14_Aug_15 _Final_FY16_Uniform_Rates_and_Rules_for_International_Service.pdf

14 August 2015

MEMORANDUM FOR ALL CARRIERS

FROM: USTRANSCOM/TCAQ-P

508 Scott Drive Scott AFB IL 62225-5357

SUBJECT: Notice of Final Fiscal Year 2016 (FY16) Uniform Rates and Rules for International

Service – Solicitation Number HTC711-15-R-C001

1. The final FY16 rates are based on fuel pegged at $3.06 per gallon for cargo and combi and $2.77 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 $0.11933 Medium Class Passenger $0.14516 Small Class Passenger $0.14939 $2,000 Large Class Cargo $0.45659 Medium Class Cargo $0.57664 Combi Service $28.65186

2. These rates are not effective until the start of the resultant contracts from solicitation HTC711-15-R-C001. The performance start date for the resultant contracts is 1 January 2016.

3. In accordance with our Memorandum of Understanding, please direct any questions or concerns to Jason.R.Logsdon2.civ@mail.mil or 618-220-7094.

//SIGNED// 14 August 2015

JASON R. LOGSDON DATE

Branch Chief, TCAQ-P

Concur:

//SIGNED// 14 August 2015

GREGORY V. HUNT DATE

Contracting Officer, TCAQ-C

Attachment:

1. 14 Aug 2015 FY16 Final Uniform Rates and Rules for International Service

UNITED STATES TRANSPORTATION COMMAND

508 SCOTT DR

SCOTT AIR FORCE BASE, IL 62225-5357

mailto:Jason.R.Logsdon2.civ@mail.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 2016

INTRODUCTION

The final FY16 USTRANSCOM Uniform Rates and Rules (hereafter referred to as “Rates”) have been developed using rate-making procedures in compliance with the Federal

Acquisition Regulation (FAR), Memorandum of Understanding (MOU) for FY13 through

FY17, and methodologies previously established by the Civil Aeronautics Board (CAB).

Rate Overview

In addition to changes and adjustments based on carrier comments and negotiations, the final

FY16 rates reflect updated pegged prices of fuel for both passenger and cargo categories as well as updated general escalation and FICA escalation factors. The updated pegged price of fuel for passenger is approximately 9.2% lower than the pegged price applied in the proposed

FY16 rates while the pegged price of fuel for cargo categories is approximately 3.5% lower.

The general escalation decreased by approximately 21% from 5.30% applied in the proposed rates and rules to the 4.20% applied in the final rates and rules. Further, the FICA escalation decreased from 5.91% to 1.99%. Due to these reduced parameters, five out of the six categories reflect an overall reduction as compared to the FY15 rates. However, when considering the rates excluding fuel costs, all with the exception of the large passenger category demonstrate an increase compared to the corresponding rate without fuel from FY15.

USTRANSCOM has reviewed the costs for the large passenger category and the decrease is briefly explained below:

Large Passenger Class

Excluding fuel, the large passenger class rate is down 4.1%. This reduction is attributable to nearly a 6% reduction in the weighted average crew cost element which accounts for approximately 9% of this rate and to the reduction in the weighted average passenger service costs by over 15% which accounts for approximately 13% of this rate.

Carrier Comments

On 30 April 2015, USTRANSCOM posted the FY16 proposed rate to Federal Business

Opportunities. On this date, USTRANSCOM also supplied each carrier its individual cut sheet detailing USTRANSCOM’s adjustments to its individual proposed costs and statistical data as well as the carrier’s individual profit calculation. Carriers were advised to provide comments, if applicable, no later than 5 Jun 2015. The FY16 final rates consist of a total of

17 proposals submitted by 11 carriers.

The following carriers provided feedback or written comments to the proposed rate: Air

Transport International (ATI), Atlas Air (Atlas), Delta Airlines (Delta), Federal Express

(FedEx), Miami Air International (Miami), Omni Air International (Omni), and United

Airlines (United). The following topics address the general rate issues identified and

USTRASCOM’s response.

General rate comments received during the FY16 rate discussions related to the following topics:

1. Atlas’ B747-400 Allowable Cabin Load (ACL)

2. Weighted Guidelines (WGL) Profit

3. Lean Six Sigma (LSS) Cost Element Escalation

4. War Risk Insurance Cost Increases

5. Utilization

6. Base Year System Unit Cost and Footnote Appendix

7. FAR 117 Cost Adjustments

1. Atlas’ B747-400 ACL

Atlas Comment: In the FY15 rates and rules and as published in the FY16 proposed rates and rules, USTRANSCOM increased certain cost elements of Atlas’ B747-400 in the large passenger category by the ratio of the standard ACL (435) to the weighted average ACL during the cost base year (Jul 13 – Jun 14)1. This adjustment was applied and rationalized based on a comment from Omni on the FY15 proposed rates. In the FY15 rates and in the

FY16 proposed rates, USTRANSCOM agreed to increase certain cost elements likely

1 Atlas’ weighted average ACL for its B747-400 is 424 based on fixed buy revenues of $39.4M and expansion buy revenues of $91.2M where Atlas performs fixed buy missions at a 400 ACL and expansion buy missions at a

435 ACL.

understated and incommensurate with the standard ACL while continuing to divide the per mile costs by the standard ACL. The adjustment was applied to the fuel cost element, the aircraft and traffic servicing cost element and the passenger service cost element. This adjustment does not fully compensate Atlas for performance at the reduced ACL when performing fixed buy missions.

Recommendation: Instead of applying the adjustments to the selected Atlas’ B747-400

FY15 cost elements, USTRANSCOM should divide Atlas’ B747-400 total cost per mile by

Atlas’ weighted average ACL.

USTRANSCOM Response: USTRANSCOM agrees to implement the recommendation and divide Atlas’ cost per mile by the weighted average ACL as opposed to the standard ACL.

This recommendation is being accepted on the basis that Atlas’ costs are likely to be affected when performing at the different ACL. Atlas may be required to transport more or fewer passengers depending on which ACL it is performing. To equitably compensate Atlas performing at different ACLs, and to avoid a rate distortion negatively affecting the other participants, the recommendation is adopted and reflected in the FY16 rates.

2. Weighted Guidelines (WGL) Profit Elements

Omni/United Comment: The weighted guidelines were introduced in the FY13 to FY17

MOU for industry ratemaking to provide a capital compensation element to carriers. The weighted guidelines methodology takes into account four profit factors: Performance Risk, Contract Type Risk, Facilities Capital Employed, and Cost Efficiency. Performance Risk is further comprised of an assessment of Technical Risk and Management / Cost Control.

Performance Risk - Technical Risk. CRAF contracts are more complex and higher risk than the majority of Department of Defense (DoD) service contracts. The DoD demands and places high importance on schedule reliability. The technical risk rating based on DFARs

Part 215 can be justified as above normal based on the importance of delivery schedules, inherent risk of the program, DoD requirements, skill level of employees and type of risk associated with DoD airlift missions.

Performance Risk - Management / Cost Control. The management / cost control risk rating should be higher due to the logistics of providing crews and maintenance support for complex and costly worldwide operations. The logistics of providing crews and maintenance support for worldwide operations are complex and costly. Further, this factor should consider the carrier’s ability to control costs while performing difficult requirements.

Contract Type Risk. Operating costs are assigned a value of 5% while fuel costs are assigned a value of 0%. The DFARs recommended range for Firm-Fixed Priced contracts with no financing is 4% to 6% with a normal value of 5%. Fuel cost should be included and compensated by this risk category since the fuel adjustment procedure is not a true cost reimbursement and places some risk on the carrier. Further, when considering the rate assigned for operating costs and the 0% assigned for fuel costs the composite value falls below the DFARs recommended range of 4% to 6%.

Cost Efficiency. The methodology for determining when to assign a cost efficiency factor is flawed. In order for carriers to realize a cost efficiency factor, it must reduce its costs by more than the general cost escalation in order to demonstrate a year-over-year cost reduction and receive credit in this category. Further, fixed costs cannot be controlled by carriers in the short term.

Recommendation: The following were recommendations regarding the specific risk elements from the weighted guidelines:

Performance Risk – Technical Risk. Assign higher than normal value to this risk element (range is 3% to 7%; normal value is 5%).

Performance Risk – Management / Cost Control. Assign higher than normal value to this risk element (range is 3% to 7%; normal value is 5%).

Contract Type Risk. Assign maximum value of 6% on all costs, including fuel.

Cost Efficiency. Use more reasonable methods to assign the rates for the cost efficiency factor.

USTRANSCOM Response: USTRANSCOM disagrees with the recommendations made regarding the specific risk elements. In considering the recommendations, USTRANSCOM considered each of the identified elements as well as the overall profit. The weighted profits realized2 by category are as follows:

Large Class Passenger 13.2% Medium Class Passenger 12.1% Small Class Passenger 9.5% Large Cargo 12.9% Medium Cargo 7.8% Combi 12.3%

USTRANSCOM reviewed the overall profits produced by the assigned risk element values.

USTRANSCOM considers the overall profits to represent a fair profit allowance.

Performance Risk – Technical Risk. USTRANSCOM disagrees with the recommendation to assign a higher than the normal value for this risk element. The range for this risk element is

3% to 7%. DFARs states the normal value for this element is 5% and the normal value should represent average conditions on the prospective contract when compared to all goods and services acquired by DoD. This risk element addresses the contractor’s degree of risk in fulfilling the contract requirements due to the technical uncertainties of performance.

USTRANSCOM considers the technical risk values assigned to be representative of the technical risk of the CRAF contract given the program’s maturity, repetitive nature and routineness of the service compared to other services acquired by DoD.

Performance Risk – Management / Cost Control. USTRANSCOM disagrees with the recommendation to assign a higher than the normal value for this risk element. The range for this risk element is 3% to 7%. DFARs states the normal value for this element is 5% and the normal value should represent average conditions on the prospective contract when compared to all goods and services acquired by DoD. This risk element addresses the contractor’s degree of risk in fulfilling the contract requirements by assessing the degree of management

2 The expected realized profit is determined for each carrier based on the difference between the applicable FY16 rate and a carrier’s operating costs per seat-mile (or ton-mile for cargo) divided by the applicable FY16 rate.

The expected realized profits are then weighted according to the same weightings used to derive the rates for each category to arrive at the reported weighted profits realized.

effort necessary to ensure contract requirements are met and to reduce and control costs.

USTRANSCOM considers the management / cost control risk values to generally be representative of the normal level of management effort required to meet contract requirements compared to other DoD contracts. Where a carrier had demonstrated cost reductions, USTRANSCOM did consider an additional increase for this factor and assigned a higher than normal value.

Contract Type Risk. USTRANSCOM disagrees with the assignment of a risk value on fuel costs for this element. The value assigned on fuel of 0% and the value on other operating costs of 5% is specified in the MOU. These values result in a composite value for each carrier anywhere between 2.4% and 3.9%. The assertion that this composite value is below the designated range of 4% to 6% established for a firm-fixed-price contract type with no financing fails to consider the fuel economic price adjustment provision and the deviation from the Prompt Payment Act allowing CRAF carriers to be paid more expeditiously than other DoD contractors. These contract provisions reduce the contract type risk and provide a level of expedited financing that is not considered in the designated range of 4% to 6% for the firm-fixed-price, no financing contract type. USTRANSCOM does recognize there is some level of fuel risk since monthly reimbursable fuel costs are done according to an annually established fuel burn rate. However, the overall fuel price risk is reduced by the fuel EPA clause. The residual risk in fuel is accounted for by the assigned risk values on fuel in the performance risk categories.

Cost Efficiency. The MOU establishes a cost efficiency factor will be assigned based upon the individual carrier’s percentage decrease in total operating cost less fuel compared to the carrier’s total operating costs less fuel from the immediately preceding period.3

USTRANSCOM recognizes this may be a difficult threshold to meet. However, DFARs identifies that this factor is meant to provide a special incentive for contractors to reduce costs. This incentive and reward for reducing or controlling costs is already a feature of the uniform rates and rules methodology. The uniform rate methodology establishes rates based

3 A carrier’s year-to-year costs for the cost efficiency category were considered exclusive of the LSS cost elements since those were fixed this rate cycle for passenger categories and fixed last rate cycle for cargo categories.

on a composite of several participants’ costs for each category building in an incentive and profit reward for achieving lower costs. The development of a composite rate based proportionally on contractors’ costs is unique among DoD service contracts. Since the purpose of the cost efficiency factor of promoting and rewarding cost control/reduction is provided for by the uniform rate methodology, USTRANSCOM does not agree the methodology for assigning a cost efficiency factor needs to be adjusted and the methodology is therefore unchanged. Further, of the 17 cost proposals, 7 were awarded a cost efficiency increase demonstrating that credit for this factor under the current guidelines is not unattainable.

3. Lean Six Sigma (LSS) Cost Element Escalation

Omni/United Comment: USTRANSCOM did not apply general escalation to the LSS cost categories: Insurance, Maintenance and Depreciation of General Ground Property, or Aircraft and Traffic Servicing costs. This approach applies costs from as far back as July 2013 to miles flown as far forward as September 2016. This significant time difference without appropriate escalation applied is a disadvantage to the carriers in cost categories making up a meaningful portion of the total cost per plane mile.

Recommendation: Apply general escalation to the LSS cost categories.

USTRANSCOM Response: In response to this comment, USTRANSCOM applied general escalation to the LSS cost categories. Going forward, USTRANSCOM will abandon the practice of only determining the costs for these categories every other year as was recommended by the LSS study. These cost elements will be determined each year to ensure they are being accurately and adequately reflected within the Uniform Rates.

4. War Risk Insurance Cost Increases

Omni Comment: Premium war risk insurance is no longer available through the FAA and is now purchased in commercial markets. In December 2014, the FAA ceased its premium war risk insurance policies previously available to carriers. This has resulted in increased costs for this coverage. These costs are currently being incurred but are not accounted for within the

Uniform Rate.

Recommendation: USTRANSCOM should work with carriers to account for this increased cost being incurred to fly DoD business.

USTRANSCOM Response: Omni was the only carrier that provided information supporting a war risk insurance cost increase. Omni’s insurance cost element was adjusted to reflect the additional war risk insurance cost increases for both its B777 in the large passenger category as well as for its B767 in the medium passenger category. Escalation was not applied to the cost increases, but was applied to Omni’s other insurance costs prior to the increase.

5. United B747 Utilization

Omni/United Comment: Utilization of 14.1 block hours per day for United’s B747 is not logical for USTRANSCOM service. This utilization represents United’s commercial service, but is not representative of DoD service.

Recommendation: USTRANSCOM should substitute United’s utilization for a utilization rate reflective of DoD daily utilization.

USTRANSCOM Response: USTRANSCOM only considers DoD specific utilization in instances for carrier’s that rely heavily on DoD business and only when the carrier can substantiate a specific DoD utilization. Each carrier’s utilization is typically determined based on the carrier’s Department of Transportation (DoT) Form 41 data of Airborne Hours

(acct: Z610) divided by Aircraft Days Assigned to Service (acct: Z810). The utilization is used in calculating the forecast year Constructed Mileage Base (CMB). The CMB is then used as the divisor for the carrier’s reported fixed costs to determine a cost per mile for the

Direct Fixed cost elements. USTRANSCOM disagrees with the recommended adjustment to

United’s utilization rate because United does not rely heavily on DoD business and the carrier’s “system” utilization rate is an equitable utilization for converting aggregate fixed costs into a per mile cost. Applying an unsubstantiated lower utilization rate unreasonably increases United’s unit fixed costs and unfairly reduces the benefits to USTRANSCOM from

United’s economies of scale.

6. Base Year System Unit Cost and Footnote Appendix

Omni/United Comment: The proposed rate this year deleted base year system cost from the proposed rate Appendices C through H. The appendices also eliminated the footnotes which explained the adjustments to carrier data made by USTRANSCOM. This reduces transparency and the ability of industry to understand USTRANSCOM adjustments to the proposed cost data. The adjustments are at the macro level and should not be considered proprietary.

Recommendation: The base year systems costs and footnotes appendices should be provided for the proposed rates and not removed in future years.

USTRANSCOM Response: USTRANSCOM agrees to include the base year systems costs and footnotes appendices in future years.

7. FAR 117 Cost Adjustments

USTRANSCOM Response: In the FY16 proposed Uniform Rates and Rules, USTRANSCOM acknowledged the cost base year (Jul 2013 – Jun 2014) included two quarters (3Q & 4Q of Calendar Year 2013) of cost data not reflective of costs associated with

FAR 117 regulations affecting the passenger categories. In recognizing this, USTRANSCOM requested carriers to provide cost data support to substantiate any cost increases associated with FAR 117 requirements not fully reflected in the cost data from the cost base year. Omni

Air provided support demonstrating a 15% increase to its personnel expense cost category for its B777 and an 18% increase to its personnel expense cost category for its B767. The data provided was accepted and is reflected in Omni’s costs. Atlas Air provided support demonstrating an approximate increase of 18% to crew salaries and personnel expense cost categories for its B767. Atlas’ data was accepted and is reflected in its costs. Miami Air provided information suggesting a cost increase due to FAR 117, but the data did not substantiate an overall cost increase.

For carriers that did not provide a response to FAR 117 cost increases and for Miami Air, USTRANSCOM reviewed each carrier’s quarterly crew costs (accts: 5123, 5124, 5128.1), personnel expenses (acct: 5136) and reported revenue aircraft miles flown (acct: Z410) for the period from Q1 of CY 2012 through Q3 of CY 2014. Each carrier’s crew costs and personnel expenses for each period were summed and divided by the revenue aircraft miles flown to calculate an average crew cost / personnel expense per mile for each quarter. These unit costs were then normalized to the 3Q of CY 2014 cost levels using a wage index for transportation

(CEU4300000008). This index was chosen to normalize the cost data because it is the sub-index used to account for cost level changes in earnings applied in forecasting the Global

Insight Index (GII) for Scheduled Air Freight. The normalized unit costs were then plotted against the revenue aircraft miles flown to generate a unit cost curve as a function of revenue aircraft miles. The comparison of the unit cost curves “pre-” and “post-” FAR 117 implementation was the basis for any adjustments applied to a carrier’s crew cost and personnel expense cost elements.

The “pre-” FAR 117 cost curve function was used to estimate the unit costs for the CY14 data points based on the aircraft revenue miles for those periods. The percentage difference between the estimated unit costs relying on the “pre-” FAR 117 cost curve and the actual unit costs was calculated. The average difference for the three quarters (1Q-3Q of CY 2014) was determined and then halved to calculate the adjustment to be applied. The average percent difference was halved to account for the fact the adjustment was only to be applied for 2 of the 4 quarters of cost data used in the cost base year. Below are examples of cost curves generated from DoT data, one showing support for an increase and one chart indicating no per-unit cost difference between “pre-” and “post-" FAR 117 implementation. The blue dots correspond to unit costs “pre-” FAR 117 implementation while the red dots correspond to unit costs “post-” FAR 117 implementation. In the chart on the left, there is a clear structural shift in the unit cost following FAR 117 implementation. The chart on the right does not demonstrate a clear unit cost increase following FAR 117 implementation.

This analysis supported a 15.5% increase to crew costs and personnel expense for United’s

B747 and a 13.7% increase to crew costs and personnel expense for Delta’s B767. This analysis did not support adjustments to any other carriers. The net result of FAR 117 adjustments was an approximate 0.4% increase to the overall large passenger rate, all else equal, and an approximate 1.4% increase to the overall medium passenger rate, all else equal.

Fuel

The TCAQ pegged price of fuel is lower than was published with the FY16 proposed Uniform

Rates and Rules. The reduction to the pegged price of fuel compared to the prices published in the FY16 proposed rates and rules is a result of reduced GII projections for the Jet Fuels producer price index during the performance period. To develop the proposed pegged price of fuel for each category, TCAQ used a projection of commercial fuel cost and the DLA fuel costs for the performance period and weighted them based on the historical proportions used for each aircraft category. The pegged price of fuel for each category is calculated based on the following equation:

Pegged Price = (Wtg of Commercial Fuel) * (Forecasted Avg Cost of Commercial Fuel) + (Wtg of DLA Fuel) * (Known/Projected Cost of DLA Fuel)

Known/Projected Cost of DLA Fuel. DLA-E has not published the FY16 standard prices for fuel, but the anticipated DLA-E JP-5 and JP-8 fuel prices projected for FY16 were used in determining the pegged price of fuel. A composite DLA fuel cost based on both JP-5 and JP-8 was developed using a weighted average cost of DLA’s anticipated FY16 price for JP-8 ($3.43/gal) which received a 90% weighting and JP-5 ($3.46/gal) which received a 10% weighting yielding a projected composite DLA fuel cost of $3.43/gal. If the actual DLA fuel prices are significantly different than these values, USTRANSCOM may publish a revision to the Uniform Rates and

Rules with an updated pegged price of fuel.

Forecasted Average Cost of Commercial Fuel. To estimate the average price of commercial fuel during the FY16 performance period, USTRANSCOM relied on the relationship between the IHS

Global Insight Index (GII) for Jet Fuels (PPI3241104Y) and the historical average quarterly cost of commercial fuel. To measure the relationship between the Jet Fuels PPI and the historical average commercial fuel cost, the historical fuel cost data as reported in the monthly fuel reports was aggregated for all carriers and converted to a quarterly average by taking the average of the three months cost representing each quarter. For example, the quarterly commercial fuel cost for quarter 1 was calculated by averaging the fuel cost per gallon for

January, February, and March. The table on the right reports the historical average commercial fuel costs for each quarter. The table also reports the updated PPI for each quarter, obtained from IHS Global

Insights for PPI 3241104Y, Jet Fuels

(the shaded values represent projections while the non-shaded values represent historical values).

The average commercial cost of fuel and the Jet Fuels PPI data was plotted graphically to examine the relationship between the PPI and the quarterly average cost of commercial fuel. Both categories, passenger and cargo, demonstrated a strong correlation between

Passenger Cargo

QTR COST/GAL COST/GAL PPI

2010 Q1 $2.26 $2.29 1.19 2010 Q2 $2.40 $2.41 1.27 2010 Q3 $2.32 $2.40 1.20 2010 Q4 $2.55 $2.55 1.35 2011 Q1 $2.99 $3.00 1.57 2011 Q2 $3.38 $3.40 1.80 2011 Q3 $3.29 $3.30 1.74 2011 Q4 $3.25 $3.28 1.72 2012 Q1 $3.38 $3.39 1.81 2012 Q2 $3.39 $3.45 1.72 2012 Q3 $3.27 $3.32 1.70 2012 Q4 $3.39 $3.42 1.71 2013 Q1 $3.40 $3.40 1.75 2013 Q2 $3.11 $3.14 1.58 2013 Q3 $3.24 $3.26 1.63 2013 Q4 $3.22 $3.24 1.61 2014 Q1 $3.25 $3.28 1.65 2014 Q2 $3.23 $3.19 1.63 2014 Q3 $3.14 $3.07 1.62 2014 Q4 $2.67 $2.76 1.37 2015 Q1 $2.00 $1.90 0.99 2015 Q2 $1.99 0.99 2015 Q3 1.10 2015 Q4 1.25 2016 Q1 1.11 2016 Q2 1.21 2016 Q3 1.31 2016 Q4 1.44

Table 1: Average Qtrly Cost of Fuel & Jet Fuels PPI the PPI and the historical average cost of commercial fuel. The graphical charts for each category are shown below.

MS Excel was used to estimate a linear function describing the relationship between the Jet Fuels

PPI and the average commercial cost of fuel which yielded two equations for forecasting the commercial price of fuel based on the Jet Fuels PPI projections, one for each category:

EQ (1): Average Quarterly Commercial Price (Pax)t = 1.8752 * (PPIt) + 0.0961

EQ (2): Average Quarterly Commercial Price (Cargo)t = 1.9264 * (PPIt) + 0.0301

Using these equations, the quarterly commercial fuel prices for both categories were forecasted for FY16 and are reported in table 2. Only the three quarters of CY

2016 were used to estimate fuel costs since these time periods correspond to the FY16 performance period. The quarterly values were averaged to calculate an average cost for the performance period.

Weightings of DLA and Commercial Fuel. A review of carriers’ recent monthly fuel reports shows cargo carriers receive 65.3 percent of their fuel at military installations and are charged the rate set by Defense Logistics Agency - Energy (DLA-E). Conversely, passenger carriers receive only 38.0 percent of their fuel commercially.

Calculated Pegged Price of Fuel. The pegged price of fuel was then calculated for each category based on the input values and the Pegged Price of Fuel equation stated above.

Pegged Price (Pax) = (62.0%) * ($2.37) + (38.0%) * ($3.43) = $2.77 / gallon

Forecasted

Avg Qtrly Commercial Fuel Price

Period PPI Passenger Cargo Jan-Mar 2016 1.11 $2.18 $2.17 Apr-Jun 2016 1.21 $2.37 $2.36 Jul-Sep 2016 1.31 $2.55 $2.55

Average $2.37 $2.36 Table 2: Forecasted Commercial Fuel Costs for FY16

Pegged Price (Cargo) = (34.7%) * ($2.36) + (65.3%) * ($3.43) = $3.06 / gallon

The pegged fuel price for passenger service is $2.77 per gallon and $3.06 per gallon for cargo service, and combi. The pegged price includes into-plane fees and taxes.

Live Mile Cargo Rate

In the FY16 proposed Uniform Rates and Rules, USTRANSCOM proposed a live mile rate for cargo service in lieu of the round-trip and one-way rate model. No carriers submitted any comments or objections to this proposal. Therefore, the FY16 Uniform Rates and Rules reflect a live mile rate and do not include a “round-trip” or a “one-way” rate. Under the live mile rate, cargo carriers will continue to receive any required “paid ferry”, based on the ferry rate for positioning and depositioning miles. Paid depositioning mileage will not exceed the mileage required to return the aircraft to its originating station. Because this is considered ferry, all carriers will be required to file ferry declarations.

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. On the basis of this review, the ferry rate for FY16 is 90 percent of the effective rate for passenger and 88 percent of the effective rate for cargo.i Also see Appendix A for ferry rates.

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 and the stage length among carriers reflected significantly different averages. At that time, there were fewer rate classes, narrowbody passenger, widebody passenger and cargo. Carriers contended 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.

By FY10, USTRANSCOM had increased the number of rate classes to five (large, medium and small passenger plus large and medium cargo). Increasing the number of rate classes effectively eliminated the need for stop charges in all classes other than small passenger and medium cargo. Unlike the larger rate classes, the small passenger and medium cargo classes still contained a significant amount of inefficient routes with shorter stage lengths and lower utilization than other routes in the class. The linehaul rate is a mathematical equation derived from the effective rate, using weight averaged stage lengths, average tons/seats per mission and the stop charge rate.ii Paying the effective rate versus, a linehaul rate plus a stop charge, should be revenue neutral for all carriers provided the following conditions are met: one, the average stage length for all carriers within a rate class remains similar to the weight averaged stage length used in the class and two, no extreme differences exist between the stage lengths of carriers within the same class. Each rate review, USTRANSCOM reviews base year data to determine relevancy of a stop charge in the individual rate classes.

This year’s analysis supports stop charges for the small passenger class only.iii In order to increase payloads, USTRANSCOM buyers continue to routinely combine missions whenever possible. This practice does decrease the average stage length for some missions in all classes below the weight averaged stage length used in the linehaul calculation; however, the number of these lower stage length missions in the larger rate classes is too small to create a significant variation between the average stage length experienced by each carrier in the class and the weight averaged stage length. Consistent with previous rate reviews, however, requirements in the small passenger class continue to differ significantly in volume and areas of operation causing a significant variation in average stage length between carriers.

Aircraft Standards

On appendix A, paragraph B, the B737-900 was added to the aircraft standards table and was assigned a maximum standard payload of 165. This maximum standard payload was assigned based on this aircraft’s capabilities and number of seats available based on comparison to other aircraft in this category.

Cost Escalation

The 27-month cost escalation factor is 4.20 percent for FY16. This is based on the calculations agreed upon in the FY13-17 MOU. This is a decrease from the 27 month factor of 5.30 percent for FY15. Appendix J provides detailed information on this calculation.

Eurocontrol

The FY16 Euro control surcharges have been calculated as follows: 2.0 percent for passenger, 2.1 percent for cargo missions, 0.25 percent for combi. This is a slight change from the FY15 Euro control of 2.1 percent, 2.7 percent and .31 percent for passenger, cargo and combi, respectively. The mission samples and analysis for euro control is provided at

Appendix I.

Incremental Passenger Movement

In FY02, USTRANSCOM developed an incremental passenger service rate for periodical requirements requiring 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. This is not authorized for additional passengers on channel missions. TCAQ updated all factors incorporated into this rate; and the FY16 Incremental

Passenger Rate is $178iv. 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, and combi aircraft rates, respectively. Appendices C through H illustrate individual treatment of each carrier’s cost by aircraft type. Appendices I and J provide the Eurocontrol Surcharge and Cost Escalation Factor, respectively. Finally, Appendix K demonstrates the FICA calculation.

i The analysis of the Passenger ferry rate was performed using the Final FY16 Large Class passenger rate of $0.11933 (effective rate) per seat mile. The passenger ferry rate and paid ferry return rate will be 90% of the effective rate. The analysis of the Cargo ferry rate was performed using the FY16 Large Class cargo rate of $0.45659 (effective rate) per ton mile. The cargo ferry rate and paid ferry return rate will be 88% of the effective rate.

SUBJECT: FY16 Ferry Rate Passenger

Wgt'd Percentage Cost Ferry

Cost Category Cost Allowed Allowed Rate % Crew 1.0251 100% 1.0251

Fuel, Oil & Supplies 4.0077 88% 3.5067 Maintenance 1.3413 100% 1.3413 Insurance 0.1593 100% 0.1593 Rent 0.0293 100% 0.0293 Depreciation 0.7155 100% 0.7155 Preop 0.0000 100% 0.0000 Capital Gains/Losses 0.0000 0% 0.0000 Grd Property 0.0306 100% 0.0306 Aircraft & Traffic Service 1.0736 85% 0.9125 Passenger Service 1.5227 65% 0.9898 G&A 0.4501 100% 0.4501 Profit 1.5774 100% 1.5774 Total 11.933

10.738 0.8999

SUBJECT: FY16 Cargo Ferry Rate

Wgt'd Percentage Cost Ferry Cost Category Cost Allowed Allowed Rate % Crew 4.3805 100% 4.3805

Fuel, Oil & Supplies 19.0835 75% 14.3127 Maintenance 5.7637 100% 5.7637 Insurance 0.1757 100% 0.1757 Rent 3.2368 100% 3.2368 Depreciation 2.0929 100% 2.0929 Preop 0.0195 100% 0.0195 Cap Gains/Losses 0.0182 0% 0.0000 Grd Property 0.1871 100% 0.1871 Aircraft & Traffic Service 3.3425 85% 2.8411 G&A 1.4736 100% 1.4736 Profit 5.8850 100% 5.8850 Total 45.6593

40.3688 0.8841 ii Linehaul rate = Effective Rate - (Stop charge/(Average Stage Length * ACL))

The following example is for informational purposes only.

$0.14973 = $0.15911 - (($2,000 / (1,421 * 150)) iii

Average Stage Length

Large Class Pax Weighted Avg 2534

GTI B747-400 2646

OAE B777 2500

UAL B747-400 2311

Medium Class Pax Weighted Avg 2402

GTI B767 2389

DAL B767 2403

OAE B767 2413

Small Class Pax Weighted Avg 1295

DAL A319 1246

BSK B737 1343

SCX B737 1462

UAL B737 772

Large Class Cargo Weighted Avg 2657

GTI B747-400 2767

FDX MD11 2117

CKS B747-400 2835

UPS MD11 1905

Medium Class Cargo Weighted Avg 1458

ABX B767-200 1544

ATI B767-200 1373

Combi ATI B757 2054 iv Incremental Passenger Rate calculation

One-Way Round-Trip Total

Avg Live Pay Miles

710,257 4,032,715 4,742,972 FY16 Passenger Seat Mile Rate 0.18257 0.11933

51,974,211 192,876,131

Total Dollars

244,850,343 Total Trips

Total Passengers

162,732 Avg Passenger per Trip

Avg Price Per Trip

603,079.66 Avg Seat Miles Per Trip 4,682,439.99 Avg Miles Per Trip

11,682

Additional passenger service cost per trip $178

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 3

D Costs Per Seat Mile by Carrier and Aircraft Type in Medium Class Charter Passenger Service 3

E Costs Per Seat Mile by Carrier and Aircraft Type in Small Class Charter Passenger Service 4

F Costs Per Ton Mile by Carrier and Aircraft Type in Large Class Cargo Service 4

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

H Cost Per Plane Mile by Carrier Charter Combi Service 1

I Eurocontrol Surcharge 6

J Cost Escalation Factor 2

K FICA Escalation 1

APPENDIX A

SCHEDULE OF UNIFORM NEGOTIATED RATES AND RULES (FINAL)

FISCAL YEAR 2016

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

$0.11933 Ferry Rate (Base - Effective Rate) 90% $0.10739 Incremental Passenger

$178

Fuel Pegged Rate

$2.77

Medium

$0.14516

Ferry Rate (Base - Effective Rate) 90% $0.13064

$2.77

Small

Live Line Haul Rate

$0.14939

Ferry Rate (Base - Effective Rate) 90% $0.14374 Stop Charge (Per Directed Landing) $2,000

Fuel Pegged Rate $2.77

(2) CHARTER CARGO SERVICE PER TON MILE

Large

$0.45659 Ferry Rate (Base - Effective Rate) 88% $0.40180

$3.06

Medium

Live Effective Rate:

$0.57664 Ferry Rate (Base - Effective Rate) 88% $0.50744 Fuel Pegged Rate $3.06

(3) CHARTER COMBI SERVICE PER PLANE MILE

$28.65186

Ferry Rate (Base - Effective Rate) 88% $25.21364 Fuel Pegged Rate $3.06

(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. 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). On one way cargo missions when Eurocontrol is applicable to both the live and empty segment, Eurocontrol will be paid on the live miles plus an additional 30 percent of those miles (i.e., 6,000 mile one way cargo mission would be paid 2.1 percent on 6,000 miles + 1,800 miles). Combi Carriers will be paid the applicable rate plus a surcharge of 0.25 percent.

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

(a) Positioning and depositioning ferry: Positioning and depositioning ferry shall be included with the offer and negotiated at time of award. Paid depositioning mileage will not exceed the mileage required to return the aircraft to its originating station.

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

(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 $178 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 (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 mission would be paid the applicable cancellation percentage on 6,000 miles + 5,100 miles times the live mile rate). Cancellation of one way cargo missions will be calculated on a trip price made up of the live miles plus 30 percent of those miles at the live mile rate (i.e., 6,000 mile one way mission would be paid the applicable cancellation percentage on 6,000 miles + 1800 miles times the live mile rate) The charges are as follows:

Time Frame Service Type

Seven days or less

Passenger and Combi:

Cargo:

31.79% 29.25%

8 to 14 days

Passenger and Combi:

Cargo:

21.84% 23.63%

15 to 30 days

Passenger and Combi:

Cargo:

18.68% 20.13%

31 to 45 days Passenger and Combi 8.36% 31 to 75 days Cargo 7.02% 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:

21.84% 23.63%

(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 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 $1959

B747-400/400ER 100 $2176

MD11F 86 $1871

MD11C 86 $1871

Aircraft Type ACL Demurrage B777F 88 $1915

DC10-30/40 75 $1632

A300-600ER 51 $1905

A300-400F 50 $1867 B767-200F 48 $1793

DC8 45 $1681

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 B737-900 165 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

B767-200 Charter Config. 207 A300 210

B767-300/300ER 240

B767-400ER 260

Large Aircraft: Large Aircraft:

A330-200 310 MD11 86

A330-300 330 B747-400 100

B777-200ER 330 B777F 88

DC10-30 330 B767-300F 61

A340 345 DC10-30/40 75

MD11/MD11ER 360 B747-100/200/300 90

B777 Charter Config. 380 B747 400 B747 Charter Config. 435

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. 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 live route segment is 4,000 miles or more the mileage shall be computed via an intermediate point(s) which yields the shortest mileage.

(3) The rate classes using a linehaul rate will receive a stop charge for enroute live and operational stops only.

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

KCHS#MMCZ-MPTO=1 Paid Stop2/

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

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

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

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

4/ / This symbol used to indicate Backhaul Mileage.

5/ - This symbol used in the above example to indicate live stops.

E. DEFINITIONS.

“Charter Service” means USTRANSCOM contracted airlift for the transportation of passengers in full planeload lots on aircraft chartered from the commercial air industry and paid at the USTRANSCOM negotiated rate.

These international charter flights are scheduled by AMC to and from designated commercial airports and/or AMC gateways and/or military aerial ports.

“Charter rate” means a commercial price that is in fact available to the general public for equivalent services.

Missions bought at a commercial charter price are all inclusive of taxes, eurocontrol and any other ancillary cost and are not subject to adjustments for fuel prices.

“Stop charge” The stop charge is paid by the government in the case of government directed landings ( enroute live and operational stops) identified by the contract or delivery order to support USTRANSCOM contracted missions. Operational stops allowed in accordance with Appendix A, Paragraph D (3) are considered directed stops.

Landings made by the contractor of his own discretion for maintenance, aborted flights, fuel stops, crew changes, or emergency landings are not considered "directed landings," and therefore receive no stop charge.

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

COINS calculates distances based on longitude and latitude for geographical locations listed in the DoD Flight

Information Publication (FLIP) and identified by location indicators assigned by the International Civil Aviation Organization (ICAO) and published in the Location Indicator, Doc 7910/67.

“Linehaul Rate” The Linehaul rate = Effective Rate - (Stop charge/(Average Stage Length * ACL))

APPENDIX B

COMPUTATION

USTRANSCOM UNIFORM RATE

PASSENGER SERVICE

LARGE CLASS AIRCRAFT

USTRANSCOM FY14 FY15 Total Adjusted Passenger Passenger Passenger

Aircraft Rate Per Revenues Revenues Revenues Weighted Carrier Type Pax Mile [000] [000] [000] Wgt % Rate

ATLAS AIR, INC. B747-400 0.11521$ 114,418$ 107,010$ $221,429 41.05% $0.04729

OMNI AIR INTERNATIONAL INC B777 0.12324$ 140,080$ 103,562$ $243,641 45.17% $0.05567

UNITED AIRLINES INC B747-400 0.11877$ 37,118$ 37,208$ $74,327 13.78% $0.01637

$539,396 1.0000

RATE -- WEIGHTED BY REVENUES $0.11933

Exclusive of Fuel $0.07925

COMPUTATION

USTRANSCOM UNIFORM RATE

PASSENGER SERVICE

MEDIUM CLASS AIRCRAFT

USTRANSCOM FY14 FY15 Total Adjusted Passenger Passenger Passenger

Aircraft Rate Per Revenues Revenues Revenues Weighted Carrier Type Pax Mile [000] [000] [000] Wgt % Rate

ATLAS AIR, INC. B767-300 0.15317$ 106,405$ 119,508$ $225,913 41.62% $0.06374

DELTA AIR LINES INC B767-300 0.13354$ 26,618$ 8,350$ $34,968 6.44% $0.00860

OMNI AIR INTERNATIONAL INC B767-300 0.14018$ 154,244$ 127,730$ $281,974 51.94% $0.07282

$542,856 1.0000

RATE -- WEIGHTED BY REVENUES $0.14516

Exclusive of Fuel $0.10526

COMPUTATION

USTRANSCOM UNIFORM RATE

PASSENGER SERVICE

SMALL CLASS AIRCRAFT

USTRANSCOM FY14 FY15 Total Adjusted Passenger Passenger Passenger

Aircraft Rate Per Revenues Revenues Revenues Weighted Carrier Type Pax Mile [000] [000] [000] Wgt % Rate

DELTA AIR LINES INC A319 0.16528$ 902$ -$ $902 2.10% $0.00348

MIAMI AIR INTERNATIONAL INC B737-800 0.17437$ 9,832$ 13,839$ $23,671 55.21% $0.09628

MN AIRLINES, LLC DBA SUN COUNTRY AIRLINES B737-800 0.14271$ 6,041$ 6,264$ $12,305 28.70% $0.04096

UNITED AIRLINES INC B737-800 0.13588$ 4,396$ 1,597$ $5,993 13.98% $0.01899

$42,870 1.0000

RATE -- WEIGHTED BY REVENUES $0.15971

Exclusive of Fuel $0.12514

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