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

__________________________________________ ) In the matter of the ) Application of ) ) **SCOTT AIR, LLC** ) Docket DOT
- OST
- 2012
- 0178 ) For a certificate of public convenience ) and necessity under 49 U.S.C. § 41102 ) to engage in interstate scheduled air ) transportation of persons, property and mail ) __________________________________________)

RESPONSE OF THE KETCHIKAN CARRIERS TO T HE REPLY OF SCOTT AIR, LLC

Communications with respect to this document should be addressed to: Hank Myers P.O. Box 7142 Bellevue, WA 98008
- 1142

(425) 830
- 4265 hank@mtcworld.com February 22, 2013BEFORE THE DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.

__________________________________________ ) In the matter of the ) Application of ) ) **SCOTT AIR, LLC** ) Docket DOT
- OST
- 2012
- 0178 ) For a certificate of public convenience ) and necessity under 49 U.S.C. § 41102 ) to engage in interstate scheduled air ) transportation of persons, property and mail ) __________________________________________)

RESPONSE OF THE KETCHIKAN CARRIERS TO THE REPLY OF SCOTT AIR, LLC

Pacific Airways, Inc. and PM Air, LLC (Ketchikan Carriers) respond to the reply of Scott Air, LLC (Scott) dated February 12, 2013. The Scot t Reply, 14 pages of frothing rhetoric, contains several material misstatements of fact and regulation, and fails to address the most salient objections of the Ketchikan Carriers. Furthermore, presented herein is new and additional evidence that Scott lac ks compliance disposition and is not in compliance with State of Alaska corporate laws and regulations. We ask that this response be accepted although otherwise unauthorized.**DUE DATE**

Scott asserts that the due date for Answers to the Show Cause Order was February 1, 2013. (Scott Reply, page 2, line 10). Department regulations require that official filing be done directly to the Docket section during specified business hours. In filing the Answer, the Ketchikan Carriers argued that the Certification case was intertwined with the Enforcement case. The timing of the Answer was constrained both by the need to give Scott a reasonable amount of time to comply with the Consent Order, and the need to obtain approval from carrier managers who were sometimes unavailable. Not being sure of the exact date that the filing would be officially received, and in an abundance of caution, The Ketchikan Carriers styled their Answer as a Petition for Reconsideration (which has a longer filing period) and the motion to b e accepted late.
As it turns out, the Answer was filed before close of business, Friday, February 1, 2013 as evidenced by the automatic receipt generator from Regulations.gov. 14 CFR 302 recognizes First Class Mail as being an acceptable method of service. Not having email addresses for all parties, w e served all Answers via US Mail, with mailings to the Applicant and its attorney being sent by Priority Mail with return receipt requested. Regulations do not require that all parties receive the filing on the day it was officially filed.We apologize for filing what now may be unnecessary petitions and motions, but had

the Answer not be docketed in a timely fashion those requests would have been mandatory. **DELAYS, HARRASMENT, ABUSE** Scott’s Reply goes to great lengths to disparage both the intent and co ntent of the filings of the Ketchikan Carriers. On page one, Scott says, “In that connection, as the Department is well aware, Pacific and PM through their representative Myers have for the past 6 months repeatedly used the regulatory process to engage in a campaign of harassment directed at Applicant, involving substantive misrepresentations of fact, which applicant has been obliged to address and rebut at each stage.” On page 3, Scott asserts, “In view of this fact, the nature of the “objection” raised, and the fact that the filing was deliberately filed late to string the application process out as long as possible, Applicant submits that the late
- filed “objection” should be dismissed. Based on their prior conduct, it is to be anticipated the [sic] sur
- reply upon sur
- reply is now going to be attempted to be filed in this case. This should not be permitted and the continuing abuse of the regulatory process should not be permitted.” On page 11, Scott concludes, “For reasons unstated, Objectors are clear ly desperate to prevent, in any way they see fit apparently, the issuance to Applicant to the certificate authority applied for herein, and seek to tie this proceeding to the §302.404 formal complaint proceeding they have recently attempted to initiate [an d which has since been formally docketed] against Applicant after their §302.403 informal complaint procedure they had initiated in June/July 2012 proved unsuccessful.”There are two DOT proceedings involving Scott. The Enforcement proceeding in Docket

D OT
- OST
- 2012
- 0002, and this certification docket. In the Enforcement case, the Ketchikan Carrier filed only one document, an informal complaint. The Department found that every allegation raised by the Ketchikan Carriers was true. After considering a mit igation statement, the Department found that Scott had engaged in unfair and deceptive business practices, and had been operating continuously in interstate transportation without authority. A fine was imposed, and Scott was directed to comply with its mi tigation statement. It is hard to call that one filing “unsuccessful”.
In the certification case the Ketchikan Carriers made one filing, an Answer to the Show Cause order.
Scott asserts that objections to the content of its application should have been filed earlier, but that was impossible. On November 19, 2012, the end of the 28
- day response period, the Ketchikan Carriers did not know how the Department would find on the complaint. As noted in the Answer in this docket, the primary proof that Scott is unfit is its continuing record of violating laws and regulations. This pattern reflects poorly on managerial fitness, and there are some questions relating to the completen ess and accuracy of the application, but those are secondary. Scott’s application is being processed under expedited procedures, which is why Order 2013
- 1
- 12 is a Show Cause Order and not a Final Order. Objectors have no requirement to fileany earlier t han the issuance of the Show Cause Order, particularly if pivotal information

could not be known.
The single filings of the Ketchikan carriers in the separate dockets have been direct and concise, without overblown rhetoric or aspersions. **§302.4 FORMAL RE QUIREMENTS**  The Answer of the Ketchikan Carriers was filed electronically, consistent with the form requirements of the Department. It is unfortunate that page numbers did not appear on the printed copies, and we accept the pagination assigned in Scott’s R eply. Copies served upon parties by mail we re printed double sided to reduce paper use. **CHANGING THE CAPTION OF THE CASE** The caption of the Scott application was “Application of SCOTT AIR, LLC for a certificate of public convenience and necessity pursua nt to 49 U.S.C. §41102 to engage in interstate scheduled air transportation of persons, property and m ail”
The caption of the Ketchikan Carriers Petition and Answer was “Petition and Answer of PACIFIC AIRWAYS, INC. [&] PM AIR, LLC In the matter of the ap plication of Scott Air, LLC for a certificate of public convenience and necessity under 49 U.S.C. §41102 to engage in interstate scheduled air transportation of persons, property and mail”
We fail to see the point.**ISSUES OF FACT**

The Ketchikan Carriers a sserted that the management of Scott Air did not recognize the difference between interstate and intrastate transportation. On page 3 of its application, in the last paragraph of the Introduction and Summary, Scott states, “...SCA’s intrastate service has b een successful and SCA now wishes to apply for certificate authority although the nature of its intrastate KLW
- KTN services will remain unchanged. ” (emphasis added) Scott then applied for an exemption **pendent e**  **lite** to engage in scheduled intrastate servic e while its certificate application was being considered. In its mitigation statement, Scott agreed to operate only in intrastate commerce until it was awarded a certificate authorizing interstate service. As has been clearly shown, Scott has engaged in interstate air transportation at the time of its application, and has continued to operate in interstate transportation even after the issuance of a Consent Order and in contradiction of its mitigation statement.

Scott confirms that it described the enfor cement action as a mere investigation. At the time of the filing, the Department had already determined that violations had occurred, and Scott was engaged in negotiations over the penalty and mitigation. Scott filed a request to engage in intrastate tra nsportation **pendent e**  **lite** while it actually continued to engage in interstate service. None
- the
- less, while Scott now contends that the Ketchikan Carriers had filed charges of unfair and deceptive business practices or anti
competitive business practices in June/July 2012, it states in its application “Neither SCA nor any relevant corporation nor any person employed by SCA nor any person having asubstantial interest in SCA or any relevant corporation has been charged with an unfair

or deceptive or anti
- co mpetitive business practices of fraud, felony or anti
- competitive business practices...during the past 10 years.” In its February 12 reply, Scott acknowledges the charges when it says “This letter was responded to in detail in August 2012.” Two months before the application was f iled. Because Scott has raised the July 24 letter from the DOT and its August, 2012 reply as defense in this matter, we request that Scott place those two letters in this docket.
Recently, the Ketchikan Carriers filed new evidenc e that Scott is engaged in transportation of interstate passengers without authority and in contradiction of its mitigation agreement. The issue of compliance disposition and managerial fitness continue to be central to this docket.

The Ketchikan Carrie rs did not question the $500,000 bank line of credit, or suggest that it was not valid. The question related to the $1.5 million loan that appeared to be credited as equity as well. While it is still relevant to understand what strings may be atta ched to the line (e.g. guarantee s), and whether the line is sufficient given Scott’s history on money losing operations, we do not question the existence of the line.
The Ketchikan Carriers not only raised the issues of data required by 14CFR204(t) because those data are vital to the finding of managerial fitness and the financial outcome of the proposed service, but because the missing data clearly contradicts adirect statement made in the first paragraph of the Proposed Service and Fitness Data

section. The paragraph states, “SCA’s application and attached Exhibits herein furnish SCA’s responses to mandatory information required of all applicants pursuant to §204.3 of the Department’s Economic Regulations, and are presented in the same sequence as those requi rements are set forth in §204.3, and cross
- referenced to the relevant sub
sections of §204.3.”
As noted in the Answer of the Ketchikan Carriers, Scott failed to provide data relating to departures, aircraft miles, available ton miles, available seat miles , revenue ton miles, revenue passenger miles, peak and average load factors, and tallies of traffic predicted broken down by quarter. It is possible to estimate some of these data using external references or assumptions, but 14CFR302.205 requires, “Whene ver economic data or other facts are provided in any pleading, such information shall include enough detail so that final results can be obtained without further clarification. Sources, bases, and methodology used in constructing exhibits, including any e stimates or judgments, shall be provided.” Not only is there insufficient data to support a finding of fitness, the application is formally deficient in its required content. **INCREASING LOSSES WHILE INCREASING EQUITY** The remaining issue is what the true f inancial record of Scott is, and what the real equity number is. The Ketchikan Carriers did not question the validity of the $500,000 line of credit. We expressed concerns that due to uncertainties about the owner equity position of the carrier, and the historic string of losses, $500,000 might not be sufficient.The CPA’s reply does little to clarify the situation other than carefully documenting that

the structured loan of $1,591,766 net of current amount was not considered equity. Unexplained is how a negative owner equity of $47,433 as at December 31, 2009 could go to a positive owner equity of $765,580 as at December 31, 2011(a swing of $813,013) while experiencing net losses of $361,786? Perhaps to simplify, how could a negative ownership equity o f $47,433 become a positive ownership equity of $669,775 as at December 31, 2010 (a swing of $717,208) while experiencing a net loss of $201,443 in one year? If we add the net loss to the owner equity at the end of the year 2010, we see that the imputed o wner equity at the beginning of operations in 2010 would have been $871,218. Looking at the reviewed statement for 2010, we are unable to determine the source of the difference between
- $47,433 equity on the year end 2009 statement and the year end 2010 e quity of 669,775.
Appendix SCA
- 6 (financial reports) appears to indicate that Scott Air, LLC was a single, continuously operating entity. Appendix SCA
- 14, the narrative history of Scott Air, LLC says that the company was formed in 1998 (Appendix SCA
- 2, State of Alaska corporate records list the formation date as April 5, 2001), and appears to have operated continuously unchanged since that time.
Turning to Appendix SCA
- 1, we find some explanation for a discrepancy, although again the numbers can’t be ma de to balance completely. On April 1, 2010, an “Amended and Restated Operating Agreement of Scott Air LLC was entered into with Scott Van Valinand Scott Currier as signators. The Agreement assumed a new entity, Ayer Track, would

be formed on April 30, 2 010 with the purpose of investing in Scott Air, LLC. The stated initial capital account for the two members was $1,064,000. This figure does not correlate cleanly with any other numbers in the financials, but it indicates a significant capital contributi on was made. Mr. Currier appears to have contributed $532,000 in cash. Mr. Van Valin did not necessarily contribute $532,000, or even any new capital because his ownership was stated to be “...the capital contribution paid in by Van Valin since the organiz ational date of the Company...”
In its attempt to explain the financial fitness of Scott, its CPA notes, “Further, the stated loss in 2010 was after considering depreciation and interest expense. Therefore, if you look at the operations before including th ose items, Scott Air, LLC actually showed a modest profit of $46,143.” Capital costs are a vital element in determining the viability of an enterprise. For an individual, the CPA’s statement is akin to saying that if I didn’t have to pay my mortgage and car payment I would be doing pretty well. Interest is a real cash cost , and without depreciation that value of the assets would be greatly overstated, giving a false impression of the value of the company and its ability to continue as an enterprise.

Wh ere does that leave us? We can’t really know . There is a maze of numbers in the Application, with no clear way to correlate them all. 14CFR241 requires that additional capital invested be detailed (account 2890), and that, “This account shall also inclu debalances of contributions to the business enterprise of individual proprietors or

partners.” The beauty of double entry bookkeeping is that impact of any change can be tracked easily. The applicant has the responsibility to present a clear, clean and complete picture of their financial fitness. The paradox of increasing equity in a period of increasing total losses still has not been explained. Rather than declaring what the numbers do not show, Scot t would be better off if it would explain the appar ent discrepancies and clarify its true financial position. **UNADDRESSED ISSUES** There are three issues raised by the Ketchikan Carriers in its Answer to Order 2013
- 1
- 12 which were not addressed by Scott.
First, it has not provided the data required by 14CFR 204.3(t). This more than simply a formal requirement, these data represent the entire basis of the projected financial statements. Paragraph 17 beginning on page 9 of the Application purports to provide the required data, and refers to Appendix SCA
- 8. N either paragraph 17 nor SCA
- 8 provides essential data required by 204.3(t). How can the Department determine the veracity or reasonableness of the projected financial statements? Scott has made no effort to rectify this shortcoming. It should be a simpl e job to provide the worksheets underlying the projected financial statements, but this has not been done.
Second is the issue of the original charges of unfair and deceptive business practices brought by the Ketchikan Carriers in July, 2012. On page 7 o f the Application, underparagraph 12 Scott says, “Except as stated herein, there are no pending investigations,

enforcement actions or formal complaints...”. The exception was reduced to a footnote in which Scott says it received an undefined letter of inv estigation from the Department, which Scott contends it answered in detail. Case closed. In paragraph 13, Scott says, “Neither SCA nor any relevant corporatio n nor any person employed by SCA nor any person having a substantial interest in SCA or any rele vant corporation has been charged with any unfair or deceptive or anti
- competitive business practices, or of fraud, felony or antitrust violations during the past 10 years. With the issuance of Order 2012
- 12
- 16, we know that this statement was not correct . Even though a new complaint has been filed that includes evidence of continued interstate commerce, Scott is silent on the pivotal issue of compliance disposition. The two letters referenced in Scott’s filing should be made public.
Third, there is the issue of pre
- operating expenses for the proposed operations. As noted in the Answer, Scott contends that it has already covered all of the pre
- operating expenses by virtue of its illegal scheduled operations. While Scott is greatly offended by being cre dited for something gained through illegal means, it remains silent on its unmet preoperating expenses. For example, it will have to develop or purchase an accounting and reporting system consistent with 14CFR298, as well as a statistical reporting system capable of creating T
- 100 segment and market reports. It will also have to significantly upgrade its liability insurance. Finally, if it intends to transport mail , Scott will have to establish facilities and a method to provide ground transportation ofmail which it does not possess now. This, combined with the lack of projected mail

revenue, clearly indicates that Scott does not intend to carry mail. **NEW EVIDENCE** Attached as Appendix A is the current corporate status report from the State of Alaska, Department of Commerce, Community and Economic Development (http://commerce.alaska.gov/CBP/Main/CorporationDetail.aspx?id=72721D) which shows that Scott Air’s status is listed as non
- complia nt. We do not know the nature of the non
- compliance, but it is just another example of the poor compliance disposition of Scott. **SUMMARY** Scott’s reply shovels a lot of smoke around an already unclear fitness record. The primary concern remains compliance disposition, about which Scott is silent except to claim continuous harassment by the Ketchikan Carriers. There is the question of how owner equity increased while net losses were suffered . Scott provides no evidence that it intends to carry US Mail , ra ising the issue of whether it should be granted a certificate of public convenience and necessity rather than commuter certification. Scott’s Reply is filled with petty sniping and internal contradictions. It complains that the service copy it received w as printed double sided. Scott claims that the due date of the Answer was February 1, which was the actual filing date of the Answer. It claims delays through a six month pattern of continuous harassment and regulatory abuse, yet the Ketchikan Carriers h ad made only one filing in each of the two dockets. Scott claims that the Answer is vague and unsupported, but it is hard to be more specific than providingcopies of actual reservations for interstate passengers, or showing that while total

losses grew o wner equity increased without explanation, or that Scott specifically denied that there were ever any charges of unfair or deceptive or anti
- competitive business practices, or that Scott is not in good standing with the State of Alaska, or showing that Sco tt has no intention of transporting US Mail and provided no evidence that it has the capability to do so.

**W HEREFORE**  , the Ketchikan Carriers request that this Response be accepted although otherwise unauthorized. We also request that the Reply of Scott Ai r, LLC filed February 12, 2013 be accepted although otherwise unauthorized and not covered by a motion to accept. The goal of this proceeding is to determine if Scott Air is actually fit, and all relevant evidence and argument should be considered until t he record is clear.
Further, the Ketchikan Carriers request the Departme nt take one of three suggested actions in the disposition of this case.

1. Assign the application to an Administrative Law Judge who will hold an evidentiary proceeding where the vera city and meaning of the Applicant’s submissions can be determined. Scott has not shown any inclination to provide clear , complete and factual responses to questions relating to their interstate transportation or financial condition. Perhaps through cross
- examination these issues could be clarified.2. Deny the application on the grounds of continued lack of compliance disposition and uncertainty about the carrier’s true financial position and records. 3. Dismiss the application without prejudice until such time as the current complaint of continuing transportation of interstate traffic is resolved, and Scott files a complete, clear and comprehensive application consistent with all the Department’s requirements including 14CFR204, 14CFR241, 14CFR298 and 14CFR302 . There is no sound basis at this time for the Department to issue a Final Order finding Scott fit. Each of the problems illuminated by the Ketchikan Carriers stem from Scott’s own words or actions. Scott clearly does not recognize that it has engaged in interstate transportation, and continues to claim that it is transporting only local traffic. Its financial reports cannot be accepted at face value. It has withheld information specifically requi red by 14CFR204.3(t) necessary to verify its financial projections. Respectfully submitted, Pacific Airways, Inc. PM Air, LLC

____________________________ by Hank Myers, authorized agent February 22, 2013**CERTIFICATE OF SERVICE**

I hereby certify th at I have this date served a copy of the foregoing Petition and Answer of the Ketchikan Carriers upon all parties served with Order 2013
- 1
- 12 by first class mail.

_________________________ Hank Myers February 22, 2013Appendix A Page 1 of 1**~** rJ Corporat ions., Bus.ine s.s. a n X \ C D co mm e rce . al aska
. gov /CBP/Main/CorporationDetail.aspx?id = 727210**~** Red mond Email**0~** Comics. and editori a.. . -" Regulations.go v - H... rJ Learning J CJ Calculate distance a... C) N ational T ransit Oat... C Cato Home Study C.
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