Order 2010

- 10

- 16 Served: October 22, 2010

UNITED STATES OF AMERICA
DEPARTMENT OF TRANSPORTATION
OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation

on the 22 nd of October, 2010

INTRA

- ALASKA BUSH
SERVICE MAIL RATES Dockets OST

- 2003

- 14694

Order Denying Petition for Re view of Staff Action

Summary By this order, the Department is denying the Postal Service’s petition to stay the
effectiveness of Order 2010

- 9

- 24, September 22, 2010, which made the r egular quarterly fuel adjustment for Intra Alaska bush mail rates for Part 121, Part 135, and Seaplane
classes of service.

Background
Order 200 9

- 11

- 2 established the current final annual rates for Part 121, Part 135, and Seaplane classes of service, but provid ed for the regular quarterly update of th os e rates for changes in fuel expense s. 1 O rder 2010

- 9

- 24 updat ed those rates to reflect fuel expense s for the quarter ended June 30, 2010 , the most recent data available , with the new rates to be
effective on October 2, 2010

. Th at order increased the Part 121 2 linehaul element 3 of the
mail rate by 5.93 percent, reflecting a 22.32 percent increase in the fuel expense s for that
class of service. 4 As typical with quarterly fuel updates, the order was issued on a final
basis . The order noted that parties had ten days to petition the Department fo r review of the final order but that filing of such a petition would not stay the effectiveness of the order.

On September 29 the Postal Service petitioned the Departmen t for review of the order.

1 Order 2004

- 10

- 2 , October 6, 2004, inaugurated quarterly fuel updates.

2 The Part 121 rate is made up of two carriers, Frontier Flying Service, Inc., and Peninsula Airways, Inc. In the most recent quarter, PenAir made up 88.82 percent of Eligible Mail RTMs, so any expense parameter affecting PenAir has a very large effect on mail rates for that class.

3 The linehaul element includes direct aircraft expense s such as pilot, fuel, aircraft, and maintenance. Quarterly fuel updates do not update the terminal element

-- the expense of loading the mail onto the aircraft

-

- because volatile fuel prices have little effect on those expenses.

4 There were no objections to the increase and decrease in the Part 135 and Seaplane rates, respectively , even though the seaplane rate decreased significantly

.- 2

-

“ The occasion for this request is the significant variance in PenAir's reported freight RTMs as compared to those of the previous quarter, (50,600 vice 163,562). That difference drives a 22.32% increase in the fuel adjustment set to be effective October 2. When contacted, PenAir claimed unfamiliarity with the discrepancy, which further suggests that the figure is incorrect. All of this clearly warrants a brief postponement of the Order's effective date until the Department can resolve the matter of the data's accuracy with the carrier, since otherwise there is no mechanism by which an erroneous windfall can be recouped. ”

On October 7, 2010, PenAir answered the Postal Service’s petition. PenAir states the following:

“The data submitted by PenAir is accurate. The alleged “significant variance” claimed by the USPS reflects the seasonal nature of the traffic in certain Alaska markets, particularly the Dutch Harbor market. In this case, the higher RTMs [revenue ton mile s] were the result of the substantially increased amount of freight traffic that PenAir transports for the fishing and processing industries in Dutch Harbor during January each year. When those industries slow down in the second quarter of the year, there is a corresponding (and unsurprising) drop

- off in such freight, resulting in a substantial reduction in PenAir’s RTMs for that quarter. Indeed, PenAir’s data for 2009 show a similar drop off between the first and second quarters of that year. Accordingl y, the USPS is wrong to question the validity of PenAir’s data.

The USPS also requested that the Depart m ent postpone the effectiveness of the Order pending resolution of its Peti t ion. This request also has no merit. First, PenAir respectfully su b mits that this Answer should provide the Department with sufficient information to reject the Petition expeditiously. Second, the Department’s Order also made clear that the “filing of a peti t ion for review shall not stay its effectiveness .”

Decision

T he r e cord substantiates PenAir’s claim that its freight RTMs regularly experience very large decreases between the first and second quarter of each year, due to the very seasonal nature of the Dutch Harbor to Anchorage market. Appendix A, which is drawn from t he

T

- 100 Segment report, shows that the individual Dutch Harbor to Anchorage market made up between 58.28 and 67.33 percent of PenAir’s scheduled freight RTMs during the first quarter in each of the last four years. Moreover, that same market is extremel y seasonal, decreasing between 92.32 and 92.84 percent for the first and second quarter for each of those same four years.

T he Postal Service correctly notes that it was the big decrease in PenAir’s Eligible Freight
RTMs between the first and second quarter of 2010 , as shown in Order 2010

- 9

- 24, which drove the 22.3 percent increase in fuel expenses

. As reflected in that order , i t appears anomalous that unit fuel expenses would increase so significantly between those two time- 3

-

periods when fuel prices were relatively stabl e , increas ing only 4.5 percent between the first and second quarter, from $2.91 to $3.04 per gallon.

However, the annual mail rates for all linehaul elements

– pilot, maintenance, aircraft, and insurance, as well as fuel

-- are cons tructed on a rate per revenue ton mile (RTM)

. Similarly, the q uarterly fuel updates are updated on the basis of fuel expense per RTM rather than on simple changes in fuel price per gallon. This recognizes the great deal of seasonality in Alaska operation s from one quarter to the next, and the effect overall load
factor

– passenger, freight and mail RTMs combined divided by available ton miles

-- has upon average fuel expenses. Updating the annual rate simply on fuel prices would not recognize this realit y and woul d therefore be less accurate.

We will therefore d eny the Postal Service’s petition on the merits.

ACCORDINGLY,

1. We deny the Postal Service’s petition for review of staff action;

2. We affirm the rates set by Order 2010

- 9

- 24;

3 . Th is docket shall remain open until further order of the Department; and

4 . We will serve this order upon all parties on the Service List for th ese Docket s

.

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

Scheduled Freight Revenue Ton Miles for PenAir, per T-100 Segment Report

Year 2007 2008 2009 2010 Quarter 1 2 1 2 1 2 1 2

Origin Dest Freight RTMs Freight RTMs Freight RTMs Freight RTMs

DUT ANC 233,979 17,691 200,379 15,391 154,682 10,956 148,876 10,657

PenAir Total 1/ 367,768 152,488 343,816 160,953 250,614 115,275 221,108 101,173

Dutch Harbor 2/ 63.62% 58.28% 61.72% 67.33%

% Decrease 3/ -92.44% -92.32% -92.92% -92.84%

1/ Part 121 aircraft only, #455, #456, #467, and #459 2/ Dutch Harbor to Anchorage Freight RTMs, as a percentage of the total. 3/ Decrease in Freight RTMs between the first and second quarter of each year for the Dutch Harbor to Anchorage market.

Note: Scheduled traffic above is not the same as eligible traffic reflected in Appendix A of Order 2010-9-24, but is very close. Eligible traffic is scheduled traffic less traffic on segments where there is mainline service.