Alaska's Penny Airfare Problem Solved

It looks like an airfare war -- a fight that resulted in ticket prices of one penny for many flights in rural Alaska -- is over for the time being, as the state and air carriers met April 25 and agreed on airfares for state- and Medicaid-related travel.

"This looks to me like the state is going to save lots and lots of money on their airfare," said Craig Kenmonth, general manager of Frontier Flying Service. "The state is going to save lots of money, but eventually someone will need to pay for the state's savings. Alaska rural commuter airlines are all struggling with ever-increasing expenses and cannot just absorb the state savings. I feel that it will be the other passengers who will pay for this in the end."

Following the meeting, the state on May 1 issued a request for bids for rural air service for state- and Medicaid-related flights based on a new formula for seat fares.

The new formula is based on the bypass mail rate using the weight of a passenger -- figured at 200 pounds -- and the distances flown from rural points, in addition to terminal airport fees. The fare formula does not include flights into major cities such as Anchorage, Fairbanks and Juneau.

The guidelines for the flights came after fares dropped March 1 when the state received a waiver from a federal requirement that allowed passengers to choose an air carrier based on personal criteria.

Seat prices plummeted to ridiculous levels when airlines vying for state-sanctioned travel dropped their rates to 1 cent to garner passenger loads that would enable them to carry bypass mail. Bypass mail is critical to rural aviation and is said to be as much as 40 percent of some airlines' annual revenue. But to be able to carry the mail, carriers must also transport a certain percentage of the passengers in that market.

In an effort to accommodate the carriers and receive a significant discount for state-related travel, the state procurement office, at the direction of Department of Administration Commissioner Scott Nordstrand, negotiated a fare rate for state- and Medicaid-related travel with statewide air carriers.

Not all air carriers, however, will be participating in the program.

"Pen Air will not be participating in this program," said Danny Seybert, chief operations officer with Pen Air. "We are not going to let anyone set our rates, that's what free enterprise is all about."

Pen Air and Era Aviation operate many scheduled flights with no competitors, forcing the state to pay what they demand. Era has also said it will not participate in the new pricing program.

Those that do participate will be presented with two different fare structures.

Air carriers that service fewer than 10 passengers, known as Part 135 carriers, receive a higher rate for bypass mail than those that carry 10 or more passengers, known as Part 121 carriers. The state decided to use the same rate structure that will result in the Part 135 carriers receiving a higher rate for carrying state and Medicaid passengers.

"Basically this is 5 percent over the historic rate for 135 operators, and 1 percent below the 121 fares from flights in the past," said Vern Jones, a procurement officer for the state.

The state will also now choose the carriers it uses based on their participation in the Medallion Foundation. The nonprofit air safety foundation is credited with helping to change aviation industry culture and to make pilots more aware of their limitations before each flight.

"In an effort to make this a program that is safe, which is of interest to the governor, we will only use carriers that are members in good standing of the Medallion Foundation," Jones said.

Responses from the carriers who wish to participate in this state bid program are due May 8.

According to Nordstrand, the intent of the April 25 meeting was to inform the air carriers that while the state has $24 million to spend on airfare and is in charge of $400 million of federal money meant for Medicaid and Medicare travel, the state wants a better deal on air travel.

The carriers, on the other hand, are trying to get the lion's share of the funds that the state pays for rural travel on aircraft and the ferry system for state- and Medicaid-related trips. An earlier offer, made by the state at a meeting with members of the Alaska Air Carriers Association April 14, did not sit well with many of the carriers.

"We applaud and thank you for your efforts to make this work, and we appreciate your business. But some of these rates don't include the terminal fees, which are higher than what we might get paid to make the trip," said Frontier Flying Service's Kenmonth said of the April 14 offer. The carriers argued that the fares -- such as $3.82 from McGrath to Nikolai, and $7.99 from Tooksook Bay to Tununak, per passenger -- were less than their costs to do the trips, and didn't include terminal expenses, which the carriers would have to eat.

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