Order 2010-6-13

Served: June 9, 2010

UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY

WASHINGTON, D.C.

Issued by the Department of Transportation

on the 9th of June, 2010

Essential Air Service at

AKHIOK, ALASKA

KARLUK, ALASKA

Under 49 U.S.C. 41731 et seq. 

DOCKET OST-2007-0020

DOCKET OST-2004-19342

ORDER SELECTING CARRIER

Summary

By this order, the Department selects Redemption Inc., d/b/a Island Air Service, to provide 

subsidized essential air service (EAS) at Karluk, Alaska, from April 1, 2010, through March 31, 

2012, at the annual rate of $44,349.1

Background

Order 2007-5-18 selected Island Air to provide subsidized EAS at Karluk. The service was set at 

three one-stop round trips per week to Kodiak with 9-seat Islander aircraft for an annual subsidy 

of $29,481. Order 2009-2-5 extended the rate through March 31, 2010, so that Karluk would be 

on the same subsidy-rate cycle as nearby Akhiok.2

In anticipation of the end of those contracts, Order 2009-11-10 requested “best and final” 

proposals for both communities, with proposals due December 22. Servant Air submitted a 

proposal at Akhiok, but not at Karluk. Servant Air proposed to provide EAS at Akhiok for 

$556,715 annual subsidy, while Island Air submitted two options at Akhiok, one requesting 

$42,803 annual subsidy and the other for $56,592. Island Air also submitted two options at 

Karluk. Under Option 1, Island Air proposed to provide three nonstop round trips per week year

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

2 Order 2008-2-10 selected Servant Air to provide subsidized EAS at Akhiok through March 31 for an annual 

subsidy of $51,079. 
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round with 5-seat Piper PA-32 Cherokee aircraft and requests $44,349 annual subsidy for this 

service. Under Option 2, Island Air proposed identical service as under Option 1, but requested 

$49,762 annual subsidy. The only difference between the two options is that Island Air projects 

reduced passenger revenue under Option 2 due to lower passenger fares.3 On December 24, 

2009, we requested comments from the state and communities regarding which carrier and 

option they preferred.

On January 11 Servant Air filed a letter indicating it would provide subsidy-free EAS at both 

Akhiok and Karluk, beginning April 1. Consistent with our policies,4 Order 2010-2-15 

terminated the carrier-selection proceeding at both communities and relied on Servant Air’s 

proposed subsidy-free air service. At Akhiok, Servant Air was contracted by Order 2008-2-10 to 

provide subsidized service through March 31, so we simply allowed that subsidy to lapse at the 

end of the contract. At Karluk, because Servant was not then providing EAS to that community, 

we set a final rate for Island Air consistent with its Option 1 proposal – $44,439 annual subsidy –

to be effective from April 1, the end of the contract, until Servant Air inaugurated its subsidy-free 

EAS. 

On April 9, staff contacted Servant Air as to when it would inaugurate EAS at Karluk. The 

carrier anticipated having a firm date in one week. Staff again contacted Servant Air on April 30, 

but the carrier still could not commit to a fixed date.

Decision

Not only has Servant Air not given us a projected starting date, it cannot tell us when it would be 

able to give us a starting date. Although we have compensated Island Air since April 1, 2010, on 

an interim basis at the rate that it proposed, the Department recognizes the burden placed on a 

carrier when it is required to provide EAS but does not know when it will be released from that 

obligation. Because Servant Air’s inability to inform the Department of a startup date for 

subsidy-free service at Karluk raises serious doubts concerning its ability to begin service for the 

foreseeable future, we will vacate that part of Order 2010-2-15 which relies on Servant’s 

inaugurating subsidy-free service at Karluk. Island Air was the only carrier that submitted a 

subsidy proposal at Karluk.5 Instead of recycling the case by issuing a new request for proposals, 

we find that the record is fresh enough so that we can base a carrier-selection decision on that 

record. We will therefore select Island Air to provide subsidized EAS at Karluk, from April 1, 

2010, through March 31, 2012, the dates it originally proposed. 

 

3 The proposed lower passenger yields are not fully offset by slightly increased numbers of passengers.

4 As we stated in Order 2009-11-10 and in for requests for proposals in general, “[i]n cases where a carrier proposes 

to provide essential air service without subsidy and we determine that service can be reliably provided without such 

compensation, we do not proceed with the carrier-selection case. Instead, we simply rely on that carrier’s subsidyfree service as proposed.”

5 Servant never requested subsidy support at Karluk, but only said that it would provide subsidy-free EAS at Karluk.

An option for the Department to rely on subsidy-free service is not a proposal, but rather reflects the market place 

working. The bulk of the communities in Alaska and the U.S. continue to receive subsidy-free EAS and we do not 

select those carriers.
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We must now address the issue as to which of Island Air’s two options we should select. The 

community of Karluk supports Island Air’s more expensive option with its lower projected fares. 

Island Air makes clear that the only difference between its two options, other than $5,413 in 

annual subsidy, is the level of projected fares and passengers. Island Air projects that the 

reduced fares in Option 2 would stimulate a significant number of additional passengers, though 

not quite sufficiently to generate increased revenue. 

We have decided to select Option 1, the slightly less expensive option, the same rate at which we 

have been compensating Island Air since April 1. As we stated in our letter dated December 24 

to the State of Alaska requesting comments, carriers have discretion to charge fares they deem 

appropriate, and that the “Department has very limited authority over fares since the airlines were 

deregulated more than thirty years ago.” Island Air is free under either option to experiment with 

lower or higher fares to stimulate the market and maximize revenue. We have reviewed Island 

Air’s proposal, and find it reasonable. 

Separately, we will continue to rely on Servant Air’s subsidy-free service at Akhiok.

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

ACCORDINGLY,

1. We vacate Order 2010-2-15, in so far as it relies on Servant Air to provide subsidy-free service 

at Karluk;

2. We continue to rely on Servant Air, Inc., to provide subsidy-free air service, at Akhiok, 

Alaska; 

3. We select Redemption Inc., d/b/a Island Air Service, to provide essential air service at Karluk, 

as specified in Appendix C. This subsidy is in lieu of, and not in addition to that set by 

Order 2010-2-15;

4. We direct Redemption, Inc., d/b/a Island Air Service, 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 forfeit its compensation for any 

claim that is not supported under the terms of this order; and
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5. We will serve copies of this order on the State of Alaska, Servant Air, Inc., and Redemption, 

Inc.

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.gov
Appendix A

Nonstop Great Circle Miles

AKK-ADQ 84

KYK-ADQ 74

AKK-KYK 44

ANC-ADQ 252

This map is provided by Sabre® AirVisionTM Profit Essentials and is being used with express permission of the copyright holder, 

Sabre Airline Solutions®.
Appendix B

Redemption Inc., d/b/a Island Air Service, Annual Subsidy Need at 

Karluk, Alaska, Docket 2004-19342 

Karluk

Total Block Hours 280

Aircraft Type: PA-32

Departures 312

Passenger & Cargo $86,645

Mail Revenue $14,185

Total Revenue $100,830

Pilot $20,965

Fuel & Oil $27,054

Maintenance $23,431

Lease $12,332

Insurance $9,249

 Total Directs $93,031

Traffic Related $11,596

Departure Related $9,641

Capacity Related $23,998

 Total Indirects $45,235

Operating Expense $138,266

Profit @ 5% $6,913

Economic Cost $145,179

Annual Compensation $44,349
Appendix C

Island Air Service, Inc., Inc., Essential Air Service to be Provided to 

Karluk, Alaska, Docket OST-2004-19342

Effective Period: April 1, 2010, through March 31, 2012.

Scheduled Service: Three nonstop round trips per week, ADQ-KYK-ADQ. 

Aircraft: Piper Cherokee, PA-32, 5 seats

Rate per Eligible Flight: $1421

Weekly Ceiling $8522

Note: 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 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 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 Aviation 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 

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 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 does make payments in the stipulated amounts or at the stipulated service levels, the carrier may cease to 

provide service to that specific 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 payment.

Subsidy contracts 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 are not currently available for performance under this order beyond September 30, 2010. The Government’s 

obligation for performance under this order beyond September 30, 2010, 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, 2010, until funds are made available to 

the Department for performance. If funds are not made available for performance beyond September 30, 2010, 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 $44,349 ÷ 312 one-way flights per year = $142

2 ADQ-KYK-ADQ, 3 round trips/week * 2 directions * $142.