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From: 

Sent: 

To: 

Cc: 

Subject: 

Follow Up Flag: 

Flag Status: 

Dennis) 

Manistee Airport [manisteeairport@gmail.com] 

Tuesday, February 28, 2012 2:24 PM 

Devany, Dennis (OST) 

Jim Gallagher; Swanson, Brian (OST) 

Re: Subsidy payment schedule 

Follow up 

Flagged 

I wanted to respond to some of your comments in this email thread. 

I am concerned that in this approval process we are loosing sight of the 

forest for the trees. Going back to our originally submitted 

proposal: 

"It is our goal to attempt to build on the successes of 2011 [i.e. 

passenger growth under Frontier Airlines] via the Alternate EAS program. 

Although) this time not by luck) but by well thought out plans that 

address the air service needs of our community by delivering a quality 

product at an affordable price. We believe that this is currently only 

possible by stepping outside the structure and constraints of the Standard 

EAS program." 

To say this in a different wayJ it is *not* our goal to utilize the 

Alternate EAS program as a means to simply bypass certain language of 

standard EAS (i.e. the definition of 'scheduled air service') in order to 

get an award for Public Charters) Inc./Charter Air Transport. But instead 

we really believe that we can use this opportunity to explore different 

options to provide quality air transportation for our community at an 

affordable price to the customer and ultimately at lower subsidy levels 

for the taxpayer. Ideas like seasonal schedule frequency differences) 

hubbing at an airport dominated by an LCC without the expectation of any 

code-share or interline) payment structures that encourage quality 

service) etc. are all things we desire to try. 

To that end we request that you view our proposal as a true alternative to 

standard EAS. 

However) it appears that based on some of the comments below we are being 

pigeon holed into the standard EAS model. For example: 

"We do not pay upfront $s to EAS carriers." 

1 

- _-_J 

, ___ } 
This is a true statement. But in light of the fact that this is an 

Alternative EAS proposal 1 not a standard EAS proposal 1 I don't understand 

the relevance. This part of our request doesn't impact the total amount 

of subsidy1 only how and when it is dispersed. However implying that this 

idea is off the table for discussion because of how standard EAS operates 

seems to not be following the spirit of Alternate EAS. 

Why are we requesting an up front sum? Because of the nature of 

performing public charters under Part 3801 all passenger fares are 

escrowed until completion of the flight. Thus a Part 380 indirect air 

carrier like Public Charters 1 Inc. is at a disadvantage as compared to a 

standard Part 121 operator when it comes to cash flow. As this relates to 

this proposal 1 a Part 380 indirect air carrier requires more up front cash 

to begin operations to hold them through until incoming cash begins to be 

available from escrow. Therefore this request is directly related to the 

proposed form of service (i.e. Part 380 operations). 

Also1 in looking at this from the big picture perspective 1 if the 

availability of some funds to facilitate the startup of operations enables 

one or two more small carriers to bid and enter the EAS fray 1 that would 

be a good thing for the overall program1 in my op1n1on. So in the spirit 

of Alternate EAS and doing things differently1 I would suggest that this 

is an element of change that might in the long run be demonstrated as 

being beneficial for the entire program. 

Another comment from the email thread below that I have some concerns over 

is: 

"I do have concerns splitting the payments into a fixed portion and a 

variable portion. One of the common 1 and somewhat legitimate 1 criticisms 

of the program is that carriers do not have incentives to provide the best 

service possible. The payout is our only real incentive to do that and by 

splitting it into a fixed and variable element 1 it dilutes any incentive 

to operate as many of the flights as possible." 

I also have concerns with the incentives and disincentives air carriers 

have in providing a quality product that meets the air service needs of 

the communities they serve. I went to some length in the Alternative EAS 

proposal discussing this topic. In fact I would say that the standard EAS 

program is broken in this regard and that the structure of the existing 

program does not incent air carriers to provide quality service. 

Therefore to use the reasoning that we need to follow how standard EAS 

operates in order to properly incent the 

air carriers is faulty logic. As an example of where this logic 

breaks down is in the following senario. In standard EAS in order to get 

paid1 the flight must operate 1 even if the flight has no passengers. Thus 

the incentive is to operate empty aircraft which increases the cost of the 

program and the appearance of waste. If however as we are proposing that 

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the subsidy is split between fixed costs and variable costs, in that same 

situation the air carrier is likely not to conduct that empty flight as 

their fixed costs are already covered thus saving the program money. All 

without impacting customer service since no passengers were impacted. 

While empty flights may not be frequent they do occasionally happen more 

so in some markets than others thus this potential cost savings is real. 

Of course the other side of this coin is that an unscrupulous operator may 

cancel flights that aren't empty, negatively impacting passengers, and 

have less monetary penalty in doing so. We understand those risks but 

still believe the benefits out way the risks. 

The primary motivation for this request was due to the fact that the 

original proposal had differing levels of service frequency in summer vs. 

winter. Thus with a purely flight based subsidy model, you end up over 

subsidizing in the summer months and under subsidizing in the winter 

(which presents cash flow challenges for the air carrier). 

While the 2.1M proposal no longer has that difference in seasonal service 

levels, we would like to retain the ability to possibly experiment in that 

direction during the course of this alternative EAS contract. 

Finally in our Alternative EAS proposal we stated the following: 

"The payment structure for the second year is to be mutually agreed upon 

by DOT, the Indirect Air Carrier and the Airport Authority with a limit on 

subsidy costs of $XXXXXXX in year two. The goal being to structure on 

going payments in such a way as to encourage the enplanement of more 

passengers, thus reducing the subsidy level per passenger." 

The idea being that after we have a year under our belt and we know much 

better how this whole process will work, that we would like to have the 

option to restructure the payment process to better align subsidy payments 

with the goals of quality air service in order to improve upon how 

standard EAS works. Again this is in line with the goal of utilizing this 

Alternative EAS program to explore possible improvements over standard 

EAS. 

Thanks for your consideration. 

sincerely, 

--Barry 

On Thu, Feb 23, 2012 at 9:29 AM, <Dennis.DeVany@dot.gov> wrote: 

> While I fully understand fixed costs/variable costs, I do have concerns 

splitting the payments into a fixed portion and a variable portion. One 

of the common, and somewhat legitimate, criticisms of the program is that 

carriers do not have incentives to provide the best service possible. The 

payout is our only real incentive to do that and by splitting it into a 

3 
fixed and variable element, it dilutes any incentive to operate as many of 

the flights as possible. 

> 

> -----Original Message-----

> From: Manistee Airport [mailto:manisteeairport@gmail.com] 

> Sent: Thursday, February 23, 2012 9:21 AM 

> To: Devany, Dennis (OST) 

> Cc: Swanson, Brian (OST); <jg727@aol.com> 

> Subject: Re: Subsidy payment schedule 

> 

> Dennis, 

> 

> The actual numbers I quoted in this email come from the original 

proposal which was 2.4M which was for 500 yearly flights (1000 segments). 

75000*12 + 1500*1000 = 2400000. 

> 

> We haven't put together similar numbers to reflect the two alternative 

proposals since we don't know what direction you are heading with this. 

> 

> I sent this email to basically ask if we are on the same page at a high 

level and if we are we can move forward to work on the details. If however 

you are going to propose something different than what we have proposed 

then we will have to evaluate and react. 

> 

> --Barry 

> 

> On Feb 23, 2012, at 8:20 AM, <Dennis.DeVany@dot.gov> wrote: 

> 

>> Barry, 

>> 

>> The whole premise of Alternate EAS is that we do not pay more than we 

would in traditional. We do not pay upfront $s to EAS carriers. But 

setting that aside, 12 rna x $75K + $1500/flt x 20 flights/week x 52 weeks 

= $2.46M. Your last email had a $1.94 option (all 19 seat) and a 2.112 

option (6 mas of 30 seaters). I can't reconcile. 

>> 

>> DD 

>> 

>> -----Original Message-----

>> From: Manistee Airport [mailto:manisteeairport@gmail.com] 

>> Sent: Thursday, February 23, 2012 8:05 AM 

>> To: Devany, Dennis (OST); Swanson, Brian (OST) 

>> Cc: Jim Gallagher 

>> Subject: Subsidy payment schedule 

>> 

>> Dennis, Brian, 

>> 

>> During this process there is one set of questions I have been 

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>> expecting you to ask as it relates to our Alternate EAS proposal, but 

>> so far they have not come up. Those questions are in relation to how 

>> in our proposal we were requesting that the subsidy be paid (or 

>> eligible grant expenses be reimbursed depending on how you structure 

>> this). While this may be a detail to be worked out later, it is a 

>> very important detail that causes some concern and nervousness on my 

>> side not knowing where this stands. 

>> 

>> Specifically the proposal as submitted stated: 

>> 

>> 3. Manistee requests that subsidy be paid as follows during the first 

year: 

>> - $75,000 monthly in arrears to cover fixed costs incurred by the 

>> Indirect Air Carrier including, but not limited to, aircraft leases, 

>> station rents and leases, personnel wages and salaries, insurance, 

>> etc. 

>> - $1,500 per completed flight to cover flight costs incurred by the 

>> Indirect Air Carrier including, but not limited to, fuel, crew costs, 

>> other per block hour expenses, etc. 

>> - A $200,000 one time startup deposit be paid upon execution of the 

>> Grant Agreement to cover startup costs incurred by the Indirect Air 

>> Carrier including, but not limited to, pre-service marketing, station 

>> startup costs, personnel training, etc. This deposit would be applied 

>> towards the last 

>> month(s) of service. 

>> - The cap on subsidy costs would be $2,400,000 in year one (not 

>> including the deposit). 

>> - The payment structure for the second year is to be mutually agreed 

>> upon by DOT, the Indirect Air Carrier and the Airport Authority with 

>> a limit on subsidy costs of $2,200,000 in year two. The goal being to 

>> structure on going payments in such a way as to encourage the 

>> enplanement of more passengers, thus reducing the subsidy level per 

passenger. 

>> 

>> While the exact final details may need to differ (especially since 

>> there are now different Alternative proposals on the table at 

>> different subsidy levels), the overall structure is based on three 

>> points: 1) Separate billings to cover Fixed Costs vs. Per Flight 

>> Costs, 2) Need for a Deposit/Advance, 3) A declining subsidy year 1 

>> vs. year 2. 

>> 

>> Let me go into more detail as to why each of these items is important 

>> to us in this proposal. 

>> 

>> 1) Separate billings for Fixed Costs vs. Per Flight Costs The 

>> traditional EAS program simply uses a per flight subsidy as the means 

>> for the subsidy payments. That simple model works even though the 

>> costs of providing service are not all associated with per flight 

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>> costs. The reason it works is that standard EAS service provides the 

>> same level of service week to week year round. So any fixed costs 

>> can be rolled into the per flight subsidy. However in our proposal 

>> we are asking for the flexibility under the Alternate EAS program to 

>> provide service that matches the seasonality of demand at Manistee 

>> with more service during peak summer periods and less during off peak 

>> winter periods. However the fixed costs largely are consistent year 

>> round (rents, salaries, etc) even though the number of flights might 

>> be different. To reflect this reality, we have requested splitting 

>> the subsidy into two parts, a reimbursement monthly to cover fixed 

>> costs, plus a reimbursement per flight operated to cover those 

>>expenses (fuel, crew, etc.). 

>> 

>> 2) Deposit. The proposal requests a $200,000 deposit/advance to be 

>> applied to the last month(s) of service. There are a lot of up front 

>> startup costs, training, station setup, advertising, etc. These are 

>> costs that the airport within its financial ability is not able to 

>> front and which for Public Charters, Inc. as a small company are also 

>> difficult to cash flow. Therefore we are asking for this deposit in 

>> order to help cover the startup expenses. 

>> 

>> 3) Varying subsidy rates year 1 vs year 2. In all the proposals 

>> (original and the two alternatives) we have provided an average 

>> subsidy rate (2.3M, 2.1M, 2.0M). However in each case we would like 

>> to see that average arrived at with a slightly higher rate year 1 vs. 

>> year 2. In the original proposal that was achieved by requesting 

>> 2.4M year 1 and 2.2M year 2. In the two alternatives no specific 

>> break down was given, but the intention would be something similar. 

>> The reason for this is that we fully expect that in year 2 passenger 

>> revenues will be higher than in year 1. Year 1 will be about 

>> building. With a new hub, new carrier, new model it is going to take 

>> some time to build the passenger numbers as the public is being 

>> informed/educated on what is now available, this is especially true 

>> since this will be starting after a hiatus in service. In year 2 we 

>> will not be facing those same issues and therefore fully expect that 

>> passenger numbers and therefore revenues in year 2 will be higher 

>> than year 1. At this point it is nearly impossible to accurately 

>> predict exactly how those passenger numbers will evolve, however in 

>> light of this reasonable expectation of increasing numbers, we see 

>> the need for slightly more subsidy in year 1 vs. year 2. 

>> 

>> In summary, we are asking for these items in order that the payment 

>> of subsidy reflects the timeline of expenses (and anticipated 

>> revenue) associated with undertaking this endeavor. While the total 

>> level of subsidy is the most important number, we request within 

>> reason the flexibility to request subsidy/reimbursement in a manner 

>> that reflects the costs associated with providing the service. 

>> 

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>> While what is being asked for may seem complicated in light of how 

>> standard EAS operates, we think that this provides us enough 

>> flexibility while providing the DOT with enough rational to justify 

>> the subsidy requests. The easiest thing for all parties would be for 

>> us to request the entire subsidy up front as one large sum, that 

>> would give us the most flexibility in how to use it and it would be 

>> easiest for you to manage. However, it is obvious why that wouldn't 

>> be feasible for all parties involved. Therefore we believe what we 

>> are asking for to be reasonable in that it still has some flexibility 

>> for us, but isn't too difficult for DOT to manage. 

>> 

>> thanks, 

>> --Barry 

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