### Order 2012

- 5

- 20 Served: May 23, 2012



### UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION



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

Issued by the Department of Transportation

on the 23 rd 

### of May, 2012

Essential Air Service at

ATKA

, ALASKA

NIKOLSKI

, ALASKA

Under 49 U.S.C. 41731 et seq

. DOCKET DOT

- OST

- 1995

- 363

DOCKET DOT

- OST

- 1995

- 363

ORDER SELECTING CARRIER Summary By this Order

, the Department is selecting Grant Aviation, Inc. (Grant), to provide essential air

service (EAS) at Atka

, Alaska , for $ 842,574 the first year and $822,445 the second year , and at

Nikolski

, Alaska

, for $ 331,431 the first year and $324,998 the second year

. 1



### Background
By Order 2010

- 7

- 9 the Department selected Alaska Airlines, Inc., to provide EAS at Adak and Peninsula Airways, Inc. (PenAir) at Atka and Nikolski through June 30, 2012. Annual subsidy

and service levels were established as follows: Adak , $1,675,703 for two nonstop or one

- stop round trips per week to Anchorage with Boeing 737

- 400 aircraft; Atka

, $290,780 for three
nonstop round trips per week to Dutch Harbor with eight

- seat Metro III aircraft; 2 

### and Nikolski

, $639,008 for two nonstop round trips per week to Dutch Harbor with nine

- seat Grumman Goose

aircraft.

As the end of the current rate terms on June 30, 2012, was approaching, Order 2012

- 2

- 8, February 10, 2012, requested proposals at all three communities by March 9, 2012. 3 

### On

1 Such subsidy is calculated and distributed on a fiscal year basis, subject to the availability of appropriated funds.

2 A Metro III is typically configured for 19 seats. PenAir removed seats to afford more cargo capacity.

3 This Order addresses Atka and Nikolski only . We will address Adak in a later Order

.

### - 2

-

March 1, 2012, PenAir requested a two

- week extension, until March 23, 2012, to submit proposals at Adak and Atka. The carrier indicated that it would not be submitting a proposal at Nikolski. By Notice dated March 2, 2012, we granted an extension until March 23, 2012, at all

three communities.

On March 21, 2012, Grant requested an additional extension.

“ Grant Aviation has only recently become aware of the Department's need for EAS proposals to serve Atka and Nikolski, Alaska

. [In order t] o allow Grant Aviation to provide a detailed, reasonable proposal for the Department's consideration, we respectfully request an extension of the deadline for submittal of our proposal until March 30, 2012. As this will be the first time Grant Aviation has made a proposal to provide EAS, the requested extension will be needed by our company to ensure that a thorough review of logistical demands and service requirements may be completed prior to submittal. As current EAS contracts serving these destinations do not expire

until the end of June 2012, the brief extension requested should not cause undue hardship to the concerned communities or any disadvantage to other air carriers making competing proposals. ”

On March 2 2 , 2012, we grant ed Grant’s request, extending the deadline to March 30 , 2012. On March 22, 2012, Servant Air petitioned the Department to rescind th at extension.

“ Subsequent to S er vant’s commitment [to submit a proposal], Department staff contacted Grant Aviation about providing a bid. Grant, like Servant, was on the serv ice list 4 and was fully aware of the status of the case, but had never contacted the Department to express interest in the case. It was only several days after the Department’s contact [by phone of Grant] and one day before the filing deadline, that Grant requested its extension. Grant justified its [request for] extension on its inexperience with the EAS process. Grant has never been at any disadvantage in this case. It has been served with all DOT

communications in the same fashion [i.e. via the service list mass mailing] as Servant. When Servant inquired about the filing deadline after both PenAir and the second, non

passenger carrier 5 declined to submit bids, Servant was told that the Department was not

inclined to extend the dead line. The actions of the Department have the appearance of

favoritism in selecting applicants.”

The Department did not rescind the extension for reasons that are discussed later in this order , and we have received proposals from Grant and Servant Air. PenAir, the incumbent, did not submit a proposal.

4 When the Department requests EAS proposals, we send out a mass mailing to all of the parties on a frequently updated service list. That list includes all scheduled carriers operating in Alaska along with consultants and other parties.

5 Servant is referring to Alaska Central Express, which recently received scheduled passenger authority and which has provided a significant level of subsidy

- free service to Atka and Nikolski while we were subsidizing PenAir.

### - 3

-

Proposal, Grant Aviation Grant proposes to operate Beech King Air 200 aircraft and provide three nonstop round trips per

week from Atka to Dutch Harbor and two nonstop round trips per week from Nikolski to Dutch

Harbor . The carrier requests a combined annual subsidy of $1,173,939 the first year and $1,147,439 the second year for this service.

Proposal, Servant Air Option 1 : At Atka, the carrier would provide two nonstop round trips per week 6 to Dutch Harbor with Beech King Air 200 aircraft ; a t Nikolski, two nonstop round trips per week to Dutch H arbor with Beech King Air 200 aircraft. Servant requests a combined annual subsidy of $1,783,346 the first year and $1,847,730 the second year for this level of service.

Option 2 : The only difference between Option 1 and 2 is that the selection period would extend for a

four

- year period. This selection is the carrier’s preferred option. Servant request s combined annual subsidy from the first year through the fourth, as follows: $1,740,952, $1,805,336, $1,909,129, and $2,018,391.

Servant does not currently operate a Beech King Air. The carrier indicates it

“can begin service with the Navajo very quickly, even before the end of the current EAS period. Once the King Air has been entered into service, all operations to both Atka and

Nikolski will use that aircraft. ...For the months in which Navajo service to Nikolski is

operate d, the fixed monthly expenses would be reduced by the cost of the second Captain and the First Officer and one half of the per diem pay. The variable operating cost per flight would be based on the Navajo rate. ”

Community Response On April 3, 2012, we requested comments from the communities and the State of Alaska no later than April 30, 2012. On April 2 6 , 2012, w e re ceived comments from the Mayor of Atka

, and on April 2 7 , 2012, from the State of Alaska . The State, as is its usual practice, does not e ndorse one carrier’s proposal over another ’s , but deferred to the expertise of the local residents. The Mayor of

Atka indicates

, “The City of Atka, as the local government of the community of Atka, supports granting the Essential Air Service subsidy for Atka to Grant Aviation. It is generally felt that as a larger airline Grant Aviation is better able to meet the transportation needs of Atka.” Nikolski filed

no response.



### Decision

T he carrie r

- selection issue is straightforward

. When selecting a carrier to provide EAS in

Alaska

, 49 U.S.C. §41733(c)(1) directs us to consider five factors : (1) service reliability; (2) contractual and marketing arrangements with a larger carrier at the hub; (3) interline arrangements with a larger carrier at the hub; (4) community views ; and (5) t he experience of the applicant in providing scheduled air service or significant patterns of non

- scheduled air service. In addition, t he Consolidated Appropriations Ac t, 2008, Public Law 110

- 161, provides that when

6 Servant indicates that PenAir has, in fact, typically provided only two round trips per week. Servant proposes two trips per week, but indicates that because it will base aircraft and crew in Dutch Harbor, its completion factor will be higher than that of PenAir, and thus Atka will continue to receive the same number of trips as it has historically.

### - 4

-

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 carriers are prop osing nonstop service with the same aircraft type to the same hub, Dutch Harbor. Both carriers have limited experience in operating in the Aleutians, with Grant having a slight advantage. 7 

### However, Grant’s proposal has a critical advantage in two areas. It requests $1, 173,939 subsidy the first year and $1,147,439 the second year, while Servant’s two year option requests $1,783,346 the first year and $1,847,730 the second year. Moreover, the community of Atka has endorsed the selection of Grant Aviation. Base d on the above, we will

select Grant.

We hereby place the community of Atka on notice that we will review the need for a third round trip at Atka during the next round of proposals. Annual subsidy at Atka is $842,574 the first year
and $822,445 t he second year. 8



### Carrier Transition We expect Pen Air and Grant to work together to make a smooth transition at these communities. In that regard, before PenAir suspends its service it must 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.

Other Matters On April 19 , 2012, Servant filed a document c ompari ng the projected subsidy

- need of the two

carriers. Servant asserts that it

“proposes a substantially higher level of safety and operational reliability. Servant will use

two

- pilot flight crews. ...For a ircraft, Servant’s bid assumes low

- time airframes and engines on the Beechcraft King Air 200 they propose to use. These aircraft are more reliable and require less maintenance in the initial periods

... than the aircraft proposed by Grant. ...Grant does not adjust costs or revenue for a secon d year. 9 As noted in the

Servant bid [on March 30] , traffic has been declining or flat at the communities and expenses have been increasing at a rate faster than inflation [and thus the level of subsidy requested by Grant is even more problematic]

. ”

We will now address those comments of Servant, as well as its petition on March 22 , 2012, that we rescind the Notice extending the deadline for proposals to March 30, 2012, thereby reject ing the proposal of Grant Aviation and effectively award ing the contract to Servant.

7 In 2011, 2012, Grant reports providing a total of eight nonscheduled departures to Dutch Harbor and nearby Cold Bay, while Servant reported no such oper ations in that time period.

8 Grant did not break out its subsidy request between Atka and Nikolski. Based on Grant’s proposal, we estimate that Atka requires $842,574 and $822,445 in the first and second year, respectively. Part of this expense is due t o low load factors, and although we did not select its proposal, Servant estimates it could reasonably accommodate the recent traffic at Atka with only two round trips per week.

9 The only difference in subsidy cost between Grant’s first and second year is a minimal charge of $26,500 for startup expenses in the first year.

### - 5

-

As the record shows, Grant submitted its proposal within the official deadline provided by the Department. Servant’s charge is that Department staff engaged in favoritism by making extra efforts to solicit proposal s from Grant and Alaska Central Express, and then granting an extension to Grant

to submit a proposal.

The EAS staff routinely contacts airlines that might be interested in submitting proposals, in part to ensure that they received a copy of the request for proposa ls via our e

- mail distribution system . Our goal is to attract a broad array of proposals, for the benefit of both the communities and the taxpayers. While the staff does not and cannot contact every carrier personally, they typically

contact the carriers that would be most likely interested, e.g., those that provide EAS elsewhere, that already operate in the vicinity or to the same hubs, or that have the appropriate

- size aircraft, etc. We fully intend to continue this process as being in the best interes ts of the communities and the

taxpayers. 10

Finally, a fter the proposals were received and made public, Servant filed a document indicating that its service would be more reliable and safer than that proposed by Grant, and also that Grant’s requested subsidy level was understated. We have found no basis for concern about Grant’s safety and reliability, as indicated by our discussion below. Of course Grant operate s under the safety regulations and review of the Federal Aviation Administratio n, and the FAA has indicated it has no

concerns in that regard

. Furthermore, i t cannot be stated that Grant carelessly under

- estimated the costs of operating in the Aleutians. Its unit operating costs are considerably higher in its proposal than its syst em average and it appears that Grant’s subsidy request is reasonable for the service it

proposes.



### 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. Grant Aviation, Inc., is subject to the Department’s continuing fitness requirements

. The Department has 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 Grant Aviation, Inc., to provide essential air service at Atka and Nikolski

, Alaska ;

2 . We set the final rate of compensation for Grant Aviation, Inc., for the provision of essential

air service at Atka and Nikolski

, Alaska

, as described in Appendix C ;

10 Specific to this case, both Grant and Alaska Central Express, the two carriers mentioned by Servant, currently operate twin

- engine turbo

- prop aircraft that Servant indicates are critical to the service and since January 1, 2011, have operated in the vicinity of Atka and Nikolski. Servant does not currently meet either criterion.

### - 6

-

3 . We direct Grant Aviation, Inc., 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 t he Department. Such documentation shall be retained for seven years from the service data 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 mu st be retained. The carrier may forfeit its compensation for any claim that is not supported under the terms of this Order ;

4 . We find that Grant Aviation, Inc., continue s to be fit, willing and able to operate as a certificated carrier and capable of p roviding reliable essential air service at the these

communities ;

5. We will continue to require Peninsula Airways, Inc., to provide EAS at these communities

until it is replaced by Grant ;

6 . Th is e docket will remain open until further Order of the Department; and

7 . We will serve copies of this Order on the civic officials of Atka and Nikolski , Alaska, the Alaska Department of Transportation and Public Facilities, and on Peninsula Airways, Inc., Servant Air, Inc., and Grant Aviation, Inc.

.

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.gov

### Appendix A

Nonstop Great Circle Miles from Anchorage (ANC)) Adak (ADK) 1,192 Atka (AKB) 1,100 Nikolski (IKO) 905 Dutch Harbor (DUT) 791 Cold Bay (CDB) 620

Other Nonstop Great Circle Miles

A dak to Atka 107

Atka to Nikolski 231

Nikolski to Dutch Harbor 116

Adak to Dutch Harbor 445

Atka to Dutch Harbor 339Appendix B

Subsidy Need at Atka and Nikolski, Alaska, Docket 1995-363

Atka Nikolski Total

Distance 339 116 Passengers 511 132 643

Mail Lbs. 99,740 20,020 119,760 Freight Lbs. 25,000 25,000 50,000

Mail+Frt. Lbs. 124,740 45,020 169,760 Segments/Turns 1/ 312 208 520

Block Time/Seg. 1.5 0.625

Block Hours 468 130 598

Pax. Fare $267 $148

Mail Rate $1.8491 $0.9926
Freight Rate $1.9100 $0.6500

Passenger Revenue $136,437 $19,536 $155,973

Mail Revenue $184,429 $19,872 $204,301
Freight Revenue $47,750 $16,250 $64,000

Total Revenue $368,616 $55,658 $424,274

Pilot @ $211.81/BH $99,127 $27,535 $126,662
Fuel @ $577.50/BH $270,270 $75,075 $345,345
Mtc. @ $532/BH $248,976 $69,160 $318,136
A/C Lease @ $301/BH $140,868 $39,130 $179,998
A/C Insurance @ $85.11/BH $39,831 $11,064 $50,896 Gnd. Hdlg. @ $300/Segment $93,600 $62,400 $156,000 Cargo Hdlg. @ $0.18/lb. $22,453 $8,104 $30,557

Total $915,126 $292,468 $1,207,594

Overhead @ 23.955% 2/ $219,218 $70,061 $289,279

Total Operating $1,134,344 $362,529 $1,496,873

Profit @ 5% $56,717 $18,126 $74,844

Cost $1,191,061 $380,655 $1,571,717 Startup Costs @ 1.69% $20,129 $6,433 $26,562

Total Cost $1,211,190 $387,088 $1,598,279

First Year Annual Subsidy $842,574 $331,431 $1,174,005 Second Year Subsidy (No Startup) $822,445 $324,998 $1,147,443

1/ AKB: 3 trips per week x 2 directions x 52 weeks = 312 IKO: 2 trips per week x 2 directions x 52 weeks = 208 2/ Includes Hangar at $48,000; Pilot Housing @ $21,600; Burden @ $219,677.

Note: Totals differ slightly with the carrier's proposal because of rounding.Appendix C

Essential Air Service to be Provided to Atka

, Alaska , Docket 1995

- 363

Effective Period : Start of Service until the end of the 24 th month after Grant start s full EAS

at both communit ies

. 1

Scheduled Service : Atka: 3 nonstop round trips per week to Dutch Harbor

. Nikolski: 2 nonstop round trips per week to Dutch Harbor

. Aircraft Type : Beech King Air 200, 9

- seat turboprop and pressurized

.

. Atka

. Nikolski

. 

### 1 st 

### Year 2 nd 

### Year 1 st 

### Year 2 nd 

### Year

Annual Subsidy 2 $842,5 74 $822, 445 $331,4 31 $324,9 98
Annual Flights 3 312 312 208 208
Rate per Flight 4 $ 2,701 $2,636 $ 1, 593 $1,562
Weekly Ceiling 5 $ 16,206 $ 15,816 $6,372 $6,248

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 elemen ts 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 eligibility for a flight that has not b een 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 jeop ardize 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 w ritten 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 complete 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 extent to which the goals of the program ar e 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 lo cation provided for under this Order , then, at the end of the period for which the Department does make payments in the stipulated amounts or at the stipulated service levels, the carrier may cease to provide service to that spec ific location

without regard to any requirement for notice of such cessation. Those adjustments in the levels of subsidy and/or service that are mutually agreed to in writing by the Department and carrier do not constitute a total or partial reduction or cessation of pa yment.

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 th e fore going 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 fr om 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 a re 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 The first year extends from the start of full EAS at both communities through the end of at least 12 full calendar

months of service.

2 See Appendix B.

3 Atka: 3 trips per week x 2 directions x 52 weeks = 312;

Ni kolski: 2 trips per week x 2 directions x 52 weeks = 208.

4 Annual subsidy divided by annual flights.

5 Rate per flight times six flights per week at Atka and four flights per week at Nikolski.