FY11 Proposed Uniform Rates and Rules.pdf

For Official Use Only

7 JUL 10

MEMORANDUM FOR ALL CARRIERS

FROM: USTRANSCOM/TCAQ-P

508 Scott Drive

Scott AFB IL 62225-5357

SUBJECT: Notice of Proposed Fiscal Year 2011 (FY11) Uniform Rates and Rules for

International Service – Solicitation Number HTC711-10-R-C001

(SUSPENSE: 9 AUG 10)

1. The FY11 rates are based on fuel pegged at $2.88 per gallon for cargo and combi and $2.75 for passenger. The proposed rates for the various classes of service are as follows. All passenger rates are expressed per seat mile. All cargo rates are per ton mile; while, combi is per plane mile.

Effective Rate Linehaul Rate Stop Charge

Large Class Passenger $0.11482

Medium Class Passenger $0.13106

Small Class Passenger $0.17426 $2,000

Large Class Cargo $0.40955

Medium Class Cargo $0.57018 $2,000

Combi Service $22.96123

2. Carriers providing cost data for the rate review should provide comments and supporting documentation to USTRANSCOM/TCAQ-P, 508 Scott Drive, Scott AFB IL 62225-5357 by close of business 9 AUG 10. It is imperative carriers identify all issues of concern prior to this deadline. Under no circumstances will an extension be granted. If specific information is required on individual cost elements, analysts will provide detailed step-by-step treatment upon carrier request.

3. Please direct any questions or concerns to me at Lucretia.Sanchez@ustranscom.mil or

618-220-7119.

//SIGNED//

LUCRETIA A. SANCHEZ

Supervisory Price/Cost Analyst

UNITED STATES TRANSPORTATION COMMAND

508 SCOTT DRIVE

SCOTT AIR FORCE BASE, ILLINOIS 62225-5357

mailto:Lucretia.Sanchez@ustranscom.mil

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 2011

INTRODUCTION

The proposed FY11 USTRANSCOM Uniform Rates and Rules (hereafter referred to as

“Rates”) have been developed using ratemaking procedures in compliance with the

Federal Acquisition Regulation (FAR), Memorandum of Understanding (MOU) for FY08 through FY12, and methodologies previously established by the Civil Aeronautics Board

(CAB). The objective of the MOU is to establish guidelines to facilitate the ratemaking process for DOD airlift with carriers willing to participate in the Civil Reserve Air Fleet

(CRAF).

The contracting officer for the CRAF contract has determined the services provided under CRAF are not commercial, in accordance with the definition at FAR 2.101.

Therefore, the FY11 contract is procured under FAR Part 15, Contracting by Negotiation, procedures. As such, in accordance with FAR 15.403-1(b), there is no exception to the requirement for certified cost and pricing data. Therefore, by law, Part 15 requires the application of Cost Accounting Standards (CAS) and Truth in Negotiation Act (TINA).

As a result of the application of CAS and FAR Part 31, Contract Cost Principles and

Procedures, the FY11 audits covered a number of areas that may have not been addressed in recent audits, including lease agreements.

Participation.

USTRANSCOM rates are based on carriers’ historical costs, projected into the contract year, plus a profit element. 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 USTRANSCOM rate categories. The FY11 rates were developed on experienced base year cost and statistical data from nineteen carriers who provided thirty-two cost proposals for the base year ending 30 Jun 09. The MOU requires carriers receiving more than $5M of USTRANSCOM charter business, as calculated by USTRANSCOM’s internal database, i to submit their actual cost data.

However, effective FY08, the CRAF contract was also required to be compliant with

TINA. The requirements of this statute call for carriers with $650K revenues to submit cost and pricing data for the annual rate reviews. USTRANSCOM’s objective is to have a pool of accurate cost data that fairly represents the cost of providing DoD charter service. Carrier’s cost data was audited and USTRANSCOM analyzed carrier’s forecast operating cost projections in the development of the FY11 rates. Adjustments made to carrier’s forecast costs were based on past ratemaking practices, findings reported by the

Defense Contract Audit Agency (DCAA), the FAR, and the MOU. Explanatory 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.

Constructive Mileage Base.

Schedule H, Forecast Aircraft Days, of the cost package is intended to calculate all days an aircraft is available for service during the forecast year. The instructions indicate that a carrier who proposes aircraft days less than 365 must explain the reduction with supplemental data. Major aircraft maintenance or modifications supported by internal records would be considered legitimate reasons for removal of aircraft days. However, reductions in aircraft days should not include routine maintenance. It appears carriers are arbitrarily deducting routine maintenance days, which is not the intent of this calculation;

nor are they providing supporting documentation for other reductions. The constructive mileage base for the proposed FY11 rate includes 365 days per aircraft listed, unless otherwise supported by the carrier with details of the adjustments.

Stop Charges.

Stop charges were initially introduced as an attempt to better align carrier’s revenues with the cost of operations where certain DOD missions had significantly more revenue stops.

Stage length among carriers reflect significantly different averages. At that time, there were two rate classes in each type of service – narrowbody and widebody. Carriers contended that missions such as the Mediterranean channel produced a short stage length, low speed and significantly higher operating costs than the typical long range DoD mission. Carriers operating the inefficient routes with short stage lengths and low utilization experienced higher operating costs per mile, but were receiving the same compensation under the uniform rate. Stop charges were introduced in an effort to curve the revenues to accommodate for those inefficient routes with short stage lengths.

A thorough review of the base year data indicates USTRANSCOM mission requirements have remained the same as last year and the average stage lengths for most classes are greater than 2,000 miles. The linehaul rate is a mathematical equation derived from the effective rate, using average stage length, average tons/seats per mission and the stop charge rate. Provided that the average stage length for all carriers within a rate category remains approximately 2,000 miles, paying the effective rate versus the linehaul/stop charge should be revenue neutral. This years’ analysis continues to support the addition of stop charges for the small passenger and medium cargo classes only ii . The requirements for these category aircraft are significantly different in volume and areas of operation. Many of these missions are short range and mid range in nature and can cause a significant variation in average stage length in carrier aircraft. The stop charge used to develop the linehaul rate for the passenger small and cargo medium class categories will be $2000 for FY11.

Capital Compensation.

The methodology established in the MOU for 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.

The Capital Asset Pricing Model (CAPM) was used to calculate the cost of equity in the full ROI calculation. The CAPM methodology is directed by the MOU and uses several elements to develop a percentage indicative of carriers receiving the full ROI. The MOU reads: “ROI for USTRANSCOM service will be computed using the capital structure of

CRAF carriers that receive full ROI from their flight equipment investment base.” As no carriers received full ROI in FY09, the FY10 full ROI rate calculation per the MOU could not be accomplished. As an alternative for FY10, so as not to inadvertently eliminate the full ROI computation altogether, the FY10 full ROI calculation reverted to the previous MOU’s intent of providing a full ROI rate that is representative of the airline industry as a whole, and not specific to CRAF carriers. This same methodology was used for the FY11 proposed rate calculation. The FY11 proposed rate full ROI calculation included 11 major carriers whose revenues represented approximately 90 percent of all major carriers’ revenues. The carriers that met these criteria were: Alaska Airlines, American Airlines, Continental Airlines, Delta Air Lines, Federal Express, Jet Blue, Northwest Airlines (Delta), Southwest Airlines, United Air Linees, United Parcel Service and US Airways, Inc. This analysis resulted in a full ROI rate of 11.23 percent. The following carriers received the full ROI for FY11: NWA (A330), CKS (B747-400), UPS

(B747-400 and MD11). Appendix L provides the details for the development of the

11.23 percent full ROI for the FY11 Rates.

USTRANSCOM applies a minimum return allowance for those carriers who have no flight equipment assets or capital assets that are fully depreciated. The minimum return provision is consistent with former ratemaking practices. Therefore, in cases where a carrier’s investment base no longer yields a return on investment equal to or greater than

11 percent of total operating costs, a minimum return (profit) of 11 percent has been provided.

Cost Escalation.

Whenever possible, the carriers and USTRANSCOM use factual information such as future lease agreements, contract wage agreements, equipment purchase agreements, and insurance premiums to project base period costs into the forecast year. In the event actual data is not available, USTRANSCOM applies a general cost escalation factor as computed on Appendix K. USTRANSCOM’s first preference has always been review of actual documentation. As a default, the cost escalation model was developed by

USTRANSCOM and coordinated with industry prior to being incorporated into the 2008-

2012 MOU. The current model uses three indices that include the Air Transport

Association Index (ATA), PPI-Nonscheduled Air Transportation Index and Global

Insight Incorporated (GII) Index. The ATA index is weighted at 34 percent. The PPI and

GII are both given a weighting of 33 percent. ATA and GII are adjusted to remove certain elements that are not recognized in the USTRANSCOM ratemaking process, such as fuel, interest, etc iii

. The cost escalation factor is used to escalate roughly 90% of cost, where no supporting data is available.

The PPI index between 2007 and 2008 increased 11.71%; however, during the proposed and final FY10 ratemaking cycle, USTRANSCOM warned the change between 2008 and

2009 was producing a negative result. In an attempt to accommodate for the negative trend, which USTRANSCOM predicted would impact the FY11 rate, we attempted to straight-line the PPI for the FY10 rate and thus smooth the negative impact for FY11.

This method was rejected by carriers who commented that USTRANSCOM should follow the MOU. USTRANSCOM conceded the position, cautioning about the impact for FY11. The FY10 Proposed Uniform Rate stated “The alternative position would be to follow the MOU to the letter, regardless of the impact of the PPI. If that alternative is recognized for FY10, it would apply to the FY11 rate as well, even if it resulted in a negative PPI in the FY11 rate.” In fact, the FY11 factor includes negative changes for both the ATA and PPI indices.

As a result of the 3-month extension to the FY10 contract, the FY11 proposed escalation factor represents a 28.5 month (vs. 27 month) mid-point to mid-point calculation. The normal 27-month calculation would have been based upon midpoint of the base year (YE

Jun 09) to the midpoint of the forecast year (Oct 10 - 30 Sep 11), or 31 Mar 2011. With the extension, however, the midpoint of the forecast year is changed to 15 May 2011.

The FY11 proposed annual cost escalation factor is -1.65 percent, resulting in a 28.5 month escalation factor of -3.88 percent. This is based on the calculations agreed upon in the MOU. The factor of -3.88% is down considerably from the 13.06% used in the FY10

Rates. USTRANSCOM will review and update these indices as needed for the final rate.

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 FY03-FY07 MOU negotiation process. This change was carried into the FY08-FY12 MOU.

The CRAF early payment class deviation, which supports the 23 days cash operating expense in the working capital calculation, expires on 30 Sep 2010. Although

USTRANSCOM has requested a continuation of this deviation, there is no guarantee of its approval. If the CRAF early payment status changes, thus causing a change to the working capital investment base at 23 days cash operating expense, the FY11 rate, FY08-

FY12 MOU and future cost packages will require adjustments.

Fuel.

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

Carriers’ fuel reports for the period Jul 07 – Sep 08 conclude cargo carriers receive 67 percent of their fuel at military installations and are charged the rate set by the Defense

Energy Support Center (DESC), which fluctuates dependent on gains and losses within the Defense Working Capital Fund. Conversely, passenger carriers receive 81 percent of their fuel commercially, which fluctuates up and down with the fuel market.

For the period Jul 07 – Jun 09, commercial fuel prices for USTRANSCOM service averaged $2.83 and $2.74 for passenger and cargo, respectively. The monthly Spot

Market Energy Information Administration (EIA) fuel index for May 10, along with the average of the Platts Market International Air Transport Association (IATA) Fuel Price

Analysis for May 10 indicate average commercial fuel prices at $2.15. Further analysis of fuel prices in USTRANSCOM service showed CRAF carriers experience approximately 20% higher commercial prices due to mission locations which are outside the SPOT markets recognized by EIA and IATA. DESC has projected JP-5 and JP-8 fuel effective 1 Jan 10 at $2.84 and $2.82, respectively. The weightings between commercial fuel and military fuel along with projected DESC fuel price and current commercial market prices resulted in a proposed USTRANSCOM pegged fuel price of $2.75 and

$2.88 per U.S. gallon, for passenger and cargo (combi will use cargo price), respectively. The pegged price includes into-plane fees and taxes for commercial fuel and an administrative fee added by DESC for military fuel. The projected DESC fuel prices and commercial fuel prices will be reviewed again for inclusion in the FY11 final rate.

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/under the pegged prices in the established rate. The solicitation addresses the fuel adjustment procedure.

Ferry.

USTRANSCOM changed the ferry rate in FY02 from 75 percent to 90 percent. 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

FY11 will remain at 90 percent of the effective rate for cargo and will be reduced to 80 percent of the effective rate for passenger.

iv

See below paragraph on Passenger Live Mile and Paid Ferry Return for new application of the ferry rate for passenger missions. Also see Appendix A for ferry rates.

One-Way Rates.

Historically, USTRANSCOM carriers claim commercial backhaul opportunities for

USTRANSCOM missions are nonexistent. Passenger and cargo missions are obviously different. Cargo generally moves in one direction and is consumed; while passengers generally require round trip service. Therefore, the ability to find a one-way commercial passenger charter to parallel USTRANSCOM’s one-way requirements does not exist.

USTRANSCOM cargo charter carriers, however, are afforded significant

USTRANSCOM expansion missions operating into Southwest Asia that appear to parallel their commercial operations, where they are able to coordinate aircraft flow and achieve commercial backhaul. A thorough analysis of carrier provided S1/S2 data has resulted in the Proposed FY11 one-way rates as follows:

One Way Rates (Percent of round-trip seat/ton mile rate)

Cargo

Large Class

Cargo

Medium Class

Passenger Combi

Fixed/

Semi-Annual/

Qtrly Expansion

165%

185%

See Below

See Below

Ad-Hoc

Expansion

175% 185% See Below See Below

Contingency 195% 195% See Below See Below

Cargo Fixed Buy, Semi-Annual/Quarterly Expansion: In FY10 USTRANSCOM introduced a new semi-annual/quarterly expansion one-way rate based on

USTRANSCOM analysis of carrier S2 data of the quarterly expansion awards. During

FY10, this rate was applied by mutual agreement only. In consideration for carriers offering the lower rate, the government offered advanced forecasting of one-way expansion missions awarded on a quarterly or semi-annual basis. This strategy was intended to allow carriers the opportunity to work the flow of DoD one-way missions with their commercial one-way business to create an efficient operation. During FY10, however, even though the government provided a semi-annual requirement, few carriers offered these missions at the lower rate. Therefore, for FY11, the lower one-way rate identified above will be used for all fixed buy, semi-annual and quarterly expansion missions. To calculate this one-way rate, USTRANSCOM reviewed one-way expansion missions reported on carrier S2 reports. Carriers report empty miles associated with the 2 legs before USTRANSCOM one-way missions originating outside CONUS or, conversely 2 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.

Appendix N reflects a sample of the calculation, which resulted in a ratio of 59% of empty miles to one-way live revenue miles. The proposed rate, however, considers all carriers within this category and is therefore established at 165%.

Cargo Ad-Hoc Expansion: In FY10, USTRANSCOM broke out the medium class and large class cargo categories due to the negligible amount of USTRANSCOM one way missions offered the medium class category and thus their inability to obtain one-way commercial backhaul. The above one-way cargo rates are based on the round-trip rate, adjusted to reflect certain savings and economies. The adjustments for the one-way rates 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 a 10 percent savings of flying an empty aircraft in the earlier paragraph concerning the “ferry” rate. This savings also holds true for flying an empty aircraft in the reverse segment of a one-way mission.

Historical data for cargo carriers suggests efficiency in aircraft scheduling resulting in fewer miles flown in empty backhaul service. Appendix M reflects the cargo carrier data associated with empty backhaul service for USTRANSCOM missions, excluding the quarterly-buy expansion data incorporated at Appendix N.

Large Class: The statistical ratio of base year paid empty flown miles to paid one-way miles reflects, on average, 40 percent efficiency in the scheduling of aircraft in empty reverse segments. This savings in conjunction with the 10 percent savings for flying an empty aircraft reflects an average of 50 percent savings for one-way cargo missions. Realizing not all carriers achieve a 40% savings in empty backhaul, USTRANSCOM is proposing a one-way ad-hoc cargo rate of 175 percent for FY11, allowing for the 10% savings associated with flying empty in conjunction with a 15% savings due to efficiencies in scheduling aircraft in empty reverse segments. This is no change from the one-way rate for FY10.

Medium Class: The statistical ratio of base year paid empty flown miles to paid one-way miles for the medium class reflects, on average, 19 percent efficiency in the scheduling of aircraft in empty reverse segments. This savings in conjunction with the 10 percent savings for flying an empty aircraft reflects an average of 29 percent savings for one-way cargo missions. Realizing not all carriers achieve a 19% savings in empty backhaul, USTRANSCOM is proposing a one-way cargo rate for the medium class of

185 percent for FY11, allowing for the 10% savings associated with flying empty in conjunction with a 5% savings due to efficiencies in scheduling aircraft in empty reverse segments. This is 5% lower than the FY10 one-way rate.

Passenger/Combi: The one-way passenger rate has historically been based on the round-trip rate, adjusted to reflect savings and economies, as discussed above. Over the past few years, passenger carriers in USTRANSCOM service have been receiving ferry based upon a formula derived by TCAQ-C. This ferry formula has made it complex for carriers attempting to report live miles, ferry miles and empty backhaul miles on passenger one-way missions. Not to mention that it has also become increasingly complicated for TCAQ buyers and administrators. Appendix M reflects the passenger carrier data associated with empty backhaul service as reported by passenger carriers.

The paid ferry miles reported, which are based on this formula, not only contain elements of ferry, but also empty backhaul. Consideration of the statistical ratio of empty backhaul miles in the one-way rate calculation, as performed on the Cargo one-way rate above, would result in a one-way rate of approximately 170% for passenger carriers. However, because of the nature of passenger missions, USTRANSCOM acknowledges the anomaly occurring as a result of the ferry formula and realizes the historic method for determining the one-way rate may no longer be fully accurate for passenger missions.

As a result, USTRANSCOM hereby introduces a live mile rate for all passenger missions for FY11. USTRANSCOM proposes one rate for all live miles, regardless if the miles are one-way or round trip. On one-way missions, the carrier will also get a “paid ferry return”, based on the ferry rate, for positioning or depositioning miles which exceed 5% of the live miles. Because this is considered ferry, carriers will be required to file ferry declarations with each paid ferry return. The application is intended as provided in the example below.

Example:

For one way missions, a carrier will be paid the live miles at the live mile rate and the empty backhaul at the ferry rate.

Route is ATL-OKBK, 7120 live miles

Carrier A:

Aircraft positions from BWI, 576 miles (KBWI-KATL) and 6543 empty backhaul miles

(OKBK-EINN-KBWI). This mission would be paid 7120 miles x live mile rate x ACL

PLUS 7119 miles (576 + 6543) x paid ferry return rate x ACL.

Carrier B is sitting at KATL:

Empty backhaul return is to KATL, 7120 miles (OKBK-EINN-KATL). This mission would be paid 7120 miles x live mile rate x ACL PLUS 7120 miles x paid ferry return rate x ACL for the empty backhaul.

Carrier C:

Ferry is from and to KMEM, 332 miles (KMEM-KATL) and 7277 miles ferry return

(OKBK-EINN-KMEM). This mission would be paid 7120 miles x live mile rate x ACL

PLUS 7277 miles x paid ferry return rate x ACL for the empty backhaul.

Standard Allowable Cabin Loads (ACL).

In FY92, USTRANSCOM implemented the concept of maximum standard ACLs for aircraft performing USTRANSCOM business. USTRANSCOM was concerned about parity among carriers and maintaining a competitive environment within the

USTRANSCOM Rates. The maximum standard ACLs are based on range capability, aircraft usable floor space, gross takeoff weight capacity, lavatories, aircraft operating expense, and passenger comfort and convenience.

The 2008 IDA study recognized that ratemaking and carrier business models do not always result in fuel efficient, modern aircraft performing on USTRANSCOM missions.

As a result, USTRANSCOM is in the process of adjusting certain business practices to encourage more modern, fuel efficient aircraft. In concert with that effort, TCAQ again performed a thorough review of the current standard pay ACLs used in the ratemaking process in an effort to create more stratification of the rates to recognize fuel efficiency, range and capacity. The objective of this review was to determine reasonableness of our current standard pay ACL in relation to aircraft productivity, weight sensitivity, cube sensitivity, range capability, and actual payloads achieved by DoD.

PASSENGER:

The evaluation for FY11 included both passenger and cargo ACLs. This year’s evaluation supported the current standard ACLs for passenger aircraft. USTRANSCOM was also requested to evaluate the Airbus A340-300. This aircraft has, therefore, been added at a proposed ACL of 345. This ACL is based on a consideration of the performance capability, as well as the dimensional differences between the A340 and the

MD11, DC10 and B777.

CARGO:

DoD cargo ranges from light weight medical supplies to armor plating. The ratemaking function must focus on aircraft capabilities in range and payload when establishing fair and reasonable rates for levels of productivity, while still considering actual payloads achieved in DOD business. USTRANSCOM is proposing to refine the allowable cabin loads for FY11 and beyond to recognize the productivity of newer technology and still provide a fair and reasonable rate for aircraft in the “National Aging Aircraft Program”.

Providing additional payloads for the next generation aircraft will allow flexibility for all carriers participating in CRAF and performing peacetime business. The introduction of additional payloads allows DoD customers to draw capacity of additional aircraft as a buffer to meet surge requirements. These analyses are an ongoing process.

In FY10, USTRANSCOM proposed a standard ACL of 110 tons for the B747-400 cargo aircraft, advising this would be reevaluated as necessary. Although this seemed reasonable at the time based on the performance capability of the aircraft in commercial service, TCAQ did not consider the fact that the difference in actual payloads achieved in

DOD service between the B747-400 and the classic B747 aircraft are minimal. As a result, USTRANSCOM tracked actual payloads of both B747-400 and Classics B747 to measure added value to DOD for the extra -400 capability. TCAQ has reevaluated all

ACLs for FY11. HQ AMC Forms 82 and 83, along with TACC’s “green-book” and historical actual cargo moved were used in evaluating all aircraft.

The B747-400, DC10 and MD11 standard ACLs have been adjusted for FY11. During the past year, USTRANSCOM documented the added value of the B747-400 in DOD service. The standard ACL of the B747-400 aircraft on USTRANSCOM missions was approximately 70 tons. Although the higher ACL was originally established because of the productive capability of the B747-400 aircraft, this is not as useful in DOD service as it might be commercially because the B747-400 aircraft have the same number of pallet positions as the B747 Classics. Therefore, the payload achieved in DOD service for both the B747-400 and the B747 classics are comparable. Nevertheless, USTRANSCOM acknowledges the B747-400 aircraft’s performance capability is greater than the B747 classic and that must be taken into consideration. USTRANSCOM therefore proposes a standard ACL for the B747-400 at 95 tons. The B747 Classics will remain at 90 tons.

Additionally, in considering the MD11 and DC10 aircraft TCAQ was not only required to consider the capability of the aircraft, but also the diminished capability as a result of the contoured requirements. The MD11 does not possess the payload capability of the

B747s. As such, the relative lift capability in DOD service was considered and

USTRANSCOM proposes to reduce the standard ACL of the MD11 to 80 tons. This change causes an upward adjustment to the rate, while also creating a more tolerable

ACL for the Tanker Airlift Control Center (TACC) and more closely aligns the actual payload achieved to the aircraft’s capability and established standard ACL.

Appendix A provides the maximum ACLs by rate aircraft category.

Eurocontrol.

USTRANSCOM provides a Eurocontrol surcharge to compensate carriers for the extra high costs of missions through Eurocontrolled airspace. USTRANSCOM analyzed actual Eurocontrol invoices for specific routes shown in Appendix J. For the FY11 proposed rate, USTRANSCOM evaluated twenty-six representative routes for passenger missions and thirty-one for cargo, a much greater representation of routes than in previous years. The current Eurocontrol charges (converted to U.S. dollars) were calculated as a percent of the trip revenues using the FY11 proposed effective rate, for all but the small class passenger and medium class cargo categories. For the small class passenger and medium class cargo categories, Eurocontrol charges (converted to U.S.

dollars) were calculated as a percent of the trip revenues using the FY11 proposed line haul rate (without stop charge). USTRANSCOM is proposing the FY11 Eurocontrol surcharge of 3.0 percent for passenger, 3.3 percent for cargo missions and .64 percent for combi. This is a change from the FY10 Eurocontrol of 2.4 percent, 3.7 percent and .64 percent for passenger, cargo and combi, respectively.

Incremental Passenger Movement.

In FY02, USTRANSCOM developed an incremental passenger service rate for periodical requirements that require the use of extra seats above the standard ACL. The rate applies when the number of additional passengers above the standard ACL is identified for an exercise, SAAM, or contingency. USTRANSCOM proposes $138 for the FY11

Incremental Passenger Rate. During the FY10 ratemaking cycle, a number of carriers questioned how this rate was developed. This rate is based on the weighted passenger service cost applied to the average miles per trip v . See Appendix A for details.

Aeromedical.

In FY10 USTRANSCOM proposed to utilize the medium class passenger negotiated uniform rate for the aeromedical per mile rate (Rate x 240ACL). No comments were received and so, for FY11, the Aeromedical Evacuation Proposed rate will be based on the medium class rate proposed herein. USTRANSCOM will continue to establish the reconfiguration daily and under utilization hourly rates and publish those in the proposed

Aeromedical Airlift Uniform Rates and Rules document.

Fuel and G&A.

During the past few years, unprecedented changes in the fuel market resulted in numerous mid-year rate changes. Under the previous ratemaking process, when price revisions were made as a result of fuel, G&A was affected. G&A rates should not be susceptible to direct operating cost short-term market changes and therefore for FY11, USTRANSCOM removed fuel from the G&A base. This resulted in a higher G&A rate applied to a base that excluded fuel. Although implementing a value added G&A methodology may have resulted in lower proposed forecasted G&A costs overall, the forecasted G&A expenses in the past have been artificially inflated due to the inclusion of fuel in the G&A base that does not draw the proportionate amount of G&A expenses.

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, 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 and L provide the Eurocontrol Surcharge, Cost

Escalation Factor and Rate of Return on Investment Computations, respectively. While

Appendices M and N provide Backhaul Operational Data for USTRANSCOM Services excluding one-way cargo large class long-term expansion, and Backhaul Operational

Data for USTRANSCOM One-Way Cargo Large Class Long-Term Expansion, respectively.

i The Commercial Operation Integrated System (COINS) database supports contracting of commercial airlift. The database for contract dollars is maintained by USTRANSCOM/TCAQ-C.

ii

Average

Stage

Length

Large Class Pax Weighted Avg 2626

OAE DC10 2739

WOA MD11 2736

WOA DC10 2305

Medium Class Pax Weighted Avg 2156

NOA B767 2476

NAO B757 2108

OAE B757 2272

RYN B767 1800

Small Class Pax Weighted Avg 1817

BSK B737 2043

RYN MD80 977

Large Class Cargo Weighted Avg 2913

GTI B747-200 2847

GTI B747-400 3038

EIA B747-200 2942

SOO B747 2564

WOA MD11 2692

Medium Class Cargo Weighted Avg 1667

ATI DC8 1755

DHL DC8 1584

MUA DC8 1956

Combi ATI DC8-62/61 2125 iii

ATA

USTC

USTC Adjusted

Elements Index

Labor 24.90% 24.90% 33.42%

Fuel* 23.80% Aircraft Ownership 7.10% 7.10% 9.53%

Non-Aircraft Ownership 4.70% 4.70% 6.31%

Professional Services 8.30% 8.30% 11.14%

Food & Beverage 1.70% 1.70% 2.28%

Landing Fees 2.20% 2.20% 2.95%

Maintenance Material 1.80% 1.80% 2.42%

Aircraft Insurance 0.10% 0.10% 0.13%

Non-Aircraft Insurance 0.40% 0.40% 0.54%

Passenger Commissions* 1.00% Communication 1.00% 1.00% 1.34%

Advertising & Promotion* 0.60% Utilities & Office Supplies 0.60% 0.60% 0.81%

Transport Related 13.90% 13.90% 18.66%

Other Operating Expenses 7.80% 7.80% 10.47%

Interest* 0.10%

Composite 100.00% 74.50% 100%

GII

USTC

USTC Adjusted

Elements Index

LABOR

Transportation Workers 25.40% 25.40% 32.56%

Benefits 4.20% 4.20% 5.38%

MATERIALS

Aircraft Parts 15.40% 15.40% 19.74%

Aircraft Engines 7.70% 7.70% 9.87%

Labor Cost in Aircraft Parts and Engines 18.10% 18.10% 23.21%

Materials Used in Air Transportation 3.60% 3.60% 4.62%

ENERGY

Jet Fuel* 22.00%

Gasoline 3.60% 3.60% 4.62%

COMPOSITE 100.00% 78.00% 100%

iv The analysis of the Passenger ferry rate was performed using the Proposed FY11 Large Class passenger rate of $0.11482 (effective rate) per seat mile. The proposed passenger ferry rate and paid ferry return rate will be 80% of the effective rate. The analysis of the Cargo ferry rate was performed using the Proposed

FY11 Large Class cargo rate of $0.40955

PASSENGER Wgt'd Percentage Cost Ferry

Cost Category Cost Allowed Allowed Rate %

Crew 1.2411 100% 1.2411

Fuel 4.3893 88% 3.8406 Maintenance 1.6961 100% 1.6961 Insurance 0.0812 99% 0.0804

Rent 0.4558 100% 0.4558

Depreciation 0.1594 100% 0.1594 Preop 0.0000 100% 0.0000 Grd Property 0.0453 100% 0.0453

Aircraft & Traffic Service 0.6363 97% 0.6172

Passenger Service 1.3294 30% 0.3988 G&A 0.3088 50% 0.1544 Profit 1.1397 50% 0.5698

Total 11.482

9.259 0.8064

CARGO Wgt'd Percentage Cost Ferry

Cost Category Cost Allowed Allowed Rate %

Crew 4.1086 100% 4.1086

Fuel 21.4560 88% 18.8813 Maintenance 5.4104 100% 5.4104

Insurance 0.1291 100% 0.1291

Rent 1.4387 100% 1.4387 Depreciation 1.1115 100% 1.1115 Preop 0.0000 100% 0.0000

Cap Gains/Losses -0.0728 0% 0.0000

Grd Property 0.1740 100% 0.1740 Aircraft & Traffic Service 2.0695 97% 2.0074 G&A 0.9869 50% 0.4935

Profit 4.1433 50% 2.0717

Total 40.9552

35.8261 0.8748 v

One-Way Round-Trip Total

Avg Live Pay Miles 2658013 15,459,535 18,117,548

FY11 Proposed Passenger Seat Mile Rate

0.20676

0.11487

Total Dollars $192,899,340 $623,318,712 $816,218,052

Total Trips 1,746

Total Passengers 612,846

Avg Passenger per Trip 351

Avg Price Per Trip $467,478.84

Avg Seat Miles Per Trip 3,642,187

Avg Miles Per Trip 10,377

Additional passenger service cost per trip 138

INDEX OF APPENDICES

No.

Appendix Title Pages

A USTRANSCOM Uniform Negotiated Rates and Rules 5

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 2

F Costs Per Ton Mile by Carrier and Aircraft Type in Large Class Cargo Service 11

G Costs Per Ton Mile by Carrier and Aircraft Type in Medium Class Cargo Service 4

H Cost Per Plane Mile by Carrier Charter

Combi Service 1

I Explanatory Notes 8

J Eurocontrol Surcharge 3

K Cost Escalation Factor 2

L Rate of Return on Investment 3

M Backhaul Operational Data for USTRANSCOM Service

Excluding One-Way Cargo Large Class Quarterly Expansion 1

N Backhaul Operational Data for USTRANSCOM Service

One-Way Cargo Large Class Quarterly Expansion 1

APPENDIX A

SCHEDULE OF UNIFORM NEGOTIATED RATES AND RULES

FISCAL YEAR 2011

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 PER SEAT MILE

RATE EFFECTIVE DATES 1 Jan 11 – 30 Sep 11

Passenger

Large

(Effective)

Medium

(Effective)

Small

(Linehaul)

Live

$0.11482 $0.13106 $0.17426

Contingency 193% $0.22160 $0.25295 $0.33632

Paid Ferry Return and Ferry

(effective rate) 80% $0.09186 $0.10485 $0.14500

Stop Charge (per directed landing)

$2,000

Incremental Passenger Each $138 $138 $138

Fuel Pegged Rate

$2.75 $2.75 $2.75

(2) CATEGORY B (CHARTER) CARGO SERVICE PER TON MILE

Cargo

Large

(Effective)

Medium

(Linehaul)

Round Trip $0.40955 $0.57018

One-Way:

Fixed/Semi Annual/Qtrly Exp

(Large) 165% $0.67576

Fixed/Semi Annual/Qtrly Exp

(Medium) 185%

$1.05483

Ad-Hoc Expansion (Large) 175% $0.71671

Ad-Hoc Expansion (Medium) 185% $1.05483

Contingency 195% $0.79862 $1.11185

Ferry (effective rate) 90% $0.36860 $0.53625

Stop Charge (per directed landing)

$2,000

Fuel Pegged Rate $2.88 $2.88

(3) CATEGORY B (CHARTER) COMBI SERVICE PER PLANE MILE

Combi Effective Rate

Dollars per plane mile $22.96123

One-Way 180% $41.33021

Ferry Rate 80% $18.36898

Fuel Pegged Rate $2.88

(4) 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. The Eurocontrol surcharge calculation does not include stop charges. The Eurocontrol charge will not be calculated on ferry miles.

Carriers will be paid the applicable rate plus a surcharge of 3.0 percent of trip price for passenger missions, 3.3 percent for cargo missions, and 0.64 percent for combi.

(5) FERRY.

(a) 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 contracted that carrier to operate a follow-on flight, which originates from the terminating station, within 24 hours.

(b) “Paid ferry return‖ on one-way passenger missions will be applied to empty backhaul miles. Ferry will be paid based on standard ACL or lesser amount.

(6) 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 $138 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.

(7) TRIP CANCELLATION. A cancellation charge will be paid on missions canceled with notification given within the time frames noted below. Times are all prior to scheduled departure. Reference to days means a continuous 24-hour period. All ―days‖ refers to ―calendar days.‖ The cancellation charge will be applied to the trip price for the route segment only (ferry, stop charges, Eurocontrol surcharge or any other additional charges will not be included). The charges are as follows:

Time Frame Service Type 1 Jan 11 – 30 Sep 11

Seven days or less

Passenger and Combi:

Cargo:

29.44%

22.83%

8 to 14 days

Cargo:

18.55%

16.62%

15 to 30 days

Cargo:

14.97%

13.29%

31 to 45 days Passenger and Combi 7.12%

31 to 75 days Cargo 6.80%

Beyond 45 days Passenger and Combi 0%

Beyond 75 days Cargo 0%

Missions awarded less than 14 days prior to operating date and subsequently cancelled

Passenger and Combi:

Cargo:

18.55%

16.62%

(8) DEMURRAGE. Demurrage will be paid on completed cargo missions when departure is delayed over 3 hours beyond scheduled block time and the delay is Government controlled (See Section H, para 25 of the contract).

Payment of delays of fractions of an hour will be calculated using normal rounding procedures, i.e., 29 minutes or less will be dropped, 30 minutes or more will be rounded to the next whole hour. Demurrage charges are as follows:

Aircraft Type ACL Demurrage

B747-100/200 90 $1,878

B747-400/400ER 95 $1,982

MD11F 80 $1,669

MD11C 80 $1,669

DC10-30/40 67 $1,398

A300-600ER 51 $2,279

A300-400F 50 $2,234

B767-200F 48 $2,145

DC8 45 $2,011

B727-100 18 $ 905

B727-200 22 $1,742

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 fewer 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

Aircraft Type Maximum Standard

Payload Aircraft Type Maximum Standard

Payload

Small Aircraft: Small Aircraft:

A319 135 B727-200 22

MD80 140 B737-200 14

B737-400/700 140

B737-800 150

A320 150

A321 170

Medium Aircraft: Medium Aircraft:

B757-200/200ER 190 DC8 45

B757-300 200 B767-200F 48

B767-200/200ER 200 A300-B4(F) 50

A310 200 A300-600ER 51

A300 210

B767-300/300ER 240

B767-400ER 260

Large Aircraft: Large Aircraft

A330 310 B767-300F 57

B777-200ER 330 DC10-30/40 67

DC10-30 330 MD11 80

A340 345 B747-100/200/300 90

MD11/MD11ER 360 B747-400 95

B747 400

C. FUEL ADJUSTMENTS.

(1) General. The carrier shall be compensated for variance in fuel prices incurred on USTRANSCOM contracted 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 - CARGO. The round-trip cargo rate will be applied to cargo trips where cargo is transported on two or more successive revenue flights in opposite directions.

E. ONE-WAY AND ROUND-TRIP SERVICES - PASSENGER. The live passenger rate will be applied to all live miles, regardless if the miles are one-way or round-trip.

F. PAID FERRY RETURN - ONE-WAY PASSENGER: Paid ferry return will be applied to empty backhaul miles associated with passenger one-way missions.

G. CHANNEL EXTENSIONS. Seattle closed as of 1 Oct 05 as a full up commercial gateway and now operates as a channel extension. Channel extension services at Seattle, as directed by the performance work statement, are TBD prior to performance.

H. 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:

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

(2) 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 AMC 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 Stops 1/

KCHS#MMCZ-MPTO=1 Paid Stop 2/

KWRI+KCOF-TAPA-FHAW-TAPA-KCOF+KWRI= 4 Paid Stops 3/

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.

(3) 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 and Yokota AB, Japan 7. Via Guam

2. Via Anchorage 5. Via Honolulu 8. Via Honolulu and 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.

I. DEFINITIONS.

―Category B‖ AMC 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 AMC on a regular basis to and from designated commercial airports and/or AMC gateways and/or military aerial ports.

―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 USTRANSCOM missions.

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.

Linehaul Rate = Effective Rate - (Stop charge/(Average Stage Length * ACL))

APPENDIX B

COMPUTATION

USTRANSCOM UNIFORM RATE

ROUND-TRIP PASSENGER SERVICE

LARGE CLASS AIRCRAFT

FY10

USTRANSCOM FY09 Passenger Total

Adjusted Passenger Revenues Passenger

Aircraft Rate Per Revenues Thru 01 Jun 10 Revenues Weighted

Carrier Type Pax Mile [000] [000] [000] Wgt % Rate

Northwest Airlines A330 $0.09195 $11,789 $0 $11,789 0.72% $0.00066

Northwest Airlines B747-200 $0.09885 $87,886 $8,942 $96,828 5.89% $0.00582

Omni Air Int'l DC10-30/40 $0.11119 $371,542 $274,993 $646,536 39.31% $0.04371

United Airlines B747-400 $0.10743 $26,533 $7,237 $33,770 2.05% $0.00221

United Airlines B777-200 $0.11974 $734 $0 $734 0.04% $0.00005

World Airways DC10-30/40 $0.12804 $190,328 $122,389 $312,718 19.01% $0.02434

World Airways MD11 $0.11534 $250,690 $291,635 $542,325 32.97% $0.03803

$1,644,700 1.0000

RATE -- WEIGHTED BY REVENUES $0.11482

USTRANSCOM UNIFORM RATE

ROUND-TRIP PASSENGER SERVICE

MEDIUM CLASS AIRCRAFT

FY10

USTRANSCOM FY09 Passenger Total

Adjusted Passenger Revenues Passenger

Aircraft Rate Per Revenues Thru 01 Jun 10 Revenues Weighted

Carrier Type Pax Mile [000] [000] [000] Wgt % Rate

Continental Airlines B767-400 $0.10498 $827 $1,068 $1,895 0.17% $0.00018

Delta Airlines B767-300 $0.10234 $8,014 $6,934 $14,947 1.38% $0.00141

North American B757-200 $0.14728 $75,923 $58,954 $134,877 12.42% $0.01829

North American B767-300 $0.13104 $304,482 $190,902 $495,384 45.61% $0.05977

Omni Air Int'l B757-200 $0.11443 $50,066 $21,270 $71,336 6.57% $0.00752

Ryan Int'l Airlines B757-200 $0.15565 $25,659 $15,599 $41,258 3.80% $0.00591

Ryan Int'l Airlines B767-300 $0.12638 $136,404 $189,918 $326,322 30.05% $0.03797

$1,086,019 1.0000

RATE -- WEIGHTED BY REVENUES $0.13106

USTRANSCOM UNIFORM RATE

ROUND-TRIP PASSENGER SERVICE

SMALL CLASS AIRCRAFT

FY10

USTRANSCOM FY09 Passenger Total

Adjusted Passenger Revenues Passenger

Aircraft Rate Per Revenues Thru 01 Jun 10 Revenues…