the carrier r evised its costing allocation
, assigning less expense to its departure

- related cost pools

. The following table depicts the evolution in SkyWest’s requested subsidy levels

.

Decision We have reviewed the subsidy rates agreed to by SkyWest and the EAS staff and find them reasonable for the service proposed

. T he support expressed by every community for SkyWest, and t he fact that none of the competing proposals met the minimum statutory requirements
, 3 

### favor the selection of SkyWest. Based on th ose facts, the re was no reason to renegotiate with any of the carriers that had already submitted proposals other than SkyWest

. Notwithstanding the above, we are making this selection tentative

. Our procedures are designed such that carriers submitting proposals to provide long

- term EAS service do not have certainty as to whether other carriers will submit proposals , which ensures the benefits of competitive

2 See Order 201 2

- 1

- 23

. This order only addresses the subsidy issues at the four communities of Eau Claire, Hancock/Houghton, Muskegon, and Paducah. 3 S taff did not offer to renegotiate rates with the other applicants

. Air Choice One proposed service with single

engine aircraf t while neither Intrepid nor Sovereign has the requisite authority to operate their proposed services from either the Federal Aviation Administration or the Department. 

### Hancock/ Requested Subsidy Eau Claire Houghton Muskegon Paducah Total Original, August 31, 2011 $1,244,783 $591,615 $1,112,826 $1,245,426 $4,194,650 Revised, December 15, 2011 $1,792,363 $1,052,501 $1,595,642 $1,838,204 $6,278,710 Agreed, December 22, 2011 $1,733,576 $934,156 $1,576,067 $1,710,775 $5,954,574 Revised less Agreed $58,787 $118,345 $19,575 $127,429 $324,136

### - 3

-

bidding to the program and communities

. 4 

### While SkyWest has negotiated in good faith with the Department, it negotiated th ose rates and requested more subsidy support after being able to review all of the competing proposals

. Under such circumstances, 5 

### we will direct all parties to show cause by January 31 , 2012, why we should not select SkyWest at the terms it has proposed at these four communities , thus allowing competing proposals, comments, and objections

. If we receive no objections or competing proposals by January 31 , the selection of SkyWest will be final. If we receive competing proposals, we then anticipate conduct ing a typical carrier

selection proceeding, including request s for community comments and a subsequent award based on the statutory criteria.

Because Order 2011

- 8

- 10 already requested proposals, we will incorporate by reference th at order and only modify it by providing parties until January 31 to submit their objections or their competing “best and final” proposals. If carriers or communities have any questions, they may contact the staff at any t ime, by phone or email, as shown in the ordering paragraphs.

Carrier Fitness 49 U.S.C. 41737(b) requires that the Department find an air carrier fit, willing, and able to provide reliable service before the Department may subsidize it to provide EAS

. SkyWest is subject to the Department’s continuing fitness requirements, and no information has come to our attention that would cause us to question the carrier ’ s fitness at this time. The Department has contacted the Federal Aviation Administration, and it has raised no concerns that would negatively affect our fitness finding s

. The Department therefore concludes that the carrier remain s fit to conduct the operations proposed here.

Certifications Before t he Department can pay compensation, SkyWest must provide properly executed certifications that it is in compliance with the regulations regarding drug

- free workplaces and nondiscrimination, as well as the regulations governing lobbying activities.

This Order is issued under authority delegated in 49 CFR 1.56a(f).

4 All of the Department’s requests for proposals indicate that proposals must be subm itted by a deadline, and that they will be held confidential until all of the proposals are made public. “ Interested carriers should prepare their proposals with every expectation that their initial proposals will also be their final and only proposals. W e retain the discretion to negotiate proposals with carriers when we deem it desirable. In such cases, of course, we will give all applicants the same opportunity. We also retain the discretion to reject outright all unreasonable or unrealistic proposal s and solicit a new round of p roposals.” (See page two of Order 2011

- 8

- 10.) 5 We have taken a similar approach in the past. See , for example, Order 2011

- 10

- 24, page five , which addressed a similar situation regarding EAS in western Kansas . “ In this ca se, we are tentatively selecting a combination of options that were not submitted originally,

.... . Therefore, to be procedurally fair to all the parties, we will issue this order on a show

- cause basis and allow all interested parties

... ten days from the ser vice date of this order to show cause why we should not make this tentative decision final. ”

### - 4

-

ACCORDINGLY,

1

. We direct all interested persons parties to show cause by January 31 , 2012, why we should not select SkyWest Airlines, Inc., to provide Essential Air Service at Eau Claire, Wisconsin; Hancock/Houghton and Muskegon, Michigan; and Paducah, Kentu cky; as described in Appendix C

. Vague or unsupported objections that do not include al l proposed adjustments and backup data will not be accepted;

2. If no objection is filed within the designated time, or if no timely

- filed objection raises material issues of fact, we hereby delegate authority to the Director, Office of Aviation Analysis, to make th is Order final;

3 . We direct SkyWest Airlines, Inc.
, to retain all books, records, and other source and summary documentation to support claims for payment, and to preserve and maintain such documentation in a manner that readily permits its a udit and examination by representatives of the Department. Such documentation shall be retained for seven years from the service date of this Order or until the Department indicates that the records may be destroyed, whichever comes first. Copies of flig ht logs for aircraft sold or disposed of must be retained. The carrier may forfeit its compensation for any claim that is not supported under the terms of this Order ;

4 . We find that SkyWest Airlines, Inc., continue s to be fit, willing and able to operate as a certificated carrier and capable of providing reliable essential air service at these communities ;

5 . Th ese docket s will remain open until further Order of the Department; and

6 . We will serve copies of this Order on the Mayors and Airport Managers of Eau Claire, Wisconsin, Hancock and Houghton, Michigan; Muskegon, Michigan; and Paducah, Kentucky
, Sovereign Air, Inc., Intrepid International Airlines, Multi

- Aero, Inc., d/b/a Air Choice One, and SkyWest A irline s, Inc., and on the carriers on our service list.
By:

Susan L. Kurland Assistant Secretary for Aviation and International Affairs (SEAL)

An electronic version of this document is available on the World Wide Web at http://www.regulations.gov

### Appendix A

- 1

Nonstop Great Circle Miles to Chicago (ORD) EAU to Chicago 268 Hancock/Houghton (CMX) to Chicago 359 Muskegon (MKG) to Chicago 118 Paducah (PAH) to Chicago 343

### Appendix B

Agreement per Discussion Concluded December 21, 2011

Hancock/ Community Eau Claire Hougton Muskegon Paducah Hub ORD ORD ORD ORD Docket 2009-0306 2009-0302 2009-0301 2009-0299 Distance 268 359 118 343 RPM's 9,380,000 15,796,000 2,950,000 12,005,000 Seats 50 50 50 50 ASM 19,121,800 25,614,650 8,419,300 24,473,050 Revenue Psgrs. 35,000 44,000 25,000 35,000 Average Fare $98.0 $102.0 $89.0 $115.0 Departures @ 98% 1/ 1,427 1,427 1,427 1,427 Block Time, Minutes 68 72 46 78 Block Hours 1,617 1,712 1,094 1,855

Passenger Revenue $3,430,000 $4,488,000 $2,225,000 $4,025,000

Total Directs $3,694,134 $3,858,009 $2,518,180 $4,180,261

Total Indirects $1,223,557 $1,305,949 $1,101,884 $1,282,382

Operating Expense $4,917,691 $5,163,958 $3,620,064 $5,462,643 Margin @5% $245,885 $258,198 $181,003 $273,132 Economic Costs $5,163,576 $5,422,156 $3,801,067 $5,735,775

Agreed Subsidy $1,733,576 $934,156 $1,576,067 $1,710,775

1/ 14 one-way flights x 2 directions x 52 weeks x 98% completion = 1,427Appendix C SkyWest Aviation, Inc., d/b/a United Express, Essential Air Service to be Provided to Eau Claire, Wisconsin; Hancock/Houghton, Michigan; Muskegon, Michigan; and Paducah, Kentucky Dockets DOT

- OST 2009

- 0299, 2009

- 0301, 2009

- 0302, and 2009

- 0306

Effective Period : January 1, 2012, through December 31, 2013 Scheduled Service : 14 nonstop round trips per week to Chicago O’Hare Aircraft : 50

- Seat CRJ

- 200 Regional Jet

Eau Claire Hancock Muskegon Paducah Annual Subsidy $1,733,576 $934,156 $1,576,067 $1,710,775 Annual Flights 1 1,427 1,427 1,427 1,427 Rate per Flight: 2 $ 1,215 $ 655 $ 1,104 $ 1,199 Weekly Ceiling 3 $ 34,020 $ 18,340 $ 30,912 $ 33,572

Note: The carrier understands that it may forfeit its compensation for any flights that it does not operate in conformance wi th the terms and stipulations of the rate Order , including the service plans outlined in the Order and any other significant elements of the required service, without prior approval. The carrier understands that an aircraft take

- off and landing at its scheduled destination constitutes a completed flig ht; absent an explanation supporting subsidy eligibility for a flight that has not been completed, such as certain weather cancellations, only completed flights are considered eligible for subsidy. In addition, if the carrier does not schedule or operate its flights in full conformance with the Order for a significant period, it may jeopardize its entire subsidy claim for the period in question. If the carrier contemplates any such changes beyond the scope of the Order during the applicable period of this rate, it must first notify the Office of Aviation Analysis in writing and receive written approval from the Department to be ensured of full compensatio n. Should circumstances warrant, the Department may locate and select a replacement carrier to provide service on these routes. The carrier must complete all flights that can be safely operated; flights that overfly points for lack of traffic will not be co mpensated. In determining whether subsidy payment for a deviating flight should be adjusted or disa llowed, the Department will consider the extent to which the goals of the program are met and the extent of access to the national air transportation system provided to the community.
If the Department unilaterally, either partially or completely, termina tes or reduces payments for service or changes service requirements at a specific location provided for under this Order , then, at the end of the period for which the Department does make payments in the stipulated amounts or at the stipulated service leve ls, the carrier may cease to provide service to that specific location without regard to any requirement for notice of such cessation. Those adjustments in the levels of subsidy and/or service th at are mutually agreed to in writing by the Department and c arrier do not constitute a total or partial reduction or cessation of payment.
Subsidy contract are subject to, and incorporate by reference, relevant statutes and Department regulations, as they may be amended from time to time. However, any such statut es, regulations, or amendments thereto shall not operate to controvert the foregoing paragraph.
Funds are not currently available for performance under this Order beyond September 30, 2012 . The Government’s obligation for performance under this Order beyond September 30, 2012 , is subject to the availability of appropriated funds from which payment for services can be made. No legal liability on the part of the Government for any payment may arise for performance under this Order beyond September 30, 2012 , until funds are made available to the Department for performance. If funds are not made available for performance beyond September 30, 2012 , the Department will provide notice in writing to the carrier.
All claims for payment must be submitted with in 60 days of the last day of service provided under this Order

.

1 14 one

- way flights x 2 directions x 52 weeks x 98 percent completion = 1,427. 2 Annual subsidy ÷ annual flights. 3 Rate per flight x flights 28 flights per week

.Appendix D-1

Historical Traffic, T-100 Market Report, On-Flight O &D

Eau Claire, Wisconsin (EAU) Hancock/Hougton, MI (CMX)

Origin Dest Total Origin Dest Total 2008 11 1,195 1,180 2,375 1,973 1,966 3,939 2008 12 1,221 1,287 2,508 1,855 1,812 3,667 2009 1 1,170 1,007 2,177 1,696 1,746 3,442 2009 2 1,101 901 2,002 1,811 1,787 3,598 2009 3 1,147 1,097 2,244 2,260 2,173 4,433 2009 4 1,030 1,061 2,091 2,107 2,290 4,397 2009 5 1,032 992 2,024 2,246 2,154 4,400 2009 6 1,295 1,176 2,471 1,931 2,268 4,199 2009 7 1,196 1,233 2,429 2,583 2,720 5,303 2009 8 1,090 1,066 2,156 2,825 2,811 5,636 2009 9 683 652 1,335 1,897 1,800 3,697 2009 10 683 549 1,232 1,901 1,778 3,679 YE 10/31/09 12,843 12,201 25,044 25,085 25,305 50,390

2009 11 534 542 1,076 1,746 1,730 3,476 2009 12 548 623 1,171 1,733 1,444 3,177 2010 1 841 703 1,544 1,433 1,477 2,910 2010 2 646 617 1,263 1,499 1,495 2,994 2010 3 1,136 1,075 2,211 1,736 1,444 3,180 2010 4 1,375 1,404 2,779 1,389 1,588 2,977 2010 5 1,384 1,467 2,851 1,356 1,374 2,730 2010 6 1,367 1,397 2,764 1,388 1,436 2,824 2010 7 1,683 1,778 3,461 1,980 2,224 4,204 2010 8 1,759 1,853 3,612 2,481 2,525 5,006 2010 9 1,688 1,656 3,344 1,759 1,684 3,443 2010 10 1,639 1,644 3,283 2,173 1,983 4,156 YE 10/31/10 14,600 14,759 29,359 20,673 20,404 41,077

2010 11 1,566 1,513 3,079 1,882 1,777 3,659 2010 12 1,427 1,536 2,963 2,048 1,805 3,853 2011 1 1,466 1,323 2,789 1,603 1,702 3,305 2011 2 1,039 1,052 2,091 1,577 1,476 3,053 2011 3 1,540 1,546 3,086 2,046 1,875 3,921 2011 4 1,323 1,352 2,675 1,697 1,859 3,556 2011 5 1,457 1,480 2,937 1,799 1,792 3,591 2011 6 1,546 1,430 2,976 1,126 1,700 2,826 2011 7 1,542 1,596 3,138 1,947 2,170 4,117 2011 8 1,468 1,439 2,907 2,041 2,465 4,506 2011 9 1,347 1,336 2,683 1,892 1,879 3,771 2011 10 1,463 1,498 2,961 2,127 1,942 4,069 YE 10/31/11 17,184 17,101 34,285 21,785 22,442 44,227Appendix D-2

Historical Traffic, T-100 Market Report, On-Flight O &D

Muskegon, Michigan (MKG) Paducah, Kentucky (PAH)

Origin Dest Total Origin Dest Total 2008 11 1,402 1,449 2,851 1,602 1,690 3,292 2008 12 1,490 1,400 2,890 1,594 1,497 3,091 2009 1 1,277 1,132 2,409 1,184 1,132 2,316 2009 2 1,326 1,239 2,565 1,182 1,131 2,313 2009 3 1,277 1,253 2,530 1,422 1,434 2,856 2009 4 1,246 1,300 2,546 1,689 1,736 3,425 2009 5 1,224 1,266 2,490 1,760 1,728 3,488 2009 6 1,361 1,360 2,721 1,976 1,955 3,931 2009 7 1,735 1,780 3,515 2,007 1,975 3,982 2009 8 1,637 1,498 3,135 1,632 1,653 3,285 2009 9 1,180 1,079 2,259 1,462 1,431 2,893 2009 10 1,205 1,141 2,346 1,494 1,514 3,008 YE 10/31/09 16,360 15,897 32,257 19,004 18,876 37,880

2009 11 1,020 969 1,989 1,341 1,362 2,703 2009 12 997 1,051 2,048 1,368 1,345 2,713 2010 1 1,109 928 2,037 1,095 993 2,088 2010 2 867 806 1,673 1,093 1,073 2,166 2010 3 897 889 1,786 1,536 1,603 3,139 2010 4 1,121 1,265 2,386 1,830 1,778 3,608 2010 5 831 959 1,790 1,999 1,932 3,931 2010 6 865 925 1,790 1,770 1,674 3,444 2010 7 1,147 1,301 2,448 1,713 1,736 3,449 2010 8 1,273 1,141 2,414 1,607 1,594 3,201 2010 9 1,181 1,105 2,286 1,877 1,838 3,715 2010 10 1,161 1,117 2,278 1,788 1,814 3,602 YE 10/31/10 12,469 12,456 24,925 19,017 18,742 37,759

2010 11 981 996 1,977 1,667 1,667 3,334 2010 12 1,059 1,203 2,262 1,502 1,516 3,018 2011 1 872 640 1,512 1,309 1,260 2,569 2011 2 734 805 1,539 998 996 1,994 2011 3 991 925 1,916 1,186 1,225 2,411 2011 4 798 922 1,720 1,293 1,386 2,679 2011 5 840 915 1,755 1,732 1,740 3,472 2011 6 959 1,165 2,124 1,812 1,688 3,500 2011 7 1,476 1,508 2,984 1,538 1,642 3,180 2011 8 1,559 1,377 2,936 1,543 1,619 3,162 2011 9 1,143 1,052 2,195 1,630 1,607 3,237 2011 10 1,343 1,289 2,632 1,623 1,759 3,382 YE 10/31/11 12,755 12,797 25,552 17,833 18,105 35,938