### 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 20 th of August, 2012

Essential Air Service at

RHINELANDER

, WISCONSIN

Under 49 U.S.C. 41731 et seq

. DOCKET DOT

- OST

- 20 11

- 0109

ORDER SETTING FINAL RATE

Summary

This Order s et s a final rate, effective May 1, 2012, until further notice

, for Cha u tauqua
Airlines , Inc.’s forced service at Rhinelander, Wisconsin. The carrier and staff ha ve agreed to a n annual rate of $3,784,752, effective May 1, 2012, until further notice.

Backgrou nd 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,

effectiv e December 11, 201 1 . 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 1 2 nonstop round trips per week to Milwaukee with 37

- seat Embraer 135 aircraft , the aircraft it operated

when it filed notice

.

In the meantime, i n response to our request for proposals

, we received proposals for long

term replacement service at Rhinelande r 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, o n June 11, 2012, Great Lakes indicated that for various reasons it could not expeditiously inaugurate service a t 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

- solicit ed proposals from carriers interested in providing service to- 2

-

Rhinelander

. 1 On July 2 3 , 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 f

ollows:

Chautauqua hereby requests that the Department revise the hold

- in subsidy for Chautauqua’s provi sion of EAS at Rhinelander, Wisconsin. Due to substantially changed circumstances occurring after the subsidy rate agreement 2 was signed in February , the subsidy compensation established in O rder 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 l e vel 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 ERJ

145 aircraft. As a consequence, Chautauqua’s actual fully allocated costs have

inc reased. Chautauqua is losing substantial amounts of money on this route and needs an immediate subsidy a djustment ... effective March 1.

The carrier ’s annual subsidy req uest of $4,2 48,103 reflected reduced revenue and the assignment of the entire ownership cost of a 50

- seat E RJ

- 145 aircraft to the service. Also, the larger aircraft required additional expense for pilots, fuel, and maintenance compared to the smaller 37

- seat E RJ

- 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 E RJ

- 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

,

s erving 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, w e 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 th o se aircraft during the term of its forced service. Also, notwithstanding that Chautauqua ha s three E RJ

- 145 aircraft available to serve Rhinelander, we allocated only one of those aircraft to Rhinelander, because reliable EAS to Rhinelander did not require mo re than one aircraft

.- 3

-

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

th ose 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 Departme nt action and o ur 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 flexibil ity than a long

- term carrier selection rate

-- assuming the carrier make s 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 O rder is issued under authority delegated in 49 CFR Part 1.56a(f).

A CCORDINGLY ,

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

, Wisconsin

, as descri bed in Appendi ces B and C ;

2. Th is rate is in lieu of, and not in addition to, th at set by Order 201 2

- 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 do cumentation shall be retained for seven years

from the service date of this O rder, 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 ca rrier may forfeit its compensation for any claim that is not supported under the terms of this O rder;

4 . Th is 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.- 4

-

5 . The Department will serve copies of this O rder on Chautauqua Airlines, Inc., an d 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.govAppendix 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 264Appendix 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: E RJ

- 145 aircraft, 50 seats Timing of Flights: Flights must be well

- timed and well

- spaced to ensure full compensation

. Effecti ve 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

- o ff 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 ch anges 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 warran t, 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

w hether 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 do es

m ake 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/o r 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 regulati ons, 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 paym ent 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 wr iting 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.