Fee For Departure

[mweiss]

One thing about the whole mainline/regional relationship has baffled me for a while. I hope some of you could enlighten me here.

As I understand it, US's relationship with Mesa requires US to pay cost + 8% as fee for departure. I recognize that one of the motivations to be derived from this is incentive for US to maximize revenue on those flights, since Mesa doesn't have the power to sell any seats.

However, the nature of "cost" concerns me. It appears that Mesa, in this arrangement, has absolutely no incentive to reduce costs. In fact, since they get 8% on top of "cost," simply becoming less efficient, which increases cost, would increase their profit. They have disincentive to reduce costs, and incentive to increase costs.

Please tell me that I'm missing something, and that "cost" is not so loosely defined. :blink:

 

[USFlyer]

It's never a good idea to not spread risk among multiple parties. But, US has limited to zero ability to finance 30-50 seat RJs, and, let's face it, many US markets are perfect for RJs. They are at the mercy of third party carriers to provide the lift.

 

[BoeingBoy]

Michael,

The "fee for departure" agreements are a little more complicated than Mesa (or whoever) just presenting a bill for their cost + 8% profit margin and US paying it.

While I have not been privy to all the details of any of these agreements, Mesa's annual report provides some details....

Mesa receives:

1 - a fixed monthly minimum
2 - additional amounts for # of flights performed
3 - additional amounts for # of block hours flown
4 - reimbursement of certain costs (insurance, fuel & oil, property tax on a/c, catering, landing fees are the ones mentioned)

The first 3 would be specified in the contract (though the 1st would probably be per aircraft to cover adding aircraft), though presumably the ability to revisit them periodically would also be covered.

Items that fall in #4 are where Mesa has no incentive to control costs, since those expenses are passed on the US (unless there is some provision that limits the amount reimbursed). Fuel is probably the biggest item here - between the pass-thru and pilot contract at Mesa, there is absolutely no incentive to even attempt to conserve fuel - the pilot contract even gives incentive to burn extra fuel.

The contract as a whole provides a profit margin, as long as Mesa (or whoever) keeps their non-reimbursed costs below the income. But JO couldn't just wake up one morning and decide to triple the pay of his employees and expect US to automatically cover it.

Jim

 

[diogenes]

Every U CEO of late has preached CASM, CASM, CASM.

As best I can determine, the costs of the affiliates are borne by mainline, increasing CASM.

My question is, does anyone at U break this cost out, so that U knows what affiliates truly cost (and it's more than the check they mail Jerry O every month) and what mainline CASM really is.

To whit;

1. Mainline ground equipment (tugs, carts, beltloaders, airstart, GPU, jetways) are paid by U, but used by the affiliates. If we deice another carrier, U bills them. Do we bill Mesa? As best I can determine, no.

2. RJ's leave bags behind by the literal truckload. Who pays for delivery? Mainline. I have anecdotal evidence that many of the misconnect bags during the meltdown were in fact due to RJ w&b issues.

3. The dolts on E-con (some of the captain's wonder-hires he's sooo proud of) hoard misconnect bags and freight, rather than move it over to mainline metal leaving for the correct destination a few hours later. CLT has found days worth of backed up bags at E-con - insight in to PineyBob's question as to U's capacity to manage the vendors they outsource work to. The freight situation has gotten so bad, some stations are requesting the company to zero out the buckets (U capacity controls freight bookings per flight) on some RJ flights. But mainline absorbs every sou of the costs.

The list goes on, but you get the gist. When a CEO whines about CASM, I always remember a significant portion of it is to subsidize the vendors.

Hmmmmm, CASM's at WN are very low, and they have no RJ's or vendors. Coincidence?

 

[evprincess]

1. Mainline ground equipment (tugs, carts, beltloaders, airstart, GPU, jetways) are paid by U, but used by the affiliates. If we deice another carrier, U bills them. Do we bill Mesa? As best I can determine, no.

[post="253226"][/post]​

Mesa is billed, at least at my station. They are billed for deicing, cleaning, airstart and GPU use and ice.

 

[fr8tmastr]

They are billed but if they are also paid cost plus, would they not be paid the money back that they just paid for deice in this scenerio? Deicing is a cost.

 

[SVQLBA]

My 2 cents on this topic ---

1) Cost-plus sets up terrible incentives in any industry it is used. It may have its role in aerospace and defense high-risk advanced development research, but really shouldn't be part of what is basically a commercial JV. (Some of the examples cited on this thread are perfect illustrations.)

2) Even if the margin is "appropriate" (and how you define that in an industry which net destroys shareholder value is not clear to me), these deals have layered in various levels of complexity and related costs that the network carriers haven't figured out. These include: staffing to manage express contracts, monitor performance, etc., operational costs at hubs of handling lots of express flights with low volumes of people/baggage. I know express carriers do a lot of the handling at the outstations, but express operations burden the mainline operations too

3) The unquantified loss of revenue from people having a poor experience on an express carrier and overall brand dilution from not having a clear product (in stark contrast to WN and B6)

4) In many ways it's a microeconomic text book case of marginal costs increasing faster than marginal revenues. In chasing extra 30-50 seat loads of passengers to keep feeding hubs, airlines are not just picking up the obvious direct costs (paying for the feed) but have burdened themselevs with a lot of additional costs that they have no handle on.


Let me be clear -- there's definitely a role for feeder operations to hubs and other roles for regional carriers. Its just that from what I've observed, the network carriers lack the ability to intergrate both the revenue side (out of yield mgt/network planning) and the true cost picture (complexity costs, not just express carrier payments) to make the right trade-offs about when and how to use contracted regional feed. The operational and marketing sides of the picture at most legacy carriers don't come together until you reach CEO level.

 

[FWAAA]

In profitable times, it might make sense to fix the costs of regional feed thru FPD agreements. You know how much the regional sevice will cost, and the mainline gets to keep all the upside. In times of rising fares - the mainline might make out like a bandit.

But in money-losing (cash-burning) times, it might not be so nice to be paying a profit to Republic or Mesa while losing one's ass.