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: January 26, 2012 Essential Air Service at Issued by the Department of Transportation on the 26 th of January, 2012 EAU CLAIRE, WISCONSIN HANCOCK/HOUGHTON, MICHIGAN MUSKEGON, MICHIGAN PADUCAH, KENTUCKY DOCKET DOT-OST DOCKET DOT-OST DOCKET DOT-OST DOCKET DOT-OST Under 49 U.S.C et seq. ORDER TENTATIVELY RE-SELECTING CARRIER Summary By this Order, the Department is tentatively re-selecting SkyWest Airlines, Inc. (SkyWest) to provide Essential Air Service (EAS) with subsidy rates as follows: Eau Claire, Wisconsin, $1,733,576; Hancock/Houghton, Michigan, $934,156; Muskegon, Michigan, $1,576,067; and Paducah, Kentucky, $1,710, Background By Order , issued on August 8, 2011, in anticipation of the December 31, 2011, expiration of the current EAS contracts, the Department requested proposals by August 31, 2011, for these communities. We received timely filed proposals from Multi-Aero, Inc., d/b/a Air Choice One, for all of the communities except Hancock/Houghton; from Intrepid International Airlines for Muskegon only; and from SkyWest and Sovereign Air for all four communities. On September 2, 2011, we requested comments on the proposals from the communities by October 3, All of the communities except Muskegon endorsed SkyWest in the strongest terms. The community of Muskegon also endorsed SkyWest, but expressed disappointment that because SkyWest proposed to base its aircraft in Chicago, its proposal would not permit the Muskegon business community to meet the early morning connecting banks for outbound service from Chicago. 1 Such subsidy is calculated and distributed on a fiscal year basis, subject to the availability of appropriated funds.

2 - 2 - On December 11, 2011, the EAS staff contacted SkyWest because it appeared that the expenses it forecast at three other EAS communities (Aberdeen, Bemidji, and Butte) were higher than those it had submitted on August 31 for these four communities. 2 SkyWest concurred, but also indicated it had unintentionally understated its expenses when it submitted its bid at these four communities by relying on unit costs applicable to an earlier time period, and that it wished to revise those bids; SkyWest submitted revised proposals on December 15. After seeing these revisions, the EAS staff requested that SkyWest renegotiate the rates at all seven of the communities. On December 22, 2011, SkyWest agreed to decrease its subsidy request at these four communities from the revised proposal that it filed on December 15, 2011, though still substantially more than what it had initially proposed on August 31. The basis for the adjustments was lower projected fuel expenses. Also, the carrier revised its costing allocation, assigning less expense to its departure-related cost pools. The following table depicts the evolution in SkyWest s requested subsidy levels. Hancock/ Requested Subsidy Eau Claire Houghton Muskegon Paducah Total Original, August 31, 2011 $1,244,783 $591,615 $1,112,826 $1,245,426 $4,194,650 Revised, December 15, 2011 $1,792,363 $1,052,501 $1,595,642 $1,838,204 $6,278,710 Agreed, December 22, 2011 $1,733,576 $934,156 $1,576,067 $1,710,775 $5,954,574 Revised less Agreed $58,787 $118,345 $19,575 $127,429 $324,136 Decision We have reviewed the subsidy rates agreed to by SkyWest and the EAS staff and find them reasonable for the service proposed. The support expressed by every community for SkyWest, and the fact that none of the competing proposals met the minimum statutory requirements, 3 favor the selection of SkyWest. Based on those facts, there was no reason to renegotiate with any of the carriers that had already submitted proposals other than SkyWest. Notwithstanding the above, we are making this selection tentative. Our procedures are designed such that carriers submitting proposals to provide long-term EAS service do not have certainty as to whether other carriers will submit proposals, which ensures the benefits of competitive 2 See Order This order only addresses the subsidy issues at the four communities of Eau Claire, Hancock/Houghton, Muskegon, and Paducah. 3 Staff did not offer to renegotiate rates with the other applicants. Air Choice One proposed service with singleengine aircraft while neither Intrepid nor Sovereign has the requisite authority to operate their proposed services from either the Federal Aviation Administration or the Department.

3 - 3 - bidding to the program and communities. 4 While SkyWest has negotiated in good faith with the Department, it negotiated those rates and requested more subsidy support after being able to review all of the competing proposals. Under such circumstances, 5 we will direct all parties to show cause by January 31, 2012, why we should not select SkyWest at the terms it has proposed at these four communities, thus allowing competing proposals, comments, and objections. If we receive no objections or competing proposals by January 31, the selection of SkyWest will be final. If we receive competing proposals, we then anticipate conducting a typical carrierselection proceeding, including requests for community comments and a subsequent award based on the statutory criteria. Because Order already requested proposals, we will incorporate by reference that order and only modify it by providing parties until January 31 to submit their objections or their competing best and final proposals. If carriers or communities have any questions, they may contact the staff at any time, by phone or , as shown in the ordering paragraphs. Carrier Fitness 49 U.S.C (b) requires that the Department find an air carrier fit, willing, and able to provide reliable service before the Department may subsidize it to provide EAS. SkyWest is subject to the Department s continuing fitness requirements, and no information has come to our attention that would cause us to question the carrier s fitness at this time. The Department has contacted the Federal Aviation Administration, and it has raised no concerns that would negatively affect our fitness findings. The Department therefore concludes that the carrier remains fit to conduct the operations proposed here. Certifications Before the Department can pay compensation, SkyWest must provide properly executed certifications that it is in compliance with the regulations regarding drug-free workplaces and nondiscrimination, as well as the regulations governing lobbying activities. This Order is issued under authority delegated in 49 CFR 1.56a(f). 4 All of the Department s requests for proposals indicate that proposals must be submitted by a deadline, and that they will be held confidential until all of the proposals are made public. Interested carriers should prepare their proposals with every expectation that their initial proposals will also be their final and only proposals. We retain the discretion to negotiate proposals with carriers when we deem it desirable. In such cases, of course, we will give all applicants the same opportunity. We also retain the discretion to reject outright all unreasonable or unrealistic proposals and solicit a new round of proposals. (See page two of Order ) 5 We have taken a similar approach in the past. See, for example, Order , page five, which addressed a similar situation regarding EAS in western Kansas. In this case, we are tentatively selecting a combination of options that were not submitted originally,.. Therefore, to be procedurally fair to all the parties, we will issue this order on a show-cause basis and allow all interested parties ten days from the service date of this order to show cause why we should not make this tentative decision final.

4 - 4 - ACCORDINGLY, 1. We direct all interested persons parties to show cause by January 31, 2012, why we should not select SkyWest Airlines, Inc., to provide Essential Air Service at Eau Claire, Wisconsin; Hancock/Houghton and Muskegon, Michigan; and Paducah, Kentucky; as described in Appendix C. Vague or unsupported objections that do not include all proposed adjustments and backup data will not be accepted; 2. If no objection is filed within the designated time, or if no timely-filed objection raises material issues of fact, we hereby delegate authority to the Director, Office of Aviation Analysis, to make this Order final; 3. We direct SkyWest Airlines, 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 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 carrier may forfeit its compensation for any claim that is not supported under the terms of this Order; 4. We find that SkyWest Airlines, Inc., continues to be fit, willing and able to operate as a certificated carrier and capable of providing reliable essential air service at these communities; 5. These dockets will remain open until further Order of the Department; and 6. We will serve copies of this Order on the Mayors and Airport Managers of Eau Claire, Wisconsin, Hancock and Houghton, Michigan; Muskegon, Michigan; and Paducah, Kentucky, Sovereign Air, Inc., Intrepid International Airlines, Multi-Aero, Inc., d/b/a Air Choice One, and SkyWest Airlines, Inc., and on the carriers on our service list. By: (SEAL) Susan L. Kurland Assistant Secretary for Aviation and International Affairs An electronic version of this document is available on the World Wide Web at

5 Nonstop Great Circle Miles to Chicago (ORD) EAU to Chicago 268 Hancock/Houghton (CMX) to Chicago 359 Muskegon (MKG) to Chicago 118 Paducah (PAH) to Chicago 343 Appendix A-1

6 Appendix B Agreement per Discussion Concluded December 21, 2011 Hancock/ Community Eau Claire Hougton Muskegon Paducah Hub ORD ORD ORD ORD Docket Distance RPM's 9,380,000 15,796,000 2,950,000 12,005,000 Seats ASM 19,121,800 25,614,650 8,419,300 24,473,050 Revenue Psgrs. 35,000 44,000 25,000 35,000 Average Fare $98.0 $102.0 $89.0 $ % 1/ 1,427 1,427 1,427 1,427 Block Time, Minutes Block Hours 1,617 1,712 1,094 1,855 Passenger Revenue $3,430,000 $4,488,000 $2,225,000 $4,025,000 Total Directs $3,694,134 $3,858,009 $2,518,180 $4,180,261 Total Indirects $1,223,557 $1,305,949 $1,101,884 $1,282,382 Operating Expense $4,917,691 $5,163,958 $3,620,064 $5,462,643 $245,885 $258,198 $181,003 $273,132 Economic Costs $5,163,576 $5,422,156 $3,801,067 $5,735,775 Agreed Subsidy $1,733,576 $934,156 $1,576,067 $1,710,775 1/ 14 one-way flights x 2 directions x 52 weeks x 98% completion = 1,427

7 Appendix C SkyWest Aviation, Inc., d/b/a United Express, Essential Air Service to be Provided to Eau Claire, Wisconsin; Hancock/Houghton, Michigan; Muskegon, Michigan; and Paducah, Kentucky Dockets DOT-OST , , , and Effective Period: January 1, 2012, through December 31, 2013 Scheduled Service: 14 nonstop round trips per week to Chicago O Hare Aircraft: 50-Seat CRJ-200 Regional Jet Eau Claire Hancock Muskegon Paducah Annual Subsidy $1,733,576 $934,156 $1,576,067 $1,710,775 Annual Flights 1 1,427 1,427 1,427 1,427 Rate per Flight: 2 $1,215 $655 $1,104 $1,199 Weekly Ceiling 3 $34,020 $18,340 $30,912 $33,572 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 September 30, The Government s obligation for performance under this Order beyond September 30, 2012, 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, 2012, until funds are made available to the Department for performance. If funds are not made available for performance beyond September 30, 2012, 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 one-way flights x 2 directions x 52 weeks x 98 percent completion = 1, Annual subsidy annual flights. 3 Rate per flight x flights 28 flights per week.

8 Historical Traffic, T-100 Market Report, On-Flight O &D Appendix D-1 Eau Claire, Wisconsin (EAU) Hancock/Hougton, MI (CMX) Origin Dest Total Origin Dest Total ,195 1,180 2,375 1,973 1,966 3, ,221 1,287 2,508 1,855 1,812 3, ,170 1,007 2,177 1,696 1,746 3, , ,002 1,811 1,787 3, ,147 1,097 2,244 2,260 2,173 4, ,030 1,061 2,091 2,107 2,290 4, , ,024 2,246 2,154 4, ,295 1,176 2,471 1,931 2,268 4, ,196 1,233 2,429 2,583 2,720 5, ,090 1,066 2,156 2,825 2,811 5, ,335 1,897 1,800 3, ,232 1,901 1,778 3,679 YE 10/31/09 12,843 12,201 25,044 25,085 25,305 50, ,076 1,746 1,730 3, ,171 1,733 1,444 3, ,544 1,433 1,477 2, ,263 1,499 1,495 2, ,136 1,075 2,211 1,736 1,444 3, ,375 1,404 2,779 1,389 1,588 2, ,384 1,467 2,851 1,356 1,374 2, ,367 1,397 2,764 1,388 1,436 2, ,683 1,778 3,461 1,980 2,224 4, ,759 1,853 3,612 2,481 2,525 5, ,688 1,656 3,344 1,759 1,684 3, ,639 1,644 3,283 2,173 1,983 4,156 YE 10/31/10 14,600 14,759 29,359 20,673 20,404 41, ,566 1,513 3,079 1,882 1,777 3, ,427 1,536 2,963 2,048 1,805 3, ,466 1,323 2,789 1,603 1,702 3, ,039 1,052 2,091 1,577 1,476 3, ,540 1,546 3,086 2,046 1,875 3, ,323 1,352 2,675 1,697 1,859 3, ,457 1,480 2,937 1,799 1,792 3, ,546 1,430 2,976 1,126 1,700 2, ,542 1,596 3,138 1,947 2,170 4, ,468 1,439 2,907 2,041 2,465 4, ,347 1,336 2,683 1,892 1,879 3, ,463 1,498 2,961 2,127 1,942 4,069 YE 10/31/11 17,184 17,101 34,285 21,785 22,442 44,227

9 Historical Traffic, T-100 Market Report, On-Flight O &D Appendix D-2 Muskegon, Michigan (MKG) Paducah, Kentucky (PAH) Origin Dest Total Origin Dest Total ,402 1,449 2,851 1,602 1,690 3, ,490 1,400 2,890 1,594 1,497 3, ,277 1,132 2,409 1,184 1,132 2, ,326 1,239 2,565 1,182 1,131 2, ,277 1,253 2,530 1,422 1,434 2, ,246 1,300 2,546 1,689 1,736 3, ,224 1,266 2,490 1,760 1,728 3, ,361 1,360 2,721 1,976 1,955 3, ,735 1,780 3,515 2,007 1,975 3, ,637 1,498 3,135 1,632 1,653 3, ,180 1,079 2,259 1,462 1,431 2, ,205 1,141 2,346 1,494 1,514 3,008 YE 10/31/09 16,360 15,897 32,257 19,004 18,876 37, , ,989 1,341 1,362 2, ,051 2,048 1,368 1,345 2, , ,037 1, , ,673 1,093 1,073 2, ,786 1,536 1,603 3, ,121 1,265 2,386 1,830 1,778 3, ,790 1,999 1,932 3, ,790 1,770 1,674 3, ,147 1,301 2,448 1,713 1,736 3, ,273 1,141 2,414 1,607 1,594 3, ,181 1,105 2,286 1,877 1,838 3, ,161 1,117 2,278 1,788 1,814 3,602 YE 10/31/10 12,469 12,456 24,925 19,017 18,742 37, ,977 1,667 1,667 3, ,059 1,203 2,262 1,502 1,516 3, ,512 1,309 1,260 2, , , ,916 1,186 1,225 2, ,720 1,293 1,386 2, ,755 1,732 1,740 3, ,165 2,124 1,812 1,688 3, ,476 1,508 2,984 1,538 1,642 3, ,559 1,377 2,936 1,543 1,619 3, ,143 1,052 2,195 1,630 1,607 3, ,343 1,289 2,632 1,623 1,759 3,382 YE 10/31/11 12,755 12,797 25,552 17,833 18,105 35,938