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From: Sent: To: Cc: Subject: FollowUpFlag: FlagStatus: Dennis) ManisteeAirport[manisteeairport@gmail.com] Tuesday,February28,20122:24PM Devany,Dennis(OST) JimGallagher;Swanson,Brian(OST) Re:Subsidypaymentschedule Followup Flagged

I wanted to respond to some ofyour comments in this email thread. I am concerned that in this approval process we are loosing sight ofthe forest for the trees. Going back toour originally submitted proposal: "It is ourgoal to attempt to build on the successes of 2011 [i.e. passenger growth under FrontierAirlines] via theAlternate EAS program. Although) this time not by luck) but by well thought out plans that address the air service needs ofour community by delivering a quality product at an affordable price. We believe that this is currently only possible by steppingoutsidethe structure and constraints ofthe 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 orderto get an award for Public Charters) Inc./CharterAirTransport. But instead we really believethatwe can use this opportunityto explore different options to provide quality airtransportation for our community at an affordable pricetothe customer and ultimately at lower subsidy levels for the taxpayer. Ideas like seasonal schedulefrequency 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 intothe standard EAS model. For example: "We do not pay upfront $s to EAS carriers."

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,___}This is a true statement. But in light ofthe fact that this is an Alternative EAS proposal1 not a standard EAS proposal1 I don't understand the relevance. This part of our request doesn't impact thetotal amount of subsidy1 only how and when it is dispersed. However implyingthat this idea is offthe table for discussion because of how standard EAS operates seems to not be following the spirit ofAlternate EAS. Why arewe requesting an up front sum? Because ofthe nature of performing public charters under Part 3801 all passengerfares are escrowed until completion oftheflight. Thus a Part 380 indirect air carrier like Public Charters1 Inc. is at a disadvantage as compared to a standard Part 121 operatorwhen it comes to cash flow. As this relates to this proposal1 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 tothe proposed form of service (i.e. Part 380 operations). Also1 in looking at this from the big picture perspective1 ifthe availability of some funds tofacilitate the startup of operations enables one ortwo more small carriers to bid and enterthe EAS fray 1 that would be a good thing for the overall program1 in my op1n1on. So in the spirit ofAlternate 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 beneficialfor the entire program. Another comment from the email thread below that I have some concerns over is: "I do have concerns splittingthe payments into a fixed portion and a variable portion. One ofthe common1 and somewhat legitimate1 criticisms ofthe program is that carriers do not have incentives to provide the best service possible. The payout is ouronly real incentiveto do that and by splitting it into a fixed and variable element1 it dilutes any incentive to operate as many ofthe 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 theAlternative EAS proposal discussingthis topic. In fact I would say that the standard EAS program is broken in this regard and that the structure ofthe existing program does not incent air carriers to provide quality service. Therefore to use the reasoningthat we need tofollow how standard EAS operates in orderto properly incent the air carriers is faulty logic. As an example ofwhere this logic breaks down is in the following senario. In standard EAS in orderto get paid1 the flight must operate1 even ifthe flight has no passengers. Thus the incentive is tooperate empty aircraft which increases the cost ofthe program and the appearance ofwaste. If however as we are proposingthat

2the 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 theirfixed costs are already covered thus savingthe program money. All without impacting customer service since no passengers were impacted. While empty flights may not be frequent they do occasionallyhappen more so in some markets than others thus this potential cost savings is real. Of course the other side ofthis coin is that an unscrupulous operatormay 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 requestwas due tothe fact that the original proposal had differing levels of service frequency in summer vs. winter. Thus with a purely flight based subsidymodel, 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 ofthis alternative EAS contract. Finally in ourAlternative EAS proposal we stated the following: "The payment structurefor the second year is to be mutually agreed upon by DOT, the IndirectAir Carrier and theAirportAuthoritywith a limit on subsidy costs of $XXXXXXX in year two. The goal beingto structure on going payments in such a way as to encourage the enplanement of more passengers, thus reducingthe subsidy level per passenger." The idea being that afterwe have ayear under our belt and we know much better how this whole process will work, that we would liketo have the option to restructure the payment process to better align subsidy payments with the goals of quality air service in orderto improve upon how standard EAS works. Again this is in line with the goal of utilizingthis Alternative EAS program to explore possible improvements over standard EAS. Thanks for your consideration. sincerely, --Barry

On Thu, Feb 23, 2012 at 9:29AM, <Dennis.DeVany@dot.gov> wrote: >While I fully understand fixed costs/variable costs, I do have concerns splittingthe payments into a fixed portion and a variable portion. One of the common, and somewhat legitimate, criticisms ofthe program is that carriers do not have incentives to provide the best service possible. The payout is our only real incentiveto do that and by splitting it into a

3fixed and variable element, it dilutes any incentiveto operate as many of the flights as possible. > >-----Original Message----- >From: Manistee Airport [mailto:manisteeairport@gmail.com] >Sent: Thursday, February 23, 2012 9:21AM >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 yearlyflights (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 directionyou are headingwith this. > > I sent this email to basically ask ifwe are on the same page at a high level and ifwe arewe can move forward towork 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 8:20AM, <Dennis.DeVany@dot.gov> wrote: > >> Barry, >> >> The whole premise ofAlternate EAS is that we do not pay more thanwe would in traditional. We do not pay upfront $s to EAS carriers. But settingthat aside, 12 rna x$75K + $1500/flt x 20 flights/week x 52 weeks 

### =$2.46M. Your last email had a $1.94option (all 19 seat) and a 2.112 option (6 mas of 30 seaters). I can't reconcile. >> >> DD >> >> -----OriginalMessage----- >> From: ManisteeAirport [mailto:manisteeairport@gmail.com] >> Sent: Thursday, February 23, 2012 8:05AM >> 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

4>> expectingyou to ask as it relates to ourAlternate EAS proposal, but >> so far they have not come up. Those questions are in relation to how >> in our proposal we were requestingthat 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. >> >> Specificallythe proposal as submitted stated: >> >> 3. Manistee requests that subsidy be paid as follows duringthe first year: >>

- $75,000 monthly in arrears to coverfixed costs incurred by the >> IndirectAir Carrier including, but not limited to, aircraft leases, >> station rents and leases, personnel wages and salaries, insurance, >> etc. >>

- $1,500 per completed flight to coverflight costs incurred by the >> IndirectAir 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 IndirectAir >> Carrier including, but not limited to, pre-servicemarketing, 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 yearone (not >> including the deposit). >>

- The payment structurefor the second year is to be mutually agreed >> upon by DOT, the Indirect Air Carrier and theAirport Authoritywith >> a limit on subsidy costs of $2,200,000 inyeartwo. The goal beingto >> structure on going payments in such a way as to encouragethe >> enplanement ofmore passengers, thus reducingthe subsidy level per passenger. >> >> While the exact final details may need todiffer (especially since >> there are now differentAlternative 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) Adeclining subsidyyear 1 >> vs. year 2. >> >> Let me go intomore detail as towhy each ofthese 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 perflight subsidy as the means >> for the subsidy payments. That simple model works even though the >> costs of providing service are not all associatedwith perflight

5>> costs. The reason itworks is that standard EAS service provides the >> same level of serviceweek toweek year round. So any fixed costs >> can be rolled into the perflight subsidy. However in our proposal >> we are askingfor the flexibility under theAlternate EAS program to >> provide servicethat matches the seasonalityof demand at Manistee >> with more service during peak summer periods and less during off peak >> winter periods. However the fixed costs largely are consistentyear >> round (rents, salaries, etc) even though the number offlights might >> be different. To reflect this reality, we have requested splitting >> the subsidy intotwo parts, a reimbursement monthly to coverfixed >> costs, plus a reimbursement per flight operated to coverthose >>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. Thereforewe are askingfor this deposit in >> orderto help coverthe startup expenses. >> >> 3) Varying subsidy rates year 1vs 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 casewe would like >> to see that average arrived at with a slightly higher rateyear 1vs. >> 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 >> breakdown was given, but the intention would be something similar. >> The reason for this is that we fully expect that in year 2passenger >> revenues will be higherthan in year 1. Year 1will be about >> building. With a new hub, new carrier, new model it is going totake >> some time to build the passenger numbers as the public is being >> informed/educated on what is now available, this is especiallytrue >> sincethis will be starting after a hiatus in service. In year 2we >> will not be facing those same issues and therefore fully expect that >> passenger numbers and therefore revenues in year 2will be higher >> thanyear 1. At this point it is nearly impossible to accurately >> predict exactly how those passenger numbers will evolve, however in >> light ofthis reasonable expectation of increasing numbers, we see >> the need for slightlymore subsidy in year 1vs. year 2. >> >> In summary, we are askingfor these items in orderthat the payment >> of subsidy reflects the timeline of expenses (and anticipated >> revenue) associated with undertakingthis endeavor. While the total >> level of subsidy is the most important number, we request within >> reason the flexibilityto request subsidy/reimbursement in a manner >> that reflects the costs associatedwith providingthe service. >>

6>> While what is being asked for may seem complicated in light of how >> standard EAS operates, we thinkthat this provides us enough >> flexibility while providingthe DOT with enough rational tojustify >> the subsidy requests. The easiestthingfor 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 itwould be >> easiestfor you to manage. However, it is obvious why that wouldn't >> be feasible for all parties involved. Thereforewe believe what we >> are askingfor 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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