Order 2010

- 3

- 23 Served: March 18, 2010



### UNITED STATES OF AMERICA
DEPARTMENT OF TRANSPORTATION 

### OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation
on the 18 th day of March, 2010

Essential Air Service at

EXCURSION INLET

AND

KAKE , ALASKA

Under 49 U.S.C. 41731 et seq

. DOCKET OST

- 2002

- 12014

AND

DOCKET OST 2008

- 0217

ORDER DISMISSING PETITION Summary By this order the Department dismisses the petition of Air Excursions to reopen the selection of
Alaska Juneau Aeronautics (AJA), d/b/a Wings of Alaska (Wings)

, to provide essential air
service (EAS) at Excursion Inlet and Kake

, Alaska

. The contract expires by its own terms on August 31, 2010. 1

Background By Order2008

- 7

- 29 we requested proposals for Excursion Inlet and Kake, Alaska

. Wings ’ proposal noted the operational difficulty of serving Kake, where they had discontinued service several years before.

“The weather along the route is frequently marginal VFR and far too many times during
the five

- plus years [of Wings’ prior] service, th e Wings’ aircraft would make it 70% or 90% of the way to Kake and be forced to turn back due to weather.”

Wings noted that reliably projecting passenger revenue at Kake was difficult, and that traffic had recently been declining.

1 Wings’ motion was filed in the dockets for Excursion Inlet and for Kake, but the issues it addresses only concern
Kake.- 2

-

“ [W] e expect the est imated mail and freight revenues in Appendix B [of Order 2008

- 7

- 29] will prove fairly accurate; however, we expect that passenger revenue will be less than the estimates provided in Appendix B. It is difficult to quantify the reduction; however, we belie ve passengers will be lost to the ferry, other means of transportation or simply not travel due to convenience; compounded further by macro

- economic factors.” 2

Wings proposal addressed which aircraft type it would use.

“Wings propose s to provide Ess ential Air Service at Kake from the hub of Juneau utilizing nin e

- seat turbine

- powered Cessna 208 Caravans. When weather and loads allow, Wings will substitute Cessna 206/207 aircraft on the route, thereby reducing the subsidy required by approximately 45% per departure

. 3 However, the annual subsidy ceiling is based on the Caravan aircraft and it is the Caravan aircraft that Wings intends to use on this route whenever weather or loads require it.”

By Order 2008

- 8

- 16, we selected Wings to provide EAS at Ex cursion Inlet and Kake, Alaska.
The order noted that not all of Wings’ service at Kake would be with 9

- seat Cessna Caravan aircraft, and explicitly recognized that Wings could substitute a Cessna 206 or 207 for the 9

- seat Caravan and be paid on the basis of 5 seats (instead of 9) for each such flight completed.
F ootnote two of Appendix C

- 2, the appendix providing the technical details for paying the carrier, noted the following:

“Wings may substitute Cessna 206/207 aircraft [for the Cessna 208] and receive full compensation up to the weekly ceiling. For payout p urposes, we will assign five seats to each such flight, up to the weekly ceiling.”

Motion of Air Excursions
On February 2

, 2010, Air Excursions, LLC (Air Ex), moved to reopen Wings ’ selection at Kake.

Air Ex moves to reopen the selection of carriers because Wings has failed to provide the service proposed in its bid, it has collected federal subsidy for service it did not provide,
it does n ot have sufficient Caravan aircraft to provide the service proposed, and its degradation of service has failed to meet the needs of the market as evidenced by the significant decrease in the number o f passengers (but not freight or mail) in the market. Air Ex requests that the Department solicit new Essential Air Service proposals in the markets which accurately reflect the level of service each carrier will provide, and the
associated level of subsi dy required.”

The carrier argued that Wings was shortchanging the government by substituting the smaller
aircraft.

2 LAB Flying Service, Inc, the incumbent at the tim e, had likewise indicated on July 11, 2009, that Kake had suffered declines in general economic activity and commercial fishing.
3 Wings was referring to the Department policy that allows carriers to substitute smaller, less expensive aircraft than
the o ne proposed, but to then be compensated at a lower rate per departure to reflect the lower cost of the flight.- 3

-

“Because Wings’ indirect expenses are based on its direct expenses plus a consistent markup, it saves 40% or more for every hour it uses its C

- 207’s in place of the Caravan. Reducing 55% of AJA’s actual operations by 40% shows that Wings has collected $223,179 more than it should have for expenses by substituting aircraft....Finally, Wings’ c u rrent fare in the market is about $5.00 more before taxes than it proposed in
its revenue forecast.”

Air Ex’s petition also stated that Wings’ had padded its projected expenses by overestimating the amount of time required t o fly the Juneau to Kake route, and was overcharging passengers by $5 more than what it had proposed.

Answer of Wings (AJA) Wings replied to Air Ex’s motion on February 17, as follows.

“ AE’s [Air Ex] allegation that AJA [Wings] does not have the necessary Caravan’s to
fulfill its contractual obligations to the Department t o provide air service to Kake and Excursion Inlet, AK, is false. AJA currently leases 2 Caravans and 3 Cessna 207s and will continue to have the needed aircraft to meet its contractual obligations to the DOT.

“ AE’s allegation that AJA has over

- charged th e Department by substituting aircraft is
false. [Consistent with Order 2008

- 8

- 16] AJA bills the Department $307.54 for departures in a C

- 208 and $170.86 for departures in a C

- 207. This represents a 45% savings to the department which is more than the cos t difference that AE claims of 40%. The reduction in subsidy is by departure, so it automatically accounts for the difference in indirect expense. AJA could have run the more expensive aircraft on the route and needlessly billed the department for empty seats. However, this seems fiscally irresponsible.

AE’s allegation that AJA has not flown all required flights to Kake and Excursion Inlet is false. AJA has completed every flight to these communities that were safe to do so.
AJA has done so in the mos t efficient aircraft possible. In no case did we turn passenger traffic away to fly a smaller aircraft.”

Decision
Order 2008

- 8

- 16 allow s for service with 5

- seat Cessna 207 aircraft with automatic reduction in subsidy for each such flight . We have reviewed Wings’ monthly billings, and they show that the
carrier has indeed billed for the smaller 5

- seat aircraft . However, the order specifically allowed
those substitutions and Wings’ saving in expense s from using the smaller aircraft have been fully

p assed through for reduc ed subsidy.

Air Ex also asserts that Wings overestimated its block times and has charged passengers higher
fares than contemplated in its proposal. 4

4 Unlike the substitution of smaller aircraft, any such overestimates that are built into its proposal are not subject to reduction in subsidy. We control for such possibilities by having our rates subject to competitive bid and also to review by Department staff for reasonableness. However, because of weather and operational constraints, many flights departing for Kake cannot be completed due to weather problems that develop during the flight, such that t he aircraft often has to turn back after incurring the expense- 4

-

of that flying time. Estimates of t hose expenses can be included in a carrier’s EAS su bsidy proposal as a legitimate cost of doing business , regardless of the fact that some flights will be completed exactly as scheduled

.

Regarding the asserted overcharging of fares, the Department has had only minimal authority
over fares since the airlin es were deregulated some 30 years ago. Rather, those fares are estimates for determining subsidy need. In addition, $5 additional charge from what was proposed one and one

- half years ago does not appear unreasonable.

Regardless of the subsidy

- reductions provided for smaller aircraft, Air Ex asserts that Wings has violated its contract by egregiously substituting aircraft other than the one it proposed and the Department selected

. As mentioned earlier, Wings’ proposal fully contemplated service with
both the large and the small aircraft, stating explicitly, “When weather and loads allow, Wings
will substitute Cessna 206/207 aircraft on the rout e ...” If Wings were to provide no service
whatsoever with Cessna 208 aircraft for extended periods of time

, that would indeed be inconsistent with it proposal

. However, Wings continues to provide some service with
Cessna 208s, and we have received no complaints from the community regarding Wings’ service. Furthermore, because Wings’ contract expires on August 31, 2010, we will shortly draft and issue an order requesting proposals as a matter of course . At that time, Air Ex, Wings, and other carriers will be invited to submit proposals, and we will review them and select one based
on our usual carrier

- selection cri teria. Based on the above, we find that there is no basis to reopen the existing selection of Wings.

This order is issued under authority delegated in 49 CFR 1.56a(f).

ACCORDINGLY,

1. We d eny the petition of Air Excursions, LLC, to reopen the selectio n of Alaska Juneau Aeronautics, Inc., d/b/a Wings of Alaska, and terminate the rate set by Order 2008

- 8

- 16 prior to August 31, 2010;

2 . Th ese docket s will remain open until further order of the Department; and

3 . We will serve copies of this order on the state of Alaska, Alaska Juneau Aeronautics, Inc., d/b/a Wings of Alaska, and Air Excursions, LLC.

By:

Susan L. Kurland Assistant Secretary for
Aviation and International Affairs