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 9 th of June, 2010

Essential Air Service at

AKHIOK, ALASKA KARLUK, ALA SKA

Under 49 U.S.C. 41731 et seq

. DOCKET OST

- 200 7

- 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 Isl ander 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, O rder 2009

- 11

- 10 requested “best and final” proposals for both communit ies , with proposals due December 22

. Servant Air submitted a proposal at Akhiok, but no t at Karluk

. Servant Air proposed to provide EAS at Akhiok for $556,715 annual subsidy , while Island Air submitted two opti ons 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 s ubsid y 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.- 2

-

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 reduce d 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 indicat ing it would p rovide 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 th at subsidy to lapse at the end of the contract. At Karluk, b ecause Servant was not then providing EAS to that community
, we set a final r ate 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 in augurate 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 d ate, it cannot tell us when it would be

a ble 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 req uired 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 servi ce 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 s o that we can base a carrier

- selection decision on that record. W e will therefore select Island Air to provide subsidized EAS at Karluk , from April 1, 2010, through March 31, 2012, the date s it originally proposed.

3 The proposed l ower 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 a nd 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 subsidy

free service as proposed.” 5 Servant never requested subsidy support at K arluk, but only said that it would provide subsidy

- free EAS at Karluk

. A n option for the Department to rely on subsidy

- free service is not a proposal, but rather reflects the market place working . T he bulk of the communities in Alaska and the U.S. continue to receive subsidy

- free EAS and we do not select those carriers.- 3

-

We must now address t he 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, t hough not quite sufficient ly 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, w e will continue to rely on Servant Air’s subsidy

- free service at Akh iok.

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 re ly 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

. W e 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 a nd 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 m ust be retained. The carrier may forfeit its compensation for any claim that is not supported under the terms of this order; and- 4

-

5 . We will serve copies of this order on the State of Alaska, Servant Air, Inc., and Redemption, Inc.

By:

Susan L. Kurl and 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

Nonstop Great Cir cle Miles

AKK

- ADQ 84

KYK

- ADQ 74

AKK

- KYK 44

ANC

- ADQ 252

This map is provided by Sabre ® AirVision TM 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 $44,349Appendix C
Island Air Service, Inc., Inc., Essential Air Service to be Provided t o Karluk, Alaska , Docket OST

- 200 4

- 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: $ 142 1

Weekly Ce iling $852 2

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 signi ficant 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 t hat 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 per iod
, 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 c an 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 t he 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 complete ly , 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 p ayment.

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 , 20 10 . The Government’s obligation for performance under this order beyond September 30 , 20 10 , 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 , 20 10 , until funds are made available to the Department for performance. I f funds are not made available for performance beyond September 30 , 20 10 , 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

.