UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.

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1 UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C. Order Served: November 16, 2012 Essential Air Service at: Issued by the Department of Transportation on the 16 th of November, 2012 AKUTAN, ALASKA Docket DOT-OST under 49 U.S.C et seq. ORDER SELECTING CARRIER TO PROVIDE ESSENTIAL AIR SERVICE Summary By this Order, the Department is selecting Grant Aviation, Inc. (Grant), to provide Essential Air Service (EAS) at Akutan, Alaska, for two years, beginning as soon as the carrier inaugurates scheduled service at annual subsidy rates of $724,025 for the first six months of service and $579,220 for the remainder of the contract. 1 Background Order , March 25, 2011, re-selected PenAir to provide EAS at Akutan for an annual subsidy rate of $654,964 through April 30, Under that contract, Akutan receives eleven nonstop round trips per week year round to Dutch Harbor with 9-seat Grumman Goose aircraft. On August 2, 2012, PenAir filed a 90-day notice of its intent to suspend its subsidized EAS at Akutan. On August 6, 2012, the State of Alaska submitted the following comments: I want to inform you that the Alaska Department of Transportation and Public Facilities built a new airport in the Aleutian Islands called Akutan airport. The runway is paved and is 4,500 feet long by 75 feet wide. 2.We anticipate that [the new] Akutan airport will begin operations on or about September 1, 2012, 1 Such subsidy is calculated and distributed on a fiscal year basis, subject to the availability of appropriated funds. 2 The current airport serving the community of Akutan (KQA), is a seaplane base at Akutan Island. The new airport with a paved runway is located on Akun Island (7AK), about 6-7 miles away. The community has informally indicated that Akutan passengers will be shuttled by hovercraft from Akutan to nearby Akun.

2 -2- and will serve the community of Akutan, Alaska..Therefore I request that Essential Air Service change the air service location from Akutan Seaplane Base (KQA) to our new ground based Akutan airport (7AK). I believe our new airport will greatly improve access to the community of Akutan, Alaska. On August 7, 2012, the City of Akutan submitted the following comments: [T]the new Akutan Airport is scheduled to begin operations on 1 September This $71 million project is the result of significant Federal, State, local and private investment, and in no small measure PenAir s consistent commitment to provide air service, including continuation of its existing EAS contract with the U.S. Department of Transportation. The City of Akutan also expressed concern about the likelihood of finding replacement service for the Grumman Goose in time for the 1 September opening of Akutan Airport. It is also concerned with the level of service that we will require of PenAir after September 1. However, in the community s view, continuation of service by the Grumman Goose beyond 1 September is not a reasonable option, other than as a backup to a new service plan. Request for Proposals In response to PenAir s 90-day notice of intent to suspend service, by Order , August 31, 2012, the Department prohibited PenAir from suspending service and requested proposals for replacement service by October 3, We noted the State and community s concerns and preferences in our RFP. Grant Aviation was the only carrier to submit a proposal. Proposals Grant submitted two proposals. Each would provide twelve nonstop round trips per week between the new Akutan airport, 7AK, and Dutch Harbor with Beech King Air 200 and Piper PA-31 (Navajo) aircraft available as backup. 3 Under Option 1, the carrier requested $811,317 annually and under Option 2 it requested $1,123,311 annually. The only difference between the two is that Option 1 would terminate on September 30, 2014, the end of Grant s EAS contract between Atka and Nikolski and Dutch Harbor, while Option 2 would terminate several months afterwards because of the later start of subsidized service at Akutan. 4 Grant s proposal makes no provision for the transport of mail, freight or passengers between the airport on Akun and the village of Akutan, which as the operator of wheeled-aircraft only it has no ability to provide. Finally, Grant s proposal was made contingent upon the Postal Service agreeing, in writing, that Grant 3 Both are 9-seat twin-engine aircraft fully equipped for IFR operations. 4 Order , May 23, 2011, selected Grant to provide EAS at Atka and Nikolski, Alaska, for a twoyear period of not less than 24 complete months. Since the carrier began service there on September 3 and September 1, 2012, respectively, the end of that contract is September 30, The only other carrier providing scheduled service at Dutch Harbor is PenAir, and it chose not to submit a proposal. Dutch Harbor is 792 miles from Anchorage and isolated from other air service. There are certain fixed costs that if not spread over significant levels of operation, drive up the cost of providing service. The higher level of subsidy for the standalone proposal reflects this reality.

3 -3- Aviation will not be held responsible for failing to transport mail beyond Akun, to Akutan itself. To date, no such assurance has been forthcoming. Community Response In response to our request for comments we received numerous responses, all fully supporting Grant s proposal. Mayor Joe Bereskin of Akutan supports Grant as the best solution for the continuation of vital air service to Akutan and encourages all parties to work out an acceptable arrangement for the handling of mail so that air service can resume in the immediate future. Jacob Stepetin, the Administrator of the Native Village of Akutan, also fully supports the selection of Grant. Similar comments were submitted by Larry Cotter, the CEO of the Aleutian Pribilof Island Community Development Association, and Joseph Plesha, the Chief Legal Officer of Trident Seafoods, one of the largest seafood processing plants, employing more than 1,000 people. On November 8, the State of Alaska indicated it supported the EAS program and deferred to the community of Akutan as the best judge of the community s needs. Postal Service Comments The Postal Service filed comments on November 6, The Postal Service indicated It is against the Postal Service s policy to pay additional costs related to contracting with the hovercraft service referred to in [Grant s] proposal. The Postal Service was not involved, invited to become involved, or consulted regarding the project that resulted in the construction of a runway on Akun. Thus we do not understand how the bill for difficulties arising out of decisions made or actions taken during that process could properly be assigned to the Postal Service. In an dated November 6, 2012, the Postal Service indicated we have not fined PenAir nor have we penalized them for not operating their posted schedules because we know how difficult the conditions are in that area of Alaska. Rather we work with the air carrier We also noted their concern about the hovercraft reliability and we indicated to Grant Aviation that we would consider allowing Grant to acquire a mail storage facility on Akun Island. So the Postal Service has addressed all of Grant s postal concerns aired in their initial EAS bid. 5 Decision The carrier-selection decision is straightforward. Grant is the only carrier to submit a proposal; it is a well-established carrier that provides reliable EAS at other communities; and it has the full support of the community. Regarding the selection period, we will accede to Grant s request to bundle the Akutan contract with the Atka-Nikolski contract. Grant began providing subsidized EAS at nearby Atka and Nikolski on September 1 and September 3, respectively, meaning that those two-year contracts will expire on September 30, Consistent with Grant s request, we will establish that date as the end of this contract as well. 5 We note that this does not address the fundamental issue of who is responsible for the hovercraft service.

4 -4- After discussions with Grant, the carrier revised its proposal to request a lower level of subsidy. Under the revised proposal the carrier would provide the same level of service, 12 nonstop round trips per week between Dutch Harbor and Akun, and requests $724,025 annually from the start of scheduled service through May 31, 2013, and $579,220 annually for the period June 1, 2013, through September 30, Under the revised proposal Grant would provide the bulk of its service with 9-seat Navajo aircraft rather than 9-seat King Air aircraft. 6 We find the revised service and subsidy levels to be reasonable. The carrier s agreement reiterates that Grant has no ability to deliver passengers, mail, or freight beyond Akun (7AK) to Akutan (KQA), and the subsidy rates in question do not presume that such service will be provided. However, the carrier will endeavor to work with all parties to coordinate its service with the hovercraft operating between Akun and Akutan. We shall make this selection contingent upon the Department s receiving properly executed certifications from Grant Aviation that it is in compliance with the Department s regulations regarding drug-free workplaces and nondiscrimination, as well as the regulations concerning lobbying activities. When the contracts for the three communities of Akutan, Atka, and Nikolski near their end, we anticipate issuing a single Request for Proposals. Emergency Nature In the typical EAS situation, we would expect PenAir and Grant to work together to make a smooth service transition, including notifying any passengers holding reservations for travel after the suspension date, to assist those passengers in making alternate air transportation arrangements, or to provide a refund of the ticket price, without penalty, if requested. However, this case is unique. In anticipation of the new airport s being completed on or about September 1, 2012, the State and East Aleutian Borough secured a hovercraft to ferry people, mail and freight the 7 miles from the airport on Akun to the village of Akutan. In order to accommodate the hovercraft, they built a dock/pier at Akutan for the hovercraft to use to load and offload passengers, freight and mail. As a result, PenAir no longer has access to a ramp that was needed for its Grumman Goose. In consequence, PenAir attempted to use a section of beach that was so rocky that it caused damage to its aircraft, and was inherently unsafe. 7 As a result, it ceased all operations to Akutan as of October 22, We understand that Grant, in the interim, has operated charter flights from Dutch Harbor to the new airport on Akun, but the community is without scheduled service, although Grant s charter service provides passenger, freight, and mail service on an ad hoc basis 6 The 30-mile stage length between Dutch Harbor and Akun is well within the Navajo s operational capability. That is not the case for the subsidized service to Atka and Nikolski, which are 340 and 117 miles from Dutch Harbor, respectively. 7 See PenAir s comments on September 20, 2012.

5 -5- Carrier Fitness 49 U.S.C (b) and requires that the Department find an air carrier fit, willing, and able to provide reliable service before Department may subsidize it to provide essential air service. Grant Aviation, Inc., is subject to the Department s continuing fitness requirements. The Department has contacted the Federal Aviation Administration, and it has raised no concerns that would negatively affect our fitness findings. 8 The Department therefore concludes that the carrier remains fit to conduct the operations proposed here. This Order is issued under authority delegated in 49 CFR Part 1.56a(f). ACCORDINGLY; 1. We select Grant Aviation, Inc., to provide essential air service at Akutan, Alaska; 2. We set the final rate of compensation for Grant Aviation, Inc., for the provision of Essential Air Service at Akutan, Alaska, as described in Appendix C; 3. We direct Grant Aviation, Inc., 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 service data 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 carrier may forfeit its compensation for any claim that is not supported under the terms of this Order; 4. We find that Grant Aviation, Inc., continues to be fit, willing and able to operate as a certificated carrier and capable of providing reliable essential air service at Akutan; 5. This docket will remain open until further order of the Department; and 8 The National Transportation Safety Board (NTSB) and the FAA are currently in the preliminary stage investigating a Grant Aviation incident on October 27, 2012, with no reported injuries. Should the investigation final reports reveal findings adverse to the air carrier, we would reassess the air carrier s fitness in light of those findings.

6 -6-6. The Department will serve a copy of this Order on the civic officials of Akutan, the Alaska Department of Transportation and Public Facilities, and Grant Aviation. By: (SEAL) Susan L. Kurland Assistant Secretary for Aviation and International Affairs An electronic version of this document is available at

7 Appendix A-1 Nonstop Great Circle Miles on the Aleutian Chain, Starting with the Farthest Community From Anchorage Adak (ADK) Atka (AKB), 107 Atka (AKB) Nikolski (IKO), 231 Nikolski (IKO) Dutch Harbor (DUT) 116 Dutch Harbor (DUT) Akutan (KQA) 35 Akutan (KQA) Cold Bay (CDB) 143 Cold Bay (CDB King Salmon (AKN) 332 King Salmon (AKN) to Anchorage (ANC) 288

8 Nonstop Great Circle Miles Akun (7AK) to Akutan (KQA) 7 Dutch Harbor (DUT) to Akutan (KQA) 42 Akun (7AK) to Dutch Harbor 35 Appendix A-2

9 Appendix B Grant Aviation, Inc., EAS to be Provided to Akutan/Akun, Alaska, Docket Aircraft Type Navajo Weekly Nonstop Round Trips to Akun (7AK) 12 Annual Flights 1,248 1/ Block Time 0.30 Annual Block Hours 374 Rate Units Pax. Revenue $148 2,000 $296,000 Mail Revenue $ ,000 $68,970 2/ Freight Revenue $ ,000 $24,750 Total Revenue $389,720 Pilots, $400 per day $ $169,360 Fuel and Oil, Gallons $8 16,848 $134,784 3/ Flight Maintenance $ $222,530 Insurance $25,448 Aircraft Lease $4, $54,000 Total Direct Expense $606,122 Hanger lease / month $4, $48,000 5/ Ticketing & ground service / per turn $ $187,200 Freight & mail Handling / lb DUT & Akun $ ,000 $27,720 Staff facilities $3, $36,000 5/ Total Indirect Expense $298,920 Sum of direct and indirect costs $905, % 17.2% $155, % 5.0% $53,035 Total Annual Economic cost $1,113,745 Annual Subsidy Rate, Initial Six months $724,025 Annual Subsidy Rate, Remainder, Thru $579,220 1/ 12 round trips per week x 2 direction x 52 weeks = 1,248 2/ Linehaul, $ per ton mile x 35 miles = $422.67/ton, Terminal, $716.16/ ton, or $0.57 per pound total, Order

10 Essential Air Service to be Provided to Akutan, Alaska, Docket Appendix C Effective Period: Start of Service through September 30, Scheduled Service: 12 nonstop round trips per week between Akun (7AK) and Dutch Harbor, (DUT). Aircraft Type: Piper PA-31 Navajo, 9 seats. Start of Scheduled Service June 1, 2013 Thru May 31, 2013 September 30, 2014 Annual Subsidy 1 $724,025 $579,220 Annual Flights 2 1,248 1,248 Rate per Flight 3 $580 $464 Weekly Ceiling 4 $13,920 $11,136 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 contract 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 March 31, The Government s obligation for performance under this Order beyond March 31, 2013, 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 March 31, 2013, until funds are made available to the Department for performance. If funds are not made available for performance beyond March 31, 2013, 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. Note: Grant Aviation reiterates that it cannot be responsible for service beyond Akun. The carrier will coordinate as much as possible with the hovercraft providing service between Akun and Akutan. 1 See AppendixB round trips per week x 2 directions x 52 weeks = 1, Annual subsidy divided by annual flights. 4 Rate per flight times 24 flights per week.

11 Appendix D General Terms and Conditions for Essential Air Service 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 these rates, 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 communities. 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 solicitation beyond March 31, The Department s obligation for performance under this solicitation beyond March 31, 2013, is contingent upon 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 March 31, 2013, until funds are made available to the Department for performance. If funds are not made available for performance beyond March 31, 2013, the carrier will receive notice in writing by the Department. All claims for payment must be submitted within 60 days of the last day of service provided under this Order