Atch 11 - Memorandum of Understanding (MOU).pdf

RATEMAKING

MEMORANDUM OF UNDERSTANDING

BETWEEN

(CARRIER)

AND

UNITED STATES TRANSPORTATION COMMAND

Effective 1 October 2024

PURPOSE

1. The purpose of this Memorandum of Understanding (MOU) is to establish guidelines to facilitate the establishment of rates for passenger, cargo, and combi airlift services with

Department of Transportation (DoT) certificated air carriers willing to participate in the Civil

Reserve Air Fleet (CRAF) program. Objectives of the CRAF program include augmenting the airlift capability of United States Transportation Command (USTRANSCOM) and assuring a mobilization base of aircraft available to the Department of Defense (DoD) for use in the event of any level of national security contingency.

2. The DoD augments its airlift capacity by using commercial airlift in a manner designed to contribute to sound economic development of an increased, modern civil airlift capability and to enhance the ability of U.S. air carriers to support the military forces in time of war with maximum effectiveness. USTRANSCOM accomplishes this through the negotiation and award of DoD airlift service contracts to U.S. air carriers which own or otherwise control aircraft suitable for allocation to the CRAF. These contracts are awarded using uniform rates to promote the objectives of the CRAF program.

HTC71124RCC01

Attachment 11

CRAF BACKGROUND

3. The origins of the CRAF program can be traced to Executive Order No. 10219, 2 March

1951, 16 Federal Register (F.R.) 1983. In the Executive Order, the Secretary of Commerce was directed to formulate plans and programs to meet the requirements for civil air transportation to include plans for the transfer or assignment of aircraft from civil air carriers to the DoD to meet defense mobilization needs. By joint agreement on 15 December 1951, the Secretaries of

Commerce and Defense established the CRAF program to augment military airlift capability in times of emergency. Several years later, Executive Order 10999, 20 February 1962, 27 F.R.

1527, directed the Secretary of Commerce to prepare plans with respect to all degrees of national emergency. As a result, the 15 December 1951 joint agreement was rescinded by an interagency memorandum of understanding dated 8 August 1963 in which the Secretaries of Commerce and

Defense jointly recognized “the requirement for incremental activation of the CRAF to meet varying defense emergency needs for the civil airlift augmentation to the military airlift capability.”

4. On 30 October 1969, Executive Order 11490, 34 F.R. 17567 rescinded Executive Order

10999 and designated the Secretary of Transportation responsible for developing plans to utilize civil air transportation resources to meet civil and military needs during national and defense-oriented emergencies. On 7 May 1981, the Secretaries of Transportation and Defense issued an agreement that rescinded the 8 August 1963 interagency memorandum, defined responsibilities of both secretaries, and established a five-year review cycle for the document. On 15 September

1987, the Secretaries of Transportation and Defense issued an agreement rescinding the 7 May

1981 interagency agreement. On 18 November 1988, Executive Order 12656, 53 F.R. 47491 rescinded Executive Order 11490 and further defined emergency preparedness functions of various government departments and agencies. On 10 November 1998, the Secretaries of

Transportation and Defense issued the current interagency memorandum of understanding which defines departmental cooperation on the CRAF program and remains in effect indefinitely, unless amended by mutual agreement or terminated.

RATEMAKING BACKGROUND

5. Like the CRAF program, the ratemaking process to price DoD airlift service has changed substantially over the years. From 1955 to 1962, the DoD relied upon price competition to establish ratemaking for the CRAF program. Congressional Subcommittee hearings held at the time, however, determined price competition to be non-compensatory and destructive to the industry. As a result, the ratemaking process was implemented under the regulatory authority of the Civil Aeronautics Board (CAB). CRAF Ratemaking continued under the CAB until deregulation in 1980. Following deregulation, the DoD and CRAF air carriers agreed by MOU to continue utilizing the CAB ratemaking methodologies. The MOU has been renewed every five years. The FY25 MOU will be in place until superseded.

6. On 31 December 2011, Section 366 of the FY12 National Defense Authorization Act (FY12

NDAA) specifically authorized the Secretary of Defense to establish fair and reasonable rates for payments made to participants in the CRAF program and to prescribe regulations for ratemaking

(10 U.S.C § 9511a). On 28 May 2015, the Code of Federal Regulations (CFR) incorporated

Section 366 of the FY12 NDAA and designated USTRANSCOM “as the rate setter for negotiated uniform rates for DoD airlift service contracts in support of the CRAF” (32 C.F.R §

243). Attachment 1 to this MOU outlines the ratemaking methodologies USTRANSCOM utilizes to establish pricing for airlift services.

AGREEMENT

7. The parties to this MOU agree that these methodologies are effective means of establishing fair and reasonable rates and furthering the objectives of the CRAF program. The parties, therefore, agree to these ratemaking methodologies in negotiating rates for future DoD airlift services for the term of this agreement. In furtherance of this agreement, and as a condition of its continued participation in the CRAF program, the Carrier agrees to furnish USTRANSCOM with the financial and operational information required by USTRANSCOM to adequately make a determination of fairness and reasonableness of price. USTRANSCOM agrees to conduct an annual review of this information and to negotiate with the U.S. air carriers participating in the

CRAF program to determine projected costs that would be properly allocable to applicable future

DoD airlift service contracts. To facilitate negotiation between the parties, USTRANSCOM may issue proposed rates for carrier comments. USTRANSCOM will consider all carrier comments before issuing final rates.

8. In case of any disagreement about the fairness or reasonableness of the final rates issued by

USTRANSCOM, the Carrier shall first address their concerns to the ratemaking team for resolution. Ratemaking issues not resolved to a Carrier’s satisfaction through discussions with the ratemaking team may be directed to the contracting officer. If resolution cannot be made by the contracting officer, concerned parties may contact the ombudsman appointed to hear and facilitate the resolution of such concerns. The Carrier shall refer to its USTRANSCOM contract for the contact information of the ombudsman. In the event a ratemaking issue is not resolved through the ombudsman process, the issue will be forwarded to the Director of Acquisition, USTRANSCOM, for the final agency resolution.

9. This MOU will be effective 1 October 2024 and will remain effective until termination, revocation, or until supersession by a replacement Ratemaking MOU or its equivalent. Either party may terminate this MOU by giving the other party 90-days written notice, subject to continuation of any obligations of the carrier pursuant to the terms of a contract or separate agreement that references, incorporates, or otherwise relies on the terms of this MOU.

10. USTRANSCOM will allocate appropriate military peacetime airlift among participating

CRAF carriers. Carrier participation in the military peacetime airlift program will be wholly voluntary. Any properly certified and DoD-approved carrier may participate in the CRAF program if it offers aircraft useful to CRAF, agrees to and complies with the conditions of this

MOU, and executes a USTRANSCOM contract.

11. The parties understand this MOU imposes no financial or contractual obligation upon either party. Placement and pricing of DoD airlift services and commitment of aircraft to the CRAF program will be accomplished via contracts awarded after solicitation and negotiation in compliance with applicable laws and regulations.

12. This MOU supersedes any prior ratemaking MOUs between the DoD and the Carrier.

SIGNATURES

United States Transportation Command

(Carrier Name)

By By

(Signature) (Signature)

(Name/Title) (Name/Title)

(Date) (Date)

Enclosure:

Attachment 1, International USTRANSCOM Ratemaking Methodology

ATTACHMENT 1

INTERNATIONAL USTRANSCOM RATEMAKING METHODOLOGY

Subject Paragraph

Profit 1 Depreciation 2 Utilization 3 Weighting of Rate 4 Participation 5 Biennial Escalation 6

1. PROFIT. USTRANSCOM will apply a mark-up of 13% to calculate the profit value per cost package. The 13% mark-up will be applied to the total operating cost, included total fuel costs.

1.1. COST EFFICENCY FACTOR. A cost efficiency factor will be assigned based upon the individual carrier’s percentage decrease in total operating cost excluding fuel compared to the carrier’s total operating cost excluding fuel used in the immediately preceding final published Uniform Rates and Rules, adjusted by general escalation. Any percentage decrease in total operating cost, excluding fuel, greater than or equal to 1.5% will receive a cost efficiency factor as outlined in the table below. The maximum cost efficiency to be assigned is four percent. If this calculation does not adequately predict cost efficiency such as when a carrier’s year-over-year increase is a result of operations to high-cost locations or a carrier has introduced a fuel-efficient aircraft with no prior year’s comparisons, the carrier is encouraged to provide a narrative explaining justification for a higher cost efficiency rating. Supporting documentation of the proposed cost efficiency factor must be included. Any narrative provided is limited to 5 pages in length. The below table provides the cost efficiency factor applied per savings.

Cost Efficiency Factor Efficiency Factor Yr to Yr Decrease 0% < 1.5% 1% ≥ 1.5% to < 2.5% 2% ≥ 2.5% to < 3.5% 3% ≥ 3.5% to < 4.5% 4% ≥ 4.5%

2. DEPRECIATION. USTRANSCOM will apply economic life standards for new aircraft at 14 years, 2 percent residual (narrowbody) and 16 years and 10 percent residual (widebody) aircraft. USTRANSCOM will apply economic life standards for used aircraft at 10 years and 5 percent residual (narrowbody and widebody aircraft). USTRANSCOM’s definition of used older aircraft is aircraft that exceed 14 years (narrowbody) and 16 years (widebody) from the aircraft’s production date. USTRANSCOM will also consider a shorter depreciation cycle supported by carrier’s actual accounting system. USTRANSCOM will apply economic life standards for rotables at 10 years and zero percent residual.

3. UTILIZATION. The carrier’s system average aircraft utilization by aircraft type as reflected on Schedule B-1, “All Services” of the request for cost data package, will be used to compute unit costs per plane mile for fixed costs and investment. USTRANSCOM will also accept utilization in USTRANSCOM service if the carrier provides support for USTRANSCOM utilization. Any carrier proposing USTRANSCOM utilization versus system utilization will be required to provide documentation on how utilization is tracked, to include the carrier’s methodology for allocating down time to various customers. A carrier proposing utilization in USTRANSCOM service which is accepted in the rate due to sufficient supporting documentation will be required to consistently propose and support utilization derived from USTRANSCOM service from the year it is proposed to the end of the MOU period. Where applicable, the traffic data shown on Schedule B-1 must coincide with those statistics reported on Form 41 reports and monthly USTRANSCOM worksheets for round-trips and one-ways. In the event a carrier’s average system utilization for a particular aircraft type is below the lower limit of 5 hours per day, then the minimum limit of 5 hours shall apply for ratemaking purposes.

4. WEIGHTING OF RATE. Forecast rates will be weighted on the 2-year base period fiscal year dollars of the aircraft included in the participation threshold defined in para. 5.

5. PARTICIPATION. Carriers participating in the USTRANSCOM forecast year business shall provide cost and pricing data for USTRANSCOM rate reviews. However, carriers may submit cost and pricing data under any circumstances.

Data is required for carriers with revenues equating to five percent (5%) or greater of the class weighting (Large, Medium, Small) for one aircraft type (i.e., B747-400, MD11, etc.) in charter passenger or cargo service. USTRANSCOM/TCAQ-C’s COINS database will be used to determine carrier business level as of 30 days after the close of the base period. For example, Fiscal Year 2027 rate review participation was determined by fiscal year-to-date dollar levels as of 30 June 2025.

USTRANSCOM will allow 60 days for carriers to prepare data, and USTRANSCOM will not make this request until 30 days after the close of the base period for which data is being requested. For each day the cost package is late (for determination of lateness, the provisions of the solicitation which deals with late receipt of offers will be used), the carriers’ entitlement will be reduced by one percentage point per day up to a maximum of 30 percent for forecast year business. Where a carrier is a passive member of a teaming arrangement and not providing air transportation services for USTRANSCOM, they will not be required to provide cost and pricing data. For active members of a teaming arrangement providing air transportation service for USTRANSCOM, cost and pricing data will be required when the above conditions are met.

6. BIENNIAL COST ESCALATION. A general cost escalation factor will be computed each year using a weighted factor comprised of the following indices (all rounded to the nearest tenth of a percentage point).

GENERAL:

In order to protect the Contractor and the Government against significant market fluctuations, the Uniform Rate shall be adjusted by escalation of the prior year’s rates vice a full cost package submission at the start of the second year of each contract period of performance. The carrier shall not submit cost and pricing data for the second year of the period of performance, (see the below example). In order to eliminate potential gaps in cost information, cost packages shall be prepared using at least 24 months of data as depicted in the following table:

Base Period Option 1 Option 2

Base Year

FY25

2nd Year

FY26

Base Year

FY27

2nd Year

FY28

Base Year

FY29

2nd Year

FY30

Methodology Cost Package Escalation Cost

Package Escalation Cost Package Escalation

Cost Package

Oct 2021 – Sep 2023 N/A Jul 2023 –

Jun 2025 N/A Jul 2025 – Jun 2027 N/A

On the escalation years, USTRANSCOM will compute the 12-month general cost escalation factor by computing the escalation factor based on the GII Pricing and Purchasing Industry Forecasting for North American Industrial Classification System (NAICS) 481112, Scheduled Freight Air Transportation (70%) and Airlines for America (A4A) Passenger Airline Cost Index (PACI) (30%). Annual fuel and labor escalations will not be subject to this method.

SPECIFIC APPROACH:

1. Cost packages are submitted for development of the Uniform Rates for year 1 of the period of performance. The rate development for year 2 of the period of performance will be calculated by escalating year 1 cost data by 12-months. This process will repeat for each period of performance. Updates will only be applicable to the following escalation categories and will be applied to costs currently established in the CRAF Ratemaking process:

- General Cost Escalation shall be applied to the following elements of cost:

o Direct Variable

Non-labor cost elements of Crew Oil and Aircraft Supplies Non-labor cost elements of Aircraft Maintenance o Direct Fixed Miscellaneous o Indirect:

Maintenance - General Ground Property Aircraft & Traffic Servicing Non-labor cost elements of Passenger Service

- Labor (Crew, Maintenance, and Flight Attendants) Escalation and FICA escalation shall be applied to the following elements of cost o Direct Variable

Labor cost for Crew Labor cost for Maintenance o Indirect Passenger Service - Labor cost for Flight Attendants

- The Margin or Profit calculations will be applied in accordance with the

Weighted Guidelines Method based on the updated and revised costs for the Base and Option Periods Year 2.

2. General Cost & FICA Escalation: As stated in the Instructions For Uniform Rates And Rules Cost Package For International Service, once historical costs have been allocated between commercial and USTRANSCOM services, USTRANSCOM costs shall be adjusted for cost level changes. The Cost Package auto-populates to incorporate the 30-month general escalation and FICA escalation provided on the Cost Package’s cover page. The 30-month general escalation and FICA escalation will be utilized for fiscal years in which the rate is developed, year one of the period of performance. In year two of the period of performance, in which escalation will be applied, a 12-month general escalation and FICA escalation will be combined to the previous year’s 30-month escalation for a total 42-month escalation.

6.1 CARRIER COST ESCALATION – Labor (Crew, Maintenance, and Flight Attendants) Escalation: The carrier shall propose an escalation rate (percentage) in order to adjust for cost level changes imposed by labor contracts. Recommended change shall be based on actual labor cost increases, such as those in the applicable CBA. If a labor contract has expired and is no longer in effect, the carrier must provide sufficient documentation and data to support its proposed labor escalation. Failure to support and adequately defend proposed labor escalation may result in the application of general escalation or no escalation if DoT Form 41 data does not support labor escalation. Labor adjustments may be requested annually for claims of past incurred cost in excess of the general escalation. Any proposed adjustment must include sufficient supporting documentation (e.g., new and old CBAs) in order to calculate actual net costs to the carrier in excess of the general escalation.

Index figures subsequently revised by GII or A4A (e.g., amending formerly released indices by removing or replacing components within the index, describing revisions by footnote or appendix, significantly altering the method of calculating the index, or any other method) shall not warrant a retroactive price adjustment under the terms and conditions of the contract. All updates to each escalation category will be performed on an annual basis that is requested by the Government in the development of the next fiscal year’s Uniform Rate. In the event publication for either of the above indices is discontinued, the parties shall agree upon an appropriate substitute index.

The GII and A4A indices take into account the following categories in determining the General Cost Escalation:

General Cost Escalation GII 70% Schedule Freight Transportation Index

A4A Passenger Airline Cost Index 30%

Aircraft Rents & Ownership Professional Services Food & Beverage Landing Fees Maintenance Material Aircraft Insurance Non-Aircraft Insurance Communication Utilities & Office Supplies Transport Related Expenses Other Operating Expenses