RELATIONS BETWEEN SOUTHERN AIR TRANSPORT AND AIR AMERICA, INC. AND AIR ASIA COMPANY LIMITED

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 00198583
• Release Decision: RIFPUB
• Original Classification: U
• Document Page Count: 7
• Document Creation Date: October 23, 2023
• Document Release Date: August 10, 2023
• Case Number: F-2020-01859
• Publication Date: March 17, 1972

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MEMORANDUM
Is +.�,w ata
TO MGDR (via Pres' ent) DATE: 17 March 1972
FROM VP-L REF. No. VP-L/72-91
SUBJECT: Relations Between Southern Air Transport and Air America, Inc.
and Air Asia Company Limited
Ref: TP1877 dated 17 December 1971
HOM211B
1. The corporate relations between Southern Air Transport and the two
companies of Air America and Air Asia are based primarily on two written
agreements, one being an agreement between Southern and Air Asia for
maintenance and supply support and one being an agreement between Southern
and Air America for aircraft ground handling and for mutual assistance
within Japan. There are or have been a number of lesser agreements (such
as aircraft leases) but in general the relations of Southern with these
two companies are based on the two main agreements.
2. During the eleven years that Southern's Pacific Division has been
operating, the business arrangements between these companies have expanded
to cover many facets that are not provided for in the written agreements.
Now that Southern's Pacific Division accounting function is to be centered
at the main office in Miami it is desirable to examine these relationships
since SAMIA will no doubt encounter many personnel, financial and operational
arrangements that are not covered by written contracts.
3. The contract between Southern and Air America (No. 69-20, also inadvertently
numbered 69-6) contains two main parts. One part provides for aircraft ground
handling services at Yokota A3, Osan AB, and Clark AB. This part represents
Air America's standard ground handling contract and is essentially the same
as Air America's handling contracts with other carriers. The second main
part provides for "Mutual Assistance" at Yokota AB and Tachikawa AB (but
not elsewhere) and reads as follows:
"Section 7. Mutual Assistance
7.1. Services
Air America agrees to assist Southern with the ground handling of its
air carrier operations and maintenance of its aircraft at both Yokota
Air Base and Tachikawa Air Base, Japan and Southern agrees to reciprocate
by similarly assisting Air America with its operations at Tachikawa
performed pursuant to contract(s) with the United States Government.
All work performed on aircraft of either Air America or Southern will
be in accordance with applicable civil air regulations of the country
of aircraft registry and officially approved Maintenance Mani-IA.1s.
7.2, Personnel
Air America's and Southern's supervisors will consult and coordinate to
make the personnel of each party available as necessary in a timely
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manner in order to maintain operations and maintenance schedules of
both Southern and Air America at Tachikawa and Yokota Air Base. When
Air Americats personnel are assisting Southern pursuant to this Section
7 of Annex A they shall be subject to the direction and instruction
of Southernts supervisors in charge of their activities and when
Southern/5 personnel are assisting Air America they shall be subject
to the direction and instruction of Air Americats supervisors in charge
of their activities.
7.3. Equipment and Parts
The parties hereto agree to make their respective tools, parts and
equipment located at Tachikawa and Yokota available to the other in
conjunction with the mutual assistance contemplated by this Section 7
of Annex A. Parts and materials provided in accordance with this
agreement are subject to acceptance inspection by the receiving party
and must meet Civil Air Regulations and/or industry standards as
applicable. All parts obtained by one party from the other shall be
replaced in kind.
7.4. Training
Southern Air Transport agrees to assist Air America in the required
training of Air America crew members by making available to Air America
Southernts facilities and personnel including the provisioning of a
crew member training program to be conducted in accordance with the
approved training program outlined in the pertinent Air America manuals.
Similarly Air America will make available to Southern such facilities
and personnel as it may from time to time have for training purposes.
7.5. Renegotiation
Apart from rendering such mutual assistance as in this Section 7 of
Annex A provided, there shall be no obligation by way of remuneration
or monetary payment by either party to the other; provided, that if
either party becomes dissatisfied with this arrangement due to an
apparent disparity in assistance being rendered, upon notice thereof
to the other both parties agree to promptly review this arrangement
after which the arrangement may be continued, may be abandoned (in
accordance with Article 16), or may be continued with such adjustments
hereto, including arrangements for the payment by one party to the
other of fees or charges for particular services, or for all services,
which shall have been derived by mutual agreement."
4. This "mutual assistance" agreement is basically limited to the following
points:
a. Each will assist the other in the ground handling of their air
carrier operations and the maintenance of their aircraft.
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b. The personnel of each will assist the other in maintaining operations
and maintenance schedules with the supervisors of the party being
assisted being in charge.
c. Tools, part, and equipment will be made available to each other on
a replacement-in-kind basis.
d. Each will assist the other in their crew member training programs.
e. The agreement can be adjusted or cancelled if the assistance given
becomes overly weighted in favor of one party.
5. Southern's maintenance agreement with Air Asia provides that Southern will
utilize AACL as the primary aircraft maintenance and supply contractor for its
aircraft. Air Asia agrees to undertake a complete maintenance and supply
program for Southern's aircraft, and components thereof, and provide parts and
material procurement with the provisioning of spare parts and engines at
Southern's operating stations.
6. Out of these two agreements which go back in much the same form for about
eleven years there has developed an "assistance" arrangement that goes
substantially beyond the relaticnship envisioned in the contract wording. While
this relationship has apparently been successful in the sense that the companies
have been successful in cooperating with each other where third parties are
concerned, between themselves the relationship has suffered from the lack
of a definitive and conclusive written agreement governing their relations.
At times both parties have absorbed expenses that should have been charged to
the other.
7. The main "assistance" offered to Southern was the provisioning to Southern
of both ground and flight personnel on a more or less permanent basis. Para-
graph 7.2 of Contract 69-20 does contemplate that personnel of each party will
assist the opposite party, but this is apparently limited to assistance in
performing a particular job or project. The personnel being "lent" would be
under the supervision of the other party during the duration of this project
mainly because the party being assisted is by law responsible for all facets
of its operations. In practice this principle has been extended so that
personnel have been "assigned" to work for Southern on a full time and more
or less indefinite basis (some of these "assigned" personnel have been on
Southern's payroll for more than ten years). In an additional deviation from
the contract terms the assigned personnel, even at the lower job levels,
remained largely under the control of the assigning company.
8. The assigned personnel have been retained on the personnel rosters of
Air Asia and Air America and treated as being on leave without pay from these
companies. Perhaps all the expenses of these personnel should have been
charged to Southern during the time they were employed by Southern, but it
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was a deliberate decision (Home Office) that the matter be treated in this
manner. Many expenses were borne by Air Asia/Air America which would appear
to be inequitable. Presumably Air Asia/Air America does benefit by keeping
these persons on its roster where they could be available for relatively prompt
recall should their services be needed. This advantage is probably nowhere
equal to costs sustained by Air Asia and Air America in carrying certain
employee expenses. These expenses include the assumption of the vacation
and travel expenses of U. S. citizen employees on Southern payroll up to
April, 1971. During this eleven-year period these costs amounted to several
hundred thousand dollars. Air America also paid the "company contributions"
to the Air America Retirement Plan for those participants who were assigned
to Southern. These payments were made up to January, 1972, at a cost of
approximately $400,000.00.
9. The above personnel expenses perhaps al-e the greatest expense iMbalance
between the companies, but there are other areas where one party has assumed
expenses that might have been more properly charged to the other party:
a.
Southern leases its 3727 aircraft from Air America with the rental
being $200.00 per aircraft hour. Due to a diminished MAC requirement
the aircraft hours have been reduced with the result that Air America
is losing money by this lease. Air America's depreciation costs on
the aircraft , along with related G & A expenses, are such that Air
America sustained a loss on the B727 aircraft of $196,943.00 in 1970 and
$123,887.00 in 1971 (the change to rental based on flight hours occurred
on January 1, 1970). This of course may not necessarily mean that
Southern has made a "profit" of these amounts since this would depend
on the terms on which Southern could have secured 3727 aircraft from
other parties.
b. In reverse to the above it appears that Southern has incurred substantial
costs in the training of 3727 crew members that under other arrangements
might not have been incurred. As Southern is the only party utilizing
jet crew members the costs of their training could be expected to be
assigned to Southern. The cost of training the initial 16 crew members
($393,868.00) was paid by Southern and Southern has paid the cost of
subsequent training for additional crew members except for two super-
visory employees. The inequitable aspect of the training expense
results from the fact that these crew members are assigned by Air
America, are subject to recall by Air America, and are subject to
the bidding procedures applicable to all of Air America's crew members.
A number of pilots have been trained and then recalled (or they bid
to another slot) with the result that Southern is faced with training
a new group. This has been occurring at a time when Southern's jet
crew member requirements have been decreasing rather than increasing.
This is probably not correctable at this date but presirmAbly any
written agreement for assigning personnel should contain terms
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governing the length of their assignment in those cases where
Southern incurs expense in their training. Southern's present
crew member requirement is 11 pilot.personnel whereas Southern has
trained 46 jet pilots over five years. Of these 46 pilots eleven
are currently with Southern, two are on leave without pay, one is
in the process of being transferred to Air America, seventeen are
with Air America, and fifteen have left.
c. Related to this practice of switching crew members back and forth is
the procedure of not releasing a crew member to his new employer until
he has qualified in the new flight program. A number of Southern crew
members have returned to Air America but have remained on Southern's
payroll and expense until they qualified in their new job position.
This may be an administrative convenience insofar as transferring
personnel goes, but it is not a fair sharing of expenses. The same
policy however works in Southern's favor when crew members are
assigned to Southern.
d. Air America and Air Asia have provided personnel services to Southern
at points other than Japan even though the mutual assistance agreement
is limited to Japan by its terms. No compensation is provided for this
service and any assistance given in return is minor. In the past much
of Southern's traffic, accounting, personnel and operations functions
in regard to planning and overall supervisions was performed by personnel
in Taipei. There has been no record of the manhours and expenses involved
in this, but over the years it would have been quite large. Personnel
records have been maintained in Taipei along with most statistical
records concerning Southern's operations. Southern has a representative
in Taipei on the Southern payroll' but his office space and secretary
are provided by Air Asia. Insurance matter and aircraft scheduling are
coordinated through Air Asia Taipei personnel; flight following for
sectors away from Japan is performed by Air America/Air Asia personnel;
American employees are paid through the AAL Hong Kong office; in
negotiating its POL contracts with Esso, Air Asia includes Southern
which provides Southern with a lower rate (but Southern does of course
pay for its own POL); Air America provides Southern with a mnall office
and store space in Saigon (TSN) free of charge except for qma31 charges
for up-keep of the office and equipment used by Southern; Southern is
audited annually by Lybrands and does pay for the time spent by Lybrand
personnel on Southern's accounts but does not pay any share of the
travel expenses and per diem expenses of Lybrand personnel who travel
to the Far East; at stations where Southern is handled by Air America
the local Air America manager acts as Southern's representative, often
performing services beyond those contemplated in the handling contract
(such as Air America's Kadena AB manager maintaining complete liaison
with the LSO customer) and the handling charge is Air America's standard
fee; World Airways shares the cost of a Boeing 727 tail gantry at Yokota
AB with Southern and Air America, the cost of this being borne by Air
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America even though Air America does not operate B727 aircraft; certain
fringe benefits for Southern's Japan-based Chinese employees, such as
retirement and annual leave costs are borne by Air America; Southern's
employees have free use of Air America's medical facilities; Southern
utilizes Air America air freight specialists on its LSO flights on an
actual cost basis without any application of G & A or profit; Civil Air
Transport personnel in Saigon assist in the handling of Southern flights,
but on a charge basis.
e. The current maintenance rate in Southern's agreement with Air Asia does
appear to be equitable now (but sometimes have been too low in the past)
in view of the downward trend of engine overhaul costs. Air Asia does
procure supplies for Southern in excess of those called for in the agree-
ment (such as passenger food items secured through Air Asia's North .
Hollywood Office) but Southern is billed for this expense at Air Asia's
in-bin cost (vendor's invoice cost plus 13.5% for North Hollywood's
procurement expenses, inland freight, insurance handling charges, etc.).
f. Southern utilizes the communications system which Air America has set up
in the Far East and to the United States (contracted from third parties)
but the system costs are prorated and Southern pays its equitable share
on a monthly basis according to usage.
g.
From time to time Southern provides route support for Air America personnel
and supplies but this is limited in amount due to requirements set up by
MAC. Southern provides similar route support to other MAC carriers and
in turn is provided route support by other MAC carriers, particularly
Airways.
h. There are five vehicles at Yokota/Tachikawa of which Air America awns
four and Southern one. Each bears a31 the costs of the vehicle(s) it
owns but they are used in common which probably results in Air America
having a disproportionate cost. However, at various times in the past
Southern has provided vehicles at other stations, such as Clark AB, when
the cost of such vehicles should have been paid by Air America as the
vehicle services should have been provided under the aircraft handling
agreement. In practice Air America would use the Southern vehicles in
carrying out its handling agreements with other carriers such as Braniff
or Flying Tigers. The reason for Southern having ownership of these
vehicles appears to be the ease with which Southern could import vehicles.
i. Southern and Air America have a joint training program in Japan for flight
crew members, this arrangement having been approved by the FAA. In
practice Southern has borne a disproportionate share of this cost since
most of the higher paid American training personnel have been carried on
Southern's payroll. Conversely Air America has carried an uneven costs
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of ground ma1ntenance personnel in Japan. During the ten-,month period
of April, 1971 through January, 1972, for example, an average of 2,731
manhours per month was required for maintenance of the B727 aircraft
whereas Southernts maintenance personnel in Japan could only produce
a maximum of 1,340 hours per month. This imbalance is being corrected
by the transfer of eight Japanese maintenance personnel from Air America
to Southern effective 1 February 1972.
109 The above sets for the major inconsistencies in the relationship between
Southern and Air America/Air Asia. Doubtlessly a detailed examination would
point out additional discrepancies, Should you desire us to make any specific
changes at this time please so advise.
1
cc: File
FTB/Walinz
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