OFFICE OF THE AUDITOR

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1 OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION REVENUE AND CONTRACT COMPLIANCE AUDIT JUNE 2006 Dennis J. Gallagher Auditor

2 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX June 16, 2006 Mr. Turner West, Manager Department of Aviation City and County of Denver Mr. Hal Fahrenbruch Property, Facilities and Airport Services Mgr. Mesa Airlines, Inc. 410 N. 44th St., Suite 700 Phoenix, AZ Dear Mr. West and Mr. Fahrenbruch: Attached is the Auditor s Office Internal Audit Division s report of their revenue and contract compliance audit of Mesa Airlines, Inc. Airport Use and Facilities Agreement dated November 10, 2004 for operations at Denver International Airport. The audit period was for the year ended December 31, The purpose of our audit was to determine whether Mesa Airlines, Inc. and the City and County of Denver complied with the terms of the contracts and whether internal controls in place were adequate under the circumstances. No material exceptions were noted as a result of the audit. If you have any questions, please call Mike Clark, Director of Internal Audit at Sincerely, DJG/kh cc: Dennis J Gallagher Auditor Honorable John W. Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Cole Finegan, City Attorney and Acting Chief of Staff Lauri Dannemiller, Executive Staff Director, City Council Stan Koniz, Deputy Manager of Aviation for Business and Technologies Pete Gingras, Assistant Deputy Manager of aviation/properties Laura Trujillo, Acting Co-Assistant Deputy Manager of Finance The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government. 1

3 TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 2 Internal Auditor s Report 3 Background, Scope, Objective, and Methodology 4 Schedule of Amounts Due and Paid and Related Notes 6 2

4 City and County of Denver Dennis J. Gallagher Auditor 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX INTERNAL AUDITOR S REPORT We have completed a revenue and contract compliance audit of the Airport Use and Facilities Lease Agreement (Contract), dated November 10, 2004, between Mesa Airlines, Inc., and the City and County of Denver. The purpose of this audit was to determine whether the accompanying Schedule of Amounts Due and Paid for the year ended December 31, 2003 is fairly presented in accordance with the Contract. We also determined whether Mesa Airlines, Inc. and the Department of Aviation complied with various other terms and conditions of the Contract, City rules and regulations, and whether internal controls were adequate in the circumstances. This audit was included in the Auditor s Office Internal Audit Division s 2004 Annual Audit Plan, and authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor. We conducted our audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Schedule of Amounts Due and Paid is in compliance with contract conditions. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the schedule. As further noted in Note 3 to this report, Mesa Airlines, Inc. operated under code-share agreements with United, Frontier, and American Airlines. As a result, many Mesa flights were actually booked by these code-share airlines. Per federal regulations, it is the responsibility of the airline issuing the airline ticket and collecting the Passenger Facility Charge (PFC) to account for and report PFC activity. Accordingly, PFC charges for these flights were collected and paid by the code-share airlines and were not included within the scope of this examination. Our audit of Mesa Airlines, Inc., began on November 18, 2004 and was substantially completed on December 21, Issuance of this report was delayed due to changes in work priorities and changes in the audit staff. We did not identify any material misstatement of the schedule of amounts due and paid as a result of our audit. We also did not identify any significant reportable conditions. Internal Audit Division Date: June 16, 2006 Staff: Dick Wibbens, CPA, Audit Manager Stan Wilmer, CPA, Audit Supervisor Wayne Leon Sanford, Senior Auditor Thomas Loreno, Staff Auditor Mike Clark, CPA Director of Internal Audit The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 3

5 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2003 Background Mesa Airlines, Inc. (Mesa Airlines) is a regional air carrier providing scheduled air transportation for passengers and airfreight over a network of routes throughout the United States. Mesa Airlines operates primarily through code-share agreements with Frontier Airlines, United Airlines and America West Airlines. The code-share agreements allow Mesa Airlines to use the major carrier's reservation system and the two-letter code of the major carrier that identifies flights and fares in the worldwide reservation system. Revenue paid by Mesa Airlines to the City and County of Denver (City) is determined in accordance with the Airport Use and Facilities Lease Agreement dated November 10, 2004, and the Denver Municipal Airport System Rules and Regulations (DMASR&R). The Airport Use and Facilities Lease Agreement detail s the airfield area facilities and the space exclusively used by Mesa Airlines in the main terminal and Concourse A. The rental rate fees and other charges are established in accordance with the cost-accounting concepts and ratemaking procedures described in Exhibit F of the contract. Scope Our audit of Mesa Airlines, Inc. at DIA (PeopleSoft fund 73800/org ) was for the year ended December 31, Procedures performed included determining compliance with the contract between the City and Mesa Airlines, Inc., as listed above and with the DMASR&R. Additionally, we reviewed the unaudited PFC reports submitted by Mesa Airlines for the year ended December 31, 2003, determined that they were calculated properly, and traced remittances made to the cash receipts register of the Department of Aviation. Objectives The objective of our audit was to determine whether Mesa Airlines paid the City the correct amounts for landing fees, space rent, automatic guideway transit system fees, baggage claim fees, conventional baggage operational and maintenance fees, deicing charges, and interest in accordance with the contracts stated above and the DMASR&R. Additional objectives included determining whether Mesa Airlines and the Department of Aviation complied with other terms and conditions of the contracts, as well as other City rules and regulations as we considered necessary in the circumstances. The objective of our review of Mesa Airlines unaudited PFC Report was to determine if the independent auditor concluded that the report was fairly presented, and in the calculation of the PFC amounts and compensation withheld used the correct formula. 4

6 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY Methodology To meet the audit objective the following evidence gathering and analysis techniques were used including, but not limited to: Review of internal controls Verification of gross landing weight Verification of rates charged Verification of evidence of receipts Confirmation of receipts Recalculation of financial transactions Discussions with management and staff Verification of evidence of insurance and performance bond Onsite physical inspections Recalculation of PFC report to determine its conformity with 14 C.F.R

7 SCHEDULE OF AMOUNTS DUE AND PAID FOR THE YEAR ENDED DECEMBER 31, 2003 Amount Due Amount Paid Balance Due (Note 1) (Note 2) Landing fees $1,093,728 $1,093,728 $ - Space rent 467, ,825 - Baggage claim fees 376, ,952 - Automatic guideway transit system 375, ,525 - Conventional baggage system operation and maintenance 49,401 49,401 - Passenger facility charge (Note 3) 7,474 7,474 - Interest charges 8,742 8,742 - Late Reporting Penalty 20,150 20,150 - Total $2,399,797 $2,399,797 $ - The accompanying notes are an integral part of this schedule. 6

8 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID Note 1. Amounts Due Landing fees, space rent, automatic guideway transit system, and baggage claim fee components are listed as revenue-producing cost centers in Exhibit F of the Airport Use and Facilities Lease Agreement. As required by Section 5.05 of the Airport Use and Facilities Lease Agreement, the City s independent auditors annually prepare a final audit. Leigh Fisher Associates, an airport consultant company, use this audit to determine the actual fees for the revenue-producing cost centers at the airport due each year. This determination was done in Leigh Fisher Associate s Year-End Settlement of Rentals, Fees, and Charges for 2003 dated March 12, We obtained the actual rates from this report to determine the amounts for landing fees, space rent, automatic guideway transit system, baggage claim fees and cargo fees in the accompanying schedule. Specific revenue components were as follows. Landing Fees Landing Fees The estimated annual landing fee for the year 2003 and the midyear adjustment was $3.265 through August and $3.43 thereafter per 1,000 pounds of landed weight for signatory carriers. There were 339,558,500 pounds of gross landing weight for Mesa Airlines in The number of reported landings by Mesa Airlines was verified through records maintained by the DIA Airport Noise and Operations Monitoring System on a test basis. Space Rent The revenue-producing cost centers of Mesa Airlines and the actual fees and applicable space as listed in the Final Report are as follows: Concourse A exclusive preferential sq. feet *$73.36 per sq. foot Concourse A tenant finishes and Equipment 902 sq. feet *$23.21 per sq. foot Joint use allocation 902 sq. feet *0.26% of joint use cost (Joint use cost is $6,067,596) Concourse A Commuter ramp $0.207 per 1,000 lbs of landing and take-off weight Concourse A commuter gate use 3 gates $ per gate Baggage Claim and Automatic Guideway Transit System Fees (AGTS) The revenue producing cost centers include baggage claim, the AGTS and tunnels, and the conventional baggage system. The number of passengers both deplaned and Originating and Destination (O&D) were used in the calculation of fees as follows: Baggage claim Rate is *2.1% of baggage claim cost Actual total baggage (Percent of Domestic Destination claim cost was Passengers (DDP)) $14,563,224 Concourse A Baggage Sort Equipment Rate is *3.66% of baggage sortation cost Actual total baggage (Percent of enplaned passengers) sortation equipment costs was $1,314,988 *These rates are rounded. 7

9 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID Concourse A Baggage Spine System Rate is *4.26% of baggage system cost Actual baggage system (Percent of domestic O&D passengers) cost was $693,324 AGTS and tunnels Rate is *2.05% of recoverable costs Actual recoverable (Percent of ODP) cost is $18,294,757 *These rates are rounded The remaining revenue components are based on contract requirements and/or the Denver Municipal Airport System Rules and Regulations. The specifics are as follows: Conventional Baggage System Operation and Maintenance The actual costs for outbound and inbound conventional baggage system operation and maintenance allocated to Mesa Airlines for 2003 based on origination and destination passengers amounted to $49,401. The Department of Aviation reconciles the actual budget versus the estimated budget at the end of every year. Interest Charges Section 9.10 of the Airport Use and Facilities Lease Agreement, provides that any payment not made when due shall accrue interest at the rate of 18% per annum commencing five days after such due date. Note 2. Amounts Paid All amounts paid in the schedule of amounts due and paid were compiled from the Department of Aviation s cash receipts records. Amounts paid include those billed and due during the audit period and collected in the ordinary course of business whether or not within the audit period. Note 3. Passenger Facility Charges Passenger Facility Charges (PFC) are imposed pursuant to 14 CFR Part 158, Federal Aviation Administration, Department of Transportation. Issuing ticket carriers are responsible for all PFC funds charged and collected. Each collecting carrier that issues an airline ticket that collects more than 50,000 PFC transactions annually shall provide for an audit at least annually of its PFC account. Per the DMASR&R, each carrier collecting PFC s shall comply with the record keeping and auditing requirements of 14 CFR Part and shall provide a copy of the required annual audit to the City and County of Denver as soon as it is available each year. Mesa Airlines, Inc., PFC activity does not meet the regulation threshold for providing an annual audit of their PFC activity. Note 3. Code Sharing Mesa Airline, Inc., participates in code-sharing arranges with Frontier Airlines, United Airlines and America West Airlines. If Mesa is not the direct seller of the airline passenger ticket, they do not collect the passenger fare and associated PFC charge. Therefore, Mesa is not required to report PFC activity on these types of transactions. It is the responsibility of the airline issuing the passenger ticket and collecting the air fare and associated charges to account for and report the PFC activity. 8

OFFICE OF THE AUDITOR

OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION (FORMERLY AMERICAN TRANS AIR, INC.) REVENUE AND CONTRACT COMPLIANCE AUDIT JUNE 2006 Dennis J. Gallagher Auditor Dennis J. Gallagher Auditor City and County