Order 2011

- 12

- 2 Served: December 8, 2011



### UNITED STATES OF AMERICA
DEPARTMENT OF TRANSPORTATION


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

Issued by the Department of Transportation
on the 8 th of December, 2011

Essential Air Service at

SIOUX CITY
, IOWA
WATERLOO
, IOWA

Under 49 U.S.C. 41731 et seq

. DOCKET DOT

- OST

- 20 11

- 0131
DOCKET DOT

- OST

- 20 11

- 0132

ORDER SELECTING CARRIER Summary By this order

, the Department is selecting American Eagle Airlines (Eagle)

, a wholly

- owned subsidiary of American Airlines, to provide essential air service (EAS) at Sioux City, Iowa, for $1,512,799 annually, and at Waterloo, Iowa, for $1,541,824 annual subsidy . Both subsidy rates

are for the two

- year period beginning when Eagle inaugurates full EAS at both communit ies

. 1

Background On July 15, 2011, Mesaba Aviation, Inc., and Pinnacle Airlines, subsidiaries of Pinnacle Airlines Corporation, d/b/a Delta Connection (Delta) filed 90

- day notices of their intent to suspend their joint service at both Sioux City and Waterloo, Iowa, effective October 13. 2 By Order 2011

- 9

- 5 we prohibited Delta from terminating service and requested proposals for replacement service by October 12, later extended to October 14. We received timely

- filed proposals from Eagle and

1 Such subsidy is calculated and distributed on a fiscal year basis, subject to the availability of appropriated funds.
2 Delta filed notice at a total of twenty four (24) communities. This order addresses only t hese two communities.
We note that Order 2011

- 11

- 30 selected Great Lakes at Fort Dodge and Mason City, Iowa; Iron Mountain, Michigan; Brainerd and Thief River Falls, Minnesota, and Watertown, South Dakota. By Order 2011

- 11

- 20 we re

solicited proposals a t Alpena, Michigan, and by Order 2011

- 11

- 29 we re

- solicited proposals at Muscle Shoals, Alabama, and at Greenville, Hattiesburg, and Tupelo, Mississippi. We will address the other communities in subsequent orders.- 2

-

from SkyWest Airlines, Inc. (SkyWest), a code

- share partner of Delta Air Lines

. 3 By letters
dated October 21 we requested comments from the communities by November 21 . In response,

w e received comments from the Mayors of Sioux City and Waterloo and from the Waterloo airport

. We also received a number of comments from concerned citizens of Sioux City

.

Both of these communities are historica lly big traffic generators compared to the typical
subsidized EAS community and have never required subsidy support until now , triggered by
Delta’s suspension notice and the absence of any proposals for subsidy

- free service in response our request for proposals . A t the time it filed notice, Delta provided Sioux City with three nonstop round trips per day with regional jets to Minneapolis, and Waterloo with three nonstop round trips per day to Minneapolis

-- two with Saab 340 turboprops and one with a r egional jet.
Order 2011

- 9

- 5 requested the maximum level of service guaranteed by the EAS program , i.e., two round trips per day, 12

- 14 per week, if 34

- seat or larger equipment is proposed.

Sioux City
, Iowa Eagle Eagle proposes 13 nonstop round trips per week to Chicago O’Hare (ORD) with 50

- seat Embraer 145 aircraft. It request s $1,512,799 annual subsidy for this service. Eagle’s proposal requested that “DOT and Sioux City waive the right to hold

- in American Eagle upon issuance o f a 120

- day notice to terminate service. Although we do not foresee this to be an issue and plan on serving Sioux City for many years to come if selected, we cannot be constrained and kept in a market indefinitely, without the ability to adapt to a changi ng marketplace. ” 4

SkyWest SkyWest proposes 14 nonstop round trips per week to Minneapolis (MSP) with 50

- seat CRJ

- 200 aircraft. It requests $1,279,682 annual subsidy for this service.

Waterloo , Iowa Eagle Eagle proposes 13 nonstop round trips per week to Chicago O’Hare (ORD) with 44

- seat Embraer 140 aircraft. It request s $1,541,824 annual subsidy for this service. Eagle’s proposal at Waterloo contains the same 120

- day exit provision as in its Sioux City proposal. 4

SkyWest SkyWest proposes 14 nonsto p round trips per week to Minneapolis (MSP) with 50

- seat CRJ

- 200 aircraft. It requests $1,983,181 annual subsidy for this service.

3 SkyWest also provides a great deal of service under the United brand.
4 This provision exposes each community to the risk that it could be without service for some period of time. Nevertheless, each community fully supports the selection of American Eagl e

.- 3

-

Community Comments Sioux City Sioux City recommends that we select Eagle. It states that Chicago is the top destination 5 for Sioux City

– more so than Minneapolis. It notes that Eagle hopes to eventually attain subsidy

free service, while Delta ’s service now requires subsidy

- support. The community hopes that Eagle could at some point add service to Dallas, the community’s second most popular

destination. 6 Finally, the community states that

“ American will have a marketing presence in Sioux City and also has a plan to attract
i nbound customers to their Sioux City service. Delta has neither, and SkyWest has provided no co ncrete plan to address this deficiency. Although the American Eagle Airlines subsidy request is larger than that requested by SkyWest (Delta), we feel that their proposal provides the community with the best opportunity to achieve long

- term viability with out Essential Air Service subsidies in the future. ”

The airport notes that it has long recognized Chicago a s the primary destination for Sioux City
travelers

, and has sought to add service to that hub even when it received subsidy

- free service to Minneapolis

.

A number of concerned citizens submitted comments, mostly favoring SkyWest. Delta employs a number of people at a call center in Sioux City , and there was concern about their employment if we selected American Eagle. There was also concer n that O’Hare is subject to more delays
and that the terminal is too large and confusing

.

Wate r loo
The City of Waterloo supports the selection of American Eagle, stating the following:

“There has been much discussion in our community among both business and community leaders and organizations to the pros and cons of the two carriers. At this time, we prefer that American Eagle be the provider of air service to Waterloo.”

The Airport favors Eagle because “ORD is a more attractive n onstop destination than MSP, and there is potentially much more demand to ORD than MSP.” Also, American has recently shown increased interest in providing EAS service whereas Delta filed notice to suspend service at 24
communities

. American has developed a track record at developing EAS markets at Manhattan, Kansas, Grand Island

, Nebraska, Watertown, New York, and Roswell, New Mexico.

The Chamber of Commerce, while noting some support for Delta, supported the selection of American Eagle.

5 Carrier reports filed with the Department indicate that very few passengers currently connect into Chicago from Sioux City . It appears the community’s study focuses on people from the Sioux City catchment area, and includes people that drive or other wise go to Chicago or other communities.

6 Since we could not require such service were Eagle to provide it, we cannot give any weight to that possibility.- 4

-

Decision
At Waterloo, the carrier

- selection issue is straightforward, Eagle requests $1,541,824 annual subsidy, while SkyWest requests $1,983,181

– or $441,357 more. When selecting a carrier,
49 U.S.C. §41733(c)(1) directs us to consider four factors. (1) service re liability; (2) contractual and marketing arrangements with a larger carrier at the hub; (3) interline arrangements with a larger carrier at the hub; and (4) community views. In addition , The Consolidated Appropriations Act, 2008, Public Law 110

- 161, provi des that when selecting a carrier to provide EAS, the Department may consider the relative subsidy requirements, thus codifying a factor that we have considered since the inception of the program. Both SkyWest and American Eagle have superb track records in providing EAS. There are no material weaknesses in either carrier’s proposals. Both are proposing nonstop service with comparable aircraft into the hub of their
code

- share partner. Both have glowing support fr om communities where they provide subsidized service. However, at Waterloo, Eagle has the advantage of both community support
and a lower subsidy

- request. On that basis we will select Eagle.

At Sioux City, unlike at Waterloo, the level of subsidy reques ted by the carrier s favors the selection of SkyWest, $1,279,682 annual subsidy vs. $1,512,799

-- or $233,117 more for Eagle

. However, Sioux City provided very strong arguments in support of American Eagle, and in this case that support is decisional. 7

The community raises sound bases for selecting Eagle. While SkyWest would be replacing Mesaba/Pinnacle at Sioux City, the service SkyWest proposes is similar to Mesaba/Pinnacle’s
service that it would be replacing , i.e., nonstop service to Minneapolis on a flight with the full support of the Delta code. Thus it appears un likely that SkyWest’s replacement of
Mesaba/Pinnacle w ould substantially stimulate Sioux City ’s traffic above its historical level s

. That is not the case for American Eagle. Eagle proposes to take Sioux City passengers to Chicago O’Hare. The community has indicated that Chicago is the primary destination of Sioux City travelers. With nonstop service to Chicago instead of only conn ecting service through Minneapolis, we anticipate that local passengers to Chicago will increase greatly. In that regard, we note that in the three communities where Eagle has replaced other EAS carriers in the recent
past

, traffic has burgeoned. 8 In tho se markets Eagle replaced 19

- seat operators going to a
different hub. At Waterloo and Sioux City , unlike the other three communities, Eagle will not be replacing service with 19

- seat aircraft , but it will be taking the two communities to a different
hub

, Chicago O’Hare. Not only is Chicago a larger population center than Minneapolis, there are significantly more nonstop departures and destinations from Chicago than from Minneapolis

. 9 Both Sioux City and Waterloo are historically large traffic generators and have

7 We note that a number of concerned citizens recommended that we select SkyWest. However, consistent with the law, we must give greater weight to the views of elected officials at Sioux City. 49 U.S.C. §41733 (c) (1)(D) directs us to give “substantial we ight to the views of the elected officials representing the users.” The Mayor of Sioux City has clearly endorsed Eagle, as has the airport board, and that is what we will rely on.
8 In the three full months Eagle has served Grand Island, it has enplaned 5,567 passengers, vs. 2,025 in the comparable three

- month period before it began service; in the s even full months Eagle has served Joplin, it enplaned 19,238 passengers, vs. 2, 328 in the comparable prior period ; and in the most recent twelve full months since Eagle began service at Manhattan, it enplaned 50,546 passengers, vs. 8,202 in the comparable prior period.
9 SkyWest notes there are 450 departures by Delta from Minneapolis, Eagl e notes that American operates a comparable number of departures from Chicago. However, in the second quarter of 2011, there were 106,380- 5

-

never received subsidy

- support. Sioux City is hopeful that with the right service, subsidy may be temporary , and we do so as well

. We find that that likelihood is greater by selecting Eagle to serve Chicago O’Hare than to continue the same Delta Connection service to Minneapolis

.

W e note that Mesaba/Pinnacle has indicated to the staff that it has an acute shortage of aircraft to provide EAS at all of the communities it serves because the leases on its Saab 340 aircraft are expiring. By selecting American Eagle at these two communities, Mesaba/Pinnacle can continue
the transition out of the 24 communities at which it filed 90

- day notices to suspend service.

Carrier Transition We expect Eagle and Delta to work together to make a smooth transition at these communities. In that regard, before Delta suspends its service we expect it to notify any passengers holding reservations for travel after the suspension date, to assist those passengers in making alternate air transportation arrangements, or to provide a refund of the ticket price, without pena lty, if requested. In this regard, the EAS staff will be working with Delta to establish new hold

- in subsidy rates as the current cont racts become eligible for renegotiation.

Carrier Fitness
49 U.S.C. 41737(b) requires that the Department find an air carrier fit, willing, and able to provide reliable service before Department may subsidize it to provide essential air service.
American Eagle Airlines is subject to the Department’s continuing fitness requirements After American Airlines filed Chapter 11, t he Department contacted the Federal Aviation Administration, and it has raised no concerns that would negatively affect our fitness finding s

. The Department therefore concludes that the carrier remain s fit to conduct the operations proposed here.

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

ACCORDINGLY,

1. We select American Eagle Airlines to provide essentia l air service at Sioux City and
Waterloo

, Iowa ;

2 . We set the final rate of compensation for American Eagle Airlines for the provision of
essential air service at Sioux City and Waterloo

, Iowa

, as described in Appendix C ;

3 . We direct American Eagle Airlines to retain all books, records, and other source and summary documentation to support claims for payment, and to preserve and maintain such documentation in a manner that readily permits its audit and examination by representatives of the Department. Such documentation shall be retained for seven years or until the Department indicates that the records may be destroyed, whichever comes first. Copies of flight logs for aircraft sold or disposed of must be retained. The carrier may fo rfeit its compensation for any claim that is not supported under the terms of this order;

departures from O’Hare and 10,341,206 seats; at Minneapolis there was half as much service, 50,334 departures and 5,0 96,674 seats.- 6

-

4 . We find that American Eagle Airlines continue s to be fit, willing and able to operate as a certificated carrier and capable of providing reliable essential air s ervice at the these
communities ;

5. We will continue to require Mesaba/Pinnacle Airlines to provide EAS at these communities
until it is replaced by American Eagle;

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

7 . We wi ll serve copies of this order on the Mayors and Airport Managers of Sioux City and Waterloo, Iowa, Mesaba/Pinnacle Airlines, Delta Airlines, Inc., SkyWest Airlines, Inc., and American Eagle Airlines

.

By:

Susan 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

Nonstop Great Circle Miles Sioux City (SUX) to Minneapolis (MSP) 233 Sioux City (SUX) to Chicago (ORD) 436 Waterloo (ALO) to Minneapolis (MSP) 166 Waterloo (ALO) to Chicago (ORD 234Appendix B

Essential Air Service at Sioux City and Waterloo, Iowa,

Dockets 2011-0131 and 2011-0132

Sioux City Waterloo Weekly Frequency 13 13 Aircraft Type EMB-145 EMB-140

Number of Seats 50 44 Scheduled Departures 1/ 1,356 1,356 Completion Factor 98% 98% Completed Departures 1,329 1,329

Block Hours 2,040 1,428

Passengers 51,324 43,212

Fare $115 $92

Total Revenue $5,902,239 $3,974,248

Flight Operations $2,591,440 $1,734,005

Fuel $2,515,273 $1,623,592

Total Directs $5,106,713 $3,357,597

Passenger Related $552,200 $434,075

Stations $1,140,457 $1,127,917

Other $262,571 $333,813

Total Indirects $1,955,228 $1,895,805

Total Operating $7,061,941 $5,253,402
Profit @ 5% $353,097 $262,670

Economic Cost $7,415,038 $5,516,072

Annual Subsidy $1,512,799 $1,541,824

1/ 13 flights/week x 2 directions x 52 weeks x 313/312 days = 1,356Appendix C

American Eagle Airlines , Essential Air Service to be Provided to Sioux City and Waterloo , Iowa, Dockets 2011

- 0131 and 2011

- 0132

Effective Period : Start of Service until the end of the 24 th month after Eagle start full EAS at both
communit ies
Scheduled Service : 1 3 nonstop round trips per week to Chicago O’Hare Aircraft Type: Sioux City, 50

- Seat EMB

- 145
Waterloo : 44

- S eat EMB

- 140

Sioux City Waterloo Rate per Flight: $ 1,138 1 $ 1,160
2
Weekly Ceiling : $ 29,588 3 $ 30,160 4

Note: The carrier understands that it may forfeit its compensation for any flights that it does not operate in conformance wi th the terms and stipulations of the rate order, including the service plans outlined in the order and any other significant elements of the required service, without prior approval. The carrier understands that an aircraft take

- off and landing at its scheduled destination constitutes a completed flight; absent an explanation supporting subsidy e ligibility for a flight that has not been completed, such as certain weather cancellations, only completed flights are considered eligible for subsidy. In addition, if the carrier does not schedule or operate its flights in full conformance with the order for a significant period, it may jeopardize its entire subsidy claim for the period in question. If the carrier contemplates any such changes beyond the scope of the order during the applicable period of this rate, it must first notify
the Office of Avia tion Analysis in writing and receive written approval from the Department to be ensured of full compensation. Should circumstances warrant, the Department may locate and select a replacement carrier to provide service on these routes. The
carrier must co mplete all flights that can be safely operated; flights that overfly points for lack of traffic will not be compensated. In determining whether subsidy payment for a deviating flight should be adjusted or disallowed, the Department will consider the exten t to which the goals of the program are met and the extent of access to the national air transportation system provided to the community.

If the Department unilaterally, either partially or completely, terminates or reduces payments for service or changes service requirements at a specific location provided for under this order, then, at the end of the period for which the Department do es make payments in the stipulated amounts or at the stipulated service levels, the carrier may cease to provide service t o that specific location without regard to any requirement for notice of such cessation. Those adjustments in the levels of subsidy and/or service th at are mutually agreed to in writing by the Department and carrier do not constitute a total or partial re duction or cessation of payment.

Subsidy contract are subject to, and incorporate by reference, relevant statutes and Department regulations, as they may be amended from time to time. However, any such statutes, regulations, or amendments thereto shall n ot operate to controvert the foregoing paragraph.

Funds are not currently available for performance under this order beyond September 30, 2012 . The Government’s obligation for performance under this order beyond September 30, 2012 , is subject to the availability of appropriated funds from which payment for services can be made. No legal liability on the part of the Government for any payment may arise for performance under this order beyond September 30, 2012 , until funds are made available to the Department for performance. If funds are not made available for performance beyond September 30, 2012 , the Department will provide notice in writing to the carrier.

All claims for payment must be submitted within 60 days of the last day of service provided under this order.

1 Annual compensation of $1, 512,799 , divided by 1, 329 annual one

- way flights, calculated as follows:
13 one

- way f lights per week x 2 directions x 52 weeks x .98 completion = 1,329

. 2 Annual Compensation of $ 1,541,824 divided by 1, 329 annual o ne

- way flights

, , calculated as follows:
13 one

- way f lights per week x 2 directions x 52 weeks x .98 completion = 1,329

. 3 2 6 one

- way flights per week times $ 1,138

. 4 2 6 one

- way flights per week times $ 1,160

.