[Federal Register Volume 67, Number 73 (Tuesday, April 16, 2002)]
[Rules and Regulations]
[Pages 18468-18484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9243]


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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 330

[Docket OST-2001-10885]
RIN 2105-AD06


Procedures for Compensation of Air Carriers

AGENCY: Office of the Secretary, DOT.

ACTION: Final rule; request for comments.

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SUMMARY: On September 22, 2001, President Bush signed into law the Air 
Transportation Safety and System Stabilization Act (``the Act''). The 
Act makes available to the President funds to compensate air carriers, 
as defined in the Act, for direct losses suffered as a result of any 
Federal ground stop order and incremental losses beginning September 
11, 2001, and ending December 31, 2001, directly resulting from the 
September 11 terrorist attacks on the United States. On October 29, 
2001, and January 2, 2002, the Department published rules to carry out 
this Act. On the latter date, the Department also requested comments on 
whether and how to establish a set-aside for certain air carriers. This 
final rule provides forms and information for air carriers in making 
third round compensation applications, updates the existing rules, and 
establishes a set-aside for air taxi, commuter, and regional carriers 
that reported fewer than 10 million available seat miles for August 
2001.

DATES: This rule is effective April 16, 2002. Comments should be 
submitted by April 30, 2002.

ADDRESSES: Interested persons should send comments to Docket Clerk, 
Docket OST-2001-10885, Department of Transportation, 400 7th Street, 
SW., Room PL-401, Washington, DC 20590. Commenters wishing to have 
their submissions acknowledged should include a stamped, self-addressed 
postcard with their comments. The Docket Clerk will date stamp the 
postcard and return it to the commenter. Comments will be available for 
inspection at the above address from 9:00 a.m. to 5:00 p.m., Monday 
through Friday. Comments also may be sent electronically to the Dockets 
Management System (DMS) at the following Internet address: http://dms.dot.gov/. Commenters who wish to file comments electronically 
should follow the instructions on the DMS web site. Interested persons 
can also review comments through this same web site.

FOR FURTHER INFORMATION CONTACT: Steven Hatley, U.S. Department of 
Transportation, Office of International Aviation, 400 7th Street, SW., 
Room 6402, Washington, DC 20590. Telephone 202-366-1213.

SUPPLEMENTARY INFORMATION: As a consequence of the terrorist attacks on 
the United States on September 11, 2001, the U.S. commercial aviation 
industry suffered severe financial losses. These losses placed the 
financial survival of many air carriers at risk. Acting rapidly to 
preserve the continued viability of the U.S. air transportation system, 
President Bush sought and Congress enacted the Air Transportation 
Safety and System Stabilization Act (``the Act''), Public Law 107-42.
    Under section 101(a)(2)(A-B) of the Act, a total of $5 billion in 
compensation is provided for ``direct losses incurred beginning on 
September 11, 2001, by air carriers as a result of any Federal ground 
stop order issued by the Secretary of Transportation or any subsequent 
order which continues or renews such stoppage; and the incremental 
losses incurred beginning September 11, 2001 and ending December 31, 
2001, by air carriers as a direct result of such attacks.''
    On October 29, 2001 (66 FR 54616), the Department published in the 
Federal Register a final rule and request for comments to establish 
procedures for air carriers regarding compensation under the Act. The 
rule covered such subjects as eligibility, deadlines for application, 
information and forms required of applicants, and audit requirements. 
On January 2, 2002 (67 FR 250), the Department published a ``second 
round'' final rule that responded to comments on the October 29 rule. 
On the same date (67 FR 263), the Department also requested comments 
concerning whether a set-aside of a portion of the funds authorized by 
the Act should be established to ensure adequate compensation for 
certain classes of air carriers.
    This ``third round'' final rule addresses the set-aside issue, 
several issues raised during the Department's consideration of pending 
claims for compensation, and comments received on other aspects of the 
compensation program. It also provides forms and information for use by 
air carriers in applying for third round compensation under the Act.

Set-Aside

Background

    As noted in the Department's January 2, 2002, request for comments, 
a number of carriers had expressed the concern that the Act's available 
seat mile (ASM)-based formula would not adequately compensate air 
ambulances and air tour operators, among others, for the losses they 
suffered as the result of the September 11 attacks. In response to 
these concerns, Congress, in the Aviation and Transportation Security 
Act (Public Law 107-71), addressed the situations of air ambulances, 
air tour

[[Page 18469]]

operators and other similarly situated classes of air carriers.
    Section 124(d) of this statute amended section 103 of the Air 
Transportation Safety and System Stabilization Act. The purpose of this 
amendment, according to the Conference Report (House Report 107-296 at 
p. 79), is ``to allow for a modified system of providing compensation 
to air tour operators and air ambulances to better address their needs 
after industry wide losses.'' The following is the text of this 
amendment:

    (d) COMPENSATION FOR CERTAIN AIR CARRIERS.--
    (1) SET-ASIDE.--The President may set aside a portion of the 
amount of compensation payable to air carriers under section 
101(a)(2) to provide compensation to classes of air carriers, such 
as air tour operators and air ambulances (including hospitals 
operating air ambulances) for whom application of a distribution 
formula containing available seat miles as a factor would 
inadequately reflect their share of direct and incremental losses. 
The President shall reduce the $4,500,00,000 specified in subsection 
(b)(2)(A)(i) by the amount set aside under this subsection.
    (2) DISTRIBUTION OF AMOUNTS.--The President shall distribute the 
amount set aside under this subsection proportionally among such air 
carriers based on an appropriate auditable measure, as determined by 
the President.

Under the statutory language, use of this set-aside authority is 
discretionary (``The President may set aside . . . ''). Neither the 
statute nor the Conference Report provides any guidance concerning the 
appropriate size of such a set-aside, the methodology for 
proportionally allocating any funds set aside, or the identity of any 
other ``classes'' of air carriers that could be included in it, if the 
President chooses to use the authority. Consequently, in the January 2, 
2002, notice, the Department requested comments on these matters.

Comments

    The Association of Air Medical Services (AAMS) suggested that air 
ambulances should be a class of carriers eligible for a set-aside. AAMS 
recommended compensating air ambulances based on a formula derived from 
Medicare fee schedule rates. Under this formula, AAMS would compare 
each carrier's transports in the 30 days ending September 10, 2001, 
with the number of transports in the 30 days beginning September 11. 
The Department would provide compensation for each transport not made 
in the second period according to a base rate plus a mileage fee 
consistent with Medicare rates. For example, the compensation for each 
``lost'' helicopter transport would be $4,256. Over 50 air ambulance 
carriers supported this proposal, and only one such carrier opposed it.
    A number of air taxi and air tour companies generally supported the 
use of a set-aside, pointing to what they saw as inequities in the 
compensation for which they would be eligible under the general ASM-
based formula. Some of these suggested that the most equitable means of 
distributing a set-aside would be to ensure that covered carriers 
received compensation amounting to the percentage of losses that other 
carriers had received.
    One Las Vegas-based company suggested multiplying the number of 
reported ASMs by the percentage decrease in ASMs compared to an 
earlier, more normal, period. Another carrier suggested a separate set-
aside for Las Vegas-based tour companies, which it said were badly hurt 
by a sharp reduction in foreign tourists. Compensation for these 
carriers would be based on their market share of ASMs flown by carriers 
in the class.
    An environmental group, to the contrary, suggested that Las Vegas-
based or other air tour companies that provide air tours in the area of 
the Grand Canyon not receive compensation at all. In this group's view, 
such operators were providing entertainment, rather than air 
transportation, and compensation to them would be inappropriate in view 
of the fact that they disturb the natural quiet of the Grand Canyon.
    The National Air Transportation Association (NATA) advocated that 
we use an ASM-based formula limited to the pool of ASMs from Part 135 
air charter carriers. NATA also suggested that participation in the 
set-aside not be limited to carriers who had applied previously, since 
some carriers may have been deterred from applying by the likelihood of 
receiving only very small amounts of compensation.
    A New York-based helicopter company suggested multiplying its 
expected revenue for the September 11-December 31, 2001, period by the 
percentage of passengers that would have used facilities that were 
closed because of the terrorist attacks. Another carrier supported a 
formula involving the average number of seats in the operator's fleet, 
the speed of the aircraft, and the on-call time per day (normally 24 
hours). The Department also received comments from a few fixed wing and 
helicopter carriers that are primarily or exclusively cargo carriers, 
requesting that a set-aside be made available to cargo carriers that 
would correct perceived inequities in the Act's RTM-based formula.
    Two indirect air carriers that provide service to Cuba using 
foreign direct air carriers suggested that public charters be viewed as 
a class eligible for a set-aside, based on a formula comparing August 
and September passenger loads multiplied by airfare minus operating 
expenses. Another public charter indirect air carrier, which 
specializes in spring break trips for students, also asserted that it 
should be eligible for a set-aside, with a formula based on lost 
bookings. A Part 121 on-demand planeload charter passenger carrier said 
that carriers in its situation were also short-changed by the statutory 
ASM formula. They suggested substituting a formula based on the ratio 
of the losses of each carrier compared to the total losses of this 
class of carriers. A charter-tour operator who sells vacation packages 
through travel agents suggested a somewhat similar approach.
    The Air Transport Association (ATA) generally supported the idea of 
a set-aside for air ambulances and air tour operators, agreeing that 
the original statutory formula did not adequately compensate them. ATA 
said, however, the amount set-aside should come out of the funds 
remaining after other air carriers had been paid 100 percent of the 
compensation for which they are eligible. This would avoid reducing 
compensation for other carriers, ATA noted.

DOT Response

    The purpose of the amendment to the Act contained in Pub. L. 107-71 
was to give the Department authority to find a way to ensure more 
adequate and equitable compensation for ``classes'' of air carriers for 
whom application of the normal ASM-based distribution formula would 
inadequately reflect their share of direct and incremental losses. It 
is clear from financial information submitted to the Department during 
the application process for compensation that there are some 
significant inequities among classes of carriers. However, for the air 
taxi, commuter, and regional air carriers with the smallest number of 
ASMs (no more than an average of 10,000 per day, or 310,000 for the 
reporting period of August 2001), the average percentage of recovery is 
about 6 percent of their claimed losses. For such carriers with between 
310,000 and 10 million ASMs, the average percentage of recovery is 
about 14 percent. For remaining carriers, with more than 10 million 
ASMs, the average percentage of recovery is about 65 percent. For 
purposes of further defining the scope of the classes, the Department 
has added a

[[Page 18470]]

new definition of a regional air carriers, based on existing 
Departmental classifications used for other purposes.
    The Department, consistent with the intent of Congress and the 
views of commenters, believes that it is appropriate to use its 
statutory set-aside authority to redress these inequities. Doing so 
would help to ensure a fair result to all classes of carriers. The most 
important questions for the Department to resolve are the 
identification of the classes of carriers eligible for compensation 
from the set-aside and the formula used to establish their 
compensation.
    As noted above, there are two groups of carriers whose compensation 
under the original statutory ASM formula falls well below the 
compensation for carriers generally. Class I includes those air taxi, 
commuter, and regional carriers who reported an average of 10,000 ASMs 
or fewer per day, or 310,000 for the reporting period of August 2001. 
Class II includes air taxi, commuter, and regional air carriers 
reporting between 310,000 and 10 million ASMs. All-cargo carriers are 
not eligible to participate in the set-aside, which, under the statute, 
applies only to carriers who report ASMs and whose compensation comes 
from the $4.5 billion portion of the statutory authorization for 
passenger carriers.
    Of the carriers who have applied for compensation to date, there 
are 143 carriers in the first class and 96 in the second. The 
Department believes that identifying classes of carriers eligible for a 
set-aside in these broad terms is more sensible, fair, and easy to 
administer than dividing carriers into smaller functional or local 
classes (e.g., air ambulances, air tour operators generally or those 
based in a particular place, public charters, etc.), each with a 
separate compensation methodology that may address its own situation 
but not fit that of others. These broad classes include the vast 
majority of the carriers in these smaller groupings, including most of 
the carriers that submitted comments to the docket.
    In addition to making the program more complicated to administer 
than a methodology covering broader classes of carriers, some of the 
specific methodologies suggested for narrower groups could be 
problematic. For example, the AAMS recommendation of a formula based on 
medicare reimbursement rates would make it difficult to distinguish 
between transportation costs and losses and other costs and losses 
attributable to non-transportation aspects of air ambulance services, 
such as the cost of waiting time for medical personnel. It would be 
difficult to achieve similarly equitable results for carriers in a 
single market, such as Las Vegas or New York, and carriers elsewhere 
using the approach suggested by Las Vegas- and New York-based tour 
operators.
    With respect to the commenter that operates spring break charters 
for students, the Department does not believe that it can base a set-
aside class on the experience of a single carrier with respect to loss 
claims that are subject to adjustment until Spring 2002, well after the 
September-December 2001 compensation period intended by Congress. 
Likewise, with respect to the commenter that operates on-demand 
planeload charters, it is difficult to identify a class of carriers 
eligible for a set-aside based solely on the situation of one carrier. 
This particular carrier, in any case, would be eligible for 
compensation as a Class II carrier under the set-aside in this rule.
    The public charter carriers who operate as indirect air carriers 
and use direct foreign air carriers to provide service to Cuba may be 
eligible for compensation. As noted below, they should refer to the 
January 2, 2002 final rule, as amended by this rule, regarding use of 
the ASMs operated by their direct foreign air carrier partners to 
support a claim for compensation. The same may be true of the indirect 
air carrier commenter that operates as a charter-tour operator.
    We considered the idea of simply compensating carriers so that each 
received compensation equivalent to about the same percentage of its 
losses as the average for all carriers. However, this approach has 
certain disadvantages. For example, it might not provide an accurate 
basis for compensation for carriers that are affiliated with larger 
carriers. It could unfairly reward carriers whose larger-than typical-
losses may be attributable to less efficient operation or unfavorable 
market conditions unrelated to the terrorist attacks. It would result 
in slower payouts to all carriers eligible for the set-aside, since it 
would preclude the Department from establishing a standard process for 
carrier claims, which would make the process unduly laborious.
    The approach that the Department has decided to take is 
conceptually similar to that suggested by some commenters, involving a 
formula that considers the market share of an individual carrier within 
a class of carriers. For carriers in Class I and Class II, the 
Department will calculate the average amount of documented losses per 
ASM reported. Using current applicants as an example, for Class I 
carriers, the average loss per ASM is approximately $.82. Thus, for 
Class I carriers, the Department would project the maximum compensation 
due by multiplying the number of ASMs for Class I carriers times $.82. 
Using this methodology, a carrier with 100,000 ASMs would receive no 
more than $82,000 in total compensation.
    For Class II carriers, the method of calculation is somewhat more 
complex. To avoid disproportionately low compensation being paid to 
those carriers who fall just above the 310,000 ASM line of demarcation 
between Class I and Class II, the Department is taking a two-tiered 
approach. Again, using current applicants as an example, the Department 
would apply the projected $.82 loss per ASM rate to the first 310,000 
ASMs of Class II carriers. For each ASM above 310,000, the carrier 
would receive an estimated $.19 per ASM, which represents the average 
loss per ASM for these incremental ASMs. For example, we project that a 
carrier with 750,000 ASMs would receive no more than $337,800 in total 
compensation. It should be noted that, depending on the actual losses 
and ASMs that are validated for set-aside applicants, the ASM rates for 
both Class I and Class II carriers could change.
    The statute calls for a class-based compensation system under the 
set-aside. No class-based system can provide perfect equality for each 
individual carrier, and any such system could create some relative 
``winners'' and ``losers.'' To preclude inequitably high or low 
compensation results for specific carriers, the Department has decided 
to add a minimum and maximum percentage recovery limit for carriers 
receiving additional compensation under the set-aside program. No Class 
I or Class II carrier will receive more in compensation than the 
average percentage of recovery for carriers with more than 10 million 
ASMs, which, based on current data, is approximately 65 percent of its 
losses, unless the carrier would have recovered more than 65 percent of 
its losses under the original ASM formula in which case it will be 
compensated using that rate. The Department will use its most current 
data in establishing a final ``cap,'' meaning that the cap percentage 
may need to be adjusted. Further, no Class I or Class II carrier will 
receive less than 25 percent of its verified eligible transportation-
related losses. The 25 percent ``floor'' will ensure, in the interest 
of fairness, that all classes of carriers will be in the position of 
receiving at least that amount of compensation, in accordance with the 
statutory direction to provide compensation that adequately reflects 
their share of direct and incremental

[[Page 18471]]

losses. In these latter cases, the carrier will be required to satisfy 
the Department that its claimed losses are valid, eligible, and 
transportation-related.
    Application of this system will ensure the result intended by 
Congress: the projected median recovery for Class I, Class II, and 
other carriers as a class will all be about the same percentage of 
losses. We project that current applicants would receive $27.5 million 
under this approach, as opposed to the $6.4 million they are projected 
to receive under the original statutory formula. In addition to this 
$27.5 million, the Department is setting aside an additional $7.5 
million to cover potential payments to new applicants. As suggested by 
commenters, the final rule will permit carriers in Class I and Class II 
who have not previously applied to do so. We believe that this is fair 
because the low amounts of compensation under the original statutory 
formula may well have discouraged some carriers from applying in the 
past. Therefore, the total set-aside will be up to $35 million. As the 
Air Transport Association (ATA) requested, the Department expects that 
this amount will not diminish the recovery of other carriers.
    To begin disbursement of compensation promptly, the Department 
plans to use a two-phase compensation process for eligible air carriers 
under the set-aside program. In the first phase, commencing upon 
publication of this rule, the Department will review those applications 
that already have been filed by such eligible air carriers, and, 
assuming no disqualifying issues arise, provide initial payment of a 
partial amount. In order to protect against potential overpayments, for 
Class I carriers this partial payment will be the lesser of (A) no more 
than 30 percent of validated losses, or (B) $0.35 per ASM. Similarly, 
for Class II carriers, the partial payment will be the lesser of (A) no 
more than 30 percent of validated losses, or (B) $0.35 per ASM for the 
first 310,000 ASMs and $0.08 per ASM for each ASM above 310,000. For 
both Class I and Class II carriers, the partial payment will be reduced 
by any amounts that have previously been paid in compensation.
    The second phase of set-aside payments will be processed as part of 
the final round of payments for all carriers. At that time, payments 
will be made to set-aside air carriers who had received first-phase 
partial compensation for the balance that the Department determines is 
outstanding. Set-aside applicants that file new applications will also 
have their applications processed by the final round of the 
compensation process.
    The Federal Aviation Administration (FAA) recently completed a 
lengthy and complex rulemaking to determine the appropriate routes and 
volume of air tour flights over the Grand Canyon. This rulemaking 
involved extensive consultation with air tour operators, environmental 
groups, Indian tribes, and other concerned government agencies. In the 
Department's view, air tour operations over the Grand Canyon that 
comply with the FAA rule are no less eligible for compensation than any 
other air carrier operations subject to the Stabilization Act. While we 
recognize that there may be continuing argument about the merits of 
such flights, this compensation rule is not the place to resolve them.

Impairments and Other Extraordinary or Nonrecurring Items

    The Airline Stabilization Act provides compensation for direct 
losses incurred by carriers beginning on September 11 as the result of 
Federal ground stop orders, and for ``incremental losses incurred 
beginning September 11, 2001, and ending December 31, 2001'' as a 
direct result of the terrorist attacks.
    By this language, Congress required that compensable losses be 
limited to the September 11-December 31 period, meaning that 
compensable losses must actually be incurred in the September 11-
December 31 period. Losses experienced before September 11 or after 
December 31 are not eligible for compensation. A number of applications 
included as claimed losses items that, while they may have been 
reported for purposes of generally accepted accounting principles 
(GAAP) as being ``incurred'' within the September 11 to December 31 
period, nevertheless would actually be experienced over a much longer 
period. One example of such an item is the devaluation of aircraft 
(impairment) or other assets, based on an expectation of their 
diminished value due, in many cases, to a perceived decrease in the 
asset's ability to generate revenue after the terrorist attacks. 
Because the Department considered that such charges should be excluded 
from compensable losses, we required carriers (through a December 4, 
2001, letter and a supplemental certification form) to clarify whether 
their applications included any extraordinary, non-recurring, or 
unusual adjustments that were not included in their pre-September 11 
forecasts, and to specify the amounts involved. In processing 
applications for second round payments, we generally excluded these 
amounts as ineligible for compensation.
    Thereafter, the Department received a number of comments objecting 
to these exclusions. In some cases, carriers returned the Supplemental 
Certification Form with a statement that such charges should be 
compensable and that they were not waiving their right to claim them. 
In a letter dated December 10, 2001, to the Department, the Air 
Transport Association and Regional Airline Association asserted that 
impairment charges had ``real-world'' impacts on air carrier finances, 
because credit is based on independently appraised asset values. Thus, 
as assets dropped in value, many carriers claimed to have lost valuable 
sources of liquidity. The associations stated their belief that 
Congress intended such losses to be compensated. Moreover, they argued 
that impairment charges, and similar writedowns, including lease 
buyouts, are recognized as losses under GAAP, and the Financial 
Standards Accounting Board (FASB) has recognized that impairment losses 
can result from the September 11 events. Thereafter, in comments 
addressed to Docket OST-2001-10885, the Air Transport Association 
reiterated the view that the inclusion of these losses is consistent 
with the Stabilization Act, GAAP, and the standards for financial 
statements set by the Securities and Exchange Commission (SEC). It 
further argued that impairment charges, like severance expenses and 
other non-recurring charges that DOT has disallowed, result in ``real'' 
accounting and economic losses, and ``real'' foregone liquidity.

DOT Response

    The Department does not disagree that impairment and similar 
charges may be proper for purposes of GAAP. Nor do we take issue with 
arguments that the reporting of such losses may be consistent with FASB 
or SEC procedures. However, because they may be proper under or 
consistent with such procedures does not mean that they are necessarily 
within the scope of losses that Congress intended to be eligible for 
compensation under the Act.
    We note that including asset devaluation charges within the 
September 11 to December 31 period would potentially allow a carrier to 
receive full compensation for what is typically a very large expense 
item, even though most of the associated cost to that carrier would be 
experienced over time. In effect, this would be similar to a front-end 
loading of depreciation or lease expenses, shifting costs that will 
occur in the future into the period for

[[Page 18472]]

which compensation is to be provided. That result, we continue to 
believe, is inconsistent with the direction to compensate carriers only 
for losses actually incurred through December 31. Further, where 
impairment charges or other writedowns reflect a temporary grounding of 
aircraft or suspension of use of other assets, we do not have the 
practical ability to monitor the accounting for those assets in the 
future to ensure that they recapture excess compensation if they are 
returned to service earlier than expected.
    Moreover, the theoretical basis for an impairment charge is an 
expected decline in asset value that reflects an expected permanently 
reduced demand and reduced ability to generate revenue. However, since 
we are already compensating carriers for the actual decline in revenue 
they are experiencing through the end of the year, there is an inherent 
duplication in also compensating them for the associated asset 
devaluation costs. As to the carriers' concern regarding loss in 
liquidity due to asset writedowns, the compensation payments provide a 
direct source of funds to replace lost liquidity.
    This is not to suggest that the Department considers that all 
extraordinary or non-recurring losses must be disallowed. Where an 
applicant can show, apart from conformity to GAAP requirements, that 
the actual costs of a loss were the direct result of the terrorist 
attacks of September 11 (and not, for example, the result of a general 
economic slowdown), were fully borne within the September 11 to 
December 31 period and are permanent, and that compensation for those 
costs would not be duplicative, the Department will consider such 
claims on a case-by-case basis. The forms for the third round 
application process include a section addressing the treatment of 
extraordinary or non-recurring losses, and section 330.39 of the rule 
has been amended to require information about such losses.

Adjustment for Losses Not the Direct Result of the Events of 
September 11

    Section 101(a)(2) of the Act provides that the President shall 
compensate air carriers for direct losses incurred beginning on 
September 11 as the result of any Federal ground stop orders, and their 
incremental losses incurred beginning September 11, 2001 and ending 
December 31 ``as a direct result of'' the terrorist attacks. Section 
107(3) of the Act further specifies that the term ``incremental loss'' 
does not include any loss that the President determines would have been 
incurred if the terrorist attacks on the United States that occurred on 
September 11, 2001 had not occurred. The application forms for third 
round compensation payments have been revised to include a section 
addressing certain types of revenues and expenses, in order to further 
implement this ``direct result'' requirement and incremental loss 
definition.
    In the previously-issued rules and guidance concerning payment of 
compensation in the first and second rounds, the Department required 
carriers to supply pre-September 11 forecast financial data including 
revenue, expenses, operating income, nonoperating expenses, and net 
income. Updated forecasts after September 11 for the period October 1 
through December 31, 2001, and later, actual results, were also to be 
supplied. Carriers were required to certify such data as true and 
accurate under penalty of law.
    The Department used, as a starting point for its compensation 
determinations, the difference between pre-September 11 forecasts and 
the updated forecasts or actual results. During their reviews, 
Department staff scrutinized applications for actual and forecasted 
revenues and expenses that did not appear to be directly impacted by 
the terrorist attacks, and incremental losses that might have been 
incurred even if the attacks had not taken place. Revenues and expenses 
of this sort were questioned, and where appropriate, disallowed.
    For example, we disallowed as expenses certain supplemental 
employee compensation payments that were not related to the events of 
September 11. Also, we disallowed certain maintenance expenses that 
were accelerated into the September 11 to December 31 period, but would 
have been incurred normally after January 1, 2002. With the experience 
gained from these case-by-case determinations, the Department believes 
that it may be helpful to clearly state the standards and procedures 
that govern in these areas, consistent with the requirements of the 
Act. These standards and procedures have been incorporated in the third 
round application Forms, as well as into the core requirements for the 
agreed-upon procedures for review of the carriers' financial data. This 
will permit both applicants and reviewers to focus on revenue and 
expense items that may be subject to exclusion as not related to 
September 11, and prevent any misunderstanding of how such items will 
be treated. It will also facilitate the administrative review process, 
as applicants will be presenting their financial information in a 
manner that permits more expeditious review, expediting also their 
third round and final payments. Applicants are to be guided by the 
following principles in applying for the third round of direct 
compensation:
    1. Use Form 330 (Final) to show forecasted and actual net income/
losses for the period September 11, 2001 to December 31, 2001. These 
must be updated from previous Forms to reflect actual results through 
December 31, 2001, using the most current information available showing 
final financial results.
    2. To be compensable under the Stabilization Act, incremental 
losses must have been actually incurred ``as a direct result'' of the 
terrorist acts of September 11, 2001. Also, any loss that would have 
been incurred if the terrorist attacks on the United States that 
occurred on September 11, 2001, had not occurred is not eligible for 
compensation under the statute.
    3. Based on its experience in reviewing claims received to date, 
the Department believes that, in most instances, it is extremely 
difficult if not impossible to distinguish, on a line line item by line 
item basis, individual revenue and expense items that were affected 
directly by the terrorist attacks from those that were affected 
indirectly, or those that were partially affected, or not affected at 
all. That conclusion is confirmed by findings of the Emerging Issues 
Task Force of the Financial Accounting Standards Board, in its 
Discussion of Agenda Technical Issues, Issue No. 01-10, addressing 
Accounting for the Impacts of the Terrorist Attacks of September 11, 
2001:

The Task Force noted that it would be impossible to isolate and 
therefore distinguish (in a consistent way) the effects of the 
September 11 events in any single line item on companies' financial 
statements because of the inability to separate losses that are 
directly attributable to the September 11 events from those that are 
not. For example, impairment of long-lived assets as a result of the 
September 11 events would in many cases be impossible to measure 
separately from impairment due to the general economic slowdown that 
was generally acknowledged to be under way. (The September 11 events 
probably contributed to the speed and depth of that economic 
slowdown, but determining the portion of the slowdown directly 
attributable to the September 11 events would be extremely 
subjective and difficult, if not impossible.)

    The Department believes that, in most cases, the comparison between 
pre-September 11, 2001 forecasts and actual results provides an 
approximation of the incremental losses that are a direct result of the 
attacks, and that approximation, without more, gives effect to the 
language of the statute.

[[Page 18473]]

However, to give further effect to the statutory language, the 
Department is providing rules and guidance for the third round and 
final payments. To avoid burdening applicants, reviewers and auditors 
with a potentially subjective and inherently imprecise line item by 
line item analysis, we are employing various measures designed to 
highlight items that may not be within the scope of compensable losses, 
while establishing a presumption that other items were impacted by the 
attacks so as to warrant inclusion within the formula. Notwithstanding 
these presumptions, to ensure fairness, applicants may bring specific 
matters to our attention as described below.
    4. The Department expects that some items, potentially of 
significant relative financial impact, that would not be identified 
through the forecast/actual analysis but yet were not directly the 
result of the terrorist attacks would be ones that were extraordinary 
or non-recurring. For example, suppose that a claim for incremental 
losses includes a post-September 11 unfavorable judgment of $1 million 
in a lawsuit, the operative facts of which all occurred prior to 
September 11. That $1 million liability is not a loss incurred as a 
direct result of the terrorist attacks, and would have been incurred 
had the attacks not taken place. Accordingly, it must be excluded from 
net losses.
    To permit the Department to take them properly into account, 
applicants must separately identify all extraordinary and non-recurring 
revenue and expense items on pages 2 and 3 of Form 330 (Final). For 
these purposes, ``extraordinary items'' are events and transactions 
that are unusual in nature and infrequent in occurrence. ``Non-
recurring items'' are either unusual or infrequent, but not both. 
Applicants shall describe and explain such items, and address, with 
supporting documents, whether each such item is attributable to the 
terrorist attacks or not.
    5. On pages 2 and 3 of Form 330 (Final), applicants must also 
report any revenue or expense items that would normally have been 
reported in a time period other than September 11 through December 31, 
2001, but were reported in and claimed for the September 11 through 
December 31, 2001 period. For example, an applicant has reported an 
amount in a Provision for Bad Debts in the October 1 through December 
31 period that normally would have been reported in the first calendar 
quarter of 2002. This must be identified in Form 330 (Final) so as to 
allow the amount of net income to be adjusted. To the extent a loss 
claim included such an expense item, it would represent a loss that 
would have been incurred had the terrorist attacks not taken place. 
Applicants are advised that the reviewing staff will give careful 
attention to any prepaid or accelerated expense items in this regard.
    6. Applicants should carefully scrutinize their applications for 
other situations, not addressed specifically above, in which losses 
have been or could be reported that were not directly the result of the 
terrorist acts, or that would have been incurred in any event, 
including items that, while not literally extraordinary or non-
recurring, were nonetheless identifiable as falling into the above 
categories. Applicants may wish to utilize monthly profit and loss 
statements, which section 330.21(g) of the revised regulation requires 
be submitted with each application, to identify prospective items of 
such character. Applicants shall report such items on Form 330 (Final), 
as appropriate.
    7. The Department expects that many applicants have experienced, by 
their own initiatives, a reduction in actual versus forecast expenses, 
giving rise to a question as to whether any such reductions may be 
excluded from the calculations of losses on the ground that they are 
unrelated to the terrorist attacks. As a general rule, for the reasons 
stated below, the Department will treat such variances for all 
categories of expenses as being attributable to the terrorist attacks. 
First, we would expect that cost reduction plans not related to the 
terrorist attacks would have been reflected in an applicant's pre-
September 11 forecasted financials. Second, we believe it highly likely 
that expense reduction efforts undertaken after September 11 were 
attributable, implicitly if not explicitly, to changed expectations 
regarding revenues after the attacks. Third, we note that Congress 
provided that we compensate air carriers for ``losses incurred.'' Cost 
savings that are achieved in fact reduce an air carrier's losses, and 
the calculations required under our regulations may not be manipulated 
to exclude actual reductions in expenses, thereby generating a basis 
for increased compensation. Moreover, we interpret Congress' language 
here as indicating an intent that carriers not receive increased 
compensation for achieving savings in costs, which they have an 
independent obligation to their managements and shareholders to 
achieve, and which it is reasonable to expect them to undertake to 
mitigate the need for compensation under the Act. If there are specific 
instances of cost savings that an applicant believes are unrelated to 
the events of September 11 and believes should be excluded with the 
effect of increasing compensation, and the applicant can provide pre-
existing documentary support for its position, the Department will 
consider the request. Otherwise, such items are not allowable and 
should not be claimed.
    8. Section 103(a) of the Stabilization Act is clear that the amount 
of compensation payable may not exceed the amount of losses that the 
air carrier demonstrates to the satisfaction of the President, using 
sworn financial statements or other appropriate data, that the air 
carrier incurred. The Department expects that application of the 
foregoing requirements will result in many compensation claims 
effectively being reduced. Where claimed losses are increased, the 
Department can be expected to give careful attention to the 
justifications offered in support of such increases. Applicants are 
advised that, under the Stabilization Act, the burden remains on them 
to demonstrate to the Department's satisfaction that all claimed losses 
have been incurred and are otherwise eligible for compensation.

Other Issues

    Overcompensation Issues. As the Department processes applications 
and receives updated data from carriers, and the Inspector General's 
office or the General Accounting Office reviews them, there may be 
instances in which we determine that we have remitted more in 
compensation than current financial or operating data support. In this 
event, as provided in revised Sec. 330.9(b), the carrier will be 
notified of the situation and is required to return the difference to 
the Department immediately. The revision makes clear that the 
Department need not wait until a third round or final payment has been 
made, or an audit has been conducted, before requiring the return of 
funds that it believes represents an overpayment.
    Timing of Compensation. In the interest of the prudent 
administration of funds under this program, the Department has 
determined that it will distribute up to 95 percent of the compensation 
for which an air carrier is eligible as part of this third round. 
Temporarily retaining the remaining five percent will permit the 
Department to determine with greater certainty the total amount of 
compensation for which all carriers are eligible, since we will have 
had the chance to review everyone's Form 330 (Final) and AUP or 
simplified procedures reports. This approach will also help us to avoid 
any possibility of exceeding authorized amounts, as well as enabling 
the

[[Page 18474]]

Department to finalize the compensation amounts based on receipt of all 
claims.. The Department will pay remaining compensation to carriers 
subsequently. We do not anticipate that carriers will have to make any 
additional claim submissions to receive the remaining compensation.
    Offsetting Losses Against Profits or Gains. A question has arisen 
as to whether an air carrier is entitled to be compensated for its 
direct losses as a result of the Federal ground stop order regardless 
of its profits or gains during the period of September 11 to December 
31, 2001. After reviewing the matter, the Department has concluded that 
air carriers seeking compensation under Section 101(a)(2) of the Act 
cannot isolate their direct losses incurred during the period of the 
Federal ground stop order from their actual results for the overall 
period of September 11 to December 31, 2001. Where, for example, a 
carrier experienced better-than-forecasted total results for that 
period, the actual results for the period after the Federal ground stop 
order was lifted, September 14, 2001 to December 31, 2001, must be 
offset against direct losses incurred during the period of the Federal 
ground stop order. Such an offset is necessary to implement the 
requirement of the Act that air carriers only receive compensation for 
losses actually incurred. A loss has been incurred only if that loss 
has not been fully offset by better-than-forecasted results. This 
result is consistent with the structure and language of the Act 
regarding direct and incremental losses. We believe such an offset is 
consistent with the overall congressional intent of the Act, to 
stabilize the air carrier industry by compensating for actual losses 
rather than enhancing profits during the September 11 to December 31, 
2001, period.
    Wet Lease Arrangements and Indirect Air Carriers. In further 
response to comments concerning the methodology for determining 
compensation in situations in which a direct and an indirect air 
carrier, or a wet lessor and a wet lessee, are both involved in an 
operation, the Department has decided to delete two provisions of its 
January 2, 2002 final rule: Secs. 330.31(d)(1)(iv) and 
330.31(d)(2)(iv). These provisions required wet lessor and indirect air 
carrier applicants to document that lessees or direct air carriers are 
either ineligible for compensation or voluntarily will not or have not 
claimed compensation with respect to the operations in question.
    The Department believes that removing these provisions will permit 
more equitable treatment for wet lessors and indirect air carriers 
without impinging on the interests of wet lessees and direct air 
carriers. Doing so will make it more likely that affected carriers will 
receive adequate compensation for the effects of the September 11, 2001 
attacks than would otherwise be the case. By removing administrative 
barriers, the Department's approach will create a level playing field 
on which different types of carriers can apply for compensation 
eligibility. Wet lessors and indirect air carriers therefore may apply 
for compensation, as long as they meet other requirements of the rule 
(e.g., the remaining four requirements of Sec. 330.31(d)(1) and (2)).
    This approach will also help to alleviate the concern that the 
deleted provisions might create an incentive for manipulation of the 
compensation system (e.g., transfers of ASMs or RTMs to other parties 
in ways that would artificially inflate the overall amount of 
compensation paid). We anticipate that the Department can implement 
this approach without reducing the compensation available to other 
eligible carriers, since some carriers are being paid on the basis of 
losses, which in these cases are less than the full formula amount.
    Accordingly, the rule provides that wet lessors and indirect air 
carriers who have not already applied to the Department for 
compensation because of their inability to meet the requirements of 
former Sec. 330.31(d)(1)(iv) and (d)(2)(iv) are permitted to submit 
applications in the third round. Applications must be received within 
30 days.
    With respect to the issue of wet lease arrangements and indirect 
air carriers, ATA requested that compensation be limited to U.S. 
citizens. In particular, ATA asked the Department to require that, in 
the case of indirect carriers and wet leases, both the applicant and 
the operator must be U.S. citizens. In ATA's view, a U.S. indirect air 
carrier should not be compensated for RTMs operated on its behalf by a 
non-U.S. direct air carrier. On the other hand, two indirect air 
carriers that operate charter flights via foreign direct air carriers 
took the opposite view.
    Under the statute and the rule, only U.S. carriers can receive 
compensation. No foreign carrier can receive funds under the Act. We do 
not see a compelling reason to treat the U.S. indirect air carrier's 
eligibility for compensation differently depending on the nationality 
of the direct air carrier involved. Indeed, some commenters whose views 
were reflected in the Department's decisions set forth in the January 2 
rule are indirect carriers who made extensive use of foreign direct air 
carriers.
    We do not believe that these provisions of the rule will cause 
significant delays in processing claims for compensation. Consequently, 
consistent with the January 2 final rule, we will continue to regard 
U.S. indirect air carriers as eligible for compensation based on ASMs 
or RTMs flown for them by foreign direct air carriers.
    Independent Public Accountant's Review. Under 49 CFR 330.37, to be 
eligible to receive payment from the third round or final installment 
of compensation under the Air Transportation Safety and System 
Stabilization Act (the Act), the applicant must submit an independent 
public accountant's (IPA) report based on the performance of agreed-
upon procedures (AUP) satisfactory to the Department with respect to 
the carrier's forecasts and actual results. The IPA's engagement must 
be performed in accordance with generally accepted professional 
standards applicable to AUP engagements. The applicant must submit the 
results of the AUP engagement to the Department with its application 
for payment of the third round or final installment. Section 330.37 has 
been expanded to specify the core requirements to be covered by these 
procedures.
    In order to reduce the application burden on smaller air carriers, 
the Department has approved simplified procedures for (1) passenger-
only and passenger/cargo carriers with fewer than 10 million available 
seat miles (ASM) in August 2001 and (2) cargo-only air carriers with 
fewer than two million revenue ton miles (RTM) for the quarter ending 
June 30, 2001.
    Model agreed-upon procedures (AUPs) were submitted to the 
Department by the American Institute of Certified Public Accountants 
(AICPA) and the Air Transport Association (ATA), and we have modified 
those procedures in certain respects to be more consistent with our 
needs. Model AUPs will be made available on the Department's web site, 
www.dot.gov, along with the simplified procedures, or can be obtained 
from the DOT contact noted above under For Further Information Contact. 
These model AUPs are provided solely as an aid to applicants in meeting 
the requirements of the Act and these rules, and the use of the model 
AUPs, or any other procedures, does not diminish or affect in any way 
the Department's right to examine fully and audit all aspects of all 
claims for compensation.

[[Page 18475]]

Regulatory Analyses and Notices

Executive Order 12866

    These amendments do not constitute an economically significant rule 
under Executive Order 12866, but they are significant under the 
Executive Order and the Department's Regulatory Policies and 
Procedures, because they affect important sectors of the air 
transportation industry and are of general policy interest.
    The Department has determined that these amendments are being 
issued in an emergency situation, within the meaning of Section 
6(a)(3)(D) of Executive Order 12866. However, their impact is expected 
to be a favorable one: making these funds available to air carriers to 
compensate them for losses resulting from the terrorist attacks of 
September 11. In particular, the impact will be favorable on the 
carriers eligible for the set-aside, since they otherwise would have 
received, individually and as a class, considerably less compensation. 
In accordance with Section 6(a)(3)(D), this rule was submitted to the 
Office of Management and Budget for review.

Regulatory Flexibility Act

    While we did request comment on the set-aside issue, there was no 
notice of proposed rulemaking. Consequently, we are not required to 
prepare a regulatory flexibility analysis under 5 U.S.C. 604. However, 
we do note that this rule may have a significant economic effect on a 
substantial number of small entities. In analyzing small entity impact 
of the amendments, we believe that, to the extent that the rule impacts 
small air carriers, the impact will be a favorable one, since it will 
consist of receiving more compensation under the set-aside than these 
carriers would have received otherwise. The Department has also 
concluded that this rule does not have sufficient federalism 
implications to warrant the consultation requirements of Executive 
Order 13132.

Paperwork Reduction Act

    This rule contains information collection requirements subject to 
the Paperwork Reduction Act (PRA), specifically the application 
documents that air carriers must submit to the Department to obtain 
compensation and information collections concerning the review of 
carriers' financial and operational information. The title, 
description, and respondent description of the information collections 
are shown below as well as an estimate of the reporting burden. 
Included in the estimate is the time for reviewing instructions, 
searching existing data sources, gathering and maintaining the data 
needed, and completing and reviewing the collection of information.
    Title: Procedures and Forms for Compensation of Air Carriers
    Need for Information: The information is required to administer the 
requirements of the Act.
    Use of Information: The Department of Transportation would use the 
data submitted by the air carriers to determine each carrier's 
compensation for direct losses suffered as a result of any Federal 
ground stop order and incremental losses beginning September 11, 2001, 
and ending December 31, 2001, resulting from the September 11, 2001, 
terrorist attacks on the United States as defined in the Act.
    Frequency: For this final rule, the Department will collect the 
information once, with air carriers reporting on Form 330 (Final). In 
addition, some air carriers must report to the Department concerning 
agreed-upon procedures engagements with independent public accountants. 
Other carriers will have to report on the basis of simplified 
procedures. These are also one-time submissions.
    Respondents: All applicants will have to submit a Form 330 (Final). 
This includes 435 existing applicants and an estimated 150 new 
applicants, for a total of 585 carriers. We estimate that it will take 
carriers 6 hours for this task, for a total of 3510 hours.
    In addition, about 97 of these carriers will have to report on the 
basis of an agreed-upon procedures (AUP) engagement with an independent 
public accountant (IPA). These carriers are those who report more than 
10 million ASMs or two million RTMs. We estimate that filling out the 
schedules associated with the AUP process will take 20 hours, with 
another 360 hours representing the time of IPA and carrier staff 
working on the AUP process. Consequently, we estimate 36,860 hours for 
the AUP requirement.
    Smaller carriers will report on the basis of simplified procedures. 
There are two tiers of these carriers; the first tier consists of 
carriers with 310,000--10 million ASMs or 200,000--two million RTMs, 
and the second tier consists of carriers with less than 310,000 ASMs or 
200,000 RTMs. We estimate that 190 carriers will be in the first tier 
and 298 in the second. We believe that the first tier procedures will 
take 10 hours and that the second tier (even more simplified) 
procedures will take three hours. Consequently, the two tiers' 
estimated burden hour totals would be 1900 hours and 894 hours, 
respectively, for a total of 2794 hours.
    Burden Estimate: Based on the above assumptions, we project a total 
of 43,164 hours. In dollar terms, we estimate the cost for these tasks 
to be $1,184,420, based on an average cost per hour of $27.44.
    Form(s): The data would be collected on Form 330 (Final), found in 
the Appendix to this rule.
    Average Burden Hours per Respondent: For larger carriers, 386 
hours; for smaller carriers, 16 hours for first tier and 9 hours for 
second tier carriers; for new applicants, 12.5 hours.
    The Office of Management and Budget has approved this information 
collection on an emergency basis, with Control Number 2105-0548.

Administrative Procedure Act Findings

    We are making this rule effective immediately, without additional 
opportunity for public notice and comment. Because of the need to move 
quickly to provide compensation to air carriers for the purpose of 
maintaining a safe, efficient, and viable commercial aviation system in 
the wake of the events of September 11, 2001, prior notice and comment 
would be impractical, unnecessary, and contrary to the public interest. 
Consequently, prior notice and comment under 5 U.S.C. 553 and delay of 
the effective date under 5 U.S.C. 801, et seq., are not being provided. 
On the same basis, we have determined that there is good cause to make 
the rule effective immediately, rather than in 30 days. We are 
providing for a 14-day comment period following publication of the 
rule, however. While the Department will begin implementing this rule 
immediately, we will respond subsequently to comments we receive.

List of Subjects in 14 CFR Part 330

    Air carriers, Grant programs--transportation, Reporting and 
recordkeeping requirements.

    Issued This 11th Day of April, 2002, at Washington, DC.
Read C. Van de Water,
Assistant Secretary for Aviation and International Affairs.

    For the reasons set forth in the preamble, the Department amends 14 
CFR Part 330 as follows:

PART 330--PROCEDURES FOR COMPENSATION OF AIR CARRIERS

    1. The authority citation for part 330 continues to read as 
follows:

    Authority: Pub. L. 107-42, 115 Stat. 230 (49 U.S.C. 40101 note); 
sec. 124(d), Pub. L. 107-71, 155 Stat. 631 (49 U.S.C. 40101 note).


[[Page 18476]]


    2. Amend Sec. 330.3 by adding a new definition of ``Regional air 
carrier'' in alphabetical order to read as follows:


Sec. 330.3  What do the terms used in this part mean?

* * * * *
    Regional air carrier means an air carrier that operates at least 
one large aircraft and has annual operating revenues of less than $100 
million.
* * * * *

    3. Revise Sec. 330.5 to read as follows:


Sec. 330.5  What funds will the Department distribute under this part?

    Under subpart C of this part, the Department will distribute up to 
the amount of the set-aside provided for in subpart C of this part to 
air carriers eligible for it. Under subparts A and B of this part, the 
Department will distribute compensation to other eligible air carriers 
up to 95 percent of the total remaining funds available, cumulatively 
with funds distributed previously.

    4. Revise Sec. 330.7 to read as follows:


Sec. 330.7  How much of an eligible air carrier's compensation will be 
distributed under this part?

    (a) If you are an eligible air carrier that has not previously 
received compensation under the Act, you will receive compensation not 
to exceed 95 percent of the compensation for which you demonstrate to 
the satisfaction of the Department that you are eligible under the Act.
    (b) If you are an air carrier that has previously received 
compensation under the Act, you will receive compensation not to exceed 
95 percent of the compensation for which you demonstrate to the 
satisfaction of the Department that you are eligible under the Act, 
less the amount of compensation that you previously received. For 
example, suppose that you previously received 85 percent of the 
compensation for which the Department ultimately determines you are 
eligible. You would then receive up to an additional 10 percent of the 
compensation for which you are eligible under the Act.
    (c) The provisions of paragraphs (a) and (b) of this section apply 
in the same way to air carriers eligible for the set-aside provisions 
of subpart C of this part as they do for other air carriers. When the 
Department determines the amount of compensation for which an air 
carrier is eligible under the set-aside provisions of Subpart C of this 
part, the Department will distribute to the air carrier either up to 95 
percent of the compensation for which it is eligible (if it has not 
previously received any compensation) or up to 95 percent of the 
compensation for which it is eligible less the amount of compensation 
it has already received. The Department may distribute these funds in 
one or more increments.
    (d) The Department will pay the remaining amount of compensation to 
the carrier (i.e., up to 100 percent of the compensation for which a 
carrier is eligible) after the Department completes a review of third 
round adjustments under this part, without further application by the 
carrier. However, the Department may require additional information to 
support payments to individual carriers in connection with this final 
payment.

    5. Amend Sec. 330.9 by revising paragraph (b) to read as follows:


Sec. 330.9  What are the limits on compensation to air carriers?

* * * * *
    (b) If at any time we determine that a past payment is greater than 
the amount justified by the provisions of this part and the 
documentation you submit, you must repay immediately the excess amount 
to the Department. This requirement applies to you with respect to all 
stages of the compensation process. For example, if the Department 
determines that a carrier's estimated losses for the September 11--
December 31, 2001 period, which were used in determining the first and 
second round payments, are higher than actual losses once actual 
results have become available in 2002, the Department will require that 
you repay the compensation overage immediately, without prejudice to 
the determination of the amount of the third round or final payment. In 
this event, you must repay the overage to the Department at the time we 
request it, without waiting for a final payment or completion of an 
audit of the total amount of compensation to which you are entitled.

    6. Amend Sec. 330.21 by adding new paragraphs (f) through (h), to 
read as follows:


Sec. 330.21  When must air carriers apply for compensation?

* * * * *
    (f) Notwithstanding any other provision of this section, if you are 
a carrier eligible for funds under the set-aside provided under Subpart 
C of this part, and you did not previously submit an application or 
wish to amend your application, you may do so by May 16, 2002. The 
Department may extend this deadline for a reasonable time, if the 
applicant demonstrates to the satisfaction of the Department that there 
is good cause for an extension.
    (g)(1) Notwithstanding any other provision of this section, if you 
are a carrier that did not previously submit an application for 
compensation because of the provisions of Sec. 330.31(d)(1)(iv) or 
(d)(2)(iv) in effect prior to April 16, 2002. (See 14 CFR 330.31 as 
revised in the Federal Register of January 2, 2002), or you wish to 
amend your application because of the removal of these provisions, you 
must submit or amend your application by May 16, 2002. The Department 
may extend this deadline for a reasonable time, if the applicant 
demonstrates to the satisfaction of the Department that there is good 
cause for an extension.
    (2) To be eligible for compensation, such an application must 
demonstrate, to the satisfaction of the Department, that you meet all 
applicable requirements of this part.
    (h) If you are an air carrier that has received compensation under 
the Act or submitted a claim for compensation prior to April 16, 2002, 
you must submit a ``third round'' application, including the report of 
the agreed-upon procedures engagement required by Sec. 330.37(c) or the 
simplified procedures report required by Sec. 330.37(d), as applicable. 
You must also submit copies of monthly profit and loss statements for 
the months July 2001 through January 2002, each of which must include 
the imputed price per gallon average of the fuel used for all aircraft 
during that month. These statements must be certified to be true and 
accurate (see Sec. 330.33). You must submit this application and all 
required supporting materials by May 16, 2002. The Department may 
extend this deadline for a reasonable time, if the applicant 
demonstrates to the satisfaction of the Department that there is good 
cause for an extension.


Sec. 330.31  [Amended]

    7. Amend Sec. 330.31 as follows:
    a. Add the word ``and'' following the semicolon in paragraph 
(d)(1)(iii); remove paragraph (d)(1)(iv); and redesignate paragraph 
(d)(1)(v) as paragraph (d)(1)(iv).
    b. Add the word ``and'' following the semicolon in paragraph 
(d)(2)(iii); remove paragraph (d)(2)(iv); and redesignate paragraph 
(d)(2)(v) as paragraph (d)(2)(iv).

    8. Amend Sec. 330.37 as follows:
    a. In paragraph (b), remove the word ``Before'' at the beginning of 
the first sentence and add the words ``Except as provided in paragraph 
(c) of this section, before'' in its place.
    b. Add new paragraphs (c) and (d), to read as follows:

[[Page 18477]]

Sec. 330.37  Are carriers which participate in this program subject to 
audit?

* * * * *
    (c) The following are the core requirements for the independent 
public accountant's review:
    (1) Determine that the earnings forecast presented to the 
Department was inclusive of the entity's full operations as an air 
carrier and was the most current forecast prepared prior to September 
11, 2001;
    (2) Determine that, if forecasts presented to the Department for 
prior periods had material variances from actual results, the carrier 
provided explanations to account for such variances;
    (3) Determine that the methodology for allocating revenue and 
expenses to the periods September 1-10 and September 11-30, from the 
forecasted and actual September results, was in accordance with air 
carrier records and analyses;
    (4) Determine that the actual expenses and revenues presented to 
the Department are in accordance with the official accounting records 
of the carrier or the financial statements included in the carrier's 
Securities and Exchange Commission Form 10-Q, and consistent with 
Generally Accepted Accounting Principles (GAAP), except to the extent 
that GAAP would require or allow treatment that would be inconsistent 
with the Act or this part;
    (5) Verify that the carrier provided explanations supporting the 
allocation methodology used if the forecasted and/or actual results for 
the September 11--30 period was different from allocating 66.7 percent 
of the total amounts for September;
    (6) Determine that the carrier provided full explanations for all 
material differences between forecast and actual results for the 
September 11--30, 2001 period and the October 1--December 31, 2001 
period;
    (7) Determine that the amounts included in management's 
explanations for such material differences were in accordance with the 
carrier's analysis of such fluctuations, and the amounts and 
explanations were traceable to supporting general ledger accounting 
records or analyses prepared by the carrier;
    (8) Determine that the amounts presented to the Department in Form 
330 (Final), pages 2-3, in appendix A of this part that the carrier 
identified as adjustments to the difference between the pre-September 
11 forecast and actual results for the period September 11 through 
December 31, 2001, were in accordance with the official accounting 
records of the carrier or the financial statements included in the 
carrier's Securities and Exchange Commission Form 10-Q, and consistent 
with GAAP, except to the extent that GAAP would require or allow 
treatment that would be inconsistent with the Act or this part;
    (9) Determine that the insurance recoveries and government payments 
reported by the air carrier and offsetting income were in accordance 
with the air carrier's general ledger accounting records;
    (10) Determine that the information presented in the air carrier's 
Supplemental Certification were in accordance with the air carrier's 
general ledger accounting records;
    (11) Include in the auditor's report full documentation for each 
exception taken by the auditor; and
    (12) Identify air carrier reports and records utilized in 
performing the procedures in paragraphs (c)(1) through (11) of this 
section.
    (d) If you are a carrier that reported fewer than 10 million ASMs 
for the month of August 2001 or fewer than two million RTMs for the 
quarter ending June 30, 2001, you are not required to report to the 
Department on the basis of an agreed-upon procedures engagement by an 
independent public accountant. Instead, you may report on the basis of 
simplified procedures approved by the Department.

    9. Add a new Sec. 330.39 to subpart B, to read as follows:


Sec. 330.39  What are examples of types of losses that the Department 
does not allow?

    (a)(1) The Department generally does not allow air carriers to 
include in their calculations aircraft impairment charges, charges or 
expenses attributable to lease buyouts, or other losses that are not 
actually and fully realized in the period between September 11, 2001 
and December 31, 2001.
    (2) The Department will consider requests to accept adjustments for 
extraordinary or non-recurring expenses or revenues on a case-by-case 
basis. If, as a carrier, you make such a request, you must demonstrate 
the following to the satisfaction of the Department:
    (i) That the expense or revenue was (or was not, as appropriate) 
the direct result of the terrorist attacks of September 11, 2001;
    (ii) That the revenue or expense was reported in accordance with 
Generally Accepted Accounting Principles (GAAP), except to the extent 
that that the GAAP would require or allow treatment that would be 
inconsistent with the Act or this part;
    (iii) That an expense was fully borne within the September 11--
December 31, 2001, period and is permanent; and
    (iv) That the resulting additional compensation would not be 
duplicative of other allowances for compensation.
    (b) The Department generally does not accept claims by air carriers 
that cost savings should be excluded from the calculation of incurred 
losses. Consequently, the Department will not allow such claims to be 
used in a way that has the effect of increasing the compensation for 
which an air carrier is eligible.

    10. Add a new Subpart C, to read as follows:

Subpart C--Set-Aside for Certain Carriers

Sec.
330.41   What funds is the Department setting aside for eligible 
classes of air carriers?
330.43   What classes of air carriers are eligible under the set-
aside?
330.45   What is the basis on which air carriers will be compensated 
under the set-aside?

Subpart C--Set-Aside for Certain Carriers


Sec. 330.41  What funds is the Department setting aside for eligible 
classes of air carriers?

    The Department is setting aside a sum of up to $35 million to 
compensate eligible classes of air carriers, for which application of a 
distribution formula containing ASMs as a factor, as set forth in 
section 103(b)(2) of the Act, would inadequately reflect their share of 
direct and incremental losses.


Sec. 330.43  What classes of air carriers are eligible under the set-
aside?

    There are two classes of eligible air carriers:
    (a) You are a Class I air carrier if you are an air taxi, regional, 
or commuter air carrier and you reported 310,000 or fewer ASMs to the 
Department for the month of August 2001 (10,000 ASMs per day).
    (b) You are a Class II air carrier if you are an air taxi, 
regional, or commuter air carrier and you reported between 310,001 and 
10 million ASMs to the Department for the month of August 2001.


Sec. 330.45  What is the basis on which air carriers will be 
compensated under the set-aside?

    (a) Except as provided in paragraph (c) of this section, as an air 
carrier eligible for compensation through the set-aside, you will be 
compensated for an amount calculated as provided in paragraph (b) of 
this section.
    (b)(1) As a Class I carrier, your compensation will be calculated 
using a

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fixed ASM rate equivalent to the mean losses per ASM for all Class I 
carriers applying for compensation.
    (2) As a Class II carrier, your compensation will be calculated 
using a graduated ASM rate equivalent to--
    (i) The mean loss per ASM for all Class I carriers applying for 
compensation, for each of the first 310,000 ASMs reported; and
    (ii) The mean loss per ASM for all Class II carriers applying for 
compensation for each ASM in excess of 310,000.
    (3) For purposes of this paragraph (b), ASMs are those verified by 
the Department for August 2001.
    (4) Any compensation payments previously made to air carriers 
eligible for the set-aside will be deducted from the amount calculated 
as the carrier's total compensation under the set-aside formula.
    (c) If you are an air carrier whose compensation is calculated 
using an ASM rate as provided in paragraph (b) of this section, your 
compensation will not be less than an amount equivalent to 25 percent 
of the direct and incremental transportation-related losses you have 
demonstrated to the satisfaction of the Department were incurred as a 
direct result of the terrorist attacks of September 11, 2001. Your 
compensation will not be more than an amount equivalent to the mean 
percentage of compensation for losses received by passenger and 
combination air carriers that are not eligible for the set-aside funds, 
unless you would have been compensated for more than that percentage of 
losses under the formula set forth in section 103(b)(2) of the Act, in 
which case you will be compensated under that formula.

    11. Revise Appendix A to Part 330, to read as follows:
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Appendix A to Part 330--Forms for New and Third Round Applications
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[FR Doc. 02-9243 Filed 4-12-02; 10:38 am]
BILLING CODE 4910-62-C