Order 2014

- 6

- 12

Served: June 19, 2014



### UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation on the day 19 th of June , 201 4

ORDER RE

- SELECTING CARRIER AND SETTING SUBSIDY RATES

Summary By this O rder, th e Department of Transportation re

- select s Schuman Aviation Company

Ltd. d/b/a Makani Kai Charters (“Makani Kai”) to provide subsidized Essential Air Service ( “ EAS ” ) with nine

- seat Cessna Grand Caravan

, or n i ne

- seat Piper Chieftain aircraft

, at Kalaupapa, Hawaii

, for the four

- year period from June 1, 2014 , through May 31, 2018. 1

That service will continue the current service of 12 nonstop round trips a week to Honolulu,

and 18 nonstop round trips a week to Molokai

. The f irst

- year subsidy rate will be $ 751,040

, the second year subsidy rate will be $ 730,848

, the third year subsidy rate will be $ 710,656

, and the fourth year subsidy rate will be $ 690,463

. 2

Background By Order 2011

- 11

- 27, issued on November 22, 2011, the Department selected Makani Kai to provide subsidized EAS with nine

- seat Cessna Grand Caravan aircraft at Kalaupapa for

the two

- year period beginning January 1, 2011, through December 31, 2013, for a first

- year subsidy rate of $932,772, and a second

- year subsidy rate of $923,5 09. That service

consist ed of 12 nonstop round trips a week between Kalaupapa and Honolulu, and 18 nonstop round trips a week between Kalaupapa and Molokai. T he Department extended the term of that contract until May 31, 2014, by Order 2014

- 1

- 22, issued on January 31, 2014

, to maintain Kalaupapa’s EAS while the Department completed the carri er selection case.

In anticipation of the end of Makani Kai’s initial rate term on December 31, 2013 , the Department issued Order 2013

- 10

- 3 , on October 4 , 2013, soli citing proposals to provide EAS, with or without subsidy support, at Kalaupapa , for a new term. In response to that

1 See Appendix A for a map.

2 EAS subsidy is calculated and distributed on a fiscal year basis, subject to the availability of funds. Essential Air Service at

KALAUPAPA, HAWAII

Under 49 U

. S.C. § 41731 et seq

. Docket DOT

- OST

- 2000

- 6 773- 2

-

Order, the Department received proposals from Makani Kai, Mokulele Flight Services, Inc.

d/b/a Mokulele Airlines (“Mokulele”) , Boutique Air, and SeaPort Airlines, Inc

.

Those proposals, as well as t he complete public file for EAS at Kalaupapa

, may be accessed online through the Federal Dockets Management System at: http://www.regulations.gov by entering “DOT

- OST

- 2000

- 6773” in the “SEARCH for: Rules, Comments, Adjudications or Supporting Documents:” field.

Proposal of Makani Kai

Makani Kai , the incumbent air carrier, proposed two options each utilizing nine

- seat Cessna

Grand Caravan or nine

- seat Piper Chieftain a ircraft . Option A proposes to maintain the

current level of service for a two

- year period at a n annual subsidy rate of $ 787,386 for the first year, and $771,232 for the second year

. Option B proposes to maintain the current

level o f service for a four

- year period at a subsidy rate of $ 751,040 for the first year, $730,848 for the second year, $71 0,656 for the third year, and $690,463 for the fourth year
, for a four

- year total of $2,883,007

.

Proposal of Mokulele Airlines

Mokulele proposed two options , each consisting of a four

- year term, utilizing nine

- seat
Cessna Grand Caravan aircraft

. Option A consists of 13 nonstop round trips per week between Kalaupapa and Honolulu at a subsidy rate of $ 345,513 for the first year, $359,998

fo r the second year, $380,626 for the third year, and $398,889 for the fourth year . Option B

consists of 13 nonstop round trips per week between Kalaupapa and Kahului for a four

- year period at a subsidy rate of $ 267,406 for the first year, $254,168 for the second year, $256,333 for the third year, and $243,840 for the fourth year. Each of those alternatives

included an a la carte option of an additional six nonstop round trips per week between Kalaupapa and Molokai at an additional annual subsidy rate of $108,217. So, for example, for an approximation of the community’s current service levels to Honolulu and Molakai, the first year subsidy would be $345,513 plus $108,217 multiplied by 3 , for 18 round trips

to Molokai ($324,651)

, for a total annual subsidy of $670,164. Th e second year subsidy

, then, would be $684,511, the third year would be $705,277, and the fourth year would be $723,540, for a four

- year total of $2,783,492.

Proposal of Boutique Air Boutique Air submitted a two

- year proposal , consisting of 12 one

- stop round trips per week between Kalaupapa and Honolulu

, 12 one

- stop round trips per week between Kalaupapa and Kahului, and 24 nonstop round trips per week between Kalaupapa and Molokai, utilizing 9

- seat Cessna Grand Caravan aircra ft, at an annual subsidy rate of $943,686

.

Proposal of SeaPort Airlines, Inc. SeaPort Airlines, Inc. submitted a two

- year proposal , consisting of 12 nonstop round trips per week between Kalaupapa and Honolulu

, and 18 nonstop round trips per week betwee n Kalaupapa and Molokai, utilizing nine

- seat Cessna Grand Caravan aircraft , at an annual subsidy rate of $952,018

.

Community Comments

On November 4, 2013

, the Department solicited community comments on this air carrier

selection case . In response to our request , we received comments from frequent users of- 3

-

EAS at Kalaupapa, with the vast majority expressing strong support for Makani Kai’s four

year proposal . The Department received comments from the Kalaupapa Settlement residents and their family memb ers , US Department of the Interior’s N ational P ark S ervice (“NPS”)

, Hawaii House of Representatives

, State of H awaii D epartment of H ealth (“HDOH”)

, doctors and nurses affiliated with the University of Hawai’i Department of

N ative Hawaiian Health School of Medicine , religious organizations, the Mayor of Maui,

the Kalaupapa Lion’s Club, and from a significant number of concerned citizens and small

business owners

. 3

By letter dated October 21, 2013, NPS described the geography and isolation of the community and explain ed that many NPS employees have used Makani Kai for work

related travel to and from Kalaupapa, and the Makani Kai has “provided timely and efficient

service under the current Essential Air Service contract .”

By letter dated November 27, 2013, t he Speak er of the Hawaii House of Representatives

, Mr. Joseph Souki, expressed support for Mokulele’s 4

- year proposal.

By letter s dated October 23, and November 26, 2013, March 11, and April 9, 2014, the Administrator of the Kalaupapa Settlement, Mr. Mark Miller, provided comments on behalf

of the HDOH and the residents of Kalaupapa . The community of Kalaupapa lacks a local government; however, Mr. Miller represents the citizens of Kalaupapa and in m any ways

act s as the ir local representative . Mr. Miller’s letters strongly support a long

- term contract
with Makani Kai , the incumbent air carrier

. Each of his letters was accompanied by petition s from Kalaupapa’s residents supporting the re

- selection of Makani Kai. In his

October 23 rd letter, Mr. Miller states “ Makani Kai has provided superior service to the Kalaupapa Settlement for the past 2 years. Makani Kai worked closely with the community to provide optimum service and allowed a resident rate for travel that has allowed and encouraged connection to both topside Molokai and Honolulu. ” Further, b oth locations are vital links to medical services, government services and other activities.”

In a letter from Dr. S. Kalani Brady, MD, MPH, FACP, Associ ate Professor, Department of Native Hawaiian Health at the University of Hawai’i, he states he is “the physician who regularly travels to Kalaupapa to serve [his] patients there.” Dr. Brady states that during the ten years he has served patients there as faculty of the University of Hawai’i School of Medicine, he has flown to Kalaupapa with several other companies and his opinion is that Makani Kai is the “best service offering” to Kalaupapa.

By letter dated March 10, 2014, Mr. Alan Arakawa, the Mayor of the County of Maui expressed support for Mokulele Airlines. Mayor Arakawa is an el ected representative of

Maui , and therefore represents interest s outside of the EAS community, as Kalaupapa is located in Kalawao County. 4

3 All public comments received are posted at www.regulations.gov and can be found by entering “DOT

- OST

2000

- 6773” in the “Search” field.

4 Although Kalawao County is a judicial district of Maui County, it is a sepa rate county and it is administered by the HDOH.- 4

-

Additionally, we received a significant number of comments from private citizens and small

business owners from across the S tate of Hawaii supporting both Makani Kai and Mokulele.

Decision Based on the discussion above, and after careful consideration of this matter, including the

comments from local official s representing Kalaupapa

, resident s of Kalaupapa

, and community volunteer s that frequently use EAS at the community

, the Department has

decided to re

- select Makani Kai for a new

, four

- year term to provide subsidized air transportation at Kalaupapa. Makani Kai will provide 12 nonstop round trips a week between Kalaupapa and Honolulu, and 18 nonstop round trips a week between Kalaupapa

and Molokai , utilizing nine

- seat Cessna Grand Caravan or n i ne

- seat Piper Chieftain aircraft

. The f irst

- year subsidy rate will be $ 751,040

, the second

- year rate will be $ 730,848 , the

third

- year rate will be $ 710,656 , and the fourth

- year rate will be $ 690,463

, for a four

- year total subsidy of $2,883,007

.

In narrowing the field of choices, the Department firs t eliminated the proposals of SeaPort and Boutique Air , given th at neither carrier received any community support and their proposed annual subsidy requirements , at $952,018 and $943,686, respectively, exceed

those of Makani Kai and Mokulele

.

This leaves two proposals for consideration, Makani Kai, the incumbent, and Mokulele. In selecting carriers to provide EAS, the Department is required to cons ider several criteria

, including service reliability, arrangements with larger carriers, community support, and marketing plans

. 5

Regarding community support, the Department is required to give substantial weight to the views of the elected officials repr esenting the users, and therefore we turn to community comments received from Kalaupapa residents, local volunteers, and Mr. Mark Miller

. . 6 Many of the letters from the community focus ed on Makani Kai’s strong customer service standards, explaining that the air carrier often goes “above and beyond the call of duty ” for its passengers. Additionally, the commenters expressed support for Makani Kai because of

its on

- time performance record, strong management team, its low fares, the air car rier’s

service reliability

, and its focus on safety and maintenance. Moreover , those letters state

that Makani Kai has demonstrated a commitment to the community of Kalaupapa and its

residents

.

In terms of service reliability, both carriers provide rel iable EAS; Makani Kai, which has served Kalaupapa for over two years, and Mokulele at Kamuela , Hawaii. For contractual

5 In selecting a carrier to provide subsidized EAS for an eligible place not in Alaska, 49 U.S.C. § 41733(c)(1) directs us to consider five factors: (a) service reliability; (b) contractual and marketing arrangements with a larger carrier at the hub; (c) interline arrangements with a larger carrier at the hub; (d) community views, giving substantial w eight to the views of the elected officials representing the users; and (e) whether the carrier has included a plan in its proposal to market its service to the community. In addition, the Consolidated Appropriations Act, 2014, Public Law No. 113

- 76, prov ides 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

. 6 In accordance with 49 U.S.C. § 41733(c)(1)(D), we give s ubstantial weight to the views of the elected officials representing the users.- 5

-

marketing arrangements and interline agreements with larger carriers, Mokulele states that it has agreements with Alaska Airlines and tw o international carriers and its flights are available on several online travel websites, including Orbitz and Travelocity. While we note that Mokulele’s proposal state s that it has a code share agreement with go! Airlines (Mesa), go! Airlines ceased oper ations in Hawaii in April 2014. Therefore, this agreement

was not a factor in this carrier

- selection case decision

. While Makani Kai does not present any agreements with larger carriers, it states that in addition to online reservations, it has

staff ava ilable to help with reservations, particularly for a large number of residents without Internet access. In terms of marketing support, Mokulele includes a line item in its proposal of $3.35 per passenger, and notes that it offers a reduced fare when passengers begin their journey with Mokulele and transfer to a partner airline. Makani Kai does not include a separate line item for marketing, however, its proposal explains that it offers some

customer

- friendly features that have been developed in conjunction with its service to the community

. 7 Lastly, although Mokulele’s subsidy requirement is lower than Makani Kai’s, the difference between the two air carriers is very small ($99,515 over the 4

- year term, or less than $25,00 0 per year).

Looking at the totality of the circumstances, given Makani Kai’s reliability at Kalaupapa

, the uniqueness of the situation of the community’s air service needs, and the strong support of Kalaupapa’s community officials and users of the servi ce , the Department select s Makani Kai to serve Kalaupapa for a four

- year term. Additionally, w e find that both Makani Kai’s service and subsidy levels are reasonable.

We make this selection at the community contingent upon the Department’s receipt of properly executed certifications from Makani Kai that it is in compliance with the Department’s regulations regarding drug

- free workplaces and nondiscrimination, as well as the regulations governing lobbying activities. 8

Air Carrier Fitness

49 U.S.C. §§ 41737(b) and 41738 require that we find an air carrier fit, willing, and able to provide reliable service before we may subsidize it to provide EAS. Makani Kai is subject to the Department’s continuing fitness requirements, and no information has come to our attention that would cause us to question the air carrier's fitness at this time. We have contacted the Federal Aviation Administration, and it has raised no concerns that would negatively affect our fitness finding. We therefore conclude that the ai r carrier remains fit to conduct the operations proposed here. 9

This Order is issued under authority delegated in 49 CFR Part 1.25a(b).

7 See Schuman Aviation Company, Ltd. Proposal to Provide Essential Air Sevice at Kalaupapa, Hawaii (dated October 30, 2013), available at docket DOT

- OST

- 2000

- 6773.

8 The certif ications are available online at http://www.dot.gov/policy/aviation

- policy/small

- community

- rural

air

- service/essential

- air

- service.

9 T h e Nati on al Tra n s po rtati o n Safety B o ard (“NTSB”) is c u rre n tly i nv esti g ating a Makani Kai accident that occurred off the coast of Kalaupapa on December 11, 2013 . Should the NTSB investigation final report

reveal findings adverse to the air carrier, we would reassess the air c a rrier’s fit n ess in light of those findings.- 6

-

ACCORDINGLY, 1. The Department selects Schuman Aviation Company Ltd. d/b/a Makani Kai Charters at Kalaupapa, Hawaii , and establishes the subsidy rate, as detailed in Appendix C ;

2. We direct Schuman Aviation Company Ltd. d/b/a Makani Kai Charters to retain all books, records, and other source and summary documentation to support claims for payment, and to preserve an d 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 from the service date of this Order 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 air carrier may forfeit its compensation for any claim that is not supported under the terms of this Order;

3. We find tha t Schuman Aviation Company Ltd. d/b/a Makani Kai Charters is fit, willing and able to operate as a commuter air carrier, and capable of providing reliable Essential Air

Service at Kalaupapa, Hawaii ; 10

4 . Docket DOT

- OST

- 2000

- 6773 will remain open pending f urther Department action; and

5

. We will serve copies of this Order on Mr. Mark Miller, the Administrator of the Kalaupapa Settlement

, Mr. Bob Florek

, the Airport Manager of Kalaupapa Airport, Mokulele Flight Services, Inc. d/b/a Mokulele Airlines, Schuman Aviation Company Ltd.

d/b/a Makani Kai Charters , SeaPort Airlines, Inc. and Boutique Air

.

By:

SUSAN L. KURLAND Assistant Secretary for

Aviation and International Affairs

(SEAL)

An electronic version of this document is available at http://www.regulations.gov

10 See note 9.Appendix A



# AREA MAP

M ap s g ene r a t e d b y t h e G r eat Ci r cle M appe r

- c op y r i g h t © Ka r l L. S w a r t z

.Appendix B

Schuman Aviation Company Ltd., d/b/a Makani Kai Air Charters
Annual Compensation Requirements for Essential Air Service at Kalaupapa, Hawaii

Departures per year 3,089

Estimated Annual Revenue

HNL & LUP $90,480 Air Fare to HNL $72.50

MKK & LUP $79,560 Air fare to MKK $42.50

Total Revenue $170,040

Expenses

Aircraft $180,000

Insurance $96,000

Pilots $162,240

Fuel $228,150

Maintenance $117,000

Engine & Prop Reserve $97,500

State landing Fee $15,974.4

Admin $85,000

Total Expenses $981,864

Income (Loss) ($811,824)

Four Year Service Plan:
Subsidy Request 1st Year $751,040

Estimated Passengers 2800
Subsidy Request 2nd Year $730,848

Estimated Passengers 3000
Subsidy Request 3rd year $710,656

Estimated Passengers 3200
Subsidy Request 4th Year $690,463

Estimated Passengers 3400Appendix C

Schuman Aviation Company Ltd. , d/b/a Makani Kai Air Charters
Provision of Essential Air Service at Kalaupapa, Hawaii Summary of Service To Be Provided

Effective Period : June 1, 2014, through May 31, 2018

Scheduled Service : 12 round trips a week to Honolulu; and 18 round trips a week to Molokai. Aircraft type: Nine

- seat Cessna Grand Caravan or Nine

- Seat Piper Chieftain Intermediate stops and upline service : No service to any intermediate or upline points are contemplated under the terms of the carrier’s proposal; accordingly, no such service may be provided on subsidized flights without prior Department approval. Timing of flights: Flights must be well

- timed and well

- spaced in order to ensure full compensation. Annual compensation: 1 st year: $ 751,040

2 nd year: $ 730,848

3 rd year: $710,656

4 th year: $690,463

The s e rate s assume an annual completion factor of 9 5 percent. A compensation ceiling is to be applied per calendar week such that service above that ceiling in one week cannot make up for service

shortfalls in another week. Subsidy Rate per Flight : 1 st year: $ 243 1

2 nd year: $23 7 2

3 rd year: $2 30 3

4 th year: $224 4 Weekly Compensation Ceiling: 1 st year: $ 14,580 5

2 nd year: $1 4, 220 6

3 rd year: $13, 800 7

4 th year: $13,440 8

1 Annual subsidy of $ 751,040 divided by 3, 089 annual departures: 5 arrivals and 5 departures each weekday and each weekend (60 flights/week) x 52 weeks x .9 9 (completion factor) = 3,08 9.

2 Annual subsidy of $ 730,848 divided by 3,089 annual departures: 5 arrivals and 5 depart ures each weekday and each weekend (60 flights/week) x 52 weeks x .9 9 (completion factor) = 3,089.

3 Annual subsidy of $710,656 divided by 3,089 annual departures: 5 arrivals and 5 departures each weekday and each weekend (60 flights/week) x 52 weeks x .9 9 (completion factor) = 3,089.

4 Annual subsidy of $690,463 divided by 3,089 annual departures: 5 arrivals and 5 departures each weekday and each weekend (60 flights/week) x 52 weeks x .9 9 (completion factor) = 3,089.

5 60 flights per week multiplied by $ 243 per flight.

6 60 flights per week multiplied by $2 37 per flight.

7 60 flights per week multiplied by $2 30 per flight.

8 60 flights per week multiplied by $2 24 per flight.Appendix D



### General Terms and Conditions for Essential Air Service

The carrier understands that it may forfeit its compensation for any flights that it does not operate in conformance with 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 understand s that an aircraft take

- off and landing at its scheduled destination constitutes a completed flight; absent an explanation supporting subsidy eligibility for a flight that has not been completed, such as certain weather cancellations, only completed flight s 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 Aviation Analysis in writing and receive written approval from the Department to be ensured of full compensation. Sh ould circumstances warrant, the Department may locate and select a replacement carrier to provide service on these routes. The carrier must complete all flights that can be safely operated; flights that overfly points for lack of traffic will not be compe nsated. In determining whether subsidy payment for a deviating flight should be adjusted or disallowed, the Department will consider the extent to which the goals of the program are met and the extent of access to the national air transportation system pr ovided 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 wh ich the department does make payments in the stipulated service levels, the carrier may cease to provide service to that specific location without regards to any requirement for notice of such cessation. Those adjustments in the levels of subsidy and/or

s ervice that are mutually agreed to in writing by the Department and carrier do not constitute a total or partial reduction 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 not operate to controvert the foregoing paragraph.

Funds may not be available for performance under this order beyond September 30, 2014. Th e Government’s obligation for performance under this order beyond September 30, 2014, is subject to the availability of funds from which payment for services can be made. No legal liability on the part of the Government for any payment may arise for perfo rmance under this order beyond September 30, 2014, until funds are made available to the Department for performance. If sufficient funds are not made available for p erformance beyond September 30, 2014, the Department will provide notice in writing to the carrier.

All claims for payment, including any amended claims, must be submitted within 90 days of the last day of the month for which compensation is being claimed. For example, claims for service provided in July must be filed by October 31; August cl aims must be submitted by

November 30, and so on.