**BEFORE THE DEPARTMENT OF TRANSPORTATION**  **OFFICE OF THE SECRETARY WASHINGTON, DC** 

**______________________________** ) Petition and Answer of ) ) **PACIFIC AIRWAYS, INC.** ) Docket DOT
- OST - 2012 - 0178 **PM AIR, LLC** ) ) In the matter of the application of ) Scott Air, LLC for a certificate of ) public convenience and necessity ) under 49 U.S.C. § 41102 to engage ) in interstate scheduled air ) transportation of persons, property, ) and mail ) ______________________________)

**PETITION FOR RECONSIDERATION OF ORDER 2013 -**  **1 -**  **12 AND ANSWER OF THE KETCHIKAN CARRIERS**  **AND PETITION T O HAVE THIS ANSWER ACCEPTED LATE** 

Communications with respect to this document should be addressed to: Hank Myers PO Box 7142 Bellevue, WA 98008 (425) 830
- 4265 February 1, 2013**BEFORE THE DEPARTMENT OF TRANSPORTATION**  **OFFICE OF THE SECRETARY WASHINGTON, DC** 

**______________________________** ) Petition and Answer of ) ) **PACIFIC AIRWAYS, INC.** ) Docket DOT
- OST - 2012 - 0178 **PM AIR, LLC** ) ) In the matter of the application of ) Scott Air, LLC for a certificate of ) public convenience and necessity ) under 49 U.S.C. § 41102 t o engage ) in interstate scheduled air ) transportation of persons, property, ) and mail ) ______________________________)

**PETITION FOR RECONSIDERATION OF ORDER 2013 -**  **1 -**  **12 AND ANSWER**  **OF THE KETCHIKAN CARRIERS AND PETITION T**  **O HAVE THIS ANSWER ACCEPTED LATE** Pacific Airways, Inc. and PM Air, LLC, (Ketchikan Carriers), both carriers holding certificates of public convenience and necessity to transport passengers, property and mail in interstate air commerce, hereby Petition the Department to Reconsider Order 2013
- 1 - 12 tentatively finding Scott air, LLC (Scott) fit, and also answers in opposition to the findings of the Show Cause Order and requests that its answer be accepted althou gh filed late.
The Ketchikan Carriers filed the original complaint with the Department, alleging that Scott was engaged in interstate air commerce without necessary authority from the Department of Transportation. In Order 2012
- 12 - 16, the Department conc luded that Scott was engaging ininterstate air commerce and ordering the carrier to cease and desist the numerous and specific

activities enumerated in the Order, and fined Scott, suspending half on the condition of no further violations for 12 months. S cott agreed to the findings and requirements in a consent agreement referenced in the Order. Having the assurances of Scott, the Enforcement Division withdrew its opposition to the certification and finding of fitness of Scott.
In the complaint filed tod ay, the Ketchikan Carriers thoroughly documented that subsequent to agreeing to the Consent Order Scott Air made no change in its operations or policies, and continued to openly solicit and accept interline, interstate passenger reservations on its univers ally accessible web site and through the use of interstate toll free telephone and fax numbers. The Ketchikan Carriers waited three weeks after the Order was issued to give Scott a reasonable time to amend its illegal practices before assembling evidence of the continued violations. The Ketchikan Carriers request that no further action be taken to finalize the fitness finding of Scott until the current complaint has been adjudicated by the Department.
In regard to Order 2013
- 1 - 12, the Ketchikan Carrier r espectfully request that this answer in opposition be accepted although filed three days late. The delay in this filing was caused by the need to first file the formal complaint documenting the continuing violations of Scott subsequent to the issuance of the Consent Order, and to gain the approval of the officers of the carriers to file the complaint and this answer , one of whom was out of state on vacation . Given the significant nature of the continuing violations, and the reflection on the compliancedi sposition and managerial fitness of Scott, a three day delay is insignificant in relation to the

content and import of this answer.

**ARGUMENT**
As noted above, the primary reason why Scott Air should be denied a certificate of public convenience and should be found unfit is its historic and continuing pattern of violating Federal law and the regulations of the Department, as well as its steadfast denial that it is or even intends to operate in interstate air commerce. In its application, as well as the appl ication for exemption pendent lite, Scott insists that it is engaging in strictly intrastate service, and has all necessary authority from the FAA to do so. It papers over its violations by explaining that despite its already sufficient authority it is ap ply for a certificate to cover all bases.
In finding Scott fit, Order 2013
- 1 - 12 bases its findings on unproven statements as well as misleading and fraudulent statements made in the application for a certificate as well as the exemption application. For example, Scott failed to comply with 14 CFR 204.4(t)(2) by not providing the required “...estimated block hours and revenue miles by type of aircraft, number of passengers and number of tons of mail and cargo to be carried, transport revenues and an estimate of the traffic which would be generated in each market receiving the proposed service. Such statements shall also include a statement as to whether the statements were prepared on the accrual or cash basis, an explanation of how the estimated costs and r evenues were developed, a description of the manner in which costs and revenues are allocated, howthe underlying traffic forecasts were made, and what load factor has been assumed for the

average and peak month.”
Without this required information, the De partment has no way to independently test the financial forecasts of Scott, or may any finding on the success of its proposed operations. It should also be noted that the pro forma financial forecast for 2013 covers all Scott Air operations, apparently in cluding its winter tourist operations in Arizona under the business name of Arizona Splash Adventures. Without the ability to determine whether Scott can operate profitably in its proposed scheduled service, the Department has no way to find Scott financi ally or managerially fit. Despite the deep pockets of its investors, continuing unprofitable operations and substantial debt to its owners presents a threat to the travelling public.
While these issues are ancillary to the continuing violations of Federa l law and regulations and the refusal of Scott to accept that it is required to hold interstate commercial authority, they do directly reflect on the managerial competence and compliance disposition of Scott. How can the Department be confident that Scott will comply with the continuing insurance and reporting requirements related to interstate commerce when Scott insists it is only engaging in intrastate service?
In essence, the Department found Scott fit based on its history of scheduled, albeit illegal service, and the deep pockets of its investors. It is the height of irony that the Departmentaccepts Scott’s assertion that all pre
- operating costs for its scheduled service have already been

incurred. This is effectively an admission that it had been operating illegal scheduled service for a number of years. Sort of like sentencing Bernie Madoff to prison, but allowing him to keep the spoils of his illegal activities. While Scott has provided evidence of a $500,000 unlimited line of credit, but the h istoric financial statements show that Scott has changed its methods of accounting and may actually owe more than $500,000 in loans to its owners. Depending on how additional cash infusions are defined, Scott may have been bankrupt at the time of its late st audited financial reports.
As at December 31, 2009, the unaudited balance sheet for Scott shows a total owner equity of

- $49,432.63 , technically bankrupt, having lost $500,787. 64 on operations based on total revenue of just over $478,000. In 2010, th e financial statements audited by L. Pete Hogan of St. George, UT showed a net loss of $201,443 for a two year net loss of $702,231. The only reason the carrier did not sink further into technical bankruptcy was due to a cash infusion for owners. While d escribed on the balance sheet as a member loan of $1,591,766 with specified repayment terms, the infusion was none
- the
- less included as equity.
For 2011, Scott changed auditing firms, always a red flag for failing companies, replacing a Utah CPA with an A rizona CPA, R.A.D. CPA, PC. Despite showing a net loss of $160,343, owner equity increased to $765,580 based on an additional member contribution of $256,148. In three years, Scott had suffered net losses of $862, 574.As at July 31, 2012, Scott had showed a modest profit of $106,371 (before any applicable

income tax), but still have a total loss to date of $756,203. While the member equity as at July 31, 2012 was listed as $871,951, that number included $1,591,766 in a structured member loan. If that load was classified as long term debt, the member equity would be **- $719,815** 
. Despite these losses, Scott continues to operate. However, the Department should request Scott to explain its true financial position, and whe ther member loans should be classified as long term debt, and whether Scott has complied with the payment terms of the structured debt agreement. The figures contained in Scott’s financial statements are summarized below.
Description Profit/(Loss) Memb er Infusions Member Equity CY 2009 ($ 500,788) $ 0 **- $ 49,433**  CY 2010 ($ 201,443) $ 1,591,766 $ 669,775 CY 2011 ($ 160,343) $ 256,148 $ 765,580 7 Mo’s ended 7/31/12 $ 106,371 $ 0 $ 871,951 Net of Member Structured Loan (2010) **- $**  **719,815**

**SUMMARY**
The Ketchikan Carriers have refrained from filing comments in this docket until the Department issued an Order in the complaint of unfair and deceptive business practices against Scott Air (apending enforcement action Scott never acknowl edged in its application). Recognizing that the

required changes might take a few days, the Ketchikan Carriers gave Scott three weeks to comply before documenting the continuing violations. That extensive evidence is detailed in the complaint filed today in Docket 2012
- 0002 and served upon Scott and its attorney of record. We incorporate that complaint by reference in this filing.
Scott Air, LLC d/b/a Island Air Express is unfit to be granted a certificate of public convenience and necessity to engage i n interstate transportation of persons, property and mail in scheduled air service. It has continuously engaged in illegal interstate scheduled service since it was founded, continued these illegal operations even after notified by the Enforcement Divisio n of the Department. Scott delayed agreement in the Enforcement matter until it had filed all materials associated in this docket. Once the Consent Order was issued, Scott made no change whatever in its policies or operations. It continued to maintain a universally accessible website, operate interstate toll free telephone and fax numbers, and accept interstate, interline passenger reservations. All of these actions are contrary to the required finding of compliance disposition.
These actions, or lack thereof, were carried out by the same management team that was in charge during the violations leading to the original complain and has controlled all operations and policies continuously since. Clearly these managers are not fit to manage a certificated operation.Scott failed to comply with 14 CFR 204.4 by not submitting information required detailing its

proposed service, operations and traffic statistics, detailed financial information, and a clear explanation of the basis of those data.

The financia l statements are suspect due to the inclusion of a structured long term loan as equity on its balance sheet. Scott has never experienced a 12 month profit , and has cumulative net losses of over $700,000.

**WHEREFORE** , the undersigned carriers respectfully r equest that the Department reconsider Order 2013
- 1 - 12, and refrain from any further action in this docket until the formal complaint of the Ketchikan carriers has been resolved. In any case, if the Department eventually determines that Scott Air is fit, o nly commuter fitness authority be granted, and not a certificate of public convenience and necessity. Scott has neither requested authority to transport mail, nor did it include any mail traffic or revenue in its proposed operations. Postal regulations a nd the current Bush Mail Rate requires that bush carriers pickup and deliver all mail to the downtown Ketchikan Post Office, and Scott neither operates or proposes to operate service to the City and Borough of Ketchikan. Respectfully submitted, Pacific Airways, Inc. PM Air LLC

__________________________ By Hank Myers, its authorized representative February 1, 2013**CERTIFICATE OF SERVICE**

I hereby certify that I have this date served a copy of the foregoing Petition and Answer of the Ketchikan Carriers upon all parties served with Order 2013
- 1 - 12 by first class mail.

_________________________ Hank Myers February 1, 2013