FY08PROPRATE.pdf

For Official Use Only

16 April 07

MEMORANDUM FOR ALL CARRIERS

FROM: United States Transportation Command Command Acquisition 508 Scott Drive Scott AFB IL 62225-5357

SUBJECT: Notice of Proposed Fiscal Year 2008 (FY08) Uniform Rates and Rules for

International Service – Solicitation Number HTC711-07-R-0004 (SUSPENSE: 21 May 07)

1. The proposed FY08 rates are the first rates set under the new Memorandum of Understanding (MOU) and incorporates the changes briefed at the September 06 MOBREP Conference. Many of the carrier’s comments received on the MOU are addressed in the introduction to the Uniform Rates and Rules. The MOU (FY08-FY12) is currently being coordinated through USTRANSCOM and tentatively will be ready for release by 18 April 07. Prior to execution of your FY08 contract, a MOU must be signed.

2. The FY08 rates are based on fuel pegged at $2.25 per gallon for passenger and $2.35 for cargo and combi. The proposed rates for the various classes of service are as follows:

Linehaul Rate Stop Charge

Large Class Passenger .10887 per seat mile $2,000 Medium Class Passenger .14188 per seat mile $2,000 Small Class Passenger .14828 per seat mile $2,000 Large Class Cargo .39693 per ton mile $2,000 Medium Class Cargo .55886 per ton mile $2,000 Combi Service $22.587 per plane mile $2,000

3. Carriers providing cost data for the rate review should provide comments and supporting documentation to USTRANSCOM, Command Acquisition, 508 Scott Drive, Scott AFB IL 62225-5357 by close of business 21 May 07. No extensions will be granted. If specific information is required on individual cost elements, analyst will provided detailed step-by-step treatment upon carrier request.

UNITED STATES TRANSPORTATION COMMAND

508 SCOTT DRIVE

SCOTT AIR FORCE BASE, ILLINOIS 62225-5357

For Official Use Only

4. If you have any questions please feel free to call 618-256-4208 or email me at bill.prather@ustranscom.mil. Carriers interested in visiting USTRANSCOM to discuss their proposal and/or the new MOU may call our office for an appointment at the telephone number above.

//SIGNED//

WILLIAM J. PRATHER

Supervisory Price Analyst

Prepared By: United States Transportation Command, Command Acquisition, 508 Scott Drive, Scott AFB IL 62225-5357

UNITED STATES

TRANSPORTATION COMMAND

PROPOSED

UNIFORM RATES AND RULES

FOR

INTERNATIONAL SERVICE

FISCAL YEAR 2008

INTRODUCTION

The proposed FY08 USTRANSCOM Uniform Rates and Rules (hereafter referred to as

“Rates”) have been developed using ratemaking procedures attached to the Memorandum of Understanding (MOU) and methodologies previously established by the Civil

Aeronautics Board (CAB). The MOU serves as the fundamental agreement between

USTRANSCOM and commercial carriers supporting USTRANSCOM’s peacetime business under the Civil Reserve Air Fleet (CRAF) program. The FY08 proposed Rates is the first rate review under the new MOU (FY08-FY12) as well as USTRANSCOM.

The ratemaking function transferred from AMC to USTRANSCOM on 1 Jan 07.

A synopsis of the major events leading to the proposed FY08 Rates and MOU for period

FY08-FY12 are summarized below:

• 29 Jul 05: First letter sent to carriers requesting their input or items they would like to see addressed for the FY08 through FY12 MOU.

• Sep 05: Briefed the carriers at the MOBREP Conference on current

MOU and provided some thoughts on the new MOU.

• Sep 06: Provided initial briefing to carriers at the MOBREP Conference on all topics for the new MOU. Carriers were asked to provide comments with supporting documentation on their relevant issues.

• 30 Nov 06: Received comments from American, American Trans Air, Air Transport, Atlas, Delta, Evergreen, Federal Express, Gemini, North

American, Omni, Polar, Ryan, and World.

• Apr 07: The FY08 proposed Rates incorporates the changes

USTRANSCOM briefed in Sep 06 and provides a brief summary and

USTRANSCOM response to carrier’s comments.

Nineteen commercial carriers participating in the USTRANSCOM airlift program provided 25 cost proposals for development of USTRANSCOM FY08 proposed Rates.

Capital Compensation.

Return on Investment (ROI) encompasses a number of key elements such as the industry capital structure, depreciation policies, industry’s leased equipment (both capital and operating) working capital considerations, and profit risk. USTRANSCOM understands that CRAF participants should receive a fair and reasonable ROI for their capital investment and business risk for their efforts to provide transportation services for DOD customers. The capital compensation component has been studied extensively in the past by industry and government groups. USTRANSCOM, again for the new MOU, has closely reviewed the capital compensation component and are discussed in the following four sections.

Full Return on Investment (ROI).

American, North American, and World provided comments to ROI. These carriers believed the ROI model for the previous MOU (FY03-FY07) underestimated the debt to equity ratio, cost of debt, and beta factor in the cost of equity. USTRANSCOM agrees with the concerns the carriers had with the full ROI model.

The changes USTRANSCOM has recommended to the ROI model are patterned after

American’s comments on the ROI model. These changes were briefed at the Sep 06

MOBREP Conference and are summarized below:

• The debt to equity ratio is based on the carrier’s debt to equity ratio who receives the full ROI.

• The cost of debt is based on a risk free rate of return on long-term 10 year treasury yields plus a debt spread based on Reuters Corporate Spreads for

Transportation. The debt spread is weighted based on USTRANSCOM revenues reported on Appendix B. The ROI model for calculation of debt is

Cost of Debt = Risk Free Rate + Weighted Corporate Debt Spread.

• The cost of equity is based on a risk free rate of return on long-term 10 year treasury yields plus a market risk premium times an average beta of CRAF carriers who receive full ROI. The model for the calculation of equity is

Cost of Equity = Risk Free Rate + (Beta x Market Risk Premium).

Carriers have responded favorably to the changes to the full ROI model. Atlas, however, commented on the 3.21 percent market risk premium used in the Sep 06 briefing as low.

USTRANSCOM agrees the market risk premium factor should be 4.91 percent.

Appendix L provides the details for the development of the full rate of return. The full rate of return is based on four carriers (American, Delta, Federal Express, and United).

The revised ROI model provides for a full ROI of 14.98 percent and will be applied to the

FY08 average net book value of owned and long-term/capital leased investment.

Minimum Return (Profit).

Minimum return is of key interest in MOU development since the majority of CRAF participants receive the minimum return factor. The minimum return factor ensures those

CRAF participants, who have no flight equipment assets or fully depreciated flight equipment assets, receive a measurable return. The previous MOU allowed for a 10 percent minimum return. USTRANSCOM has recommended an 11 percent minimum return for the next MOU (FY08-FY12). Evergreen, North American, Omni, and World provided comments on the proposed 11 percent minimum return. Two of the four carriers who responded on this issue accept the 11 percent as reasonable. The other two carriers felt a 12 percent minimum return is more appropriate. The carriers who preferred a minimum return at 12 percent, however, provided no supporting documentation, only reasons to why a higher return was needed. The reasons provided were to offset teaming commission expense, interest expense, and support modernization of carrier’s fleets per

USTRANSCOM’s desire to have more modernized aircraft in CRAF. Carrier’s request to recognize teaming commission expense and interest expense is not new. Our response has been and continues to be that these two cost categories are unallowable per Federal

Acquisition Regulations. As for the reason for a higher profit request to support modernized aircraft in CRAF, a price incentive for the use of fuel-efficient aircraft is prohibited by 31 U.S.C 1301(a).

USTRANSCOM applied the weighted guideline method in its analysis of fair ROI. The weighted guideline method is a common means of determining profit in most government contracts. This method provides an organized and structured approach to evaluate and weigh the factors and cost risks associated with a particular contract. ATA profit margins and the profit margins of many of the CRAF participants were also reviewed.

The historical ATA profit data reflects a five year average profit rate of negative 3.9 percent and recent profit margins for many of the CRAF participants has averaged 6.4 percent.

The results of our weighted guideline analysis combined with industry average profit comparisons fully supports USTRANSCOM’s 11 percent minimum return.

Working Capital.

Working capital represents the timeframe from which services have been provided under

CRAF until the date those services are paid, notwithstanding the carrier’s working capital on hand. Working capital became part of the investment base under the MOU negotiations for FY88-FY93. The number of days used in the calculation was changed to

23 days from 21 days during the last MOU negotiation process (FY03-FY07). Carriers provided no comments in changing the 23 days currently used in the calculation of working capital for the new MOU. Therefore, the new MOU will continue to apply 23 days in calculating working capital.

Depreciation.

Several carriers provided comments on depreciable lives of aircraft and related parts for older equipment. The carriers recommended a shorter depreciation life for older equipment. Forcing a depreciation life of 14 or 16 years turns back the clock on the airframe to new and understates the true impact of an older aircraft. USTRANSCOM for years has permitted carriers to request a shorter depreciation life cycle for older equipment providing the shorter depreciation life is supported by their accounting system.

USTRANSCOM for the new MOU will depreciate older aircraft and support equipment at 10 years and 5 percent residual (narrow-body and wide-body aircraft).

USTRANSCOM’s definition of used older aircraft is aircraft that exceed the 14 years

(narrow-body) and 16 years (wide-body) from aircraft production date. USTRANSCOM will also continue to accept a shorter depreciation cycle supported by a carrier’s actual accounting system and recognized tax depreciation methods.

Aircraft Utilization.

USTRANSCOM applies a carrier’s fleet wide system average utilization for the calculation of a system constructed mileage base. Carriers provided comments for the new MOU that USTRANSCOM should recognize an average utilization for

USTRANSCOM operations. The reasons provided for applying a USTRANSCOM utilization include inconsistent and non-repetitive departure times, longer average ground turn times, the requirement to position and de-position aircraft at military locations, the inability to park at military installations, and scheduling requirements related to maximum-aircraft-on-ground issues. USTRANSCOM realizes performing

USTRANSCOM missions can result in inefficiencies as compared to the scheduled commercial operations. USTRANSCOM, therefore, will recognize a USTRANSCOM utilization in the development of the system constructed mileage along with the continued use of system utilization. However, the carrier must provide support for the

USTRANSCOM utilization.

USTRANSCOM will continue the practice of allowing carriers to remove days for major modifications and scheduled heavy maintenance in the forecast year. This is an area in which we annually have Defense Contract Audit Agency (DCAA) verify the carrier’s forecasted days.

Carriers commented on lowering the minimum utilization of 5 hours per day to 4 hours per day. USTRANSCOM feels it is not necessary to lower the daily utilization to 4 hours since the new MOU allows the CRAF carriers to use a utilization in USTRANSCOM service.

Cost Escalation.

The MOU incorporates a cost escalation model. The purpose of the model is to produce a cost escalation factor which is used to project our historical base year (1 Jul-30 Jun).

The model projects a 27-month cost escalation. Carriers and USTRANSCOM try to use factual information such as lease agreements, insurance policies, and wage agreements for projecting forecast period cost levels. The cost escalation factor is applied when actual data is not available.

USTRANSCOM’s goal is to provide a cost escalation model which most consistently tracks with the cost changes of the aviation industry. The previous model used the ATA composite index weighted at 75 percent and PPI-Nonscheduled Transportation weighted at 25 percent. USTRANSCOM briefed the carriers at the Sep 06 MOBREP Conference of adding a new index to the model called GII-Scheduled Freight Air Transportation, put out by Global Insight Incorporated (GII). The GII uses the PPI data and makes adjustments to this data based on market conditions (supply and demand factors) and provides projected escalation into the future years.

Four carriers provided comments on the new escalation model. Three of the four comments were in favor of the change made to the previous model. The one carrier who favored keeping the current model provided no reasons.

The percentage index weighting for the new model is 34 percent, 33 percent, and 33 percent for the ATA, PPI, and GII indices, respectively. The proposed FY08 annual cost escalation factor under the new model is 4.59 percent, Appendix K. The annual escalation for the final FY07 rates was .98 percent. USTRANSCOM will update these indices as needed for the final rate.

Weighting of Rate.

Two carriers provided comments on weighting the rate on Mobilization Value Points

(MVP) versus the application of revenues to weight the Rates. The two carriers contend that the present method does not achieve USTRANSCOM’s stated objective of providing fair and reasonable rates that reflect a true representation of industry costs.

USTRANSCOM disagrees with the two carriers. The ratemaking process has a proven track record of providing annual Rates that are fair and reasonable and representative of industry cost. The CRAF Rates are based on the carriers’ costs that perform CRAF missions (Atlas, Evergreen, Federal Express, Gemini, Kalitta, Polar, and United Parcel).

USTRANSCOM’s cargo requirements are primarily fulfilled with the B-747 aircraft.

This translates into a large class cargo rate predominately based on this aircraft. The

FY07 Rate for this class consisted of nine carriers’ cost (six B-747, two MD-11, and one

DC-10). Evergreen’s, Atlas’, and Polar’s cost represent 87.5 percent for this rate class.

The average FY07 operating cost per plane mile for this rate class was $32.02. The average compensation per plane mile from the FY07 Rate was $35.22. The rate of return ranged from -4.7 percent to 36.6 percent. Based on these facts, the Rate for this class provides fair and reasonable compensation for the CRAF carriers who perform CRAF cargo missions.

Weighting the Rates with MVPs goes against economic theory in the development of the annual Rates. The MOU states CRAF annual Rates will be developed from certified carriers who actually fly the CRAF airlift requirements. If USTRANSCOM used MVP points, carriers could artificially inflate the Rate without ever flying or flying only a limited number of missions.

MVP are indirectly tied to revenue since they are used to award contracts to carriers/teaming arrangements. Since MVP are tied to revenue, MVP indirectly affect the weighting already. Also, the using of MVP to weight the Rates would provide incentives to the carriers which go against Federal Acquisition Regulations. An incentive must be tied to contract performance and allowing the Rates to be weighted by MVP would have no affect on contract performance.

USTRANSCOM’s position is weighting the Rates on revenues provides a direct relationship between contract performance to cost incurred in the execution of the contract. The entitlement process (MVPs) should not be mixed with the development of the Rates since the entitlement process already contain incentives.

Participation.

USTRANSCOM briefed changing the revenue requirement level for submitting pricing data for the annual rate reviews from $3M to $10M at the Sep 06 MOBREP Conference.

Four carriers provided comments on this recommendation. The four carriers were against changing the rate participation level to $10M and preferred to keep the level at $3M. The carriers believe moving the level to $10M would hinder in maintaining a representative sample of carriers’ cost in the development of the CRAF annual Rates. USTRANSCOM agrees with carriers that the $10M participation level could result in not having a representative number of proposals when USTRANSCOM’s current CRAF requirement levels begin to decrease. USTRANSCOM reviewed the number of required proposals at

$3M level and $5M level. The review disclosed minimal difference between the two participation levels. Therefore, USTRANSCOM will move the required rate participation level to $5M for the new MOU.

Several carriers also requested more time to complete the package and a standard time each year for the rate review to begin. Under the prior MOU, carriers were given a minimum of 45 days to complete the package. The MOU also states that

USTRANSCOM will not make a request for cost data until 30 days after the close of base period (1 Jul – 30 Jun).

Under the new MOU, USTRANSCOM will allow 60 days for carriers to complete the cost proposal. Our request for cost data remains unchanged which is 30 days after the close of base period. The request for cost and pricing data will be made no later than

15 Aug.

USTRANSCOM Rates are based on carriers’ cost plus a guaranteed minimum profit.

Carrier’s rates are weight averaged, based on USTRANSCOM revenues for a two-year period, into a single worldwide rate per seat-mile and ton-mile for each of the rate categories. The FY08 Rates were developed on experienced base year cost and statistical data furnished by 19 carriers for the base year ending 30 Jun 06. USTRANSCOM’s objective is to have a pool of accurate cost data that fairly represents the cost of providing

DoD charter service. Carriers’ cost data was audited and USTRANSCOM analyzed carriers’ forecast operating cost projections in the development of the FY08 Rates.

Adjustments made to carriers’ forecast costs were based on past ratemaking practices, Federal Acquisition Regulations, and new MOU. Detailed notes are provided in

Appendix I to identify individual carrier adjustments. The more significant items of interest for all carriers are explained in the following paragraphs.

Class of Aircraft Service.

In FY04, the multi structure for cargo (large and medium) and passenger aircraft (large, medium, and small) was introduced to equitably align aircraft operating cost to revenues based on aircraft productivity (ton and seat capacity). The large class cargo consists of aircraft with an ACL ranging from 60 to 90 tons. The medium class cargo includes aircraft with an ACL of 36.5 to 51 tons. The large class passenger includes aircraft with an ACL greater than 260 seats. The medium class passenger is aircraft with an approximate ACL range of 180-260 seats. And finally, the small class passenger includes aircraft with an ACL of 150 seats or less. A carrier’s cost per seat and ton-mile will be used to place aircraft that fall between class categories.

It is accepted airline economics that smaller aircraft typically have higher operating cost per unit (ton/seat mile) and shorter stage lengths. The multi rate structure better aligns the carrier’s aircraft operating cost to compensation and is based on a performance based strategy.

Fuel.

USTRANSCOM pegs the price of fuel for charter services based on data from carrier provided fuel reports and industry data. Fuel reports are reviewed for commercial fuel price trends for DoD missions and ratio of DoD and commercial fuel uplifted in support of DoD missions.

Carriers’ fuel reports for period Jul 06-Jan 07 conclude cargo carriers receive 75 percent of their fuel at military installations and are charged the fuel rates set annually by

Defense Energy Support Center (DESC). Conversely, passenger carriers receive 82 percent of their fuel commercially, which fluctuates up and down with the fuel market.

Commercial fuel prices for USTRANSCOM passenger service ranged from $2.01 to

$2.40 and USTRANSCOM cargo operations ranged from $2.04 to $2.42 per U.S. gallon for Jul 06 through Jan 07.i DESC has estimated JP-8 fuel for FY08 at $2.32. The Final

FY07 USTRANSCOM pegged fuel prices were set at $2.15 and $2.25 per U.S. gallon, for passenger and cargo, respectively.

DESC has made an adjustment to the FY07 fuel prices. The changes to DESC fuel are affected 1 Apr 07, and decreases fuel prices for JP-4, JP-5, and JP-8 fuel from $2.37, $2.32, and $2.30 to $2.21, $2.16, and $2.14 respectively. USTRANSCOM became aware of the changes to the FY07 fuel prices after the pegged prices for FY08 proposed

Rates had been established.

Based on carrier’s fuel reports and commercial market fuel prices USTRANSCOM has pegged price of fuel at $2.25 and $2.35 per U.S. gallon, for passenger and cargo, (combi will use cargo prices), respectively. The pegged price includes into-plane fees and taxes. The pegged fuel prices will be looked at again for the final FY08 Rates.

USTRANSCOM will continue to adjust each carrier’s monthly revenues upward or downward if the price of fuel varies by $.01 or more per gallon over the pegged prices in establishing the rate. The solicitation addresses the fuel adjustment procedure.

Stop Charges.

Since the introduction of the multi class rate structure in FY04, USTRANSCOM performed another analysis of the stop charge concept. This analysis of round-trip and one-way missions disclosed that a $2,000 stop charge for each rate category best meets the objective of aligning a carrier’s trip operating cost with trip revenues. Therefore, the stop charge used to develop the line-haul rate for each passenger and cargo rate will remain at $2,000 for FY08.ii

Eurocontrol.

USTRANSCOM provides a Eurocontrol surcharge to compensate carriers for the extra high costs of missions through Eurocontrolled airspace. Actual Eurocontrol invoices for specific routes shown in Appendix J were analyzed. The current Eurocontrol charges

(converted to U.S. dollars) were calculated as a percent of the trip revenues using the

FY07 line haul rate (without stop charge). USTRANSCOM is proposing the FY08

Eurocontrol surcharge of 3.1 percent for passenger and 3.5 percent for cargo missions. .

See Appendix A for treatment of DC-8 cargo missions flying the hub and spoke operations within Europe.

Ferry.

The ferry rate increased from 75 percent to 90 percent in FY02. The ferry rate is a reduced rate based on savings of flying an empty aircraft. An empty aircraft does not incur costs such as food, full cabin crew salary, and passenger liability insurance. The aircraft in empty service is more fuel-efficient and flies a more direct route. An empty aircraft in non-revenue service also incurs lower cost in “aircraft and traffic servicing.”

Non-revenue enroute stops do not incur cost related to traffic handling personnel, gate requirements, security, and in some cases lower landing fees. USTRANSCOM reviewed the current cost levels in all cost categories. The ferry rate for FY08 will remain at 90 percent of the effective rate.iii See Appendix A for actual ferry rates.

One-Way Rates.

Historically, carriers claim that commercial backhaul opportunities for USTRANSCOM missions are nonexistent. The ability to find a one-way commercial charter to parallel

USTRANSCOM’s one-way requirements does not exist since passengers require round-trip service. Unless a carrier has a significant USTRANSCOM fixed buy that parallels a commercial tour operation, there is limited ability to coordinate aircraft flow and achieve commercial backhaul.

The one-way passenger and cargo rates are based on the round-trip rates, adjusted to reflect certain savings and economies. The adjustments for the one-way rate are: (1) cost savings associated with flying an empty aircraft in backhaul service, (2) a reduction for backhaul miles flown in commercial service, (3) a reduction for fewer miles flown in backhaul service due to aircraft scheduling efficiencies.

USTRANSCOM addressed the savings of flying an empty aircraft in the earlier paragraph concerning the “ferry” rate. The savings for flying an empty aircraft are roughly 10 percent. This savings also holds true for flying an empty aircraft in the reverse segment of a one-way mission.

Although there are limited commercial backhaul opportunities in USTRANSCOM passenger service, historical data does reflect some efficiency in aircraft scheduling resulting in fewer miles flown in empty backhaul service. Appendix M reflects the carrier data associated with empty backhaul service for USTRANSCOM missions. This data reflects the two empty legs before or after a USTRANSCOM one-way mission.

Carriers report the two legs before one-way missions originating outside Continental U.S.

(CONUS) or, conversely, the two legs after one-way missions originating inside the

CONUS. The empty legs represent the movement of the aircraft prior to re-entering commercial service, positioning to maintenance, or positioning to a carrier’s home base of operation.

The statistical ratio of historical empty flown miles to live one-way miles does reflect some efficiencies in the scheduling of aircraft in empty reverse segments. The ratio of live miles to empty miles, based on statistics of Appendix M, reflects a minimum percent savings on average. This savings in conjunction with the 10 percent savings for flying an empty aircraft reflects a minimum of 15-20 percent savings for one-way missions.

Therefore, USTRANSCOM is proposing a one-way passenger rate of 185 percent for

FY08. Taking these variables into account for all requirements, USTRANSCOM proposes the following one-way rates for FY08.

• The one-way passenger rate is set at 185 percent of the round-trip seat mile rate.

• The one-way expansion cargo rate is set at 180 percent of the round-trip ton-mile rate.

• The one-way combi rate is set at 185 percent of the round-trip per plane mile rate.

• The one-way contingency passenger rate is set at 193 percent of the round-trip passenger rate.

• The one-way contingency cargo rate is set at 195 percent of the round-trip cargo rate.

Two Tiered Cargo One-Way Rate.

The two-tiered one-way cargo rate was established in the FY99 Rate. It set a reduced rate of 150 percent for fixed buy one-way channel missions presented to the industry a year in advance. In theory, this concept allowed the carriers the opportunity to work the flow of the DoD one-way missions with their commercial one-way business to make an efficient operation. The cargo requirements for CRAF participants are declining as a result of an increased amount of airlift available from the organic fleet. USTRANSCOM does not have any fixed buy one-way channel missions to offer in FY08. Therefore, the two-tiered cargo one-way rate is not applicable for FY08 fixed buy requirements.

Standard Allowable Cabin Loads (ACL).

The concept of maximum standard ACL was implemented in FY92 as a result of concern about parity among carriers and maintaining a competitive environment within the CRAF

Rates. The maximum standard ACL’s are based on range capability, aircraft usable floor space, gross takeoff weight capacity, lavatories, aircraft operating expense, and passenger comfort and convenience. Appendix A provides the maximum ACL’s by rate aircraft category.

Incremental Passenger Movement.

Incremental passenger service rate for periodical requirements that require the use of extra seats above the standard ACL was developed in FY02. The rate applies when the number of additional passengers above the standard ACL is identified for an exercise, SAAM, or contingency. See Appendix A.

Appendices.

Appendix A provides procedures and rules for the application of USTRANSCOM Rates.

Appendix B provides the weighting and participation of carriers comprising the large, medium, and small class of passenger aircraft and the large and medium class of cargo aircraft, and combi aircraft rates, respectively. Appendices C through H illustrate individual treatment of each carrier’s cost by aircraft type, with explanatory notes provided in Appendix I. Appendices J, K, L and M provide the Eurocontrol Surcharge, Cost Escalation Factor, Rate of ROI Computations, and Operational Data for AMC

Services, respectively.

i The average commercial prices of fuel in USTRANSCOM service include into-plane fees and taxes. The below average price is also a weighted average for the month based on total dollars and total gallons broken out by passenger and cargo operation. The weighted average price is computed based on all carriers who provided fuel reports.

Passenger Cargo Commercial Commercial Month Avg. Price Avg. Price Jul 06 2.33 2.35 Aug 06 2.40 2.42 Sep 06 2.32 2.36 Oct 06 2.05 2.11 Nov 06 2.01 2.04 Dec 06 2.04 2.07 Jan 07 2.01 2.19 ii This chart is a comparison of compensation a carrier would receive under the effective rate verses line-haul rate. The statistical data used to calculate the average trip length, average number of departures per trip, and average ACL for each class of aircraft was calculated from statistical data for base year (1 Jul 05 – 30 Jun 06).

Average Average Effective Line Haul Aircraft Effective Average Stop Linehaul Directed Trip Rate Per Rate Per Class Rate ACL Charge Rate Stops Miles Mile Mile

Lg Pax 0.11118 336 $2,000 0.10887 4 9,684 $37.36 $37.41 Med Pax 0.14584 207 $2,000 0.14188 4 8,141 $30.18 $30.35 Sm Pax 0.15530 150 $2,000 0.14828 4 7,250 $23.30 $23.34

Lg Cgo 0.40499 89 $2,000 0.39693 5 13,334 $36.04 $36.08 Med Cgo 0.57700 45 $2,000 0.55886 4 8,647 $25.97 $26.07 iii The analysis of the ferry rate was performed using the final FY07 Large Class passenger Rate of 10.423 (effective rate) cents per seat mile. The 89.9 was rounded to 90 percent.

Wgt'd Percentage Cost Ferry Cost Category Cost Allowed Allowed Rate

Crew .8768 100% .8768 Fuel 3.4620 90% 3.1158 Maintenance 1.0951 100% 1.0951 Insurance 0.0822 100% 0.0822 Rent 0.6308 100% 0.6308 Depreciation 0.3204 100% 0.3204 Preop 0.0000 100% 0.0000 Grd Property 0.0383 100% 0.0383 Aircraft & Traffic Service 0.6876 85% 0.5845 Passenger Service 1.7300 65% 1.1245 G&A 0.5206 100% 0.5206 Profit .9790 100% .9790 Total 10.423 9.3752 0.8995

INDEX OF APPENDICES

No.

Appendix Title Pages

A United States Transportation Command Uniform Negotiated Rates and Rules 7

B Computation of Uniform Rates: 6 Large Class Passenger Service Medium Class Passenger Service Small Class Passenger Service Large Class Cargo Service Medium Class Cargo Service Combi Class Service

C Costs Per Seat Mile by Carrier and Aircraft Type In Large Class Charter Passenger Service 7

D Costs Per Seat Mile by Carrier and Aircraft Type in Medium Class Charter Passenger Service 7

E Costs Per Seat Mile by Carrier and Aircraft Type in Small Class Charter Passenger Service 1

F Costs Per Ton Mile by Carrier and Aircraft Type in Large Class Cargo Service 7

G Costs Per Ton Mile by Carrier and Aircraft Type in Medium Class Cargo Service 2

H Cost Per Plane Mile by Carrier Charter Combi Service 1

I Explanatory Notes 12

J Eurocontrol Surcharge 2

K Cost Escalation Factor 2

L Rate of Return on Investment 4

M Operational Data for United States Transportation Command 1 Service

APPENDIX A

SCHEDULE OF UNIFORM NEGOTIATED RATES AND RULES

FISCAL YEAR 2008

A. RATES. Air transportation services shall be paid for at the following rates. In addition, carriers' monthly USTRANSCOM revenues based on the uniform rate will be adjusted for the variance in fuel price as provided in paragraph C of this Appendix A.

(1) CATEGORY B (CHARTER) PASSENGER SERVICE

a. Large Class Aircraft

Passenger Linehaul Rates, cents per seat mile Round-trip: 10.887 One-way: 20.141 (Contingency Rate): 21.012 Ferry rate: 10.006(90% of effective rate) Stop Charge: $2,000 per directed landing Incremental Passenger Rate: $176 (per passenger)

b. Medium Class Aircraft

Passenger Linehaul Rates, cents per seat mile Round-trip: 14.188 One-way: 26.248 (Contingency Rate): 27.383 Ferry rate: 13.126(90% of effective rate) Stop Charge: $2,000 per directed landing Incremental Passenger Rate: $176 (per passenger)

c. Small Class Aircraft

Passenger Linehaul Rates, cents per seat mile Round-trip: 14.828 One-way: 27.432 (Contingency Rate): 28.618 Ferry rate: 13.977(90% of effective rate) Stop Charge: $2,000 per directed landing Incremental Passenger Rate: $176 (per passenger)

(2) CATEGORY B (CHARTER) CARGO SERVICE

a. Large Class Aircraft

Cargo Linehaul Rates, cents per ton mile Round-trip: 39.693 One-way (expansion buy): 71.447 (Contingency Rate): 77.401 Ferry rate: 36.449(90% of effective rate) Stop Charge: $2,000 per directed landing

b. Medium Class Aircraft

Cargo Linehaul Rates, cents per ton mile Round-trip: 55.886 One-way (expansion buy):100.595 (Contingency Rate): 108.978 Ferry rate: 51.930(90% of effective rate) Stop Charge: $2.000 per directed landing

(3) CATEGORY B (CHARTER) CHARTER SERVICE

Combi Linehaul Rates, per plane mile Dollars per plane mile: 22.587 One-Way: 41.785 one-way plane mile Ferry Rate: 21.136 (90% of effective rate) Stop Charge: $2.000 per directed landing

(4) DIMENSIONAL PRICING – All cargo moved under Less Than Full Pallet (LTFP) CLINs are subject to dimensional pricing. Dimensional weighting compensates for low density per cubic area cargo movement. The dimensional weighting factor for international is 166 and for domestic cargo movement the factor is 194, consistent with commercial industry. The formula below illustrates how the dimensional weighting factor is applied for international. For the domestic calculation, substitute 194 in the place of 166.

Step 1 Shipment ____ length X ____ width X ____ height = cubic inches.

Step 2 ____ cubic inches, divided by 166 cu in/lb. = ____ chargeable pounds.

Step 3 Pay greater amount of: chargeable pounds or actual pounds.

Example: A shipment weighting 5 pounds that is 10” long, by 10” wide, by 10” high.

Step 1 10” (length) X 10” (width) X 10” (height) = 1,000 cubic inches.

Step 2 1,000 cu in, divided by 166 cu in/lb. = 6.02 chargeable pounds

Step 3 Actual weight = 5 pounds Chargeable weight = 6 pounds Payable weight = 6 pounds

(5) CATEGORY A SCHEDULED SERVICE CARGO (FULL PALLET)

The trip price for Scheduled Service cargo transportation is based on either a per pound or a per pallet, depending on the requirement, and negotiated outside the USTRANSCOM rate.

- Minimum guarantee per 463L pallet for widebody is 4,980 pounds.

- Minimum guarantee per 463L pallet for narrowbody is 3,750 pounds.

(6) EUROCONTROL. Eurocontrol applies where a carrier is required to transit countries with an ICAO prefix of "E" or "L" (i.e., EDAF, LIRA), with the exception of EGYP in the Falkland Islands. Carriers will be paid the applicable rate plus a surcharge of 3.1 percent of trip price (does not include stop charges) for passenger missions and 3.5 percent of trip price (does not include stop charges) for cargo missions. The Eurocontrol charge will not be calculated on ferry miles.

For DC-8 combi and other cargo missions flying a hub and spoke operation within Europe, the surcharge will not apply. These cargo missions will be reimbursed Eurocontrol charges based on actual invoices. Eurocontrol charges are those invoiced by Eurocontrol, Rue De La LOI 72-B-1040, Bruxelles.

(7) FERRY. In the event the air carrier operates a round-trip flight where the distance between originating and terminating stations exceeds 250 statute miles, the carrier will be paid either ferry rate for the statute miles between the originating station and termination, or ferry rate for the statute miles between the terminating station and, by mutual consent, one of the carrier's principle operating bases. Ferry will be paid based on standard ACL or lesser amount. Positioning and depositioning ferry shall be included with the offer and negotiated at time of award.

The carrier will not be paid ferry compensation to “close the jaw” if USTRANSCOM has that carrier operate a follow-on flight, which originates from the terminating station, within 24 hours.

(8) INCREMENTAL PASSENGER MOVEMENT. The incremental passenger rate applies when the number of additional passengers above the standard ACL is identified for an exercise, SAAM or contingency. The incremental passenger movement rate is $176 for each additional passenger over the standard ACL. In cases when the per seat cost is lower than USTRANSCOM’s incremental passenger rate, USTRANSCOM will pay the lesser amount.

B. AIRCRAFT STANDARDS. The rate set forth in paragraph A shall be applied to the following standard aircraft loads. When an aircraft is offered for channel missions with less seats than the standard ACL, and the aircraft is not 34 inch seat pitch configuration, we will only pay for the actual number of seats.

PASSENGER AIRCRAFT CARGO AIRCRAFT

Maximum Entitlement Maximum Entitlement Standard Category Standard Category Aircraft Type Payload Aircraft Type Payload

Small Aircraft:

Small Aircraft:

B-727-100 120 Short Range B-727-100 18 Short Range B-737-100 120 Short Range B-727-200 22 Short Range B-737-300 130 Short Range A319 135 Short Range MD-80 140 Short Range B-737-400 140 Short Range B-727-200 150 Short Range B-737-800 150 Short Range A320-232 150 Short Range A321-200 170 Short Range

PASSENGER

AIRCRAFT CONT. Maximum Entitlement

CARGO

AIRCRAFT CONT. Maximum Entitlement

Standard Category Standard Category Aircraft Type Payload Aircraft Type Payload

Medium Aircraft: Medium Aircraft:

B-757-200 190 Narrow Body DC-8-50 36.5 Narrow Body B-757-200ER 190 Narrow Body DC-8-62 39.2 Narrow Body B-757-300 200 Narrow Body DC-8-61 39.2 Narrow Body B-767-200 200 Narrow Body DC-8-63 45 Narrow Body B-767-200ER 200 Narrow Body DC-8-71 45 Narrow Body A-310 200 Narrow Body DC-8-73F 45 Narrow Body A-300-600ER 210 Narrow Body B-767-200F 48 Narrow Body A-300 210 Narrow Body A300-B4(F) 50 Short Range B-767-300 240 Wide Body A300-600ER 51 Short Range B-767-300ER 240 Wide Body B-767-400ER 260 Wide Body

Large Aircraft: Large Aircraft:

L-1011-50 280 Wide Body L-1011-50/100 60 Wide Body L-1011-100 280 Wide Body DC-10-10F* 70 Wide Body DC-10-10 280 Wide Body DC-10-30/40 75 Wide Body L-1011-500 300 Wide Body MD-11C 82 Wide Body A-330-300 310 Wide Body MD-11F 86 Wide Body A-330-323 310 Wide Body B-747-100 90 Wide Body B-777-200ER 330 Wide Body B-747-200 90 Wide Body DC-10-40 330 Wide Body B-747-400 90 Wide Body DC-10-30 330 Wide Body B-747-400ER 90 Wide Body MD-11C 360 Wide Body MD-11ER 360 Wide Body B-747-100 400 Wide Body B-747-200 400 Wide Body B-747-400ER 400 Wide Body

*DC-10-10F is under review and will be in final rate.

Note: Pay ACL for B-767-300F is under review and will be in final rate.

C. FUEL ADJUSTMENTS.

(1) General. The carrier shall be compensated for variance in fuel prices incurred on USTRANSCOM contract full planeload missions bought at the USTRANSCOM rate. Compensation will not be made to the prime or subservicing carrier for substitute service or subcontracted miles. Adjustments will be made upward or downward if the price of fuel varies by more than one cent per gallon from the pegged price (as stated in the USTRANSCOM Uniform Negotiated Rates and Rules) used in establishing the USTRANSCOM rates.

(2) Category B. The solicitation/contract addresses the current fuel adjustment procedures.

D. ROUND-TRIP SERVICES. The round-trip rate will be applied to trips where passengers and/or cargo are transported on two or more successive revenue flights in opposite directions.

E. CHANNEL EXTENSIONS. Seattle closed as of 1 Oct 05 as a full up commercial gateway and now operates as a channel extension. The following amounts will be paid per stop when the government directs a landing at Seattle.

Large Class Aircraft Ferry In/Live Out $3,594.00 Live In/Ferry Out $2,224.00

Medium Class Aircraft Ferry In/Live Out $3,594.00 Live In/Ferry Out $2,224.00

Small Class Aircraft Ferry In/Live Out $3,594.00 Live In/Ferry Out $2,224.00

F. COMPUTATION OF PASSENGER SEAT-MILES AND CARGO TON-MILES FOR PAY PURPOSES.

Long Range Service: Computation of miles and stop charges shall be computed as follows:

(a) If a live route segment is less than 4,000 miles, mileage shall be computed nonstop from origin to destination of that segment.

(b) When a route segment is 4,000 miles or more the mileage shall be computed via an intermediate point(s) which yields the shortest mileage. The government will pay for a directed operational stop when a route segment exceeds 4,000 miles. Carrier enroute stops related to paid ferry when positioning an aircraft for USTRANSCOM service do not receive a stop charge since paid ferry is paid on the effective rate versus the linehaul rate.

Examples: KBWI*CYQX–EDDF–LTAG–EDDF*CYQX–KBWI-KCHS = 7 Paid Stops1/

KCHS#MMCZ-MPTO=1 Paid Stop2/

KWRI+KCOF-TAPA-FHAW-TAPA-KCOF+KWRI= 4 Paid Stops3/

1/ * This symbol used in the above example indicates operational stops.

2/ # This symbol used in the above example indicates special miles for circumnavigating countries which will not grant over flight clearances—stop charges do not apply.

3/ + This symbol used in the above example indicates ferry leg for which stop charges do not apply.

(c) If a route segment is in the Pacific, the mileage shall be computed as indicated below:

PACIFIC ROUTINGS

PHILIPPINE

BETWEEN THAILAND A/ ISLANDS GUAM KOREA HAWAII TAIWAN OKINAWA JAPAN ALASKA

CONUS 4 or 6 4 or 6 5 4 or 8 B/ 1 4 or 8 B/ 4 or 8 B/ 2 or 5 B/ 1

ALASKA 3 3 - 3 - 3 3 1 or 3

JAPAN 1 1 1 1 1 B/ 1 1

OKINAWA 1 1 1 1 3 B/ 1

TAIWAN 1 1 1 1 3 B/

HAWAII 7 7 1 3 B/

KOREA 9 1 1

GUAM 1 1

PHILIPPINE 1

ISLAND

ROUTINGS

1. Direct 4. Via Anchorage/Yokota AB, Japan 7. Via Guam

2. Via Anchorage 5. Via Honolulu 8. Via Honolulu/Yokota AB, Japan

3. Via Yokota AB, Japan 6. Via Honolulu - Guam 9. Via Taipei A/ Certain trips to Thailand require submission of flight plan for circumnavigation.

B/ Honolulu – Yokota AB, Japan either direct or via Midway or Guam as specified in the USTRANSCOM contract.

G. DEFINITIONS.

“Category A cargo” Transportation of less than full planeload lots of cargo individually waybilled on schedules commercial flights between CONUS and overseas stations or between overseas stations.

“Category B Airlift” USTRANSCOM channel airlift for the transportation of passengers in full planeload lots on aircraft chartered from the commercial air industry. These international charter flights are scheduled by USTRANSCOM on a regular basis to and from designated commercial airports and/or USTRANSCOM gateways and/or military aerial ports.

“Charter rate” means a commercial price that is in fact available to the general public for equivalent services. Missions bought at a commercial charter price are all inclusive of taxes and any other ancillary cost and are not subject to adjustments for fuel prices.

“Consignment” means a number of Category A cargo pallets moving as one shipment, on the same date and assigned a Government/Commercial Bill of Lading (GBL/CBL) Number or listed on a DD Form 250 as one shipment. The minimum charge for any consignment is based on pallet minimum weight guarantees, times the number of pallets in the consignment. If the total weight of cargo on all pallets in the consignment exceeds the average guarantee, make payment for the actual weight.

“Contingency rate” The USTRANSCOM proposed contingency one-way rates are to be used at the USTRANSCOM commander’s discretion during conditions such as outbreak of war, armed conflict, insurrection, civil or military strife, or similar conditions (overseas). The one-way rates are adjusted to reflect limited backhaul capabilities.

“Stop charge” The stop charge is paid by the government in the case of government directed landings (operational and traffic stops) identified by the contract or delivery order to support the USTRANSCOM mission.

Operational stops allowed in accordance with Appendix A, Paragraph F (b) are considered directed stops. Landings made by the contractor of his own discretion for maintenance, aborted flights, fuel stops, crew changes, or emergency landings are not considered "directed landings," and therefore receive no stop charge.

“Pay miles” means the statute miles used to compute the price of the mission in accordance with COINS.

COINS calculates distances based on longitude and latitude for geographical locations listed in the DoD Flight Information Publication (FLIP) and identified by location indicators assigned by the International Civil Aviation Organization (ICAO) and published in the Location Indicator, Doc 7910/67.

APPENDIX B

COMPUTATION

AMC UNIFORM RATE

ROUND-TRIP PASSENGER SERVICE

LARGE CLASS AIRCRAFT

AMC

ADJUSTED FY06 FY07

RATE PER PASSENGER PASSENGER WEIGHTED

AIRCRAFT PAX MILE REVENUES REVENUES RATE

CARRIER TYPE (CENTS) [000] [000] (CENTS)

American Airlines B-777-200ER 12.510 $6,009 $0 American Trans Air L-1011-500 11.958 $172,253 $76,703 Omni Air Int'l DC-10-30 10.942 $316,472 $141,762 United Airlines B-747-400ER 12.231 $29,300 $10,996 United Airlines B-777-200 12.686 $10,102 $0 World Airways MD-11 10.671 $397,824 $157,068 World Airways DC-10-30/40 11.918 $26,756 $36,178

RATE -- WEIGHTED BY REVENUES 11.118

Linehaul Rate Effective Rate Average Average Rate Per Per Paid Per Seat Mile Stage Seats Per Directed Seat Mile

(cents) Length Mission Landing (cents)

11.118 2575 336 $2,000 10.887

Note: The weighted average stage length and weighted average seats are based on international base year data.

AMC UNIFORM RATE

ROUND-TRIP PASSENGER SERVICE

MEDIUM CLASS AIRCRAFT

AMC

ADJUSTED FY06 FY07

RATE PER PASSENGER PASSENGER WEIGHTED

AIRCRAFT PAX MILE REVENUES REVENUES RATE

CARRIER TYPE (CENTS) [000] [000] (CENTS)

American Trans Air B-757-200 $15.328 $31,011 $10,630 American Trans Air B-757-300 $14.734 $95,323 $40,741 Delta Airlines B-767-300ER $12.060 $10,884 $3,484 North American Airlines B-767-300 $15.154 $122,956 $72,496 North American Airlines B-757-200 $15.530 $32,197 $42,731 Omni Air International B-757-200 $11.065 $35,402 $18,794 Ryan International Airlinese B-757-200 $14.492 $61,733 $11,836

RATE-WEIGHTED BY REVENUES 14.584

Per Seat Mile Stage Seats Per Directed Seat Mile

14.584 2441 207 $2,000 14.188

AMC UNIFORM RATE

ROUND-TRIP PASSENGER SERVICE

SMALL CLASS AIRCRAFT

AMC

ADJUSTED FY06 FY07

RATE PER PASSENGER PASSENGER WEIGHTED

AIRCRAFT PAX MILE REVENUES REVENUES RATE

CARRIER TYPE (CENTS) [000] [000] (CENTS)

Miami Air Int'l B-737-800 15.530 $45,384 $28,378

RATE--WEIGHTED BY REVENUES 15.530

Per Seat Mile Stage Seats Per Directed Seat Mile

15.530 1900 150 $2,000 14.828

AMC

ADJUSTED FY06 FY07

RATE PER CARGO CARGO WEIGHTED

AIRCRAFT TON MILE REVENUES REVENUES RATE

CARRIER TYPE (CENTS) [000] [000] (CENTS)

Atlas Airlines B-747-200/300/400 $42.266 $322,932 $242,790 Evergreen Int'l Airlines B-747-100/200 $39.202 $412,335 $233,289 Fed Express Corp MD-11 $52.212 $4,007 $2,346 Gemini Air Cargo DC-10-30 $38.517 $22,808 $4,651 Kalitta Air B-747-100/200 $39.834 $47,959 $37,535 Polar Air Cargo B-747 $39.019 $73,521 $0 United Parcel Service B-747-100/200 $39.345 $11,015 $2,749

RATE -- WEIGHTED BY REVENUES 40.499

Effective Rate Average Average Rate Per Per Paid Per Ton Mile Stage Tons Per Directed Ton Mile

40.499 2786 89.0 $2,000 39.693

Note: The weighted average stage length and weighted average tons

COMPUTATION

AMC UNIFORM RATE

ROUND-TRIP CARGO SERVICE

LARGE CLASS AIRCRAFT

AMC

ADJUSTED FY06 FY07

RATE PER CARGO CARGO WEIGHTED

AIRCRAFT TON MILE REVENUES REVENUES RATE

CARRIER TYPE (CENTS) [000] [000] (CENTS)

Air Transport Int'l DC-8-63/71/73 52.222 $29,337 $4,769

ASTAR DC-8-73F 62.851 $29,344 $6,933

RATE -- WEIGHTED BY REVENUES 57.700

Effective Rate Average Average Rate Per Per Paid Per Ton Mile Stage Tons Per Directed Ton Mile

57.700 2449 45.0 $2,000 55.886

Note: The weighted average stage length and weighted average tons

COMPUTATION

AMC UNIFORM RATE

ROUND-TRIP CARGO SERVICE

MEDIUM CLASS AIRCRAFT

AMC UNIFORM RATE

ROUND-TRIP COMBI SERVICE

COMBI AIRCRAFT

AMC FY06 FY07

ADJUSTED PASSENGER PASSENGER WEIGHTED

AIRCRAFT RATE PER REVENUES REVENUES RATE

CARRIER TYPE PLANE MILE [000] [000] (CENTS)

Air Transport International DC-8-62/61 $23.4836 $78,873 $76,886

RATE--WEIGHTED BY REVENUES $23.484

Effective Rate Average Rate Per Per Paid

Per Plane Mile Stage Directed Plane Mile

(cents) Length Landing (cents) $23.484 2,231 $2,000 $22.587

Note: The average stage length is the stage length carrier proposed for AMC operations.

APPENDIX C

AMERICAN AIRLINES Aircraft Type B777-200ER

LARGE CLASS AIRCRAFT Passenger Service

FY08 RATE REVIEW

FORECAST YEAR FY08

YE JUN 06

CARRIER BY AS

SYSTEM CARRIER ADJUSTED

TOTAL REVENUE & BACKHAUL/PAID MILES (000) 56,085 164 A 164

AVERAGE DAILY AIRCRAFT UTILIZATION 7.7 11.6 B 7.7

COST PER REVENUE/PAID AIRCRAFT MILE

Direct Variable:

Crew $2.3784 $2.5300 C $2.7442 Fuel, Oil, & Aircraft Supplies 8.5666 8.4600 D 9.8261 Flight Equipment Maintenance 1.4415 1.5300 E 2.4269

Total Direct Variable 12.3864 $12.5200 14.9972

Direct Fixed:

Hull, Public Liability, & Property Damage Insurance 0.0430 0.2500 F 0.3966 Aircraft Rentals & Miscellaneous 0.0000 0.0000 0.0000 Flight Equipment Depreciation & Obsolescence 1.5575 3.0900 H 4.6493 Amortization of Preoperating Expense 0.0000 0.0000 0.0000

Total Direct Fixed 1.6005 3.3400 5.0459

Indirect:

Maintenance & Depreciation-General Ground Property 0.4500 J 0.4864 Aircraft & Traffic Servicing 7.1500 K 8.1629 Passenger Service 3.1700 L 3.9899 General & Administrative 1.0000 M 1.0348

Total Indirect 11.7700 13.6740

TOTAL OPERATING COST 27.6300 33.7171

Return on Investment 4.2100 N 7.5666

TOTAL COST $31.8400 $41.2837

Average Investment for FY08 Working Capital 1.5300 O 1.8082 Owned Flight Equipment (net) 30.9300 P 44.8385 Long Term/Capital Leased Flight Equipment (net) 0.0000 0.0000 Ground Property & Equipment (net) 3.5100 R 3.8643 Deferred Preoperating Expense/Other 0.0000 0.0000 Annual Operating Lease Expense 0.0000 0.0000

Allowable Cabin Load 330 U 330

RAT…