30 Aug 12 Final FY13 Uniform Rates and Rules for International Service.pdf

For Official Use Only

30 AUG 12

MEMORANDUM FOR ALL CARRIERS

FROM: USTRANSCOM/TCAQ-P

508 Scott Drive Scott AFB IL 62225-5357

SUBJECT: Notice of Final Fiscal Year (FY) 2013 - 2017 Ratemaking Memorandum of

Understanding (MOU) and Final FY13 Uniform Rates and Rules for International Service – Solicitation Number HTC711-12-R-C004

1. The final FY13 rates are the first rates set under the final FY13-FY17 MOU as attached. In order to receive a FY13 contract award, the attached MOU must be signed and returned to USTRANSCOM/TCAQ-P, 508 Scott Drive, Scott AFB IL 62225-5357 by close of business 14 Sep 12.

2. The final FY13 rates are based on fuel pegged at $3.41 per gallon for passenger and $3.48 for cargo, combi and L-100. The final 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 $0.13111 Medium Class Passenger $0.14324 Small Class Passenger $0.15940 $2,000 Large Class Cargo – MFE $0.45318 Large Class Cargo – Classic $0.47949 Medium Class Cargo $0.51547 $2,000 Combi Service $27.96065 L100 Service $1.41798

3. In accordance with our Memorandum of Understanding, please direct any questions or concerns to me at Lucretia.Sanchez@ustranscom.mil or 618-220-7119.

//SIGNED//

LUCRETIA A. SANCHEZ

Chief, Pricing Branch

Two Attachments

1. 30 Aug 12 Final FY13 Uniform Rates and Rules for International Service

2. 30 Aug 12 Final FY13 – FY17 MOU

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

FINAL

UNIFORM RATES AND RULES

FOR

INTERNATIONAL SERVICE

FISCAL YEAR 2013

INTRODUCTION

The Final FY13 USTRANSCOM Uniform Rates and Rules (hereafter referred to as “Rates”) were developed using rate-making procedures in compliance with the Federal Acquisition

Regulation (FAR), Memorandum of Understanding (MOU) for FY13 through FY17, attached, and allocation 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 FY13 rates issued on 11 Jul 12 were the first rates established under the FY13-17 MOU.

Carrier comments were received on both the FY13 proposed rates as well as the FY13-17

DRAFT MOU. This introduction is organized to first address comments to the FY13-17

MOU and secondly to address FY13 rate-specific comments.

Part I - FY13-17 Memorandum of Understanding:

Since April 2011 USTRANSCOM has held over 35 individual and group meetings with industry which were attended by more than 150 personnel. Comments received throughout this process were incorporated into the DRAFT MOU presented to industry on 11 Jul 12.

Written carrier comments to this DRAFT MOU were received from a total of ten carriers -four individual carriers and one team, representing six carriers. These comments, along with

USTRANSCOM responses, are organized below according to the major topics of discussion.

1. Minimum Return Weighted Guidelines Methodology

A. Cost Efficiency Factor (Op Costs and Fuel)–

Omni Comment: Current structure of cost efficiency factor is based on all costs excluding fuel and does not give consideration to possible drastic fluctuations in the DOD business base.

The effect of such fluctuations on fixed costs is out of the control of the carrier. Due to the cost efficiency factor scale only being recalculated in the MOU every five years, this could result in the scale being unrealistic with unattainable percentages in the later years of the

MOU period.

Omni Recommendation: The year over year analysis should be measured only on those costs the carrier has control of such as crew, maintenance and passenger service expense. The costs to be measured should be clearly documented in the MOU. The resultant year over year change should be compared to the 12 month escalation factor included in the uniform rate.

Then any increase which would be less than the 12 month escalation factor should earn the maximum 4%. This factor can be reduced by 1% for each 1% increase.

North American/World Airways Comment: The required saving thresholds currently proposed in the cost efficiency table of the draft MOU are extremely high and not routinely sustainable. Additionally, the spread between realized savings and cost efficiency factor is too large.

North American/World Airways Recommendation: Change the cost efficiency table as follows:

From USTRANSCOM proposed:

>= Prior Cost Up to 3% >3% to 6% >6% to 9% >9%

0% 1% 2% 3% 4%

To:

>= Prior Cost 0-1.25% 1.25-2.50 2.50-3.75 >3.75%

Cost Eff Factor 1% 2% 3% 4%

USTRANSCOM Response:

The cost efficiency factor is a special factor that provides an incentive for contractors to reduce costs. To the extent a contractor can demonstrate cost reduction efforts that will benefit the pending contract, USTRANSCOM may increase the profit objective by an amount not to exceed 4 percent. The language in the MOU allows contractors to provide narratives to identify situations where the table did not adequately predict cost efficiencies achieved such as when a carrier’s year-over-year change is increased as a result of operations to high cost locations required by the government.

In some cases, GLAH’s recommendation would not provide for the government to participate in a share of the potential savings. USTRANSCOM could not, therefore, provide for a cost efficiency factor exceeding the cost savings realized, as proposed by this recommendation.

USTRANSCOM’s original calculations for cost efficiency allow for consideration of unique situations by submission of a narrative. Additionally, the percentages in the

MOU have historically been achieved, as indicated in Chart 1 below. USTRANSCOM reviewed the proposed recommendations with leadership and the original calculations for cost efficiency remain unchanged.

North American/World Airways Comment: USTRANSCOM has not allowed a cost efficiency factor for fuel.

North American/World Airways Recommendation: Unless USTRANSCOM implements the incentive program discussed below, an appropriate efficiency rating should be given to the fuel profit. Given the fuel burn savings realized by USTRANSCOM (almost 24% for modern cargo and 14% for large passenger), it is obvious that fuel burn is a significant (possibly the most significant) potential source of efficiency. Those two aircraft classes both have exceeded the 9% threshold for maximum savings. This means it would be reasonable to credit fuel expense in those two categories at 4% on the weighted guidelines.

Breakout of Cost Efficiencies Applied (62.26%) up to 3%

3-6%

6-9%

>9% 37.74% (20)

62.26% (33)

Cost Efficiency 2010-2012 (53 Data Points Reviewed)

No Cost Efficiency

Cost Efficiency Applied

CHART 1

USTRANSCOM Response: Given carrier protections discussed in paragraph 1.B below, USTRANSCOM considers the fuel profit of 5% to be a liberal position. Cost efficiencies associated with fuel and/or fuel burn rates could be additional benefit carriers might achieve on an individual basis; but are to be handled outside the uniform rate, with an incentive program to be determined by the Contracting Officer.

B. Contract Type Factor (Op Costs and Fuel)–

Omni Comment: The proposed contract type factor segregates fuel from other operating costs. Other operating costs are assigned a risk factor of 5% and no risk factor is assigned to the fuel cost component. The CRAF contract is a firm fixed price contract – the riskiest of all contract types as defined in FAR 16 and DFAR 215. In addition, the proposed factor for fuel does not recognize any risk associated with fuel procurement. Even though there is a reconciliation procedure under the CRAF contract related to fuel, there is still risk to the carrier for the procurement

Omni Recommendation: The composite contract type factor should include the maximum allowed of 6% for operating costs other than fuel. The risk of procuring fuel should be recognized in the contract type factor for fuel, with a risk factor of 1-2%. This factor would reflect the cost and procurement of the necessary fuel plus an incentive for carriers to be more fuel efficient. That particular component could be evaluated on a carrier by carrier basis.

USTRANSCOM Response: With regard to the 0% factor afforded the fuel portion of this contract, USTRANSCOM considers this element to be a cost type arrangement. As such, the range assigned by DFARS 215.404-71-3 for a Cost-plus-fixed-fee is 0 to 1 percent. As the contract contains protections such as the economic price adjustment for fuel, as well as a class deviation from the Prompt Payment Act, which allows CRAF carriers to be paid more expeditiously than other DOD contractors, the 0% factor is appropriate. Additionally, the 0% afforded to contract risk on the fuel portion of the

CRAF contract has full support of USTRANSCOM and AMC leadership.

The 5% factor afforded the portion of the contract less fuel, is the normal value assigned in accordance with DFARS 215.404-71-3. Items of consideration to determine this factor were: length of contract, adequacy of cost data for projections, protections provided under contract provisions (such as an economic price adjustment) and payment provisions. As this contract contains an economic price adjustment and a class deviation from the Prompt Payment Act, the normal value of 5% has been reviewed by leadership and remains unchanged.

C. Technical Factor (Fuel) –

North American/World Airways Comment: USTRANSCOM has provided a 4% technical factor associated with fuel.

North American/World Airways Recommendation: The technical risk should be a minimum of 6%, however we believe there is no doubt that the “technology incentive” range should be used with a normal profit of 9% for both fuel and non-fuel. Improved fuel burn was the main goal of modernization. It has been achieved as carriers have moved from less technologically advanced aircraft to more modern lift. The primary driver of this change is technology. Jet propulsion is the same technology that powers space travel and missile propulsion. It is not about buying a commodity, producing rivets, or manufacturing uniforms.

Pilots utilize sophisticated computers and equipment to optimize fuel burn and navigate the aircraft to nontraditional international airports.

USTRANSCOM Response: In accordance with DFARS 215.404-71-2, the technology incentive range is not applicable to this contract. The standard technical range is from 3 to 7 percent, with 5% as the normal value. With regard to the technical factor for fuel, a value of 4% was assigned. This is based on the fact that the commodity of fuel within the contract includes a routine, well-proven technology.

D. Fuel Cap –

Omni Comment: Carriers were recently made aware that the fuel cap utilized in the weighted guidelines is based on the lesser of a trailing five year average or the current fuel peg rate. Currently, DESC is charging below market rate for fuel purchased at military locations. Should this “below market rate” continue for an extended period of time, the fuel cap included in the weighted guidelines methodology would be understated.

Omni Recommendation: The five year average calculation was not provided in the proposed rates, but should be included in the final rate package. We concur that five years is an appropriate amount of time for the fuel cap calculation as it allows for significant fluctuations in fuel cost to be smoothed out. Incidents of abnormally low fuel costs through

DESC should be evaluated, and if they occur over long periods of time, they should be adjusted to a more reasonable market rate for the fuel cap calculation.

USTRANSCOM Response: Agreed. The analysis is provided belowi. Additionally, significant incidents of abnormally low or high fuel costs through DESC will be evaluated and adjusted as necessary.

Lynden Comment: Dates for the 5 year rolling average are not included in the MOU

Lynden Recommendation: Specify dates used to calculate the 5 year rolling average.

USTRANSCOM Response: The 5 year rolling average is intended to include the previous 5 years of data. So, for the FY13 rate package, USTRANSCOM included FY08 through FY12 data, which included the associated base period information. The rolling average will, therefore, include a 5 year trailing average of weighted carrier rates paid, as reported on fuel summary reports, as indicated in the endnote below.

North American/World Airways Comment: The fuel cap imposed by USTRANSCOM is unfair and redundant if fuel profit has already been adjusted downward for lower carrier price risk. USTRANSCOM has further reduced the profit on fuel further by capping the already too low fuel profit.

North American/World Airways Recommendation: The fuel cap should be removed from the profit calculation for the FY13-17 MOU. If the fuel profit is set at a level close to the non-fuel profit and a cap is implemented, it should be arrived at in a more fair and logical manner than using a 5-year historical average. The price of fuel 3 to 5 years ago has no relevance in this calculation. As fuel burn in the rates is derived from the base year, it would be logical to utilize the base year for the cap as well. This was the alternative to reduced fuel profit actually proposed by another carrier.

USTRANSCOM Response: The proposed fuel cap is required to mitigate the government’s risk to profit on fuel. We have mitigated the impact of this fuel cap to carriers by establishing a trailing five year average which allows for smoothing of significant upward or downward fluctuations in fuel costs. This position was further reviewed and discussed with leadership and remains unchanged.

E. Range for Facilities Capital Employed -

North American/World Airways Comment: The aircraft age values utilized by

USTRANSCOM are inappropriate. Before a historical rate exists for an equipment type, the carrier must operate in the base year for USTRANSCOM. This makes the first two years of the aircraft age virtually unusable for inclusion in this chart. Additionally, the characteristics of aircraft do not change drastically every five years but change every 15-20 years when new generation aircraft or engines are introduced.

North American/World Airways Recommendation: The recent baseline age of flying aircraft in the CRAF program was 26.3 years. Therefore, we believe the norm (with a value of 17.5%) can safely be set at 20 to less than 25 years. Aircraft with an age of 26 to less than

30 years would have a value of 15.0% (less than norm) and 30 year old aircraft and above would have a value of 10%. The merits of this proposal are; 1) new aircraft are rewarded appropriately 2) modern (but not new) aircraft are slotted at a rate above the norm 3) the norm reflects an accurate baseline and 4) older aircraft that likely perform at below norm level are penalized in the facilities capital table.

Change the facilities capital table as follows:

From USTRANSCOM proposed:

A/C Age <5Yrs 5 to <10 10 to <15 15 to <20 20 to <25 >=25

25% 20% 17.5% 15% 12.5% 10%

To:

A/C Age <8Yrs 8 to <20 20 to <25 26 to <30 >=30

25% 20% 17.5% 15% 10%

Further clarification on North American/World Airways Recommendation:

Change the facilities capital table to read:

FY13

A/C Age <5Yrs 5 to <10 10 to <20 20 to <25 >=25

25% 20% 17.5% 15% 12.5%

FY14

A/C Age <6Yrs 6 to <11 11 to <21 21 to <26 >=26

25% 20% 17.5% 15% 12.5%

FY15

A/C Age <7Yrs 7 to <12 12 to <22 22 to <27 >=27

25% 20% 17.5% 15% 12.5%

FY16

A/C Age <8Yrs 8 to <13 13 to <23 23 to <28 >=28

25% 20% 17.5% 15% 12.5%

FY17

A/C Age <9Yrs 9 to <14 14 to <24 24 to <29 >=29

25% 20% 17.5% 15% 12.5%

USTRANSCOM Response: The North American/World Airways updated recommendation allows for a sliding scale which appears contrary to USTRANSCOM’s goals to maintain modern, fuel efficient aircraft in CRAF operations throughout the

MOU period. It also contains a recommendation for a 10-yr range to be rated as

“Normal”, while also increasing the lowest range from 10% to 12.5%. The ranges selected by USTRANSCOM indicate a desired state. These values are based upon a review of various data, to include: (1) industry standard information indicating the average fleet age for major US Flag carriers is less than 10 years of age and (2) the 2010

TCJ5/4 “Modern” aircraft analysis indicates aircraft greater than 15 years are considered “aging” as there is a direct link to aircraft reliability and maintenance costs.

The ranges provided by USTRANSCOM are intended to discontinue carrier’s historical propensity to operate older, less modern aircraft in CRAF service, while operating more efficient aircraft in their commercial business. This position was further reviewed and discussed with leadership and the ranges provided in the MOU remain unchanged.

F. Capital Expended Calculation –

FedEx Team (representing ATI, Atlas, Delta, FedEx, Polar and Sun Country)

Comment: USTRANSCOM currently calculates capital expended calculation based on constructed miles using system-wide data. (System Utilization x System Speed x Days

Available)

FedEx Team Recommendation: It does not follow that a margin allocable to AMC business should change as a result of circumstances with respect to a carrier’s business that is totally unrelated to their AMC flight activities or utilization. USTRANSCOM should use AMC constructed mileage to determine expended capital.

FedEx Team Comment: USTRANSCOM has questioned the capital expended calculation in general, in that, USTRANSCOM does not believe the present calculation appropriately allocates “capital expended” to AMC business. USTRANSCOM indicated they were performing further analysis and seeking outside assistance.

Recommendation: The present calculation is being done correctly, except with respect to the choice of the appropriate constructed mileage base. The capital expended calculation is intended to allocate a fixed margin value to the assets that are performing services for the US

Government, in this case AMC, and to other customers of the service provided. When AMC utilization is different from commercial utilization, AMC and commercial constructed mileage bases (CMBs) differ accordingly. The respective CMBs when applied to the actual

AMC and commercial miles flown, when properly allocated, should sum to the capital expended for each type of business. This only happens properly when the differing utilizations of assets are treated accordingly. Otherwise, higher utilization businesses would be required to subsidize lower utilization businesses and vice versa.

USTRANSCOM Response: For the FY13 rate, USTRANSCOM agrees to use the FDX

Team recommendation, except that “available days” within the CMB calculation will be as defined by the Department of Transportation at 14 CFR Part 241.

IMPORTANT NOTE: According to DOD guidance, facilities capital employed should be allocated to the contract for which it is being applied. USTRANSCOM maintains its position that the present calculation does not appear to appropriately allocate “capital expended” to USTRANSCOM business. As a result, USTRANSCOM appealed to

OSD/DPAP-CPF for assistance. Due to unforeseen circumstances at OSD/DPAP-CPF, we were unable to complete our analysis in time to incorporate any changes into the

FY13 rate. USTRANSCOM will, however, continue to work with OSD/DPAP and

DCMA to determine if the expended capital calculation used in the FY13 Uniform Rate requires corrections prior to FY14.

G. OTHER: Fuel Incentive –

North American/World Airways Comment: USTRANSCOM proposes to incent carriers through an incentive program for fuel savings. This will take time.

North American/World Airways Recommendation: As an interim suggestion, we suggest rewarding the aircraft classes that have improved fuel burn on a year over year basis. For instance, the large passenger category has achieved a fuel burn that is 14% lower than the

FY12 fuel burn for that category. The large modern cargo category has a 23.8% lower fuel burn compared to the applicable FY12 rate. Using the cost efficiency guidelines, this would indicate carriers should expect a 4% benefit. Because the savings are based on burn (not price) it translates to realized savings for USTRANSCOM.

USTRANSCOM Response: Given the carrier protections discussed in paragraph 1.B above, USTRANSCOM considers the fuel profit of 5% to be a liberal position. Cost efficiencies associated with fuel and/or fuel burn rates could be additional benefit carriers might achieve on an individual basis; but are to be handled outside the uniform rate, with an incentive program to be determined by the Contracting Officer.

2. PARTICIPATION –

North American/World Airways Comment: The proposed weighting of categories with few participants should be reconsidered. Drastic changes due to increased revenue threshold and retiring aircraft present many challenges. Aircraft types for which no rate package is submitted or audited may later become relevant as other aircraft types are required or teaming arraignments [sic] change.

North American/World Airways Recommendation: USTRANSCOM should advise carriers of all aircraft clearing the threshold at the beginning of the rate process, then advise as packages are withdrawn or fleet types retired. Additionally, to avoid a shortage of viable rates, it may be best to request a minimum of 3 rate packages per category, even if only two carriers meet the 5% threshold. Or the historical revenue threshold test should be made excluding an aircraft type that may be retired prior to the forecast year. When fewer than 2 carriers meet the 5% threshold, we recommend adding language to the MOU that offers guidelines on how USTRANSCOM and the carriers arrive at an appropriate rate. If unaudited

DOT data is to be utilized to create a second rate package (post DCAA audit), carrier input should be solicited. The individual weightings within the category should be normalized, based either on the added rate package serving as a proxy for that carrier’s portion of the historical share or based on expected entitlement for the forecast year.

USTRANSCOM Response: As the rate process is protracted and market conditions drive aircraft retirement, USTRANSCOM is often not made aware of aircraft retirement until weeks or even days before it occurs. Therefore, it would be unfeasible for USTRANSCOM to predict aircraft to be retired in the forecast year in order to exclude them in the “participation” revenue threshold test, as recommended.

USTRANSCOM will exercise our discretion to determine appropriate participants in the rates.

As to “normalizing” weightings, in most cases it would not be appropriate to normalize individual weightings based on a proxy for the historical share of business or on the expected entitlement for the forecast year. USTRANSCOM will continue to exercise careful judgment in handling such anomalies within the normal ratemaking process.

Lynden Comment: The 60 day cut off may be a challenge for Lynden this year

Lynden Recommendation: Lynden requests an exemption due to an accounting system change USTRANSCOM Response: USTRANSCOM has allowed extensions on a case-by-case basis in the past. However, it would not be prudent for either party to discuss an extension at this time.

3. FUEL –

Omni Comment: The draft MOU indicates USTC will consider adjusting the uniform rate if fuel prices differ from the fuel peg by greater than 25%.

Omni Recommendation: Consideration should be given to modifying the language to allow more flexibility for adjusting the rate at lower fluctuation percentages.

North American/World Airways Comment: The 25% threshold for adjusting the fuel peg is too high. At 25 %, carriers would be bearing a potentially significant working capital hit.

Recommendation: The threshold should be set at 15%. This level ensures both parties are treated fairly without creating excessive adjustments.

Lynden Comment: The 25% figure appears to be high.

Recommendation: Lynden would prefer a 10-15% threshold.

USTRANSCOM Response: Further analysis indicates historical changes have been made when economic fluctuations in fuel dictated such an adjustmentii.

USTRANSCOM will continue to exercise discretion in this matter. The proposed MOU language has, therefore, been removed in its entirety.

4. OMBUDSMAN –

Omni Comment: The Ombudsman should thoroughly understand and review the contracting process to ensure that contractors are being treated fairly during the bidding process and to facilitate open communication when a contactor [sic] feels that there are issues that should be discussed. Seeking resolution through the Ombudsman who is not an independent third party puts the carriers at a disadvantage during mediation. The current chain of command does not allow the Ombudsman an unbiased perspective of the issues and prevents the level of transparency that should be evident in the contracting process.

Omni Recommendation: Appoint an Ombudsman independent of the pricing branch of

USTRANSCOM.

USTRANSCOM Response: This matter is under review with the Director of

Acquisition, who appoints the OMBUDSMAN for all USTRANSCOM contract actions.

Appointment of the Ombudsman is not a part of the ratemaking process.

5. OTHER COMMENTS -

North American/World Airways Comment: Page 3 of the MOU reference to Section 366 is unclear

North American/World Airways Recommendation: Include relevant actual language from the National Defense Authorization Act for Fiscal Year 2012 should be included.

USTRANSCOM Response: The MOU will be changed to reflect this language.

North American/World Airways Comment: Several references to dates reflect the prior year MOU period.

North American/World Airways Recommendation: Correct as required.

USTRANSCOM Response: The MOU will be changed to resolve any incorrect references.

North American/World Airways Comment: In the past, unanimous agreement of all carriers was required to modify the MOU.

North American/World Airways Recommendation: If this is still the case, stipulate such in the new MOU.

USTRANSCOM Response: No change is required. USTRANSCOM leadership must retain the right to make necessary changes that are in the best interest of the

Government. Any modifications to the MOU will be handled on a case by case basis.

Part II - FY13 Proposed Uniform Rates:

Excluding fuel, the large passenger and large cargo (modern) rates are higher than the FY12 rates; while the medium and small passenger class and large (classic) and medium cargo class rates are lower. USTRANSCOM has reviewed these costs extensively and the decreases can be briefly explained as follows:

Medium Passenger Class:

Excluding fuel, the medium passenger class rate is down 5.64%. This can largely be attributed to the removal of the B757 aircraft from the FY13 rate. As a result of the lower

ACLs on the B757, their seat mile costs are generally higher than that of the B767, increasing the seat mile rate accordingly. As no single B757 carrier’s participation level was greater than 5% for FY13, no B757 aircraft were included in the rate, resulting in a lower per seat mile cost overall.

Small Passenger Class:

Excluding fuel, the small passenger class rate is down 5%. This is a direct result of the highest weighted carrier, Miami Air, costs declining. Miami Air is weighted at 60.57%, so changes in this carrier’s costs will have a dramatic impact to this class. Nevertheless, Miami’s costs are still slightly higher than other B737-800 operators in this class.

Large Cargo (Classic) Class:

Excluding fuel, the large cargo (classic) class rate is down 16.97%. This is attributed to the removal of the modern aircraft from this class. See response to item 1, below.

Medium Cargo Class:

Excluding fuel, the medium cargo class rate is down 13.89%. This is attributed to the removal of ASTAR Air Cargo from the rate. This high cost carrier elected not to participate as a CRAF carrier after FY12 and they were subsequently removed from the ratemaking process. Additionally, after the proposed rate was issued, USTRANSCOM received notice that National Air Cargo parked their DC8 aircraft. As a result, NAC’s costs were also removed from the FY13 final rate.

Carrier Comments.

The proposed rates were issued on 11 Jul 12, with carrier comments due no later than 01 Aug

12. The FY13 rates consisted of a total of 19 proposals submitted by 15 carriers.

Carriers were invited to meet with USTRANSCOM before comments were due and individual analyst cut sheets were provided to all carriers. The cut sheets provided detailed information related to adjustments made by the analyst to an individual contractor’s costs and/or statistical data. Individual profit calculations were also included within the cut sheets.

Twelve carriers representing sixteen proposals requested meetings with USTRANSCOM before comments were due on 1 Aug 12. After the meetings, the following carriers provided written comments to the proposed rate: ABX Air, Inc (ABX), Air Transport International

(ATI), Atlas Air (Atlas), Delta Airlines (Delta), Evergreen International Airlines (Evergreen), Federal Express (FedEx), Lynden Air Cargo (Lynden), Miami Air (Miami), North American

Airlines (North American), Omni Air International (Omni), Southern Air (Southern), and

World Airways, Inc (World). Although most carrier comments related to carrier-specific issues, general comments received on the FY13 rate related to:

1. Separation of the modern and classic aircraft in the large cargo class

2. Large passenger class weightings

3. Established Allowable Cabin Load (ACL) of the charter-configured B777 aircraft

1. Separation of modern and classic aircraft in the large cargo class -

Evergreen Comment: Historically the classic B747s, B747-400s and MD11s have been averaged together for one rate. This year, USTRANSCOM separated this category into

Modern and Aged (Classic).

Recommendation: Evergreen proposes one rate be used for all of the large class cargo aircraft. The aircraft are used on the same missions and one rate should apply. One rate for all large cargo class will be easier to administer both by USTRANSCOM and the carriers.

One rate would avoid errors of incorrect rates applied to missions. This also coincides with how the rates have been developed historically.

USTRANSCOM Response: USTRANSCOM reviewed the proposed recommendation with leadership and our original position on this matter remains unchanged for the following reasons: Segregating the modern B747-400s and MD11s from the classic

B747s in the rate, as well as the award process, supports the Command initiative to utilize modern, fuel-efficient aircraft. Furthermore, efforts to acknowledge investments in modern aircraft within the profit calculations would have been diminished if

USTRANSCOM would not have taken this action. The solicitation was amended on 11

Jun 12 to account for this change. Any issues/concerns with this action should have been addressed at that time.

2. Large Class Passenger Weightings

Omni and North American/World Airways Comment: Fewer than two carriers met the

5% revenue threshold in this category. Omni parked their DC10 and replaced them with the

B777. The individual weightings within the category are based on actuals.

North American/World Airways Recommendation: The weighting between World’s

MD11 and Omni’s B777 should be normalized. A 50/50 split would approximate the share of each carrier given their respective anticipated entitlements for FY13. It would also closely resemble the split that would have occurred if the B777 served as a proxy for the historical

Omni DC10.

Omni Recommendation: The weighting between World’s MD11 and Omni’s B777 should be normalized at 60/40.

USTRANSCOM Response: During this rate cycle, a number of unusual circumstances impacted the large passenger class. One carrier replaced their entire operations with a new aircraft, while the other highly weighted carrier filed for Chapter 11 Bankruptcy protection. So, although it is not in accordance with the MOU language, USTRANSCOM understands the request to “normalize” the weightings of the remaining two aircraft within the Large Class Passenger category. However, in accordance with past practices, USTRANSCOM supports the use of historical information to determine a methodology to accommodate theses anomalies versus establishing a participation level based upon an estimated level of future participation.

A number of variables impacted this recommendation. For instance, World is not operating the same number of MD11s as during FY11 and Omni’s two B777 aircraft actually replaced five DC10s operated during FY11. As predicting revenues between carriers within a team would be nearly impossible, USTRANSCOM reviewed FY12 revenues to determine an appropriate weighting to use in the FY13 rate. The above issues were taken into consideration and a new weighting of 70% was given to the

MD11, with 30% weighting to the B777. This weighting is being considered only as a result of the anomalies that occurred during this particular rate cycle.

3. ACL Review

Atlas and North American/World Airways Comment: An ACL of 380 for Omni’s B777 provides that aircraft credit for too much payload, rewards the carrier for seats that cannot be used on most missions, reflects an aircraft with an uncomfortable and cramped seat pitch, and unnecessarily dilutes the rate.

Atlas and North American/World Airways Recommendation: A more appropriate ACL should be assigned.

USTRANSCOM Response: After the proposed rates had been issued, USTRANSCOM received additional information regarding operating costs for the charter B777 aircraft.

USTRANSCOM will consider these costs, along with comments received to re-evaluate the Charter B777 ACL. While we do not have the ability to finalize this analysis for the

FY13 final rate, a supplementary review will be completed; and if appropriate, an adjustment to the ACLs will be accomplished.

Fuel.

TCAQ 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 on DOD missions and ratio of DOD and commercial fuel uplifted in support of DOD missions.

A review of carriers’ recent monthly fuel reports conclude cargo carriers receive 64 percent of their fuel at military installations and are charged the rate set by Defense Logistics Agency -

Energy (DLA-E). Conversely, passenger carriers receive 75 percent of their fuel commercially, which fluctuates up and down with the commercial fuel market.

The average commercial fuel price is derived from the International Air Transportation

Association (IATA) fuel index and OPISiii.

DLA-E JP-5 and JP-8 fuel prices effective 01 Jul 12 were not used in determining the pegged price of fuel used in the final rate. USTRANSCOM estimated DESC prices effective 1 Oct at

$3.52 and $3.54 for JP5 and JP8, respectively. USTRANSCOM may adjust the rates prior to contract performance should the posted DLA standard prices differ significantly.

USTRANSCOM will continue to closely monitor fuel prices for the FY13 contract performance period and make appropriate adjustments to the pegged fuel prices as we have done in prior contract periods.

The weightings between commercial fuel and military fuel and the current commercial fuel and military fuel prices results in a pegged fuel price of $3.41 for passenger and $3.48 per

U.S. gallon for cargo, combi, and L100. The pegged price includes into-plane fees and taxes.

Capital Compensation.

The analysis for the FY13 final rate resulted in a full return on investment (ROI) rate of 9.66 percent. No carriers received the full ROI for FY13. Appendix N provides the details for the development of the 9.66 percent full ROI for the FY13 Rates.

Minimum Return.

As anticipated, for those aircraft classes predominantly weighted by modern, fuel-efficient aircraft, the weighted guidelines methodology used in the FY13 rates produced average minimum profit percentages higher than the previous MOU rate of 11%. The weighted profits realized by category are as follows:

Large Class Passenger 14.00%

Medium Class Passenger 12.67%

Small Class Passenger 14.96%

Large Cargo (Modern) 18.73%

Large Cargo (Aged) 7.11%

Medium Cargo 7.86%

Combi 9.44%

L-100 10.73%

Cost Escalation.

The 27-month cost escalation factor is 5.31 percent for FY13. This is based on the calculations agreed upon in the FY13-17 MOU. This is an increase from the 28.5 month factor of 5.12 percent for FY12. Appendix M provides detailed information on this calculation.

Eurocontrol.

The FY13 Euro control surcharges have been calculated as follows: 2.0 percent for passenger, 2.6 percent for cargo missions, .36 percent for combi. L-100 euro control will be on a cost reimbursable basis. This is a change from the FY12 Euro control of 2.4 percent, 3.0 percent and .42 percent for passenger, cargo and combi, respectively. The mission samples and analysis for euro control is provided at Appendix L.

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 in advance for an exercise, SAAM, or contingency. TCAQ updated all factors incorporated into this rate;

and the FY13 Incremental Passenger Rate is $206iv. See Appendix A for details.

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

(both classic and modern), combi, and L100 aircraft rates, respectively. Appendices C through J illustrate individual treatment of each carrier’s cost by aircraft type, with explanatory notes provided in Appendix K. Appendices L, M and N provide the Eurocontrol

Surcharge, Cost Escalation Factor, Rate of Return on Investment Computations, respectively.

Appendices O and P provide Backhaul Operational Data for USTRANSCOM One-Way services and Appendix Q provides information on the FICA escalation calculation.

i Calculation for fuel cap compiled from USTRANSCOM Fuel Database

FY08 Rate FY09 Rate

FY10 Rate FY11 Rate FY12 Rate

Base Period:

(Jul 06-Jun 07)

Base Period:

(Jul 07-Jun 08)

Base Period:

(Jul 08 - Jun 09)

Base Period:

(Jul 09-Jun 10)

Base Period:

(Jul 10-Jun 11)

Cargo Percent Commercial Uplifts .3026 .3298 .3410 .3210 .3228

Percent Military Uplifts .6974 .6702 .6590 .6790 .6772

Fuel Price Averages Commercial 2.33 2.78 2.36 2.36 2.58

Military 2.19 2.57 2.70 2.82 2.60

Cargo Average 2.23 2.64 2.58 2.67 2.59

Passenger Percent Commercial Uplifts .7884 .7403 .8117 .7969 .7743

Percent Military Uplifts .2116 .2597 .1883 .2031 .2257

Fuel Price Averages Commercial 2.28 2.81 2.31 2.27 2.48

Military 2.19 2.63 2.72 2.83 2.62

Passenger Average 2.26 2.76 2.39 2.38 2.51

5 Yr Avg. 2.503 ii Calculation for Historical Rate Changes based on data contained in the respective uniform rate packages:

FY08 Pegged Rate Changes

Pax

CGO

Overall

Pegged

Diff Amt

Diff %

Wtd Diff

Original 2.10 n/a

2.20

R1 2.60

0.50

23.8%

2.70

22.7%

23.35%

R2 3.40

0.80

30.8%

3.20

18.5%

25.62%

R3 4.20

0.80

23.5%

4.30

1.10

34.4%

28.09%

FY09 Pegged Rate Changes

Original 4.20

4.15

R1 2.30

(1.90)

-45.2%

2.40

(1.75)

-42.2%

-43.84%

R2 1.65

(0.65)

-28.3%

1.55

(0.85)

-35.4%

-31.51%

FY11 Pegged Rate Changes

Original 2.68

2.95

R1 3.90

1.22

45.5%

3.98

1.03

34.9%

41.20%

FY12 Pegged Rate Changes

Original 3.30

3.77

R1 2.75

(0.55)

-16.7%

2.57

(1.20)

-31.8%

-23.28% iii

IATA Fuel Price Analysis: (10 Aug 2012)

Jet Fuel Price 100% Asia& Oceania 22% 308.7 67.91

Europe & CIS

28% 313.4 87.75

Middle East & Africa

7% 305.2 21.36 North America

39% 317.0 123.63

Latin America

4% 328.7 13.15

Average 3.14

OPIS Index: (Mean 8/10 and 8/17/12)

New York 318.74 U.S. Gulf 315.07 Los Angeles 325.36 Rotterdam 316.25

Singapore 310.36 Arab Gulf 307.75 Average 3.16 iv Incremental Passenger Rate calculation

Carrier Aircraft

Type ACL

Passenger Service Cost Per

Mile

Passenger Service Cost

Per Seat

FY11

Passenger

Revenues (000)

FY12

Passenger Revenue

(000)

Total Revenue by Carrier

Weighted Avg for each Carrier

Weighted Avg Pax Svc Cost

OAE B777 380 4.1183 0.01083763

96,768 96,768

0.2960

0.00320777

WOA MD11 360 6.6378 0.01843833 230,168 230,168

0.7040

0.01298087

0.01618864

One-Way Round-Trip Total

Avg Live Pay Miles

2,107,098 12,853,826 14,960,924

FY13 Final Passenger Seat Mile Rate 0.24255 0.13111

185,370,165 644,245,662

Total Dollars

796,615,826

Total Trips

1,178

Total Passengers

427,261

Avg Passenger per Trip

Avg Price Per Trip

676,244.33

Avg Seat Miles Per Trip

4,606,389.76

Avg Miles Per Trip

12,700

Additional passenger service cost per trip 206

INDEX OF APPENDICES

No.

Appendix Title Pages

A USTRANSCOM Uniform Negotiated Rates and Rules 6

B Computation of Uniform Rates: 8 Large Class Passenger Service Medium Class Passenger Service Small Class Passenger Service Large Class Cargo (MFE) Service Large Class Cargo (Classic) Service Medium Class Cargo Service Combi Class Service L100 Class Service

C Costs Per Seat Mile by Carrier and Aircraft Type In Large Class Charter Passenger Service 2

D Costs Per Seat Mile by Carrier and Aircraft Type in Medium Class Charter Passenger Service 4

E Costs Per Seat Mile by Carrier and Aircraft Type in Small Class Charter Passenger Service 3

F Costs Per Ton Mile by Carrier and Aircraft Type in Large Class Cargo Service (MFE) 3

G Costs Per Ton Mile by Carrier and Aircraft Type in Large Class Cargo Service (Classic) 3

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

I Cost Per Plane Mile by Carrier Charter Combi Service 1

J Cost Per Ton Mile by Carrier Charter L100 Service 1

K Explanatory Notes 4

L Eurocontrol Surcharge 6

M Cost Escalation Factor 2

N Rate of Return on Investment 3

O Backhaul Operational Data for USTRANSCOM Service Excluding One-Way Cargo Large Class Quarterly Expansion 1

P Backhaul Operational Data for USTRANSCOM Service One-Way Cargo Large Class Quarterly Expansion 1

Q FICA Escalation 1

APPENDIX A

SCHEDULE OF UNIFORM NEGOTIATED RATES AND RULES

FISCAL YEAR 2013

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) CHARTER PASSENGER SERVICE PER SEAT MILE

Large

Live Effective Rate

$0.13111 Ferry Rate (Base - Effective Rate) 90% $0.11800 Incremental Passenger

$206

Fuel Pegged Rate

$3.41

Medium

Live Effective Rate

$0.14324

Ferry Rate (Base - Effective Rate) 90% $0.12892

$3.41

Small

Live Line Haul Rate

$0.15940

Ferry Rate (Base - Effective Rate) 90% $0.15297 Stop Charge (Per Directed Landing) $2,000

Fuel Pegged Rate $3.41

(2) CHARTER CARGO SERVICE PER TON MILE

Large - Modern Fuel Efficient (MFE)

Round Trip Effective Rate

$0.45318 One-Way 166% $0.75228 Contingency Rate (Per Para G) 195% $0.88370 Ferry Rate (Base - Effective Rate) 90% $0.40786

$3.48

Large - Classic

$0.47949 One-Way 166% $0.79595 Contingency Rate (Per Para G) 195% $0.93501 Ferry Rate (Base - Effective Rate) 90% $0.43154

$3.48

Medium

Round Trip Line Haul Rate

$0.51547 One-Way 166% $0.85568 Contingency Rate (Per Para G) 195% $1.00517 Ferry Rate (Base - Effective Rate) 90% $0.48805 Stop Charge (Per Directed Landing) $2,000 Fuel Pegged Rate $3.48

(3) CHARTER COMBI SERVICE PER PLANE MILE

$27.96065

One-Way 185% $51.72720 Contingency Rate (Per Para G) 193% $53.96405 Ferry Rate (Base - Effective Rate) 90% $25.16459 Fuel Pegged Rate $3.48

(4) CHARTER L-100 SERVICE PER TON MILE

$1.41798

Ferry Rate (Base - Effective Rate) 90% $1.27618 Fuel Pegged Rate $3.48

(5) 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. On round trip passenger, one-way passenger when either the live or empty segment transits a eurocontrol country, cargo or combi missions, Eurocontrol will be paid on live miles only.

On one way passenger missions when Eurocontrol is applicable to both the live and empty segment, Eurocontrol will be paid on the live miles plus an additional 85 percent of those miles (i.e., 6,000 mile one way passenger mission would be paid 2.0 percent on 6,000 miles + 5,100 miles). Carriers will be paid the applicable rate plus a surcharge of

2.6 percent for cargo missions and 0.36 percent for combi. Eurocontrol fees for the L100 class aircraft will be cost reimbursable.

(6) FERRY. Ferry will be paid based on standard ACL or lesser amount.

(a) Close the jaw 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. 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) Positioning and depositioning ferry: Positioning and depositioning ferry shall be included with the offer and negotiated at time of award.

(c) “Front/backhaul ferry” on one-way passenger missions will be applied to empty backhaul miles in addition to, and in the same manner as, positioning/depositioning ferry identified in subparagraph (b) above.

(7) 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 $206 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.

(8) TRIP CANCELLATION. A cancellation charge will be paid on missions canceled with notification given within the time frames noted below (see contract Section H, TRIP CANCELLATION). 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). Cancellation of one way passenger missions will be calculated on a trip price made up of the live miles plus 85 percent of those miles at the live mile rate (i.e., 6,000 mile one way passenger mission would be paid the applicable cancellation percentage on 6,000 miles + 5,100 miles times the live mile rate). The charges are as follows:

Time Frame Service Type 1 Oct 12 – 30 Sep 13

Seven days or less

Passenger and Combi:

Cargo:

28.86% 21.63%

8 to 14 days

Passenger and Combi:

Cargo:

18.72% 15.79%

15 to 30 days

Passenger and Combi:

Cargo:

15.30% 12.71%

` Passenger and Combi 7.54% 31 to 75 days Cargo 5.96% 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:

18.72% 15.79%

(9) 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 contract Section H, REIMBURSABLE SUBMISSION). 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 $1837

B747-400/400ER 100 $1969

MD11F 86 $1693

MD11C 86 $1693

B777F 88 $1733

DC10-30/40 75 $1531

A300-600ER 51 $1695

A300-400F 50 $1662 B767-200F 48 $1596

DC8 45 $1496

L100 23 $1899 B727-100 18 $905 B727-200 22 $1742

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 the fixed buy 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 B737-200 14

MD80 140 B727-200 22

B737-400/700 140 L100 23 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 – Modern Fuel Efficient (MFE)

A330-200 310 MD11 86

A330-300 330 B747-400 100

B777-200ER 330 B777F 88

DC10-30 330 B767-300F 61

A340 345 MD11/MD11ER 360 Large Aircraft – Classic B777 Charter Config. 380 DC10-30/40 75 B747 400 B747-100/200/300 90

C. FUEL ADJUSTMENTS.

(1) 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) The solicitation/contract addresses the current fuel adjustment procedures (see PWS, Appendix 3, FUEL

ADJUSTMENT PROCEDURES).

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

E. SEATTLE CHANNELS. Seattle closed as of 1 Oct 05 as a full up commercial gateway and now operates as a channel extension.