So last week I wrote about the plight of Kalaupapa, a small village on the north side of Molokai, in Hawai’i. The village’s air service has been quite the roller coaster with Pacific Wings unsubsidized service for the past few years. The DOT reopened the EAS bid process, and after months of waiting, awarded it to Shuman Aviation/Makani Kai Air Charters.
I unfortunately didn’t spend a lot of time reviewing the numbers because of everything going on at the DOT and EAS program (along with my work & city board position) and apparently DOT didn’t do it either.
EAS has typically worked this way:
-> Airline reviews past traffic data, discusses market with airport, airport board, and chamber of commerce (or other civic groups)
-> Airline planning/finance group works out the numbers to determine how much money it will need to fly the route
-> Airline finance wizards and marketing then gets together, reviews the “real” numbers, then performs wizardry for the competitive bid process. Most of the “bids” are hardly ever real numbers, as you don’t want to give your competitors your entire accurate cost structure or revenue figures. I don’t know any airline that actually gives the DOT *real* numbers (but a few have). You somehow make your numbers “look good” for the DOT to the point you can win the market, and still make money.
-> DOT allows a 5% profit margin to be built into the bid. Some airlines do this as 5% of the loss expected, some do it as 5% of the direct operating costs. Anyway you do it, this 5% is a small number.
-> Airlines submit bids with all the juicy details (well, mostly)
-> DOT asks for community feedback – sometimes it listens, sometimes other forces are at work
-> After 30 – 45 days, DOT selects new carrier
-> 90 days later (in a perfect world), new carrier starts flying.
Normally this is a very thorough process… but this summer, DOT got slammed with Delta notifying it was pulling out of 20-some markets, giving Dennis Devany’s group a near heart attack (and the local communities) … only because your local Congressmen have been using EAS as a nasty poster child of ‘wasteful’ spending, so its a challenge to get more money for this group.
Now add in the political hot mess that is called Pacific Wings… and then you have attorneys all over.
So that’s why I find it hard to believe the DOT missed this:
Yup… look at that. The subsidy is NOWHERE near the operational loss. In fact, its a difference of $306,586.78. That’s not quite the 5% allowed by DOT. Here is a link to the Makani Kai bid.
What the subsidy SHOULD have been are one of these two figures: $657,493.62 or $670,208.90. Big difference. I provide two numbers based on 5% of the overall loss anticipated (first number) and the 2nd number is based on 5% of the direct operating costs.
So what happened? Who knows. But what this does allow is for airlines to start playing “lets make a deal” with DOT… so either someone at DOT was too busy dealing with everything else and this one slipped thru, or the numbers provided by airlines really don’t make a difference. Either way, airline planners across the country are going to be intrigued by this bid moving forward. DOT has typically performed some negotiations with carriers once they are close to doing the selection, and this is allowed by the rules, and what should have happened here was negotiations to get the subsidy rate much closer to the loss than granted.