Northern Air Cargo EAS Proposal
October 10, 2017
Michael D. Gomas Office of Aviation Analysis U.S. Department of Transportation 1200 New Jersey Avenue, S.E. Washington, D.C. 20590 RE: "Proposal to Provide Essential Air Service at St. Paul, Alaska, Docket DOT‐OST‐2017‐0110" Dear Mr. Gomas: Northern Air Cargo, Inc. hereby submits this proposal to the Department of Transportation (DOT) to provide essential air service, for cargo‐only service, to the community of St. Paul, Alaska. This proposal contains our subsidy request to provide this service and NAC certifies are in compliance with Department regulations regarding: 1. Nondiscrimination Assurance 2. Governance of Lobbying Activities 3. Drug‐Free Workplace Requirements On behalf of Northern Air Cargo, Inc we appreciate the opportunity to participate in the Essential Air Service program and please contact me if you need additional information. Sincerely,
David W. Karp President & CEO
Attachments
A NORTHERN AVIATION SERVICES COMPANY 4510 OLD INTERNATIONAL AIRPORT ROAD|ANCHORAGE, AK 99502 PHONE 907‐243‐3331|TOLL FREE 800‐727‐2141|FAX 907‐249‐5190|WWW.NAC.AERO
Proposal to Provide Essential Air Service at St Paul, Alaska Docket DOT-OST- 2017-0110
Due Date: October 10, 2017
Northern Air Cargo, Inc. 4510 Old International Airport Rd Anchorage, AK 99502 (907) 249-5163
Proposal to Provide Essential Air Service at St. Paul, Alaska Docket DOT-OST-2017-0110 October 10, 2017
Table of Contents Transmittal Letter Narrative ..............................................................................................Page 1 Subsidy Request ..................................................................................Page 2
"Proposal to Provide Essential Air Service at St. Paul, Alaska DOT-OST Docket 2017-0110" Narrative Northern Air Cargo, Inc. (NAC) is pleased, in response to Order 2017-0110, to submit its Essential Air Service (EAS) proposal for cargo-only air service, inclusive of freight and mail, to St. Paul, Alaska with a requested subsidy of $1,470,317 annually, with a proposed subsidy mitigation strategy that could result in annual refunds ranging from $78,541 to $392,703. NAC understands that there is no certificated passenger carrier serving the market, which also possesses both the capacity/cube and frequency that the market requires in order to provide St. Paul with reliable and affordable general freight service and essential bypass mail service. It is for this reason that we submit an cargo-only solution for consideration, which we believe may complement proposal(s) from other carriers capable of providing ample passenger capacity but not freighter capacity. Northern Air Cargo, Inc., established in 1956, has provided a wide variety of air cargo delivery services, domestic and international mail handling and delivery services, aircraft maintenance services, ground service operations and cargo agent ground handling for a wide variety of governmental and multi-national and regional companies - including the United States Postal Service, the United States Department of Defense, Conoco Phillips, Shell Oil, BP Global, Continental Airlines, Frontier Airlines and Japan Airlines. Northern Air Cargo, Inc. proposes to provide one hundred and four (104) B737-200/300 cargo jet service air flights per year to St. Paul, Alaska from its Anchorage hub, located at the Ted Stevens Anchorage International Airport (ANC), utilizing the following schedule: Northern Air Cargo, Inc. proposes to fly two (2) times per week round-trip service from Anchorage to St. Paul, via Dillingham, Ak. The Dillingham leg is proposed as a strategy to reduce the required EAS subsidy to Northern Air Cargo, Inc. Northern Air Cargo, Inc. commits to providing the highest possible degree of service to the Department of Transportation and the community of St, Paul and, to the best of our ability, to provide the services and capacities as proposed. Although Northern Air Cargo, Inc. is not required to report on-time performance to the Department of Transportation (DOT); as a quality control measure Northern Air Cargo, Inc. tracks its on-time performance to DOT and Federal Aviation Administration (FAA) standards. During the past 12 months, Northern Air Cargo, Inc. has had a 98.88% dispatch reliability according to DOT/FAA guidelines.
Northern Air Cargo, Inc. October 10, 2017
1
EAS Proposal at St. Paul
Subsidy Request NAC is requesting an EAS subsidy, for cargo-only service, in the amount of $1,470,314 per year, based upon the following assumptions: Revenue Projections NAC's subsidy request assumes that freight and mail volumes remain flat at rates experienced over the period from July 2016 through June 2017. Additionally, NAC has assumed an average fifty percent (50%) share of the freight/mail market from Anchorage to St. Paul. Therefore, NAC's revenue projections per flight are: Revenue Estimate (per flight) Rate Volume (lbs) Outbound Freight 1.00 852 Outbound Mail 1.30 2,764 Inbound Freight 0.40 235 Inbound Mail 1.30 139 Total 3,990
Revenue $ 852 $ 3,594 $ 94 $ 181 $ 4,720
Expense Projections Northern Air Cargo, Inc.'s subsidy request is based upon the following expense assumptions; the Anchorage-Dillingham-St. Paul-Anchorage flights have an estimated cost of $17,970 per flight. Per Flight Estimated Expenses Variable Costs Cost of Fuel Cost of Fuel Landing Fees Ground Handling Ground Handling MX Flight Hour Engine Costs Fixed Costs Capital Costs Mechanic Labor MX Admin / Overhead Flight Crew Labor Flight Ops Admin / Overhead Insurance Admin Overhead
Assumptions Weighting ANC‐DLG‐SNP‐ANC $ 1.85 $ 6.50 $ 352.00 $ 500.00 $ 1,400.00 $ 280.00 $ 550.00 $ 1,118.00 $ 275.00 $ 50.00 $ 700.00 $ 50.00 $ 85.00 $ 50.00
$ 3,756 $ 3,299 $ 352 $ 500 $ 1,400 $ 812 $ 1,100 $ 3,242 $ 798 $ 145 $ 2,030 $ 145 $ 247 $ 145 $ 17,970
Total
Northern Air Cargo, Inc. October 10, 2017
80% 20%
2
EAS Proposal at St. Paul
Profit Projections Northern Air Cargo, Inc.'s subsidy request is based upon a five percent (5%) profit, based upon the following per flight estimates: Per Flight Profit Estimated Expenses Profit @5%
Anchorage‐Dillingham‐St Paul ‐ Anchorage $ 17,970 $ 899
Requested Per Flight Subsidy Northern Air Cargo, Inc.'s subsidy request per flight is as follows: Per Flight Subsidy Estimated Revenues Estimated Expenses Operating Profit (Loss) Profit Requested Subsidy Per Flight
Anchorage‐Dillingham‐St Paul ‐ Anchorage $ 4,720 $ 17,970 $ (13,250) $ 899 $ (14,149)
Annual Requested Subsidy Based upon the above assumptions, Northern Air Cargo Inc.'s requested annual subsidy to provide the proposed one hundred and four (104) B737-200/300 cargo jet service flights per year to St. Paul, Alaska from its Anchorage hub, located at the Ted Stevens Anchorage International Airport, via Dillingham, AK is $1,471,446, per the following schedule: Annual Subsidy Anchorage‐Dillingham‐St Paul ‐ Anchorage 104 Flights Per Year (14,149) Subsidy Per Flight $ $ (1,471,446) Annual Subsidy
Proposed Subsidy Mitigation Northern Air Cargo's requested annual subsidy is calculated based upon Northern Air Cargo, Inc. realizing approximately a thirty (30) percent share of the 2017 actual ANC-DLG-SNP-ANC freight and mail volumes. We recognize that the projected market share of thirty (30) percent is a significant variable; and, therefore, we propose a subsidy mitigation strategy.
Northern Air Cargo, Inc. October 10, 2017
3
EAS Proposal at St. Paul
The proposed subsidy mitigation strategy is based upon an annual reconciliation of actual total realized revenues for ANC-DLG-SNP-ANC. NAC will remit to the DOT eighty (80) percent of the difference between the per flight subsidy paid to NAC by DOT and the actual realized revenue up to $25,000 per flight, which is based upon 100% of the 2017 actual mail and freight volumes. NAC will retain twenty (20) percent of the variance to account for increased variable expenses due to larger cargo load factors. The following table presents the potential subsidy refund at various mail/freight levels:
Estimated Revenue at 30% Realized Annual Revenue 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Variance Variable Expenses @ 20% Per flight refund to DOT Assume 104 Flights Annual subsidy refund
$ 4,720
Proposed Subsidy Mitigation $ 4,720 $ 4,720 $ 4,720 $ 4,720
$ 4,720
$ 4,720
$ 4,720
$ 2,832 $ 3,776 $ 4,720 $ 5,664 $ 6,608 $ 7,552 $ 8,496 $ 1,888 $ 944 $ ‐ $ (378) $ (189) $ ‐ $ 1,510 $ 755 $ ‐
$ 9,440 $ (944) $ (1,888) $ (2,832) $ (3,776) $ (4,720) $ 189 $ 378 $ 566 $ 755 $ 944 $ (755) $ (1,510) $ (2,266) $ (3,021) $ (3,776)
$ 157,081
$ (78,541) $ (157,081) $ (235,622) $ (314,162) $ (392,703)
$ 78,541
$ ‐
Conversely, should the annual revenue reconciliation reveal that Northern Air Cargo, Inc. realized less than the estimated revenue of $4,720 per flight; then, the DOT would remit to Northern Air Cargo, Inc. the difference between the $4,720 flight and the actual realized revenue.
Northern Air Cargo, Inc. October 10, 2017
4
EAS Proposal at St. Paul
The following chart details the revenue assumptions included in the above chart:
Revenue / Pound $ 1.30 $ 1.00 $ 1.30 $ 0.40 Revenue / Pound $ 1.30 $ 1.00 $ 1.30 $ 0.40
30%
Flight Segment ANC‐SNP Mail ANC‐SNP Freight SNP‐ANC Mail SNP‐ANC Freight Total
Pounds Total Per Flight 172,490 1,659 53,160 511 8,668 83 14,654 141 248,972 2,394
70%
Flight Segment ANC‐SNP Mail ANC‐SNP Freight SNP‐ANC Mail SNP‐ANC Freight Total
Revenue Total Per Flight $ 224,237 $ 2,156 $ 53,160 $ 511 $ 11,269 $ 108 $ 5,862 $ 56 $ 294,527 $ 2,832
Pounds Total Per Flight 402,476 3,870 124,040 1,193 20,226 194 34,193 329 580,935 5,586
Northern Air Cargo, Inc. October 10, 2017
Revenue Total Per Flight $ 523,219 $ 5,031 $ 124,040 $ 1,193 $ 26,294 $ 253 $ 13,677 $ 132 $ 687,230 $ 6,608
40% Pounds Total Per Flight 229,986 2,211 70,880 682 11,558 111 19,539 188 331,963 3,192
Revenue Total Per Flight $ 298,982 $ 2,875 $ 70,880 $ 682 $ 15,025 $ 144 $ 7,816 $ 75 $ 392,703 $ 3,776
80% Pounds Total Per Flight 459,973 4,423 141,760 1,363 23,115 222 39,078 376 663,926 6,384
5
Revenue Total Per Flight $ 597,965 $ 5,750 $ 141,760 $ 1,363 $ 30,050 $ 289 $ 15,631 $ 150 $ 785,405 $ 7,552
50% Pounds Total Per Flight 287,483 2,764 88,600 852 14,447 139 24,424 235 414,954 3,990
Revenue Total Per Flight $ 373,728 $ 3,594 $ 88,600 $ 852 $ 18,781 $ 181 $ 9,769 $ 94 $ 490,878 $ 4,720
90% Pounds Total Per Flight 517,469 4,976 159,480 1,533 26,005 250 43,962 423 746,916 7,182
Revenue Total Per Flight $ 672,710 $ 6,468 $ 159,480 $ 1,533 $ 33,806 $ 325 $ 17,585 $ 169 $ 883,581 $ 8,496
60% Pounds Total Per Flight 344,980 3,317 106,320 1,022 17,336 167 29,308 282 497,944 4,788
Revenue Total Per Flight $ 448,473 $ 4,312 $ 106,320 $ 1,022 $ 22,537 $ 217 $ 11,723 $ 113 $ 589,054 $ 5,664
100% Pounds Total Per Flight 574,966 5,529 177,200 1,704 28,894 278 48,847 470 829,907 7,980
Revenue Total Per Flight $ 747,456 $ 7,187 $ 177,200 $ 1,704 $ 37,562 $ 361 $ 19,539 $ 188 $ 981,757 $ 9,440
EAS Proposal at St. Paul
Michael D. Gomas Office of Aviation Analysis U.S. Department of Transportation 1200 New Jersey Avenue, S.E. Washington, D.C. 20590 RE: "Proposal to Provide Essential Air Service at St. Paul, Alaska, Docket DOT‐OST‐2017‐0110" Dear Mr. Gomas: Northern Air Cargo, Inc. hereby submits this proposal to the Department of Transportation (DOT) to provide essential air service, for cargo‐only service, to the community of St. Paul, Alaska. This proposal contains our subsidy request to provide this service and NAC certifies are in compliance with Department regulations regarding: 1. Nondiscrimination Assurance 2. Governance of Lobbying Activities 3. Drug‐Free Workplace Requirements On behalf of Northern Air Cargo, Inc we appreciate the opportunity to participate in the Essential Air Service program and please contact me if you need additional information. Sincerely,
David W. Karp President & CEO
Attachments
A NORTHERN AVIATION SERVICES COMPANY 4510 OLD INTERNATIONAL AIRPORT ROAD|ANCHORAGE, AK 99502 PHONE 907‐243‐3331|TOLL FREE 800‐727‐2141|FAX 907‐249‐5190|WWW.NAC.AERO
Proposal to Provide Essential Air Service at St Paul, Alaska Docket DOT-OST- 2017-0110
Due Date: October 10, 2017
Northern Air Cargo, Inc. 4510 Old International Airport Rd Anchorage, AK 99502 (907) 249-5163
Proposal to Provide Essential Air Service at St. Paul, Alaska Docket DOT-OST-2017-0110 October 10, 2017
Table of Contents Transmittal Letter Narrative ..............................................................................................Page 1 Subsidy Request ..................................................................................Page 2
"Proposal to Provide Essential Air Service at St. Paul, Alaska DOT-OST Docket 2017-0110" Narrative Northern Air Cargo, Inc. (NAC) is pleased, in response to Order 2017-0110, to submit its Essential Air Service (EAS) proposal for cargo-only air service, inclusive of freight and mail, to St. Paul, Alaska with a requested subsidy of $1,470,317 annually, with a proposed subsidy mitigation strategy that could result in annual refunds ranging from $78,541 to $392,703. NAC understands that there is no certificated passenger carrier serving the market, which also possesses both the capacity/cube and frequency that the market requires in order to provide St. Paul with reliable and affordable general freight service and essential bypass mail service. It is for this reason that we submit an cargo-only solution for consideration, which we believe may complement proposal(s) from other carriers capable of providing ample passenger capacity but not freighter capacity. Northern Air Cargo, Inc., established in 1956, has provided a wide variety of air cargo delivery services, domestic and international mail handling and delivery services, aircraft maintenance services, ground service operations and cargo agent ground handling for a wide variety of governmental and multi-national and regional companies - including the United States Postal Service, the United States Department of Defense, Conoco Phillips, Shell Oil, BP Global, Continental Airlines, Frontier Airlines and Japan Airlines. Northern Air Cargo, Inc. proposes to provide one hundred and four (104) B737-200/300 cargo jet service air flights per year to St. Paul, Alaska from its Anchorage hub, located at the Ted Stevens Anchorage International Airport (ANC), utilizing the following schedule: Northern Air Cargo, Inc. proposes to fly two (2) times per week round-trip service from Anchorage to St. Paul, via Dillingham, Ak. The Dillingham leg is proposed as a strategy to reduce the required EAS subsidy to Northern Air Cargo, Inc. Northern Air Cargo, Inc. commits to providing the highest possible degree of service to the Department of Transportation and the community of St, Paul and, to the best of our ability, to provide the services and capacities as proposed. Although Northern Air Cargo, Inc. is not required to report on-time performance to the Department of Transportation (DOT); as a quality control measure Northern Air Cargo, Inc. tracks its on-time performance to DOT and Federal Aviation Administration (FAA) standards. During the past 12 months, Northern Air Cargo, Inc. has had a 98.88% dispatch reliability according to DOT/FAA guidelines.
Northern Air Cargo, Inc. October 10, 2017
1
EAS Proposal at St. Paul
Subsidy Request NAC is requesting an EAS subsidy, for cargo-only service, in the amount of $1,470,314 per year, based upon the following assumptions: Revenue Projections NAC's subsidy request assumes that freight and mail volumes remain flat at rates experienced over the period from July 2016 through June 2017. Additionally, NAC has assumed an average fifty percent (50%) share of the freight/mail market from Anchorage to St. Paul. Therefore, NAC's revenue projections per flight are: Revenue Estimate (per flight) Rate Volume (lbs) Outbound Freight 1.00 852 Outbound Mail 1.30 2,764 Inbound Freight 0.40 235 Inbound Mail 1.30 139 Total 3,990
Revenue $ 852 $ 3,594 $ 94 $ 181 $ 4,720
Expense Projections Northern Air Cargo, Inc.'s subsidy request is based upon the following expense assumptions; the Anchorage-Dillingham-St. Paul-Anchorage flights have an estimated cost of $17,970 per flight. Per Flight Estimated Expenses Variable Costs Cost of Fuel Cost of Fuel Landing Fees Ground Handling Ground Handling MX Flight Hour Engine Costs Fixed Costs Capital Costs Mechanic Labor MX Admin / Overhead Flight Crew Labor Flight Ops Admin / Overhead Insurance Admin Overhead
Assumptions Weighting ANC‐DLG‐SNP‐ANC $ 1.85 $ 6.50 $ 352.00 $ 500.00 $ 1,400.00 $ 280.00 $ 550.00 $ 1,118.00 $ 275.00 $ 50.00 $ 700.00 $ 50.00 $ 85.00 $ 50.00
$ 3,756 $ 3,299 $ 352 $ 500 $ 1,400 $ 812 $ 1,100 $ 3,242 $ 798 $ 145 $ 2,030 $ 145 $ 247 $ 145 $ 17,970
Total
Northern Air Cargo, Inc. October 10, 2017
80% 20%
2
EAS Proposal at St. Paul
Profit Projections Northern Air Cargo, Inc.'s subsidy request is based upon a five percent (5%) profit, based upon the following per flight estimates: Per Flight Profit Estimated Expenses Profit @5%
Anchorage‐Dillingham‐St Paul ‐ Anchorage $ 17,970 $ 899
Requested Per Flight Subsidy Northern Air Cargo, Inc.'s subsidy request per flight is as follows: Per Flight Subsidy Estimated Revenues Estimated Expenses Operating Profit (Loss) Profit Requested Subsidy Per Flight
Anchorage‐Dillingham‐St Paul ‐ Anchorage $ 4,720 $ 17,970 $ (13,250) $ 899 $ (14,149)
Annual Requested Subsidy Based upon the above assumptions, Northern Air Cargo Inc.'s requested annual subsidy to provide the proposed one hundred and four (104) B737-200/300 cargo jet service flights per year to St. Paul, Alaska from its Anchorage hub, located at the Ted Stevens Anchorage International Airport, via Dillingham, AK is $1,471,446, per the following schedule: Annual Subsidy Anchorage‐Dillingham‐St Paul ‐ Anchorage 104 Flights Per Year (14,149) Subsidy Per Flight $ $ (1,471,446) Annual Subsidy
Proposed Subsidy Mitigation Northern Air Cargo's requested annual subsidy is calculated based upon Northern Air Cargo, Inc. realizing approximately a thirty (30) percent share of the 2017 actual ANC-DLG-SNP-ANC freight and mail volumes. We recognize that the projected market share of thirty (30) percent is a significant variable; and, therefore, we propose a subsidy mitigation strategy.
Northern Air Cargo, Inc. October 10, 2017
3
EAS Proposal at St. Paul
The proposed subsidy mitigation strategy is based upon an annual reconciliation of actual total realized revenues for ANC-DLG-SNP-ANC. NAC will remit to the DOT eighty (80) percent of the difference between the per flight subsidy paid to NAC by DOT and the actual realized revenue up to $25,000 per flight, which is based upon 100% of the 2017 actual mail and freight volumes. NAC will retain twenty (20) percent of the variance to account for increased variable expenses due to larger cargo load factors. The following table presents the potential subsidy refund at various mail/freight levels:
Estimated Revenue at 30% Realized Annual Revenue 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Variance Variable Expenses @ 20% Per flight refund to DOT Assume 104 Flights Annual subsidy refund
$ 4,720
Proposed Subsidy Mitigation $ 4,720 $ 4,720 $ 4,720 $ 4,720
$ 4,720
$ 4,720
$ 4,720
$ 2,832 $ 3,776 $ 4,720 $ 5,664 $ 6,608 $ 7,552 $ 8,496 $ 1,888 $ 944 $ ‐ $ (378) $ (189) $ ‐ $ 1,510 $ 755 $ ‐
$ 9,440 $ (944) $ (1,888) $ (2,832) $ (3,776) $ (4,720) $ 189 $ 378 $ 566 $ 755 $ 944 $ (755) $ (1,510) $ (2,266) $ (3,021) $ (3,776)
$ 157,081
$ (78,541) $ (157,081) $ (235,622) $ (314,162) $ (392,703)
$ 78,541
$ ‐
Conversely, should the annual revenue reconciliation reveal that Northern Air Cargo, Inc. realized less than the estimated revenue of $4,720 per flight; then, the DOT would remit to Northern Air Cargo, Inc. the difference between the $4,720 flight and the actual realized revenue.
Northern Air Cargo, Inc. October 10, 2017
4
EAS Proposal at St. Paul
The following chart details the revenue assumptions included in the above chart:
Revenue / Pound $ 1.30 $ 1.00 $ 1.30 $ 0.40 Revenue / Pound $ 1.30 $ 1.00 $ 1.30 $ 0.40
30%
Flight Segment ANC‐SNP Mail ANC‐SNP Freight SNP‐ANC Mail SNP‐ANC Freight Total
Pounds Total Per Flight 172,490 1,659 53,160 511 8,668 83 14,654 141 248,972 2,394
70%
Flight Segment ANC‐SNP Mail ANC‐SNP Freight SNP‐ANC Mail SNP‐ANC Freight Total
Revenue Total Per Flight $ 224,237 $ 2,156 $ 53,160 $ 511 $ 11,269 $ 108 $ 5,862 $ 56 $ 294,527 $ 2,832
Pounds Total Per Flight 402,476 3,870 124,040 1,193 20,226 194 34,193 329 580,935 5,586
Northern Air Cargo, Inc. October 10, 2017
Revenue Total Per Flight $ 523,219 $ 5,031 $ 124,040 $ 1,193 $ 26,294 $ 253 $ 13,677 $ 132 $ 687,230 $ 6,608
40% Pounds Total Per Flight 229,986 2,211 70,880 682 11,558 111 19,539 188 331,963 3,192
Revenue Total Per Flight $ 298,982 $ 2,875 $ 70,880 $ 682 $ 15,025 $ 144 $ 7,816 $ 75 $ 392,703 $ 3,776
80% Pounds Total Per Flight 459,973 4,423 141,760 1,363 23,115 222 39,078 376 663,926 6,384
5
Revenue Total Per Flight $ 597,965 $ 5,750 $ 141,760 $ 1,363 $ 30,050 $ 289 $ 15,631 $ 150 $ 785,405 $ 7,552
50% Pounds Total Per Flight 287,483 2,764 88,600 852 14,447 139 24,424 235 414,954 3,990
Revenue Total Per Flight $ 373,728 $ 3,594 $ 88,600 $ 852 $ 18,781 $ 181 $ 9,769 $ 94 $ 490,878 $ 4,720
90% Pounds Total Per Flight 517,469 4,976 159,480 1,533 26,005 250 43,962 423 746,916 7,182
Revenue Total Per Flight $ 672,710 $ 6,468 $ 159,480 $ 1,533 $ 33,806 $ 325 $ 17,585 $ 169 $ 883,581 $ 8,496
60% Pounds Total Per Flight 344,980 3,317 106,320 1,022 17,336 167 29,308 282 497,944 4,788
Revenue Total Per Flight $ 448,473 $ 4,312 $ 106,320 $ 1,022 $ 22,537 $ 217 $ 11,723 $ 113 $ 589,054 $ 5,664
100% Pounds Total Per Flight 574,966 5,529 177,200 1,704 28,894 278 48,847 470 829,907 7,980
Revenue Total Per Flight $ 747,456 $ 7,187 $ 177,200 $ 1,704 $ 37,562 $ 361 $ 19,539 $ 188 $ 981,757 $ 9,440
EAS Proposal at St. Paul
