Supporters of the Essential Air Service (EAS) program appear to have won a major victory in a key House committee to increase federal funds for the program by $2 million.

The House Appropriations Committee has proposed spending $104 million to provide subsidies to regional airlines that provide air service to the communities in the EAS program. The White House had earlier proposed a spending cap of $50 million and a rewrite of the eligibility rules to reduce the number of communities qualifying for full EAS support. The EAS payments are part of the transportation department's budget for the fiscal year that begins Oct. 1. The full House could take up the transportation budget as early as this week.

While the proposed $104 million EAS budget is an increase over this year's appropriation of $102 million, it still falls short of the $127 million outlined in the 2003 Vision 100 reauthorization legislation for the Federal Aviation Administration (FAA) and the aviation trust fund.

The Regional Airline Association (RAA) and Regional Aviation Partners (RAP) are continuing to fight for a larger appropriation so that EAS carriers can be compensated for their higher fuel bills.

"We had requested about $115 million to go along with Vision 100 so [the Department of Transportation (DOT)] could make real-time rate adjustments when carriers are seeing significantly higher costs, especially fuel," said Faye Malarkey, RAA's vice president of legislative affairs. "We still consider this a pretty big victory."

A Senate appropriations subcommittee is expected take up the EAS program this week. There appears to be sentiment to provide more than the $104 million with the extra funds designed to fully implement neglected elements of Vision 100, including the fuel adjustments provisions, said Todd Jorns, RAP's associate director of legislative affairs. RAA's Malarkey said she hopes an additional $11 million will be added by the Senate subcommittee.

A House-Senate conference committee would eventually work out any differences in EAS funding before the final transportation budget is approved.

Several regional carriers have continued to provide EAS flights even as they are losing money on the program.

Big Sky Airways, a unit of MAIR Holdings [MAIR], earns about $7 million a year in EAS subsidies to provide service to nine western communities, and it will lose about $1 million this year providing those flights, said Fred de Leeuw, Big Sky's president. The carrier has not dropped an EAS community because of its losses, he noted.

With the exception of its service to Sheridan, Wyo., Big Sky is flying the bare minimum flights to each EAS community as spelled out in its EAS contracts. Big Sky began three daily roundtrips between Sheridan and Denver in April. The EAS contract has rates based on the more recent higher fuel prices, he said. Earlier this month, the airline added a fourth daily flight because "the market is so big," he added.

"We would hope that with Vision 100, which allows DOT to adjust the EAS rate, that [DOT] will actually do that. The problem is that DOT tells us there is no funding from Congress and as a result there is no money," de Leeuw said.

"Clearly having a fuel adjustment is a safe, wise and prudent move," said Doug Caldwell, president of RegionsAir.

Operating with an American Airlines [AMR] code-share, RegionsAir provides service to eight EAS communities. "The new fare structure out there has tended to deflate the average ticket price. Most of the EAS carriers are under a pro-rate system - we get a chunk of the overall ticket price, but the revenue per ticket is going down," Caldwell noted.

"At one point, we operated more service than what we were subsidized for," Caldwell added. "The frequencies stimulate traffic and that is good for all. But with the fuel prices so high, we have quit doing that. Back when fuel was $25 bucks a barrel, the incremental revenue of these extra flights exceeded the incremental costs. With fuel at $45, $50 or $60 bucks a barrel, there is just no way to make it.

"Traffic is pretty strong right now with the exception of those markets where you just have two flights a day. With two flights-a-day, connecting service is very difficult. But those with three or more flights a day, traffic is pretty strong today," Caldwell said.

Caldwell said its possible that RegionsAir is now operating the EAS flights at a loss, however, the most recent quarter's financial statement has not been calculated.

When RegionsAir submitted its most recent EAS bid a few months ago, it attempted to calculate the rate based on higher fuel costs; but it was not anticipating the price of oil hitting $60 a barrel. In bidding for an EAS contract, Caldwell said the carrier needs to guess what fuel will be over the two-year life of the contract while at the same time trying to set a rate that will be competitive in the bidding process.

Malarkey said that based on quick "back of the envelop" calculations, the regional carriers providing EAS service have collectively lost between $10 million and $17 million due to higher fuel prices.

All DOT programs are not created equally, Jorns noted. The department also administers the Intra-Alaska Bush Mail Service and the Intra-Alaska Mainline Mail Service and it has the ability in these programs to adjust the fuel reimbursement rate quarterly. These adjustments are part of the framework of the one-year contracts.

In the case of the EAS contracts, the service period is two years. Jorns said that in order to recoup any significant losses during a contract, a carrier must file a notice to terminate the contract, which reopens the bidding process. "Clearly, this is not stable for EAS communities and it is the reason why a 'real-time' mechanism is need to adjust the compensation rates for increased costs," he said.

One of RAP's educational efforts has paid off - at least for now. The House Appropriations Committee included language in the legislation taking DOT to task for not implementing the code-share pilot program (RAN, June 20). Formally known as Section 406 of Vision 100, the original legislation calls on DOT to compel major airlines to provide code-share service with those regional carriers connecting EAS communities to major hubs. Up to 10 EAS communities can be selected to participate in a pilot program. Without any grants or loans involved, this is a low-cost program for the government to implement, Jorns said.

Four communities served by Air Midwest, a unit of Mesa Air Group [MESA], have applied to participate in the program even though DOT has not established an application process.

>>Contacts: Faye Malarkey, RAA, (202) 367-1170; Todd Jorns, RAP, (608) 845-1618.<<