[00:00:00] Speaker 00: Case number 24-1369, Boutique Air Inc. [00:00:03] Speaker 00: Petitioner versus United States Department of Transportation and Sean P. Duffy in his official capacity as Secretary of Transportation. [00:00:12] Speaker 00: Mr. Goldberg for the petitioner, Mr. Fuller for the respondents. [00:00:17] Speaker 04: Good morning, counsel. [00:00:18] Speaker 01: Mr. Goldberg, please proceed when you're ready. [00:00:21] Speaker 01: Thank you, and may it please the court. [00:00:23] Speaker 01: Roy Goldberg on behalf of the petitioner, Boutique Air Inc. [00:00:27] Speaker 01: This case involves a long-standing important program, the Essential Air Service Program, administered by the respondent DOT. [00:00:35] Speaker 01: And that program provides critical transportation links between the smaller communities and the larger airports in the United States and ultimately throughout the world. [00:00:44] Speaker 01: And this case involves the department's decision a year ago to award the Essential Air Service subsidy payments for Jackson, Tennessee to Denver Air Connection rather than Boutique Air. [00:00:55] Speaker 01: And the department made this decision [00:00:57] Speaker 01: despite the undisputed fact that Denver Air plans to charge the federal government taxpayers millions of dollars more for the four-year period that is covered by the award in comparison to Boutique Air, and also to offer only two-thirds as many flights, 12 a week, as opposed to 18 for Boutique Air. [00:01:15] Speaker 01: So this difference in cost is anywhere from $8.4 million to $21.5 million. [00:01:21] Speaker 01: That's a considerable amount. [00:01:23] Speaker 01: There was a statutory amendment a couple months that came into effect in 2024, a couple months before the decision, that expressly required the DOT to consider the total compensation that it was proposed by the air carrier. [00:01:38] Speaker 01: And unfortunately, in this case, the department, maybe because it was a new requirement for some reason, they failed to, in our argument, they failed to address that statutory factor. [00:01:51] Speaker 01: They certainly failed to provide [00:01:52] Speaker 01: any cogent explanation for why Denver Air Connection should win, given that, again, it was so much more expensive and didn't even have the same operations. [00:02:02] Speaker 01: So we're not faced here with a typical decision where there's a record and that the department weighed and evaluated the evidence before it and made a discretionary decision. [00:02:12] Speaker 01: Rather, in this case, the department just failed to show its work. [00:02:15] Speaker 01: It basically took a position of, well, just trust us. [00:02:18] Speaker 01: We're the government. [00:02:19] Speaker 01: We've made a decision. [00:02:20] Speaker 01: They gave reasons. [00:02:21] Speaker 01: They didn't give reasons as to why the costs of Boutique Air, the much lower cost proposal, should win out. [00:02:29] Speaker 01: A good example would be some of the other cases where they actually look at the various costs, look at the subsidies being proposed, and actually then go into the record as to why they've decided that decision. [00:02:41] Speaker 01: In this case, they gave no reason as to why the much more expensive cost proposal from Denver Air Connection [00:02:48] Speaker 02: Mr. Goldberg, just in order to enable us to better evaluate the subsidy component of your claim, can you explain how the per passenger subsidies work? [00:03:02] Speaker 02: Because part of the department's reasoning gave me the impression they thought that they would become less over time. [00:03:12] Speaker 01: I'm only familiar, Your Honor, Judge Pillard, with what's in the record, which is that the subsidies proposed by Denver would increase during the four years, which is understandable, as did the Batik subsidies. [00:03:23] Speaker 01: It's just that if you look at it, and I believe it's in the reconsideration decision, there's a table that compares. [00:03:29] Speaker 01: And it just shows there's a very large difference between the two, and that in our case, Batik Air was much cheaper. [00:03:36] Speaker 01: And we think, in part, it's arbitrary and capricious, because it's in the record. [00:03:40] Speaker 01: In Rutland and in Quincy, [00:03:42] Speaker 01: The department said, well, the community wants you, but we're not going to select you because you happen to be a few hundred thousand dollars more here. [00:03:49] Speaker 01: We're talking as much as twenty one million dollars more. [00:03:52] Speaker 01: And yet they flipped the script and they said, we're not going to go with you and did not really. [00:03:57] Speaker 01: They never gave. [00:03:58] Speaker 01: There's nothing in the record that says we've actually done the homework and let me show you your work. [00:04:03] Speaker 01: The US air example is interesting. [00:04:06] Speaker 01: It's cited by the government. [00:04:07] Speaker 01: It dealt with an award of international route to Manchester, England. [00:04:11] Speaker 02: So just in terms of like the brass tacks, like how the subsidies work, they subsidize 100%, they subsidize a proportion. [00:04:18] Speaker 02: When the air carrier is drawing a lot of business, it seems like it doesn't need the subsidy anymore. [00:04:25] Speaker 02: Does it ebb away? [00:04:27] Speaker 02: Just remind us what the... [00:04:29] Speaker 02: How this works? [00:04:31] Speaker 02: What are they paying for? [00:04:32] Speaker 02: How is it per passenger? [00:04:34] Speaker 02: Is it permanent? [00:04:36] Speaker 01: Sure. [00:04:37] Speaker 01: Well, this case is for four years. [00:04:38] Speaker 01: Actually, I believe it's four years with a two-year option or vice versa. [00:04:42] Speaker 01: It could be six years. [00:04:44] Speaker 01: And there is in the record a reference to it. [00:04:46] Speaker 01: First, I think it was Denver Air Connection. [00:04:48] Speaker 01: One of the carriers said, we don't need a waiver. [00:04:50] Speaker 01: We don't need a subsidy. [00:04:51] Speaker 01: We can go ahead. [00:04:52] Speaker 01: We'll make money. [00:04:52] Speaker 01: Choose us. [00:04:53] Speaker 01: But then that was taken away. [00:04:55] Speaker 01: So all the carriers required a subsidy. [00:04:57] Speaker 01: The passengers do pay something. [00:04:59] Speaker 01: It's just not enough. [00:05:00] Speaker 01: You know, this comes back to actually 1978 and airline deregulation. [00:05:05] Speaker 01: Once that happened, all kinds of small communities, they just no longer, the market wasn't there. [00:05:11] Speaker 01: So the market needs to be assisted. [00:05:13] Speaker 01: And so if I'm going from a small town, if I'm going from Jackson, Tennessee, I'm going to pay something. [00:05:18] Speaker 01: It's probably going to be like $59 or something like that to go to St. [00:05:21] Speaker 01: Louis or go to Atlantic or then I will change planes. [00:05:25] Speaker 01: But if I'm a carrier, I don't serve that market at all because I can't make any money unless the government comes in. [00:05:30] Speaker 01: And so in this particular case, we just believe that this was a situation where the government maybe could have put something on the record. [00:05:37] Speaker 04: Can I just say, J-26, boutique air service department should have selected it because it submitted a valid proposal to serve Jackson at significantly lower subsidy. [00:05:48] Speaker 04: While the department is required to consider the total compensation, the statute does not require the department to select the least expensive air service proposal. [00:05:56] Speaker 04: the agency goes on to say is discussed above multiple other statutory factors favor DSE's proposal over Boutique Air's proposal. [00:06:02] Speaker 04: So there's an acknowledgement that there's a cost differential. [00:06:05] Speaker 04: There's an explanation that there are other factors that outweigh the cost differential. [00:06:10] Speaker 01: But it's so conclusory, Chief Judge Radarvastan. [00:06:13] Speaker 01: I mean, it's basically just saying, trust us. [00:06:16] Speaker 01: Here's the statute. [00:06:17] Speaker 01: We follow the statute. [00:06:18] Speaker 01: Now let's move on. [00:06:19] Speaker 04: I don't think it's just saying that because [00:06:22] Speaker 04: It's saying there's other statutory factors that outweigh it. [00:06:26] Speaker 04: And then there's an explanation above about why those other statutory factors tip against your client and in favor of that error. [00:06:33] Speaker 01: But what they don't do is go into the actual competing cost proposals and give any indication as to why the much more significant higher cost of Denver Air Connection would be a factor to consider. [00:06:49] Speaker 01: I know the government is objected to us putting in the supplemental 28 J. But [00:06:53] Speaker 01: with Parkersburg, but that's a great example. [00:06:55] Speaker 01: If you look at that recent decision, it has a cost analysis and a comparison of what was requested. [00:07:04] Speaker 04: I think, I mean, it's certainly true that if it all, if everything comes down to cost or if a lot of it comes down to cost, [00:07:11] Speaker 04: then an assessment of the costs and a more detailed analysis may well be something that the agency thinks is necessary for it itself to make a decision. [00:07:20] Speaker 04: But I don't think that there's a rule that says just because costs are different, there has to be the same level of detail of cost comparison when there are other considerations that factor in and outweigh the cost. [00:07:33] Speaker 01: But your honor, it was just so summary, the way they did it. [00:07:36] Speaker 01: The first decision on August 8th, they basically said, well, the community likes Denver Air Connection better. [00:07:43] Speaker 01: They didn't go in any more detail, didn't give us the opportunity. [00:07:46] Speaker 01: Then on the reconsideration, [00:07:48] Speaker 01: They gave a little bit more detail. [00:07:50] Speaker 01: And they said, well, during the pandemic, you had service issues. [00:07:53] Speaker 01: And then in the record, they put in an article from November 2021. [00:07:58] Speaker 01: But I mean, this wasn't a debarment situation. [00:08:01] Speaker 01: They shouldn't be treating it as a debarment situation. [00:08:03] Speaker 01: Certainly, Batik is fully qualified. [00:08:06] Speaker 01: And the example, another that I would give, Your Honor, is the PNV Perry by Energy versus Firk case from this court in 2014, where the court said that [00:08:16] Speaker 01: FERC failed to explain how or why and in what sense the continued energy demand of historic customers did not also cost the same. [00:08:25] Speaker 01: They were getting a price break that the new customers weren't getting. [00:08:28] Speaker 01: And the court said that the commission failed to offer a reasoned basis for his conclusion. [00:08:34] Speaker 01: And that was a Judge Williams decision. [00:08:35] Speaker 01: And I think the same is true here. [00:08:37] Speaker 01: The DOT has said, oh, trust us. [00:08:39] Speaker 01: We've considered costs. [00:08:40] Speaker 01: We've considered the other factors. [00:08:42] Speaker 01: And here's how we come out. [00:08:43] Speaker 01: but they haven't shown its work. [00:08:44] Speaker 02: But Mr. Gilbert, I also thought it was relevant on J-27 where, this is the reconsideration letter further on, where Corwin talks about sort of the interplay between the higher cost of Denver's proposal and the level of confidence it has that Jackson will, [00:09:12] Speaker 02: continue to be eligible. [00:09:14] Speaker 02: It talks about the requirement of an average of 10 appointments a day. [00:09:20] Speaker 02: And basically, I take them to be saying that access to reliable air service is going to make promises Jackson [00:09:36] Speaker 02: better outcome in rebuilding its air transportation access. [00:09:40] Speaker 02: So really sort of taking the two factors together, the community's confidence, therefore the likelihood that there will actually be usage of the subsidized transport. [00:09:53] Speaker 02: And that if what ultimately the department is trying to do is to beef up and put on its own [00:10:01] Speaker 02: two feet or two wings, the air service, that it has more confidence that spending a little more upfront is going to accomplish that. [00:10:10] Speaker 02: Let me say why I think that's unfair. [00:10:12] Speaker 02: I'm not sure I'm reading that correctly, but if I am, it's a little hard to think that we're going to second guess it. [00:10:17] Speaker 01: Well, it's a little unfair, I think. [00:10:18] Speaker 01: First of all, they recognize that Batik Air put in that it was 99% on time for controllable. [00:10:26] Speaker 01: They have an issue of what does controllable mean. [00:10:27] Speaker 01: Well, I think everybody knows controllable means not a weather delay. [00:10:30] Speaker 01: traffic service, et cetera. [00:10:32] Speaker 01: So that was in the record. [00:10:33] Speaker 01: It totally ignored. [00:10:35] Speaker 01: The evidence of the community, that was in 2021 when we were in the middle of a pandemic. [00:10:40] Speaker 01: And yes, we're honest that they had performance issues during the pandemic four years ago. [00:10:45] Speaker 01: Now, I think in the reconsideration decision, Your Honor, they say, well, that was recent. [00:10:48] Speaker 01: Well, no. [00:10:50] Speaker 01: In aviation, 2021 during the height of the pandemic was not recent for a time period that's 2024 to 2028. [00:10:57] Speaker 01: The final thing is, and your honor mentioned the fact that the subsidy level. [00:11:02] Speaker 01: I mean, the $650 subsidy level is clearly going to be blown out by this more than $1,000 a passenger subsidy level. [00:11:09] Speaker 01: And all that the DOT says is, well, we don't prejudge what may happen in the future. [00:11:14] Speaker 01: But we think that's another. [00:11:16] Speaker 01: So three primary grounds for arbitrary and capricious. [00:11:18] Speaker 01: First of all, they may have a conclusion that they've met the factors, but they don't show their work. [00:11:23] Speaker 01: Second of all, it's very inconsistent with what happened in the two [00:11:28] Speaker 01: in Rutland and Quincy, where they said Batik Air community wants you, but you cost a few $100,000 more a year, so we're not going to go with you. [00:11:35] Speaker 01: And then finally, the fact that they completely ignored the fact that Jackson will be ineligible to be an EAS community going forward if this subsidy goes through. [00:11:46] Speaker 01: So we think that on the basis of this record, it's arbitrary and capricious. [00:11:50] Speaker 01: Thank you, Your Honors. [00:11:51] Speaker 04: Thank you, Council. [00:11:55] Speaker 04: Mr. Fuller? [00:12:03] Speaker 03: May it please the court, Sam Fuller for respondents. [00:12:06] Speaker 03: Your honor, I'd like to start with a few points that petitioners raised in their argument. [00:12:11] Speaker 03: First, the reliability issues. [00:12:14] Speaker 03: When the department considered the cost in its reconsideration order and its selection order, it considered what it was getting for that cost. [00:12:22] Speaker 03: The record explicitly states that the government is considering the cost factor in the context of boutique's reliability issues. [00:12:32] Speaker 03: raises various quibbles with those reliability issues, but they're well supported in the record. [00:12:37] Speaker 03: First, boutiques, as the community described, struggled to complete flights in 2021, but also boutique failed to follow the statutory provisions for leaving the community in December 2021. [00:12:49] Speaker 03: That left the community without any confidence in boutique service, as was explained in the record. [00:12:55] Speaker 03: In short, the department's analysis of the cost factor was not only how much the money was, but also what the government was getting for its money. [00:13:05] Speaker 03: As the reconsideration order explains, a mayor provider that was not supported by the community that had past issues with reliability was simply not a bargain. [00:13:16] Speaker 03: The government also adequately considered the cost factor here. [00:13:20] Speaker 03: In both orders, there is an analysis of the cost. [00:13:23] Speaker 03: First, [00:13:24] Speaker 03: does what petitioner asked it to, it did what petitioner asked it to do in the selection order. [00:13:30] Speaker 03: It laid out a table of what each proposal cost compared all of those top line dollar levels. [00:13:35] Speaker 03: And then it expanded upon its analysis in the reconsideration order. [00:13:39] Speaker 03: The reconsideration order explains that cost is considered in the context of the other factors. [00:13:45] Speaker 02: What's the specific response to Boutique's argument that Jackson's eligibility for this service is going to be jeopardized by the large subsidy and it's not going to be able, Denver is not going to be able to keep a per passenger subsidy below the requisite $650? [00:14:09] Speaker 03: Yes, a few points on that. [00:14:10] Speaker 03: First, as we noted in the briefing, the subsidy cap is actually not in effect right now through the end of September. [00:14:17] Speaker 03: And the department's policy is not to judge a community's compliance with the subsidy cap ahead of time. [00:14:24] Speaker 03: That's a judgment that's made on a backwards-looking basis. [00:14:28] Speaker 03: But most importantly is, as the reconsideration order mentions on, I believe, the final or next to last page, [00:14:37] Speaker 03: The subsidy is a per passenger subsidy, so it's a fraction. [00:14:41] Speaker 03: And what the department determined here, which was a reasonable determination to make, is that better quality service that cost more money would increase ridership. [00:14:50] Speaker 03: So yes, the top of the fraction was increasing. [00:14:53] Speaker 03: There are more dollars. [00:14:54] Speaker 03: But the hope is that a provider that's supported by a community and that has increased reliability over the prior provider would be able to grow that bottom of the fraction. [00:15:04] Speaker 02: Right so when you say it's per passenger I think I find that a little bit confusing because it's not actually per passenger it is an amount of money that's given and then when it's looked at is sort of reviewed as whether it's meeting the requirements of the program it's. [00:15:23] Speaker 02: divided by the number of passengers. [00:15:24] Speaker 02: So if you have an airline that has a lot more uptake, there's a lot more passengers, then the per passenger cost to the government goes down. [00:15:36] Speaker 02: Effectively, it's the same amount of money, but it's a better deal for the government because it's increasing passengers, right? [00:15:43] Speaker 02: Is that right? [00:15:44] Speaker 03: Exactly, Your Honor. [00:15:45] Speaker 03: And that's how the government makes the eligibility determination that Boutique is concerned about. [00:15:51] Speaker 03: So yes. [00:15:52] Speaker 03: The overall subsidy considered as a statutory factor is just the cost of the proposal as the statutory language mentions. [00:15:59] Speaker 03: But the EAS eligibility point that Boutique raised, that's the fraction, that's the per passenger subsidy. [00:16:06] Speaker 03: And that's capped at $650 for a community such as Jackson. [00:16:13] Speaker 02: And so am I right that crucial part of the reasoning and support of the larger subsidy to Denver Air is this [00:16:22] Speaker 02: sentence on in the reconsideration order at J-27 where the department finds that as Jackson works to rebuild its air transportation, access to reliable air service may be its best medicine, especially with respect to rebuilding trust in air transportation in the community and increasing emplacements. [00:16:43] Speaker 02: Without a specific [00:16:46] Speaker 02: prediction about how many passengers are going to go, the department is really depending on the idea that people are going to like the service Denver offers and many more people are going to fly. [00:17:01] Speaker 02: And so Jackson's going to continue to be eligible and the higher cost that the government's paying is going to be worth something in terms of benefit to the community. [00:17:10] Speaker 03: That's correct, Your Honor. [00:17:11] Speaker 03: And that also matches the government's more broad analysis of the cost factor, where the government considers what it gets for its money. [00:17:19] Speaker 03: In the reconsideration order, it also mentions that it considered the subsidy in the context of performance, reliability, the community's preferences. [00:17:30] Speaker 03: And it determined that something that the community supported that had a track record of reliability [00:17:35] Speaker 03: that hadn't attempted to leave the community before the holidays, contrary to how the statute requires, was worth the higher cost. [00:17:46] Speaker 02: Why isn't boutiques pointing to the unusual circumstances of the pandemic sufficient to assuage the concerns about their reliability? [00:17:57] Speaker 03: So your honor, the community was unequivocal in stating that it doesn't view boutique as a viable option. [00:18:04] Speaker 03: So first, that goes to community preference, which is a separate factor, that the community simply was not willing to consider boutique after what had happened. [00:18:14] Speaker 03: But also, boutique's reliability issues continued well after the acute phase of the pandemic. [00:18:21] Speaker 03: It attempted to abandon the market [00:18:23] Speaker 03: December 2021. [00:18:24] Speaker 03: That wasn't April 2020. [00:18:28] Speaker 03: Moreover, the community comments mentioned that Denver Air Connection has a strong record of reliability at other EAS communities, which the department also took into consideration. [00:18:41] Speaker 03: And the final point is the department couldn't verify Boutique's claims of controllable cancellation. [00:18:48] Speaker 03: That's an invented metric that the department doesn't keep in its statistics. [00:18:53] Speaker 03: The department tried to verify boutique's claims, and as it mentions in the reconsideration order, that controllable cancellation statistic wasn't something that could be confirmed anywhere. [00:19:04] Speaker 03: The department doesn't know what controllable encompasses or doesn't encompass, and it didn't have any other evidence of boutique's reliability before it. [00:19:15] Speaker 04: Colleagues don't have additional questions? [00:19:17] Speaker 04: Thank you, counsel. [00:19:19] Speaker 04: Thank you, your honor. [00:19:24] Speaker 04: Goldberg will give you a minute for rebuttal. [00:19:28] Speaker 01: Thank you, Your Honor. [00:19:29] Speaker 01: May please record again Roy Goldberg. [00:19:30] Speaker 01: Um, on this last point, I think that's council testifying as to state the pandemic in 2021. [00:19:38] Speaker 01: But December was, I believe it was called Omnicron. [00:19:40] Speaker 01: Maybe it was Delta. [00:19:42] Speaker 01: I mean, things had changed quite a bit and it was still a serious situation for the industry. [00:19:47] Speaker 01: So [00:19:47] Speaker 01: It's frankly arbitrary and capricious for the department at this time to say, well, we've decided that the community had this overwhelming vote in the matter. [00:19:56] Speaker 01: And because it was basically an effective debarment, like in government contracts, where they're saying, well, we're not going to allow you batik. [00:20:02] Speaker 01: But that wasn't the due process. [00:20:04] Speaker 01: It wasn't even in the original order and barely in the reconsideration order. [00:20:09] Speaker 01: So I don't think the government has put on the record a rational basis for how it treated batik here. [00:20:17] Speaker 01: And there's no real discussion as to how the numbers really work out and why it's so important to have the much more expensive Denver Air Connection. [00:20:26] Speaker 01: And finally, there really is no explanation in the record as to why in Rutland and in Quincy, being a few hundred thousand dollars over, even though the community wanted boutique, was sufficient to deny boutique air in those markets, 2017, 2019. [00:20:41] Speaker 01: And then we come to today where it's completely reverse. [00:20:45] Speaker 01: lip service to the requirement in the statute, but they don't explain, they don't show their work. [00:20:50] Speaker 01: So we think it's arbitrary and capricious. [00:20:52] Speaker 01: It's not the right way to do this program. [00:20:54] Speaker 01: I know the DOT can do it right. [00:20:55] Speaker 01: They did it right in Parkersburg, frankly, and that's why we ask for relief from this court. [00:21:00] Speaker 01: Thank you very much. [00:21:00] Speaker 02: And you are not challenging the community preference analysis. [00:21:05] Speaker 02: You're challenging really principally this extraordinary cost difference. [00:21:11] Speaker 01: There's five statutory factors. [00:21:15] Speaker 01: They can consider community, of course. [00:21:17] Speaker 02: But you're not challenging the way they consider community. [00:21:22] Speaker 01: A little bit, your honor, because in the order, they don't say anything about past performance. [00:21:26] Speaker 01: They quote the mayor in a letter saying something without using any emphasis on that at all. [00:21:32] Speaker 01: And then in the reconsideration, they do bring it out a little bit more, certainly. [00:21:37] Speaker 01: Talking about 2021, they never tie it up till now. [00:21:41] Speaker 01: They never talk other than saying that we don't believe your 99% figure boutique. [00:21:45] Speaker 01: So I would think. [00:21:46] Speaker 02: They don't say they don't believe. [00:21:47] Speaker 02: They say we can't substantiate it. [00:21:50] Speaker 01: Exactly. [00:21:50] Speaker 01: I'm sorry. [00:21:50] Speaker 01: That's what I mean. [00:21:51] Speaker 01: They can't substantiate it. [00:21:52] Speaker 01: Exactly. [00:21:52] Speaker 01: But when they say that the recent history shows a performance issue, I think in this world, 2024 to 2028 is not relevant to December 2021. [00:22:03] Speaker 01: Thank you very much. [00:22:05] Speaker 04: Thank you, counsel. [00:22:05] Speaker 04: Thank you to both counsel. [00:22:07] Speaker 04: We'll take this case under submission.