N ORTHERN A IR C ARGO

, I NC

, 3900 O LD I NTERNATIONAL A IRPORT R OAD A NCHORAGE

, AK 99502

LOCAL 907-243-3331 TOLL FREE 800 727-2141 FAX 907 249-5190 WWW

. NAC

. AERO 

### February 11, 2015

Todd M. Homan, Director

Office of Aviation Analysis

U.S. Department of Transportation

1200 New Jersey Avenue, S.E.

Washington, D.C. 20590

RE: "Proposal to Provide Essential Air Service at Adak, Alaska, Docket DOT-OST-2000-8556"

Dear Mr. Homan:

Northern Air Cargo, Inc. hereby submits this propo sal to the Department of Transportation (DOT) to

provide essential air service to the community of Adak, Alaska. 

### This proposal contains our subsidy

request to provide this service.

On behalf of Northern Air Cargo, Inc we appreciat e the opportunity to partic ipate in the Essential

Air Service program and please contact me if you need additional information.

Sincerely,

David W. Karp

President & CEO

Attachments

# Proposal to Provide

Essential Air Service

at Adak, Alaska

Docket DOT-OST- 2000-8556

Due Date:

February 11, 2015

Northern Air Cargo, Inc.

4510 Old International Airport Rd

Anchorage, AK 99502

(907) 249-5163

# Proposal to Provide Essential Air Service

at Adak, Alaska

Docket DOT-OST-2000-8556

February 11, 2015

Table of Contents

Transmittal Letter

Narrative .............................................................................................. Page 1

Subsidy Request .................................................................................. Page 2

### Northern Air Cargo, Inc. 1 EAS Proposal at Adak

February 11, 2015 

## "Proposal to Provide Essential Air Service at Adak, Alaska

DOT-OST Docket 2000-8556"

Narrative

Northern Air Cargo, Inc. (NAC) is pleased, in response to Order 2014-12-13, to submit its

Essential Air Service (EAS) proposal for cargo-only air se rvice, inclusive of freight and mail, to

Adak, Alaska with a requested subsidy of $1,034,071 annually, with a proposed subsidy

mitigation strategy that could result in annual refunds ranging from $63,000 to $445,000.

Northern Air Cargo, Inc., established in 1956, ha s provided a wide variet y of air cargo delivery

services, domestic and international mail handlin g and delivery services, aircraft maintenance

services, ground service opera tions and cargo agent ground hand ling for a wide variety of

governmental and multi-national and regional comp anies - including the United States Postal

Service, the United States Depa rtment of Defense, Conoco Phill ips, Shell Oil, BP Global,

Continental Airlines, Frontier Airlines and Japan Airlines.

Northern Air Cargo, Inc. proposes to provide thirty-four (34) B732-200/ 300 cargo jet service air

flights per year to Adak, Alaska from its An chorage hub, located at the Ted Stevens Anchorage

International Airport (ANC), utilizing the following schedule:

 Non-Peak Fishing Season: During the months of April, May, September, October,

November, December and January, Northern Air Cargo, Inc. proposes to fly two (2)

times per month round-trip service from Anc horage to Adak. One of the flights is

proposed to be an Anchorage - Bethel - Adak - Anchorage flight and one of the flights is

proposed to be an Anchorage - Adak - Anchorag e flight. The Bethel leg is proposed as a

strategy to reduce the required EAS s ubsidy to Northern Air Cargo, Inc.

 Peak Fishing 5 Months: During the months of February, March, June, July and August,

Northern Air Cargo, Inc. proposes to fly four (4) times per month round-trip service from

Anchorage to Adak. Two of the flights are pr oposed to be Anchorage - Bethel - Adak -

Anchorage flights and two of the flights are proposed to be Anchorage - Adak -

### Northern Air Cargo, Inc. 2 EAS Proposal at Adak

February 11, 2015 

### Anchorage flights. Again, the Bethel leg is proposed as a strategy to reduce the required

EAS subsidy to Northern Air Cargo, Inc.

Northern Air Cargo, Inc. commits to providing th e highest possible degree of service to the

Department of Transportation and the community of Adak and, to the best of our ability, to

provide the services and capacities as propose d. Although Northern Air Cargo, Inc. is not

required to report on-time performance to the Depa rtment of Transportation (DOT); as a quality

control measure Northern Air Cargo, Inc. track s its on-time performance to DOT and Federal

Aviation Administration (FAA) standa rds. During the past 12 months, Northern Air Cargo, Inc.

has had a 91% on-time record according to DOT/FAA guidelines.

Subsidy Request

Northern Air Cargo, Inc. is requesting an EAS subsidy in the amount of $1,034,067 per the

following flight schedule:

Peak

Seasons Non Peak

Seasons

Months 5 7

Flights Per Month 4 2

Flights (ANC

‐ ADK

‐ ANC) 2 1

Flights (ANC

‐ BET

‐ ADK

‐ ANC) 2 1



### Revenue Projections

Northern Air Cargo, Inc.'s subsidy request assu mes that freight volumes remain flat at 2014

levels and that mail volumes continue to declin e at an estimated ten percent (10%) annually.

Additionally, NAC has assumed that it will achieve an average thir ty percent (30% ) share of the

freight/mail market from Anchorage to Adak a nd that the remainder will be carried on another

carrier selected to provide EA S passenger/cargo air service.

### Northern Air Cargo, Inc. 3 EAS Proposal at Adak

February 11, 2015 

### Therefore, NAC's revenue pr ojections per flight are:

Rate Volume (lbs) Revenue

Outbound Freight 1.50 $ 2,620 3,930 $

Outbound Mail 1.46 $ 1,102 1,608 $

Inbound Freight 0.50 $ 2,493 1,247 $

Inbound Mail 1.46 $ 146 213 $

Total 6,361 6,998 $ Revenue Estimate (per flight)



### Expense Projections

Northern Air Cargo, Inc.'s subsidy request is based upon the following expense assumptions; the

Anchorage-Bethel-Adak-Anchorage flights have an estimated cost of $33,768 per flight and the

Anchorage-Adak-Anchorage flights have an estimated cost of $37,493 per flight.

Assumptions Weighting Anchorage

‐

Bethel

‐ Adak

‐

Anchorage

(4.5167 Bhr) Anchorage

‐

Adak

‐

Anchorage

(5.1667 Bhr)

Variable Costs

Cost of Fuel (ANC) 2.00 $ 50% 4,254 $ 4,727 $

Cost of Fuel (ADK) 7.00 $ 50% 14,888 $ 16,545 $

Landing Fees 242.00 $ 242 $ 242 $

Ground Handling (ADK)(per pound) 0.05 $ 1,600 $ 1,600 $

Ground Handling (ANC)(per flight) 1,400.00 $ 1,400 $ 1,400 $

MX Flight Hour (per Bhr) 263.00 $ 1,188 $ 1,359 $

Engine Costs (per cycle) 150.00 $ 300 $ 300 $

Fixed Costs

Capital Costs (per Bhr) 1014 4,580 $ 5,239 $

Mechanic Labor (per Bhr) 275 1,242 $ 1,421 $

MX Admin / Overhead (per Bhr) 50 226 $ 258 $

Flight Crew Labor (per Bhr) 667 3,013 $ 3,446 $

Flight Ops Admin / Overhead (per Bhr) 50 226 $ 258 $

Insurance (per Bhr) 85 384 $ 439 $

Admin Overhead (per Bhr) 50 226 $ 258 $

Total 33,768 $ 37,493 $ Per Flight Estimated Expenses

### Northern Air Cargo, Inc. 4 EAS Proposal at Adak

February 11, 2015 

### Profit Projections

Northern Air Cargo, Inc.'s subsidy request is based upon a five percen t (5%) profit, based upon

the following per flight estimates:

Requested Per Flight Subsidy

Northern Air Cargo, Inc.'s subsidy request per flight is as follows:

Annual Requested Subsidy

Based upon the above assumptions, Northern Air Cargo Inc.'s requested annual subsidy to

provide the proposed thirty-four (34) B737-200/300 cargo jet servic e flights per year to Adak,

Alaska from its Anchorage hub, located at the Te d Stevens Anchorage International Airport, is

$1,034,071, per the following schedule: Anchorage

‐

Bethel

‐ Adak

‐

Anchorage Anchorage

‐

Adak

‐

Anchorage

Estimated Expenses 33,768 $ 37,493 $

Profit @ 5% 1,688 $ 1,875 $ 

### Per Flight Profit

Anchorage

‐

Bethel

‐ Adak

‐

Anchorage Anchorage

‐

Adak

‐

Anchorage

Estimated Revenues 6,998 6,998

Estimated Expenses 33,768 37,493

Operating Profit (Loss) (26,769) (30,495)

Profit @ 5% 1,688 1,875

Requested Subsidy Per Flight 28,457 32,370 

### Per Flight Subsidy



## Annual Subsidy Anchorage

‐

Bethel

‐ Adak

‐

Anchorage Anchorage

‐

Adak

‐

Anchorage



### Flights Per Year 17 17

Subsidy Per Flight 28,457 $ 32,370 $

Annual Subsidy 483,773 $ 550,297 $

Total Annual Subsidy 1,034,071 $

### Northern Air Cargo, Inc. 5 EAS Proposal at Adak

February 11, 2015 

### Proposed Subsidy Mitigation

Northern Air Cargo's requested annual subsidy is calculated based upon No rthern Air Cargo, Inc.

realizing approximately a thirty (30) per cent share of the 2014 act ual ANC-ADK-ANC freight

and mail volumes. We recognize that the projecte d market share of thirty (30) percent is a

significant variable; and, therefore, we propose a subsidy mitigation strategy.

The proposed subsidy mitigation strategy is base d upon an annual reconciliation of actual total

realized revenues for ANC-ADK-ANC (on both th e non-stop and one-stop segments). NAC will

remit to the DOT eighty (80) percent of the diffe rence between the per flight subsidy paid to

NAC by DOT and the actual realized revenue up to $25,000 per flight, which is based upon

100% of the 2014 actual mail and freight volumes. NAC will retain twenty (20) percent of the

variance to account for increased variable expenses due to larger cargo load factors.

The following table presents the potential subs idy refund at various mail/freight levels:

Estimated Revenue at 30% 6,998 $ 6,998 $ 6,998 $ 6,998 $ 6,998 $ 6,998 $ 6,998 $ 6,998 $

Realized Annual Revenue

10%

20%

30% 6,998 $

40% 9,331 $

50% 11,664 $

60% 13,997 $

70% 16,329 $

80% 18,662 $

90% 20,995 $

100% 23,328 $

Variance

‐ $ (2,333) $ (4,666) $ (6,998) $ (9,331) $ (11,664) $ (13,997) $ (16,329) $

Variable Expenses @ 20%

‐ $ 467 $ 933 $ 1,400 $ 1,866 $ 2,333 $ 2,799 $ 3,266 $

Per flight refund to DOT

‐ $ (1,866) $ (3,732) $ (5,599) $ (7,465) $ (9,331) $ (11,197) $ (13,063) $

Assume 34 Flights

Annual subsidy refund

‐ $ (63,451) $ (126,902) $ (190,354) $ (253,805) $ (317,256) $ (380,707) $ (444,158) $ Proposed Subsidy Mitigation



### Conversely, should the annual revenue reconciliati on reveal that Northe rn Air Cargo, Inc.

realized less than the estimated revenue of $6,998 per flight; then, the DOT would remit to

Northern Air Cargo, Inc. the difference between the $6,998 per flight and the actual realized

revenue.Northern Air Cargo, Inc.6 EAS Proposal at AdakFebruary 11, 2015The following chart details the revenue assumptions included in the above chart:Revenue/FlightPound SegmentTotal PerFlight Total PerFlight Total PerFlight Total PerFlight Total PerFlight Total PerFlight Total PerFlight Total PerFlight1.46$ANC‐ADKMail89,0822,620133,623$3,930$118,7763,493178,164$5,240$148,4704,367222,705$6,550$178,1645,240267,246$7,860$1.50$ANC‐ADKFreight37,4551,10254,684$1,608$49,9401,46972,912$2,144$62,4251,83691,140$2,681$74,9092,203109,368$3,217$1.46$ADK‐ANCMail84,7622,49342,381$1,247$113,0163,32456,508$1,662$141,2704,15570,635$2,078$169,5244,98684,762$2,493$0.50$ADK‐ANCFreight4,9691467,254$213$6,6251959,672$284$8,28124412,090$356$9,93729214,508$427$Total216,2676,361237,942$6,998$288,3568,481317,256$9,331$360,44610,601396,570$11,664$432,53512,722475,884$13,997$PoundsTotal PerFlight Total PerFlight Total PerFlight Total PerFlight Total PerFlight Total PerFlight Total PerFlight Total PerFlight1.56$ANC‐ADKMail207,8586,113311,787$9,170$237,5526,987356,328$10,480$267,2467,860400,869$11,790$296,9408,734445,410$13,100$1.50$ANC‐ADKFreight87,3942,570127,596$3,753$99,8792,938145,824$4,289$112,3643,305164,052$4,825$124,8493,672182,280$5,361$1.56$ADK‐ANCMail197,7785,81798,889$2,909$226,0326,648113,016$3,324$254,2867,479127,143$3,740$282,5408,310141,270$4,155$0.50$ADK‐ANCFreight11,59334116,926$498$13,25039019,344$569$14,90643821,762$640$16,56248724,181$711$Total504,62414,842555,198$16,329$576,71316,962634,512$18,662$648,80219,082713,826$20,995$720,89121,203793,140$23,328$30% 40% 50% 60%Pounds Revenue Pounds Revenue Pounds RevenueRevenueRevenue Pounds Revenue Pounds Revenue PoundsPounds Revenue70% 80% 90% 100%