December 8, 2004
Laura Remo Air Carrier Fitness Division (X-56) U.S. Department of Transportation 400 7th Street, S.W. Washington, D.C. 20590
Dear Ms. Remo:
Attached is the information requested in Order 2004-10-10. Again, Olson Air Service, Inc. apologizes for the delays in filing the required data. When the Order was issued, Sen. Olson and his staff were away from their corporate offices in the final weeks of his re-election campaign to the Alaska State Senate. I believe the answers below address each of the concerns about fitness raised by the Order.
CORPORATE ADDRESS
The correct corporate service address of Olson Air Service, Inc. since August, 1999 is P.O. Box 241248, Anchorage, AK 99524-1248. The P.O. Box 240325 address was the service address for F.A.A. documents, and not monitored by Olson corporate management personnel. That box was closed when the Homer operating address replaced it for F.A.A. service. When the F.A.A. base of operations was in Nome, the F.A.A. service address was P.O. Box 142, Nome, AK, but the corporate address was P.O. Box 241248 in Anchorage. In addition to using the P.O. Box 241248 address for all future correspondence, please send a copy of all correspondence to Hank Myers, P.O. Box 7341, Bellevue, WA 98008-1341, email [email protected]. Mr. Myers’ office phone number is 425-641-8243, and his fax number is 425-649-0904.
EXPLANATION OF $0 NET INCOME ON ALL F-1 REPORTS THROUGH THIRD QUARTER, 2003
Donald Olson has been involved in Olson Air Service since his youth. His father started the business 50 years ago as an air taxi based in Golovin. Prior to 2001, he served as the President, as well as a pilot and mechanic for the air service. Dr. Olson owned other businesses as well, but the bulk of his time was spent in the Olson Air Service operation. In 2000, Dr. Olson was elected to the Alaska State Senate from his home district which begins at the Canadian border, extends south to the Brooks Range and west to the Bering Sea and continues along the sea coast south to Nunivak Island encompassing 56 villages. As a consequence, Senator Olson could no longer serve as the day to day operating manager of Olson Air, nor could he fly the line or perform other duties for the carrier on a routine basis.
Senator Olson entered into a professional services agreement for mid-level management at his Nome base of operations. Under the terms of the agreement, the mid-level management team leased aseets from Olson Air Service, Inc. at a rate based on the volume of operations performed by the Air Service. The team was responsible for the day to day operations of the carrier including flight operations, maintenance, ground services and D.O.T. and Postal Service reporting. Operational and general management control were performed by Olson Air’s key management personnel. Air service in Alaska is highly seasonal. As an incentive to attract a competent management team, and to encourage efficient operation, Sen. Olson agreed that any profits left after payment of his aircraft lease would be kept by the mid-level management team. On the other hand, any losses suffered in the airline operation after the lease payment would be absorbed by the team. The F-1 and F-2 reports filed through December, 2003 reflect the actual costs of operations for the air carrier service, with any cash profits distributed to the management team (increasing expenses), and any losses absorbed by the management team (reducing expenses). When Olson added service at the Bethel hub, the agreement incorporated those operations as well.
While the F-2 reports accurately reflect the costs of operating the air service, including aircraft leasing, the corporate P&L accurately reflects the revenues and expenses incurred by the corporation and its owner. It is a common practice among airline owners to establish a separate leasing company to hold all fixed assets, which in turn leases the assets to the airline operating company. In this case, Sen. Olson kept the aircraft in Olson Air Service, Inc. with the aircraft lease expense being used to determine the amount of money to be paid to or absorbed by the managers. Olson Air, Inc. also incurred inter- company expenses from other businesses owned by Sen. Olson. For example, Olson Ventures, LLC owns a building used by other of Sen. Olson’s businesses for corporate use. Each business is charged a prorated lease amount. This expense is not related to the operation of the certificated air services, and is specifically excluded from the F-2 reports.
Appendix A compares the F-1 and F-2 reports for the air carriers operation with the Income Statement for Olson Air Service, Inc. Essentially, the aircraft lease payment is not an expense for Olson Air Service, Inc. because is not a cost incurred by the owner, and thus reduces Olson Air Service, Inc. expenses. On the other hand, Olson Air Service, Inc. incurs additional expenses not related to the air service which are properly excluded from the F-2 expense report. The accounting transition began in the fourth quarter of 2003, when Operating Revenues and Operating Expenses accounted for all items, and Sen. Olson absorbed the small operating loss in that quarter. CHANGES BEGINNING JANUARY 1, 2004
With the passage of the Rural Service Improvement Act, it was clear that the mail revenue for Olson Air would decrease significantly at Nome. Olson had deleted service at Bethel in 2003. The management team requested termination of the existing agreement, and proposed to offer individual services at contracted rates. Under the agreement effective January 1, 2004, the former management team provided payroll and reporting services for Olson Air, as well fueling, maintenance and ground handling at Nome and some villages, and other services as needed.
Olson Air understood that future operations at Nome might not be profitable, and planned to add scheduled service from the Homer hub, which was not affected by the R.S.I.A. With this in mind, the new contract was for a term of six months. During this period, Olson began scheduled air service at Homer, and then terminated scheduled air service at Nome. Since July 1, 2004, all business, operations and management functions are being handled by Olson Air Service, Inc. employees or contractors paid directly by Olson Air Service. Since January 1, 2004, Olson Air Service, Inc. receives no lease payments, and pays all operating expenses. Consequently, operating profits or losses are now being recorded. After reviewing the F-1 and F-2 reports submitted by the former management team, some changes are necessary to reflect items handled directly by Olson Air managers and not reflected on the reports. The revised F-1 and F-2 reports for the first quarter of 2004 are submitted herewith.
Olson Air is adapting to the new requirements of the Rural Service Improvement Act by reducing the scope of its operations. Currently it operates service from a hub in Homer, AK (see Appendix C). It is working with the F.A.A. to streamline management personnel and is examining new areas of service to increase asset utilization and overall revenue.
CONTINUING FITNESS
Olson Air Service continues to be fit, willing and able to operate certificated air service. While the R.S.I.A. has forced changes in the scope and area of operation, Olson remains financially fit. It pays all bills upon receipt, has adequate cash reserves to continue its operations, and has a significant balance due from other Olson owned businesses. Olson Air has no long term debt, and the market value of its assets, one Cessna 207 and one Cessna 402, exceeds $300,000. The Rural Service Improvement Act has resulted in significant financial losses for most of the certificated carriers in Alaska. Nearly all have responded by concentrating services in fewer markets, and trying to maintain passenger and freight yields. Olson’s actions ahead of the rest of the industry leave it less vulnerable to the major problems facing other carriers while it returns to historic profitability in its operations. CERTIFICATION
Pursuant to title 18, United States Code section 1001, I, in my individual capacity and as the authorized representative of the applicant, have not in any manner knowingly and willfully falsified, concealed or covered up any material fact or made any false, fictitious, or fraudulent statement or knowingly used any documents which contain such statements in connection with the preparation, filing or prosecution of the application. I understand that an individual who is found to have violated the provisions of 18 U.S.C. section 1001 shall be fined not more than $10,000 or imprisoned not more than five years, or both.
Respectfully submitted,
Olson Air Service, Inc.
______Donald Olson by Hank Myers Appendix A Page 1 of 3
RECONCILIATION OF F-1 & F-2 REPORTS WITH OLSON AIR SERVICE INCOME STATEMENT
TWELVE MONTHS ENDED DECEMBER 31, 2003
ITEM F-1/F-2 INCOME STATEMENT DIFFERENCE
Revenue $ 1,295,467 $ 1,295,467 $ 0
Operating Expenses Excluding Lease $ 1,191,748 $ 1,191,748 $ 0
Lease Expense $ 137,467 $ 137,467
Total Air Carrier Operating Exp. $ 1,329,215 $ 1,191,748 $ 137,467
Inter-Company Expenses 1/ ($ 17,273) ($ 17,273)
Operating Profit ($ 33,748) $ 120,992 $ 154,740
Olson Lease Amount Less Inter-Company Expense $ 154,740
______
1/ Inter-Company Expenses were shown on the Olson Air Service, Inc. income statement as net of Inter-Company transactions. Appendix A Page 2 of 3
RECONCILIATION OF F-1 & F-2 REPORTS WITH OLSON AIR SERVICE INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 2003
ITEM F-1/F-2 INCOME STATEMENT DIFFERENCE
Revenue $ 724,466 $ 724,466 1/ $ 0
Operating Expenses Excluding Lease $ 647,760 $ 647,760 $ 0
Lease Expense $ 76,705 $ 76,705
Total Air Carrier Operating Exp. $ 724,466 $ 647,760 $ 76,705
Inter-Company Expenses 2/ $ 24,594 $ 24,594
Operating Profit $ 0 $ 52,113 $ 52,113
Olson Lease Amount Less Inter-Company Expense $ 52,113
______
1/ $ 717,465 amount previous shown on 11/5/03 Fitness Filing was for cash payments received from the Postal Service during the period rather than the accrued revenue for traffic actually transported during the six months ended 6/30/03. The accrued amount is correct and consistent with the other F-1 and F-2 report items.
2/ Inter-Company Expenses were shown on the Olson Air Service, Inc. income statement as Depreciation and Rent Expense on 11/5/03 Fitness filing (net of all Inter-Company transactions). Appendix A Page 3 of 3
BALANCE SHEET AS AT DECEMBER 31, 2003
ITEM YE 12/31/02 CHANGES YE 12/31/03 ASSETS Cash $ 21,567 ($ 24) $ 21,543
Accounts Receivable $ 35,449 ($ 35,449) $ 0
Due from Related Companies $ 62,900 $ 133,967 $ 196,867
Fixed Assets, Net $ 27,908 ($ 13,188) $ 14,720
TOTAL ASSETS $ 147,824 $ 85,306 $ 233,130
LIABILTIES & EQUITY
LIABILITIES
Accounts Payable $ 0 $ 0 $ 0
Other Current Payables $ 0 ($ 34,533) ($ 34,533) 1/
Long Term Debt $ 0 $ 0 $ 0
TOTAL LIABILITIES $ 0 ($ 34,533) ($ 34,533)
EQUITY
Common Stock $ 5,780 $ 0 $ 5,780
Paid In Capital $ 7,118 $ 0 $ 7,118
Retained Earnings $ 111,369 $ 59,193 $ 170,562
Net Income $ 23,557 $ 60,645 $ 84,202
TOTAL EQUITY $ 147,824 $ 119,839 $ 267,663
TOTAL LIABILITIES & EQUITY $ 147,824 $ 85,306 $ 233,130
______1/ Cash Advance to Management Team to cover anticipated cash needs Appendix B Page 1 of 2
RECONCILIATION OF F-1 & F-2 REPORTS WITH OLSON AIR SERVICE INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 2004
ITEM F-1/F-2 INCOME STATEMENT DIFFERENCE
Revenue $ 85,831 $ 85,831 $ 0
Operating Expenses $ 189,733 $ 189,733
Total Air Carrier Operating Exp. $ 189,733 $ 189,733 $ 0
Inter-Company Expenses 2/ $ 0 $ 0 $ 0
Operating Profit ($ 103,902) ($ 103,902) $ 0 Appendix B Page 2 of 2
BALANCE SHEET AS AT JUNE 30, 2003
ITEM YE 12/31/03 CHANGES YE 6/30/04 ASSETS Cash $ 21,543 ($ 12,154) $ 9,389
Accounts Receivable $ 0 $ 18,228 $ 18,228
Due from Related Companies $ 196,867 ($ 41,612) $ 155,255
Fixed Assets, Net $ 14,720 ($ 6,539) $ 8,181
TOTAL ASSETS $ 233,130 ($ 42,077) $ 191,053
LIABILTIES & EQUITY
LIABILITIES
Accounts Payable $ 0 $ $ 0
Other Current Payables ($ 34,533) 1/ $ 71,783 $ 37,250
Long Term Debt $ 0 $ 0 $ 0
TOTAL LIABILITIES ($ 34,533) $ 71,783 $ 37,250
EQUITY
Common Stock $ 5,780 $ 0 $ 5,780
Paid In Capital $ 7,118 $ 0 $ 7,118
Retained Earnings $ 170,562 $ 84,202 $ 254,764
Net Income $ 84,202 ($ 198,061) ($ 113,859)
TOTAL EQUITY $ 267,663 $ 119,839 $ 153,803
TOTAL LIABILITIES & EQUITY $ 233,150 $ 85,306 $ 191,053 ______1/ Cash Advance to Management Team to cover anticipated cash needs Appendix C Page 1 of 1
CURRENT OPERATING SCHEDULE OF OLSON AIR SERVICE, INC.
Community Flight 801 Flight 802 Dep=Depart Arr=Arrive Times Days Times Days
Homer Dep 1130 Mo, We, Fr
Seldovia Arr 1145 Mo, We, Fr Seldovia Dep 1155 Mo, We, Fr
Nanwalek Arr 1200 Mo, We, Fr Nanwalek Dep 1210 Mo, We, Fr
Port Graham Arr 1215 Mo, We, Fr Port Graham Dep 1225 Mo, We, Fr
Homer Arr 1245 Mo, We, Fr
Homer Dep 1130 Tu
Seldovia Arr 1145 Tu Seldovia Dep 1155 Tu
Homer Arr 1210 Tu
All flights Operated with 5-passenger Cessna 207 aircraft