Order 2003-1-8 Served: January 3, 2003 UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C. Issued by the Department of Transportation on the 3rd day of January, 2003 Essential Air Service at: ADAK, ALASKA Under 49 U.S.C. 41731 et seq. Docket OST 00-8556 ORDER SELECTING CARRIER Summary By this order, we are selecting Alaska Airlines, Inc., to provide subsidized essential air service (EAS) at Adak, Alaska, for the one-year period beginning with the start of its service at an annual subsidy rate of $1,647,026. Background On December 5, 2000, Reeve Aleutian Airways, Inc. (Reeve) ceased operating scheduled service in Alaska, leaving Adak with no air service. Adak is an island community toward the end of the Aleutian chain located 445 miles west of Dutch Harbor, the nearest community with scheduled jet service, and 1,192 miles from Anchorage. Adak'’s essential air service determination was established by Order 80-1-167 as five round trips a week during the peak and four round trips a week during the off-peak to Anchorage, 1,192 miles distant, with up to two intermediate stops and 60-seat or larger aircraft. For many years, Adak served as a naval base, but the base closed a few years ago and traffic has shrunk. As a result of the decreased demand, and based on agreement between the State of Alaska and the Department, for some time Reeve provided service below Adak’s EAS determination, but still operated two round trips a week with Boeing 727-100 aircraft, until it ceased operations, in order to accommodate passenger, freight, and mail needs. A village of approximately 100-to-200 people remains at Adak, down from about 5,000 several years ago, before the base closing. By Order 2001-7-3, the Department selected Evergreen to provide two round trips a week with Boeing 727-100 combi aircraft for $1,502,542 annually. As stated on page 6: The very long distance of 1,200 miles to Anchorage, coupled with the very severe and unpredictable weather, almost dictates the use of large aircraft. The large aircraft with both its greater lift and larger cargo door should fully accommodate Adak’s cargo needs. In addition, all of the options require very substantial subsidy levels. On balance, we find that while the unique nature of the Adak market militates towards the selection of large combi aircraft, we will be examining during the ensuing two-year period the air service situation at Adak. Because Evergreen did not have active authority to transport passengers, the order authorized Evergreen and Peninsula to provide, in the meantime, a mixture of once-a-week, all-cargo service from Evergreen with DC-9-30 aircraft for $748,392 and passenger service from Peninsula consisting of 4 peak and 3 off-peak round trips per week with Metro 23 aircraft for $564,043. All service, under the interim arrangement, was to be provided to Anchorage. By Order 2002-7-5, July 2, 2002, the Department re-solicited proposals for Adak, because Evergreen had not inaugurated the combination passenger/cargo service the Department selected. Proposals In response to our request, four carriers, Evergreen, Peninsula, Alaska, and Jetstream Aviation submitted proposals. Alaska Airlines Alaska'’s proposal includes two options. Under Option 1, Alaska proposes to provide Adak with two one-stop round trips a week to Anchorage year round with B-737-200 combination passenger/cargo aircraft for $1,647,026 annual subsidy for a one-year contract period. Under Option 2, Alaska would require the same level of subsidy for the same level of service but the contract period would extend for two years instead of one. Alaska Airlines would have the option of stopping at Dillingham, Cold Bay, or King Salmon. Evergreen International Evergreen proposes to provide one one-stop (at Cold Bay) round trip per week to Anchorage with all-cargo DC-9 aircraft, and requests $1,729,133 annual subsidy. Selecting Evergreen would require the selection of another carrier to provide passenger service, but neither Alaska, Peninsula, nor Jetstream chose to negotiate such a partnership. Peninsula Airways Peninsula'’s proposal includes three options, all of which would make an intermediate stop at Cold Bay. Under Option 1, Peninsula proposes to provide Adak with three, one-stop round trips a week to Anchorage year round with 30-seat Saab 340 turboprop aircraft and requests $849,931 annual subsidy for this service. Under Option 2, Peninsula proposes to provide Adak with three one-stop round trips a week to Anchorage in the peak period and two in the off-peak, also with Saab 340s, and requests $556,540 annual subsidy for this service. Under Option 3, Peninsula proposes to operate four one-stop round trips per week to Anchorage in the peak and three in the off-peak with Metro 23 aircraft. Peninsula states that under any of these options it would provide extra sections if the demand warranted at no extra expense to the government. Jetstream Aviation Jetstream'’s proposal includes two options, both of which would be operated with 16-seat, Gulfstream II-B, twin-engine jet aircraft. Under its Option I, Jetstream would provide two nonstop round trips a week to Anchorage for an annual subsidy of $1,571,909. Under Option II, it would provide three nonstop round trips a week in the 40-week peak and two nonstops in the 12-week off-peak to Anchorage for a subsidy of $1,839,404 a year. Comments By letter dated October 31, the Mayor of Adak and City Council recommended our selection of Alaska Airlines. The community based its recommendation on Alaska Airlines large aircraft, coupled with the long distance to Anchorage of 1,200 miles and the very severe and unpredictable weather in the Aleutians. Also, the community desired the cargo carrying capacity of large jet aircraft, which it felt was critical to Adak’s seafood industry. On October 1, 2002, the U.S. Postal Service expressed concern over the possible selection of a bush carrier, as the bush rate is significantly higher than the mainline, especially over a distance of 1,200 miles. The Postal Service said that it would be forced to seek lower-cost alternatives if a bush carrier were selected to provide EAS, so that no mail revenues should be included in bush carriers’ subsidy calculations. Decision We have decided to select Alaska Airlines. The proposals of Jetstream and Evergreen lack community support and require similar or more subsidy than the other applicants, and so can be readily rejected. However, the decision between Peninsula and Alaska Airlines requires us to consider conflicting carrier-selection criteria: Peninsula requires significantly less subsidy than Alaska Airlines, ranging from $749,095 to $1,247,547 less, depending on which option were selected. On the other hand, Alaska Airlines is strongly favored by the community. In non-Alaska communities, the Department would nearly always select the lower-cost alternative when the subsidy differences are this great. Also, two of Peninsula’s options would provide service with cabin-class Saab 340 aircraft, equipment larger than most subsidized communities receive, and all of Peninsula’s options would provide more frequent service than Alaska Airlines contemplates. Notwithstanding the above, the Department has traditionally given even greater weight to desires of Alaska communities, given the state’s greater dependence on air service. Clearly, no community currently relying on subsidized air service is as isolated and dependent on air service as Adak. For these reasons, we will select Alaska Airlines. However, given the very substantial level of subsidy required to support this service, if traffic does not respond or the level of subsidy support needed does not decline, we will review the issue towards the end of the one-year contract period. Regarding the Postal Service’s comments, we have assumed full mail revenues for all of the applicants in this case. At the same time, we are engaged in policy-level discussions with Postal Service officials regarding a number of issues brought about by recent mail legislation in P.L. 107-206. 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 compensate it for essential air service. The Department has routinely monitored Alaska Airlines’ continuing fitness. The Federal Aviation Administration has advised us that the carrier is conducting its operations in accordance with its regulations, and knows of no reason why we should not find that Alaska Airlines remains fit. The carrier has a great deal of experience providing air service throughout Alaska and to nearby Dutch Harbor, and, based on its operating record, we find that the carrier continues to be fit to provide the essential air transportation at issue in this case. This order is issued under authority delegated in 49 CFR 1.56a(f). ACCORDINGLY, 1. The Department selects Alaska Airlines, Inc., to provide essential air service at Adak, Alaska, for the one-year period beginning when the carrier inaugurates its proposed service; 2. The Department sets the final rate of compensation for Alaska Airlines for the provision of essential air service at Adak, as described in Appendix C, to be payable as follows: for each calendar month during which essential air service is provided, the amount of compensation shall be subject to the weekly ceiling and shall be determined by multiplying the subsidy-eligible flights completed each month between Adak and Anchorage by $7,918.39;  3. We terminate the subsidy rates set by Orders 2001-7-3 for Evergreen International Airways, Inc., and by Order 2002-8-8 for Peninsula Airways’ provision of essential air service at Adak and allow those carriers to suspend their Adak service effective with the inauguration of service by Alaska Airlines; 4. We find that Alaska Airlines continues to be fit, willing, and able to provide reliable air service; 5. We direct Alaska Airlines 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 the 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. 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; 6. This docket will remain open until further order of the Department; and 7. We will serve a copy of this order on the Alaska Department of Transportation, the Mayor of Adak, Peninsula Airways, and Evergreen International Airlines, Alaska Airlines, and the United States Postal Service. Read C. Van de Water Assistant Secretary for Aviation and International Affairs (SEAL) An electronic version of this document is available on the World Wide Web at http://dms.dot.gov Appendix C ALASKA AIRLINES, INC., ESSENTIAL AIR SERVICE AT ADAK, ALASKA, DOCKET 00-8556 EFFECTIVE PERIOD: Start of service for a one-year period. SCHEDULED PASSENGER SERVICE: 2 one-stop round trips each week to Anchorage. AIRCRAFT TYPE: Boeing 737-200 aircraft. TIMING OF FLIGHTS Flights must be well-timed and well-spaced to ensure full compensation SUBSIDY RATE PER FLIGHT: $7,918.39 COMPENSATION CEILING EACH WEEK: $31,673.56 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 plan 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 this 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 these rates, it must first notify the Office of Aviation Analysis in writing and receive written approval from the Department to be assured 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 agreed amounts or at the agreed 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 parities to the agreement 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. See Appendix C for calculations. We expect Alaska Airlines and Peninsula Airways and Evergreen International Airlines to coordinate their transition, which we expect to occur within 60 days of the issuance of this order. Annual compensation of $1,647,026 divided by the estimated annual completed departures and arrivals: 4 flights per week x 52 weeks = 208 total. Subsidy rate per flight of $7,918.39 multiplied by 4 subsidy-eligible flights each week.