Revised for Correct Docket Number

Order 2012-8-21

August 20, 2012

UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY

WASHINGTON, D.C.

Issued by the Department of Transportation

on the 20th of August, 2012

Essential Air Service at

RHINELANDER, WISCONSIN

Under 49 U.S.C. 41731 et seq. 

DOCKET DOT-OST-2011-0109

ORDER SETTING FINAL RATE

Summary

This Order sets a final rate, effective May 1, 2012, until further notice, for Chautauqua

Airlines, Inc.’s forced service at Rhinelander, Wisconsin. The carrier and staff have

agreed to an annual rate of $3,784,752, effective May 1, 2012, until further notice.

Background

On September 12, 2011, Chautauqua Airlines, Inc., a wholly owned subsidiary of 

Republic Airways Holdings and doing business as Frontier Airlines (Chautauqua or 

Frontier), filed a 90-day notice to suspend its subsidy-free service at Rhinelander, 

effective December 11, 2011. By Order 2011-10-15, October 20, 2011, we requested 

proposals at Rhinelander and prohibited Chautauqua from suspending service. We

required the carrier to continue providing the statutory minimum of 12 nonstop round 

trips per week to Milwaukee with 37-seat Embraer 135 aircraft, the aircraft it operated

when it filed notice. 

In the meantime, in response to our request for proposals, we received proposals for longterm replacement service at Rhinelander from only one carrier, Great Lakes Aviation, 

Ltd., and by Order 2012-3-5, March 7, 2012, we selected Great Lakes to provide 18 

nonstop round trips per week between Rhinelander and Minneapolis/St. Paul for an 

annual subsidy of $1,410,250, and set a final “short-term annual subsidy rate of 

$1,837,638” for Chautauqua’s continuing service at Rhinelander until Great Lakes could 

replace it. However, on June 11, 2012, Great Lakes indicated that for various reasons it 

could not expeditiously inaugurate service at Rhinelander and did not want to hinder 

Rhinelander from considering alternative service. As a result, by Order 2012-6-9, 

June 15, 2012, we re-solicited proposals from carriers interested in providing service to 
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Rhinelander.

1 On July 23, 2012, we received proposals, but it could still be several 

months until long-term replacement service begins and Chautauqua is relieved of its 

obligation.

On May 1, Chautauqua first requested that we revise upward the rate of $1,837,638 set by 

Order 2012-3-5, as follows: 

Chautauqua hereby requests that the Department revise the hold-in subsidy for 

Chautauqua’s provision of EAS at Rhinelander, Wisconsin. Due to substantially 

changed circumstances occurring after the subsidy rate agreement2 was signed 

in February, the subsidy compensation established in Order 2012-3-5 no longer 

reflects Chautauqua’s ‘fully allocated actual cost to the carrier’ (49 U.S.C. 

41734(e)) of performing EAS at Rhinelander. First, Frontier has dramatically 

reduced service at Milwaukee from approximately 30 daily flights to 

approximately 7 daily flights. The result of the substantial service reduction 

eliminated many connecting opportunities and as a consequence, the level of 

passengers and associated revenues has declined. Chautauqua is projecting an 

annualized decline of over 50%. Second, as of March 8, 2012, Chautauqua no 

longer operates ERJ-135 aircraft and the smallest aircraft in its fleet is the ERJ145 aircraft. As a consequence, Chautauqua’s actual fully allocated costs have 

increased. Chautauqua is losing substantial amounts of money on this route and 

needs an immediate subsidy adjustment ... effective March 1.

The carrier’s annual subsidy request of $4,248,103 reflected reduced revenue and the 

assignment of the entire ownership cost of a 50-seat ERJ-145 aircraft to the service. 

Also, the larger aircraft required additional expense for pilots, fuel, and maintenance 

compared to the smaller 37-seat ERJ-135s contemplated in Order 2012-3-5. On July 23, 

2012, Chautauqua agreed to a subsidy rate of $3,784,752, $463,351 less than it had most 

recently requested. While that level reflected a significant subsidy decrease, it still 

reflected a significant increase from the level set by Order 2012-3-5. The decrease from 

the $4,248,103 it requested was due to lower aircraft and overhead expense. The 

$355,735 decrease in aircraft expense reflected only a portion of the ownership cost of a 

single ERJ-145 aircraft.3 Regarding overhead expense, Order 2012-3-5 calculated that 

expense as 12.73 percent of other expenses. When Frontier de-hubbed Milwaukee,

serving Rhinelander became more expensive due to the carrier’s inability to cross-utilize 

its fixed assets in other markets. However, that increased expense did not 

commensurately increase its overhead expense. Accordingly, we reduced the percentage 

markup for overhead expense reflected in Order 2012-3-5. The table below summarizes 

the changes in revenue, expenses, and subsidy.

 

1 Order 2012-6-9 requested proposals by July 16, 2012. By notice dated July 12, 2012, we extended the 

deadline to July 23, 2012.

2 The agreement was between Chautauqua and Department staff and was the basis for Order 2012-3-5.

3 Lower than historical aircraft costs were recognized because the carrier retains the ability to attempt to 

renegotiate the leases for those aircraft during the term of its forced service. Also, notwithstanding that 

Chautauqua has three ERJ-145 aircraft available to serve Rhinelander, we allocated only one of those 

aircraft to Rhinelander, because reliable EAS to Rhinelander did not require more than one aircraft. 
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Finally, after discussions with the staff, the carrier agreed that the higher rate be set 

effective May 1, 2012, the date it first notified the Department that the rate in 

Order 2012-3-5 was inadequate because it realized it would incur losses in addition to 

those contemplated in the earlier rate Order.

Decision

We have reviewed the subsidy rate agreed to by Chautauqua and find it reasonable for the 

service proposed. While the carrier initially requested that we recognize the losses it 

incurred from the period March 1, 2012, through May 1, 2012, over and above the rate 

set by Order 2012-3-5, we have decided not to do so. May 1, 2012, was the first time that 

the carrier made the Department aware of the inadequacy of the rate set by Order 2012-3-

5. That rate was set on a final basis until further Department action and our longstanding 

policy is that final rates are not subject to retroactive adjustment. By being final the rates 

afford both the carrier and the Department budgeting certainty; by not having a specified 

end date the rate affords more flexibility than a long-term carrier selection rate --

assuming the carrier makes it known that the rate should be adjusted. Final rates also 

provide carriers the incentive to efficiently operate and continue to meet passenger 

demand,

4 while retroactively adjustable rates remove those incentives and expose the 

Department and carrier to an increased administrative burden. 

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

ACCORDINGLY,

1. We set the final rate for Chautauqua Airlines, Inc., for its provision of EAS at 

Rhinelander, Wisconsin, as described in Appendices B and C;

2. This rate is in lieu of, and not in addition to, that set by Order 2012-3-5;

3. We direct Chautauqua 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 the audit 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 flight 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. This Docket will remain open until further Department action; and

 

4 Retroactively adjustable rates do not provide that incentive, because any revenue decrease is simply 

compensated for with an increase in subsidy. 

Aircraft Seats per Aircraft Overhead Other Expenses Annual 

Type Aircraft Revenue Expense Expense and Profit Subsidy

Order 2012-3-5 ERJ-135 37 $1,763,920 $257,760 $387,338 $2,956,460 $1,837,638

Revised Request ERJ-145 50 $1,264,290 $1,438,864 $592,843 $3,480,686 $4,248,103

Agreed ERJ-145 50 $1,264,290 $1,083,129 $503,291 $3,462,622 $3,784,752

Revised less Agreed $0 $355,735 $89,552 $18,064 $463,351
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5. The Department will serve copies of this Order on Chautauqua Airlines, Inc., and 

Rhinelander, Wisconsin.

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

Nonstop Great Circle Miles to Rhinelander

Central Wisconsin, CWA 60

Iron Mountain, IMT 67

Ironwood, IWD 70

Green Bay, GRB 103

Escanaba, ESC 115

Marquette, MQT 112

Houghton, CMX 116

Duluth, DLH 155

Minneapolis, MSP 190

Milwaukee, MKE 201

Chicago, ORD 264
Appendix B

Essential Air Service to be Provided at Rhinelander, Wisconsin, Docket 2011-0109

Order 2012-3-5 Revised Agreed

Effective 12/11/11-4/30/12 N A 5/1/12-UFN

Aircraft ERJ-135 ERJ-145 ERJ-145

Seats 37 50 50

Weekly Service 12 12 12

Nonstop Yes Yes Yes

Hub MKE MKE MKE

Passengers 27,200 13,400 13,400

Pax. Fare $60.50 $90.00 2/ $90.00

Departures 1/ 1,227 1,227 1,227

Block Hours 1,074 1,074 1,074

Total Revenue $1,763,920 $1,264,290 $1,264,290

Aircraft $257,760 $1,434,864 $1,083,129

Other $1,953,886 $2,489,790 $2,489,790

Total Directs $2,211,646 $3,924,654 $3,572,919

Other $831,071 $732,401 $732,401

 Sum of Above Expenses $3,042,717 $4,657,055 $4,305,320

Overhead, % of Above $387,338 $592,843 $503,291

Indirects $1,218,409 $1,325,244 $1,235,692

Operating Epxense $3,430,055 $5,249,898 $4,808,611

Profit @ 5% $171,503 $262,495 $240,431

Economic Cost $3,601,558 $5,512,393 $5,049,042

Subsidy $1,837,638 $4,248,103 $3,784,752

1/ 12 round trips per week x 2 directions x 52 weeks x 313/312 x .98 = 1,227

2/ As Chautauqua's on-line connecting opportunities at Milwaukee decreased, the percentage 

of higher fare, local passengers increased and lower fare, connecting passengers decreased.
Appendix C

Subsidy Rate Agreement for the Provision of Essential Air Service by 

Chautauqua Airlines, Inc., at Rhinelander, WI, Docket 2011-0109

Service: 12 nonstop round trips per week to Milwaukee (MKE)

Aircraft Type: ERJ-145 aircraft, 50 seats

Timing of Flights: Flights must be well-timed and well-spaced to ensure full compensation. 

Effective Period: May 1, 2012, until further notice

Annual Subsidy Rate: $3,784,752

Flights: 1,227 1

Rate per Flight: $3,085 2

Weekly Ceiling: $74,040 3

Note: The carrier understands that it may forfeit its compensation for any flights that it does not operate in conformance with 

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 flight; 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 compensation. 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 compensated. In determining

whether subsidy payment for a deviating flight should be adjusted or disallowed, 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, terminates 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 levels, 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 that are mutually agreed to in writing by the Department and carrier 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 statutes, 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 within 60 days of the last day of service provided under this Order.

 

1 12 round trips per week x 2 directions x 52 weeks x .98 completion x 313/312.

2 $3,784,752 ÷ 1,227 annual flights.

3 $3,085 x 24 flights per week.