Order 2015-4-3 Served: April 7 2015



### UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation

on the 7 th day of April, 2015

ORDER TEMPORARILY EXTENDING CURRENT CONTRACT

Summary By this Order, the Department is extending th e current contract for Great Lakes Aviation, Ltd. (“Great Lakes”) to provide Essential Air Service (“EAS”) at Merced, California, from March 1, 2015, through September 30, 2015, as described in Order 2012-9-9. By further Order, the Department may terminate this rate term before, or extend it beyond, September 30, 2015, as explained in this Order and pursuant to 49 U.S.C. §§ 41734 and 41737(d). Great Lakes will continue to provide Merced with 12 weekly nonstop round trips to Los Angeles International Airport (LAX), at an annual subsidy rate of $2,779,116. 1

Background By Order 2012-9-9, issued on September 10, 2012, the Department re-selected Great Lakes to provide subsidized EAS at Merced using Beechcr aft 1900 aircraft, for the two-year period from October 1, 2012, through September 30, 2014. By Order 2014-10-15, issued on October 16, 2014, the Department extended that contract, and amended the subsidy rate, from October 1, 2014, through February 28, 2015. Under that contract, Great Lakes has provided Merced with 12 weekly nonstop round trips to LAX, at an annual subsidy rate of $2,779,116.

As the end of that rate term approached, the Department issued Order 2014-5-9, on May 21, 2014, requesting proposals from air carriers interested in providing EAS at Merced for a new term, with proposals due no later than June 27, 2014.

On June 26, 2014, Mokulele Airlines requested an extension to that deadline, until July 11, 2014. In that request, Mr. Ron Hansen, Chief Operating Officer of Mokulele Airlines, explained that the air carrier needed additional time to evaluate the market. By Notice dated June 26, 2014, the Department granted the extension request and set the due date for proposals at July 11, 2014. On that date, five air carriers submitted proposals to serve Merced: Great Lakes, Boutique Air, Makani Kai Air, S eaPort Airlines, Inc., and Mokulele Airlines.

1 Subsidy is calculated and distribut ed on a fiscal year basis, subject to the availability of funds. Essential Air Service at

MERCED, CALIFORNIA

Under 49 U.S.C. § 41731 et seq

. DOT-OST-1998-3521-2-

Those proposals, as well as the complete public file for EAS at Merced, may be accessed online through the Federal Docket Management System at http://www.regulations.gov , by entering “DOT-OST-1998-3521” in the “SEARCH fo r: Rules, Comments, Adjudications or Supporting Documents:” field.

Community Comments On July 14, 2014, the Department requested community comments regarding this air carrier selection case. On August 14, 2014, the community of Merced requested an extension of the deadline to submit formal comments. On August 15, 2014, the Department granted the extension requests and set the due date for formal comments at September 29, 2014.

By letter dated September 29, 2014, the Department was notified by Mr. John Bramble, Merced City Manager, and Mr. Larry Morelock, Chair of the Merced Regional Airport Authority, that the community had considered the various merits of each air carrier’s proposal; however, the city had not yet reached a conclusion as to which air carrier it intends to

recommend for this carrier-selection case.

On February 20, 2015, the Department participated in a telephone conference with Ms. Janet Young, Interim Manager at Merced Regional Airport, to determine which of the five proposals the community supports. Ms. Young explained that the community is in discussions with the applicants regarding the service proposals submitted for consideration. During that conversation, Ms. Young requested additional time to submit formal comments. Given that the Department has not finalized this carrier selection case by the end of the rate term established by Order 2012-9-9, and in accordance with 49 U.S.C. § 41734(c), the Department must extend

Great Lakes’ EAS contract until this carrier selection case has concluded.

Subsequent Developments On March 27, 2015, one of the air carriers that submitted a proposal to serve Merced for a new term requested a modification to its proposal. The Department found it to be in the public’s interest to grant the modification request, and in order to continue to provide a fair carrier selection process, the Department offered all carriers that originally proposed service at Merced, in response to Order 2014-5-9, an opportunity to amend their proposal, if they so choose. Any amended proposals are due by April 6, 2015. The Department will request formal comments from the community on expedited bases and conclude the carrier selection

case soon thereafter.

Legislative Changes That May Affect Future EAS Eligibility at Merced The Federal Aviation Administration (FAA) Modernization and Reform Act of 2012 (Public Law No: 112-95) amended 49 U.S.C. § 41731(a)(1)(B) to change the definition of “eligible place” for the purpose of receiving EAS. The amendment states that to be eligible, a community must maintain an average of 10 enplanements or more per service day, as determined by the Secretary, during the most recent fiscal year beginning after September 30, 2012. The legislation exempts locations in Alaska and Hawaii and communities that are more than 175 driving miles from the nearest large- or medium-hub airport. As Merced is within 175 miles of Mineta San Jose International Airport (SJC), a medium-hub airport, it must meet the 10-enplanement-a-day threshold for EAS to continue after FY2013 or otherwise face termination of its eligibility to receive EAS, barring a waiver from the Secretary.-3-

Additionally, the Department is prohibited from subsidizing air service at a community where the subsidy per passenger exceeds $200, unless the community is more than 210 highway miles from the nearest large- or medium-hub airport. This applies to Merced due to the fact that it is located less than 210 miles from SJC, a medium-hub airport. 2

By Order 2014-4-26, issued on April 24, 2014, the Department issued a show-cause Order directing interested parties to submit objections to the Department’s tentative findings that Merced enplaned fewer than 10 passengers per day. In response to that Order, the Department received objections from the community, but none of those objections disputed our findings that Merced enplaned fewer than 10 passengers per day during FY 2013.

Therefore, by Order 2014-6-6, issued on June 24, 2014, the Department made final its tentative decision in Order 2014-4-26, thereby terminating the EAS eligibility of Merced. On June 3, 2014, the Merced Regional Airport submitted an application for a waiver on behalf of the community of Merced.

By Order 2014-9-21, issued on September 26, 2014, the Department granted the waiver petition submitted by Merced Regional Airport. That Order states that Merced’s compliance with 49 U.S.C. § 41731(a)(1)(B) will be re-assessed based on Fiscal Year 2015 data (October 1, 2014, through September 30, 2015). The Department will continue to process the carrier-selection case at hand; however, to ensure that Merced does not suffer from a service hiatus, the Department must extend Great Lake s’ current contract from March 1, 2015, through September 30, 2015. However, as discussed above, by further Order, the Department may terminate this rate term before, or extend it beyond, September 30, 2015, as explained in this Order and pursuant to 49 U.S.C. §§ 41734 and 41737(d).

Decision Great Lakes must continue to provide EAS to the community as described in Order 2012-9-9, until the carrier selection proceeding is complete. 3 The Department will extend Great Lakes’ current subsidy rate of $2,779,116, through September 30, 2015, as described in Great Lakes’ most recent proposal dated July 11, 2014 (further detailed in Appendix B of this Order). If the carrier selection proceeding is completed before the end of the rate term established by this Order, the Department will issue a new Order either selecting a replacement carrier and terminating Great Lakes’ continued obligation to provide EAS at Merced or re-selecting Great Lakes at a new subsidy rate and term. If the carrier selection proceeding is not completed by September 30, 2015, the Department will issue another Order further extending Great Lakes’

contract established in this Order.

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

ACCORDINGLY, 1. The Department extends the Essential Air Se rvice contract of Great Lakes Aviation, Ltd., to continue to provide Essential Air Service at Merced, California, under the terms and conditions

2 Congress first established the $200 ceili ng under P.L. 101-164 for fiscal year 1990, and re-established it in fiscal years 1994-1999. The ceiling was made permanent by P.L. 106-69, the Department of Transportation and Related Agencies Appropriations Act of 2000.

3 49 U.S.C. § 41734.-4-

established by Order 2014-10-15, through September 30, 2015. By further Order, the Department may terminate this rate term before, or extend it beyond, September 30, 2015, as explained in this Order and pursuant to 49 U.S.C. §§ 41734 and 41737(d);

2. The Department sets the rate of comp ensation for Great Lakes Aviation, Ltd., for the provision of Essential Air Service at Merced, California, as described in Appendix B;

3. The Department directs Great Lakes Aviati on, Ltd. 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 from the issuance 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;

4. Docket DOT-OST-1998-3521 will remain open until further order of the Department; and

5. The Department will serve copies of this Order on the civic officials of Merced, California, the Managers of Merced Regional Airport, Great Lakes Aviation, Ltd., Boutique Air, Makani Kai Air, SeaPort Airlines, Inc., and Mokulele Airlines and the service list for this

docket.

By:

BRANDON M. BELFORD Deputy Assistant Secretary for

Aviation and International Affairs

(SEAL)

An electronic version of this document is available online at www.regulations.govAppendix A



# Great Lakes Aviation, Ltd.

Annual Compensation Requirements for Essential Air Service at Merced, California to Los Angeles (LAX) Two Round Trips - B1900 - 9 seat - (at 98 percent completion)

Departures: 1,227

Block Hours: 1,534 Revenue Passenger Miles: 1,820,000

Available Seat Miles: 2,871,180

Operating Revenues: Passenger: MCE-LAX 7,000 psgrs at $92.27 $645,890

Other: (at 0.62% of passenger revenue) $4,005

Total Operating Revenues: $649,895

Operating Expenses:

Direct: Aircraft and Hull Insurance $365,710

Fuel and Oil $911,917 Flying Operations $302,565

Maintenance $483,092

Total Direct Expenses: $2,063,284

Total Indirect Expenses: $1,202,440

Total Operating Expenses: $3,265,724

Operating Loss ($2,615,829) Profit Element (5.0% of Total Operating Expenses) $163,286

Annual Compensation Requirement: $2,779,116

All Merced – Los Angeles – Merced service is Non-Stop

This Proposal is submitted with no upline scheduling restrictions.Appendix B

Great Lakes Aviation, Ltd.

Essential Air Service to be Provided at Merced, CA

Effective Period: March 1, 2015, until September 30, 2015

Scheduled Service: 12 w eekly nonstop round trips to Los Angeles (LAX)

Aircraft: 9-Seat Beechcraft 1900 Rate per Eligible Flight 1 : $2,272 Weekly Ceiling 2 : $54,528

The air 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, incl uding the service plans outlined in the Order and any othersignificant elements of the required service, without prior approval. The air carrier understands that an aircraft takeoff and landing at its scheduled destination constitutes a co mpleted 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 air 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 air carrier contemplates any such changes beyond the scope of the Order during the applicable period of these rates, it must first notify the Office of Av iation 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 air carrier to provide service on these routes. The air 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 air carrier may cease to provide serv ice to that specific location wit hout 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 air 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 may not be available for performance under this Order beyond September 30, 2015. The Government’s obligation for performance under this Orde r beyond September 30, 2015, 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 performance under this Order beyond Septembe r 30, 2015, until funds are made available to the Department for performance. If sufficient funds are not made available for performance beyond September 30, 2015, the Department will provide no tice 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 st ; August claims must be submitted by November 30 th , and so on.

1 Annual compensation of $2,779,116, divided by 1,223 annua l departures (4 flights x 6 days x 52 weeks x 98 percent completion).

2 24 flights per week multip lied by $2,272 per flight.