Order 2011

- 11

- 18 Served: November 16, 2011
UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C. Issued by the Department of Transportation on the 16 th of November, 2011

INTRA

- ALASKA MAINLINE

SERVICE MAIL RATES Docket OST

- 2003

- 14695 (Docket OST

- 95

- 429)

FINAL MAINLINE MAIL AND QUARTERLY FUEL UPDATE Background By Order 20 1 1

- 9

- 6 , September 13 , 201 1 , the Department directed the parties to show cause by October 3 why we should not make final the annual rates tentatively set forth in that order. The order noted that Lynden’s non

- fuel linehaul cost per available ton mile (ATM) increased by 36 percent between YE March 31, 2010, and YE March 31, 2011 . Also, it noted that there was a 41 percent decr e ase in airborne hours , but little or no corresponding decrease in non

- fuel linehaul expenses , notwithstanding that the number of operating hours typically drives the level of non

- fuel linehaul expenses

. 1 We received an objection f rom the Postal Service on Sept ember 30. The Postal Service stated that it had no objection to the Department’s calculations or methodology, but was concerned with the increase in non

- fuel unit costs reported by Lynden Air Cargo (LAC). “LAC had a dramatic decrease in operating hours. However, LAC’s direct expenses

– which are driven by operating hours

– did not have a significant decrease [leading to LAC’s 36 percent increase in unit cost per ATM] . This leads the Postal Service to believe that adopting the proposed rates may, in effe ct, put the Postal Service in a position to supplement LA C ’s workforce in other areas [unrelated to moving the mail].” LAC replied to the Postal Service ’s comments on October 5. LAC notes that the Department’s calculation of LAC’s unit costs and the bl ock hours used in that calculation were correct for both time periods. However, the calculation of nonfuel linehaul expenses was based on a 20 percent decrease in block hours , not the 4 1 percent decrease in airborne hours cited in the body of Order 2011

- 9

- 6

. 2 Lynden also states that

1 Non

- fuel linehaul expense, Schedule P5.1, includes Flying operations , M aintenance, D epreciation or lease , and “Other.” 2 While airborne hours (time in the air) and block hours (airborne hours plus time the aircraft is moving on the ground) are closely linked , in th is instance that connection was lost because Lynden incorrectly reported its airborne hours, though not its block hours.- 2

- “The majority of the increase in LAC’s non

- fuel linehaul costs is attributable to an increase of $2,819,517 in maintenance costs, of which $2,120,803 was directly related to required heavy maintenance checks which are performed at FAA

required intervals [and which the carrier directly expenses as opposed to averaging out ]. The expense s of these required checks, which are directly related to safety of flight, are recorded in the period the check is performed and may no t always be commensurate with the hours flown for the same period.”
Decision Lynden maintains that its accounting system essentially operates on a cash basis rather than accrual and that it incurred disproportionately high heavy maintenance expenses duri ng the year ended March 31, 2011. This appears to explain its 36 percent year

- over
- year increase in non

- fuel linehaul expense per ATM . If those expenses had been averaged over time there would have been no dramatic increase. In fact, during years of les s than average heavy

- maintenance expenses, all other things being equal, Lynden would show decreases in costs per ATM, thus pushing the mail rate lower. While LAC reported that o ther direct expense items such as flight crew increase d significantly between the two time periods, increases in maintenance expense were by far the biggest single component . A higher

- than

average number of heavy maintenance checks happening to come due at the same time would thus explain this increase.

T he Postal Service also raised the issue as to whether it is paying for operations by LAC that are not related to the carriage of mail. The rate

- update methodology that the Department has employed for many years, and which has been agreed upon by all the parties, does not a ttempt to isolate the actual costs of moving the mail. Those calculations were done years ago in a very lengthy and expensive formal mail

- rate proceeding conducted under the auspices of an Administrative Law Judge. Since then, the department has simply u pdated those rates, not based on the CPI but, rather, based on the carriers’ changes in unit costs. The implicit assumption is that as the unit costs of the carriers’ operations change, based on a whole host of factors, such as more fuel efficient aircraf t, changes in aircraft size and speed, those changes apply equally to mail, passenger and freight costs, and we adjust the mail rates accordingly.

Order 2011

- 9

- 6 also noted that overall nonfuel linehaul expense for the mainline carriers increased by only 0.76 percent because LAC’s 36 percent increase was offset by a 16 percent decrease in costs per ATM for Alaska Airlines and a 14 percent decrease for Tatonduk Outfitters. T he class rate system focuses on overall operating expense, and b ased on this year’s very small increase appears to be working. Under the class rate system,
c ompetition among the carriers to restrain their expenses drives down the average for all of the carriers in the cost pool and work s to ensure that Postal Service expenditures are kept to a minimum. In other words, w hile the Postal Service is concerned that some LAC expenses unrelated to carrying the mail are driving up that carrier’s expenses and therefore the mail rate , it rather ap pears to be the case that the efficiencies achieved by Alaska Airlines and Tatonduk for operations , only some of which are related to the carriage of mail , have ke pt the increase in the non
- fuel linehaul rate f rom the prior year to under one percent

. Othe r Matters There were no objections to the terminal rate s proposed by Order 2011

- 9

- 6, and we will therefore make those rates final.- 3

- In addition, Order 2011

- 9

- 6 indicated that we would update the final rates tentatively set by that order for QE 6

- 30

- 11 fu el expenses when those data became available. Those data are now available, and we will make the appropriate updates, as shown in the appendices to this order. ACCORDINGLY,
1. We finalize the rates tentatively set by Order 20 1 1

- 9

- 6 , updated for fuel expenses for the quarter ended June 30, 2011, set forth in Appendix A of this order , effective the second Saturday after the service date of this order ;
2 . This docket shall remain open until further order of the Department; and

3 . We will serve this order upon all parties on the Service List for this Docket.

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

INTRA-ALASKA MAINLINE CLASS SERVICE MAIL RATES

(1) (2) (3) (4) (5)

Base Year Adjustment Change from

Rates 1/ Factors 2/ Final Rates 3/ Current Rate 4/ Current Rate 5/

Linehaul Charge per Billing Ton-Mile

Priority $1.1969 195.76% $3.5400 $3.4674 2.09% Non-priority $0.7246 195.76% $2.1431 $2.0992 2.09%

Terminal Charge per Pound Originated

Priority $0.1697 103.68% $.3456 $.3617 -4.45% Non-priority $0.1458 103.68% $.2970 $.3108 -4.44%

1/ Per Order 82-11-23. 2/ See Appendix B of this order. Unlike the linehaul charge, the terminal charge will not change from quarter to quarter with the quarterly fuel updates. 3/ Column (1) increased by Column (2). 4/ Per Order 2011-6-21. 5/ Any differences between priority and nonpriority elements are due to rounding.Appendix B

INTRA-ALASKA MAINLINE CLASS SERVICE MAIL RATES COST ADJUSTMENT FACTORS

Base Year Ended Current New 9/30/80 Costs Costs

Unit Cost per Available Ton-Mile Fuel $0.49645 2/ $0.53144 3/ Nonfuel $0.65004 2/ $0.65004 2/ Total $0.399469 1/ $1.14649 $1.18148

Percentage Change from Base Year 187.00% 2/ 195.76% 4/

Unit Cost per Ton Enplaned $191.54 1/ $390.13 2/ $390.13 2/
Percentage Change from Base Year 103.68% 2/ 103.68% 2/

1/ Order 82-11-23, updated most recently in Order 97-12-24. 2/ Appendix B of Order 2011-9-6. 3/ Appendix C of this order. 4/ ( $1.18148 /$0.399469)-1.Appendix C
Operating Expenses, Alaska Airlines, Northern Air Cargo, Lynden Air Cargo, and Tatonduk Outfitters, Ltd. Intra-Alaska Class Service Mail Rates--Quarter Ended June 30, 2011
Lynden Northern Tatonduk Alaska Air Cargo Air Cargo Outfitters, Ltd. Row (AS) (LAC) NAC (TOL)

1 Skd. P.12, Skd. Intra-AK Cost $16,225,932 $967,693 $4,001,003 $2,995,238 2 Skd. P12, Skd. Intra-AK Gallons 4,909,747 276,513 1,187,365 696,958 3 Cost per Gallon 1/ $3.30 $3.50 $3.37 $4.30 4 Intra-Alaska Skd. Hours, All A/C 6,837 390 1,395 2,230 5 Burn per Hour 718 709 851 313
Lynden Northern Alaska Air Cargo Air Cargo Tatonduk Outfitters Ltd. Peninsula Airways

(AS) (LAC) NAC (TOL) (TOL) (KS) (KS) #617 #556 #620 #218 #461 456 2/ 459 2/ Total B-737-400 Hercules 737-200 DC-6 Brasilia Saab 340 Saab 340 6 Fuel $7,669,769 $3,494,159 $164,794 $3,620,770 $390,046

7 Intra-AK Skd. Blk. Hrs. 10,933 6,267 390 1,395 1,300 225 1,356 0 8 Total Block Hours 32,886 20,149 2,096 1,693 1,788 263 6,228 669

9 Intra-AK Fuel Expense $23,287,310 $14,849,030 $967,785 $4,000,679 $2,540,496 $140,983 $788,337 $0

10 Intra-AK Skd. ATMs 2/ 48,322,725 33,349,215 2,551,066 7,102,979 3,936,312 200,786 1,182,367 0 11 Unit Cost/ATM, Fuel $0.481912 $0.445259 $0.379365 $0.563240 $0.645400 $0.702156 $0.666745 $0.000000

12 Intra-AK Mail RTMs 2/ 5,121,354 1,096,588 918,921 1,532,563 1,407,288 82,659 83,335 0 13 RTM Percent of Total 100.00% 21.41% 17.94% 29.92% 27.48% 1.61% 1.63% 0.00% 14 Wtd. Cost/ATM, Fuel $0.53144 $0.09533 $0.06806 $0.16852 $0.17736 $0.01130 $0.01087 $0.00000

1/ Fuel costs for Alaska Airlines, Lynden and Northern Air Cargo are calculated by first determining the intra-Alaska cost for per gallon for those carriers from Schedule P12, secondly determining the fuel burn per block hour. While we show that calculation for Tatonduk, we do not use that reuslts. Instead, we continue to determine Tatonduk's costs the old way because its DC-6 aircraft burns expensive Avgas while its turboprop Brasilia burns less expensive Jet A, and 'Schedule P12 does not break down intra-Alaska expenses into those two cargeories. PenAir does not report schedule P12, and so we have relied on Schedule F-2 'for expenses and a special report filed by the carrier that separates its traffic between Part 121, Part 135, and mainline service. 2/ For PenAir, rows 7, 10, and 11 reflect its intra-Alaska scheduled block hours, ATMs, and Mail RTMs for the mainline portion of of PenAir's fleet, 'i.e., those operations who average payload per departure is 7,500 lbs. or more.