Question
- Thread starter Doc
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Doc said:
Through contracts, MESA/MDA can "guarantee" themselves a profit but U does not set out to "guarantee" a profit to them. And when you say "guarantee", that means that if operating costs such as fuel remain constant, they can profit, but there are no guarantees as we all see these days.
And the issue is that U pays MESA/MDA an amount that covers the operation of these flights, but if U were to take on the flights themselves, it would cost much, much more. By contracting to these other carriers, U's CASM is actually LOWER than it would be if they tried tackling the smaller markets themselves.
Well, I have heard differently I will do some home work but what I understand is that wether they fly 1 or 50 on a flight they make a profit, and this was one of the reasons United lost it's comutter I forgot the name already but its new name is independence air. United changed the agreement in BK and they wanted out of the deal.........
Doc said:
Do all the homework you want, but what I tell you is fact. United wanted out b/c ACA had stated its intentions to begin a LCC out of IAD which essentially forced the negation of the agreement. Why would they want to pay a company that is beginning a war with them at thier hub? It is cheaper to contract out, that is a fact. There is no way to guarantee profit, that is a fact (why even operate an airline if you have the power of foresight? The stock market would be the place to go).
Now...the "expense" of contracting out comes in the form of lower morale of mainline employees and inconsistencies in the service provided. That isn't necessarily a minor "expense".
Light Years
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Ch. 12 said:
MDA is really only an internal thing, not really an airline at all. Its just a division of US Airways itself (the actual company), like MetroJet, US Airways Shuttle, or the seperate international crewing- (basically... none of those are a completely valid comparison, but its really only a group at US operating a specific airplane, under different contracts, on a fenced seniority list) So MDA is not even an entity that makes profits or losses for itself, its simply a name for an operating division of US Airways.
Piedmont and PSA are wholly-owned subsidiaries of the US Airways Group. They are thier own companies (unlike MDA) within the US Airways Group corporate structure, so the money stays "at home" so to speak.
Mesa, Trans States, and Chautauqua are contract RJ companies. They are completely different companies that are basically "franchising" to put it nicely, or outsourcing and whipsawing the actual US/USX employees if you were being honest. The agreements vary, but I believe Mesa (and I'd imagine the others) are guaranteed a profit. I'm not quite sure if its still a fee-per-departure agreement.
Air Midwest, Colgan Air, Trans States turboprop operations, and Shuttle America are contracted turboprop operators. As I understand it, they are free to set thier own schedules as such and thier income depends on how profitable the flights they operate are. Affiliate turboprops operate under a more traditional codeshare type of set-up.
Labor costs are lower at all of the Express than they are at mainline, so whether they use thier own internal cheaper labor or outsource to an outfit with low costs they are saving money by using Express carriers. But from the little I know about CASM etc, the fewer seats you have, the higher your CASM is. I also dont believe Express carriers are figured into US's CASM, with the exception maybe of MDA.
Mesa contract with US is a revenue gaurantee flat rate per flight with a built in profit.
Also in the contract US reimburses Mesa for Fuel, Insurance, Ground Handling, Lease Cost, and other things.
Last year according to Mesa's 10K US Paid them $232,000,000 to operate 50 RJs.
Also in the contract US reimburses Mesa for Fuel, Insurance, Ground Handling, Lease Cost, and other things.
Last year according to Mesa's 10K US Paid them $232,000,000 to operate 50 RJs.
700UW said:
Right...fee per departure. But that DOES NOT guarantee profit!! If you receive $4,000 per flight and fuel suddenly goes up, pushing costs above $4,000, the only way that Mesa would make more is if the renegotiated. Even after a renegotiation, it would still be cheaper b/c U would have to pay the fuel themselves, along with more expensive labor, if they did not "express out" these routes. No "built in profit", just hedging. Mesa "hedges" these routes by setting a rate ahead of time and they can either win big (if operating costs go down) or lose (if op costs go up...as has jet fuel). By hedging, Mesa isn't guaranteeing a favorable outcome but rather "locking in" a revenue amount. If U fills all seats on all of these flights at a decent yield (thus getting added revenue) they keep all of the excess...nothing goes to the express carriers.
It's a simple contract, really. And while there is a REVENUE guarantee, there is no PROFIT guarantee. Please...it is a huge difference. This is how rumors get started.
oldiebutgoody
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WRONG...Ch. 12 said:
The way I understand the arrangement, UAIR pays a fee per departure AND pays for fuel as well, basically absorbing ALL of the variable costs for operation. This DOES guarantee a profit for the companies UAIR pays, as long as the flights operate (even if they are extremely late, virtually removing ALL profit potential for the mainline operation). What a deal! It's no wonder that ALL of the carriers that employ this strategy are losing their ARSES!
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From Mesa's annual report (their fiscal year ended September 30, 2003):
**********
US Airways Code-Sharing Agreements
Revenue-Guarantee
As of September 30, 2003, we operated 52 50-seat regional jets for US Airways under a code-sharing agreement, with an additional four 50-seat regional jets added in December 2003. Under the jet code-share agreement, we provide US Airways Express service between US Airways hubs and cities designated by US Airways.
In exchange for performing the flight services under the agreement, we receive from US Airways a fixed monthly minimum amount, plus certain additional amounts based upon the number of flights flown and block hours performed during the month.
Additionally, certain costs incurred by Mesa in performing the flight services are “pass-through†costs, whereby US Airways agrees to reimburse us for the actual amounts incurred for these items: insurance, property tax per aircraft, fuel and oil cost, catering cost, and landing fees. We also receive a fixed profit margin based upon certain costs reimbursements under the agreement.
Twenty-four of the fifty-six jets must be in compliance with the ‘jets-for-jobs’ provisions in the US Airways pilot contract. ‘Jets-for-jobs’ is an agreement between Mesa, US Airways and their respective pilot unions in which furloughed US Airways Pilots receive an agreed upon number of captain and first officer positions on certain aircraft added to the agreement. Additionally, on November 22, 2002, the Company signed a non-binding letter of intent with US Airways to provide up to an additional 50 70-seat regional jets. The additional aircraft, which will also be subject to ‘jets-for-jobs,’ are expected to be delivered beginning in mid-fiscal 2004. Mesa and US Airways continue to discuss the terms of the Letter of Intent, but no definitive agreement has been reached and no assurance can be made that a definitive agreement will be reached that is mutually acceptable to both parties.
The code-share agreement for (i) the initial 32 ERJ-145s terminates on December 31, 2008, unless US Airways elects to exercise its option to extend the term for three years upon 12 months notice; and (ii) the additional 24 jets terminates in January 2013, unless US Airways elects to exercise its option to extend the term for two years upon 12 months notice. Further, on November 19, 2003, the Company signed a Seventh Amendment to the US Airways code-share agreement in which the number of additional aircraft was increased from 24 jets to 27 jets. These aircraft are expected to be placed in service beginning in the second quarter of fiscal 2004.
***************
Perhaps the sentence that sums it up best is:
"We also receive a fixed profit margin based upon certain costs reimbursements under the agreement. "
Jim
**********
US Airways Code-Sharing Agreements
Revenue-Guarantee
As of September 30, 2003, we operated 52 50-seat regional jets for US Airways under a code-sharing agreement, with an additional four 50-seat regional jets added in December 2003. Under the jet code-share agreement, we provide US Airways Express service between US Airways hubs and cities designated by US Airways.
In exchange for performing the flight services under the agreement, we receive from US Airways a fixed monthly minimum amount, plus certain additional amounts based upon the number of flights flown and block hours performed during the month.
Additionally, certain costs incurred by Mesa in performing the flight services are “pass-through†costs, whereby US Airways agrees to reimburse us for the actual amounts incurred for these items: insurance, property tax per aircraft, fuel and oil cost, catering cost, and landing fees. We also receive a fixed profit margin based upon certain costs reimbursements under the agreement.
Twenty-four of the fifty-six jets must be in compliance with the ‘jets-for-jobs’ provisions in the US Airways pilot contract. ‘Jets-for-jobs’ is an agreement between Mesa, US Airways and their respective pilot unions in which furloughed US Airways Pilots receive an agreed upon number of captain and first officer positions on certain aircraft added to the agreement. Additionally, on November 22, 2002, the Company signed a non-binding letter of intent with US Airways to provide up to an additional 50 70-seat regional jets. The additional aircraft, which will also be subject to ‘jets-for-jobs,’ are expected to be delivered beginning in mid-fiscal 2004. Mesa and US Airways continue to discuss the terms of the Letter of Intent, but no definitive agreement has been reached and no assurance can be made that a definitive agreement will be reached that is mutually acceptable to both parties.
The code-share agreement for (i) the initial 32 ERJ-145s terminates on December 31, 2008, unless US Airways elects to exercise its option to extend the term for three years upon 12 months notice; and (ii) the additional 24 jets terminates in January 2013, unless US Airways elects to exercise its option to extend the term for two years upon 12 months notice. Further, on November 19, 2003, the Company signed a Seventh Amendment to the US Airways code-share agreement in which the number of additional aircraft was increased from 24 jets to 27 jets. These aircraft are expected to be placed in service beginning in the second quarter of fiscal 2004.
***************
Perhaps the sentence that sums it up best is:
"We also receive a fixed profit margin based upon certain costs reimbursements under the agreement. "
Jim
700UW said:
Sorry, but I am not incorrect that it is not a profit-guarantee contract. Trust me.
Jim- Thanks for the definition from the annual report. I will back off using fuel as an example since that is a pass through cost. I apologize for using that as my example of costs.
Please be careful, though, in seeing the line "We also receive a fixed profit margin based upon certain costs reimbursements under the agreement. " The key to note is that it is a margin over "certain costs" and not over all costs. That is why the contracts are called "revenue" guarantees and not "profit" guarantees.
And sorry, oldie...the big picture does not mean that U is losing their shirt on the deal. That is emotion speaking. You see, in the big picture, they are saving money. While Mesa can profit at a much lower level due to much lower costs, U benefits by paying an amount that is less than what it would cost U, but in most cases more than it costs Mesa. U would be in even worse shape financially if they tried to take on all of the express flying.
BUT...as I mentioned before...even though these agreements mean cheaper costs for U and profits (didn't say guaranteed) for Mesa, they are extremely detrimental for morale. The U employees feel abandoned by corporate when routes are farmed out. This is true in any outsourcing scenario. But the point of out-sourcing is not to make everyone happy b/c that costs too much. It is to save costs by utilizing dedicated express carriers that benefit from economies of scale.
Mesa's agreement with U has a 8% profit built into it. If costs of fuel increase, U pays them for that. With a business model like this, how can you go wrong. Year after year, Mesa gets more aircraft from the 8% guaranteed profits from U as well as their guarantees from United and AMW. Eventually Mesa will be so big from these oversights that they will take over US Airways.
