Question

[BoeingBoy]

Ch. 12,

We may be talking semantics here. From what I've read (pretty much what I posted from Mesa's annual report) you are technically correct - there is no guaranteed profit in the "fee for departure" contract. However, there is effectively a built in profit for Mesa because the agreement calls for "passing thru" many of the variable costs of their operation and removes what are perhaps the largest "risks" of operating an airline - fuel variations and actually having to sell the seats.

Now if JO got a wild hair and tripled his employees' wages, etc, would Mesa be losing money? Probably.

Jim

 

[700UW]

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

[post="169478"][/post]​

Hey CH 12, do you understand what the bold type means?

 

[ITRADE]

Fixed yes, few doubted that. But the 8% number is the issue. The financial says nothing about that.

 

[Ch. 12]

Hey CH 12, do you understand what the bold type means?

[post="169890"][/post]​

700- I already pointed out in my earlier post with bold (and enlarged) type that this is a profit on certain costs and not the overall contract. So what if Mesa has drawn up an x% profit on insurance or some other line item. The point is that it distinctively says - in the same sentence you pointed out - that it is just certain costs. And those "profit margins" are also driven by performance initiatives (on-time, etc) and can vary...even down to a 0% profit (over certain costs)if they are not performing to U's specifications.

Thanks, ITrade...I was asking about the 8%. I never saw any statement in regards to an "8% profit guarantee". If it exists, I just wanted to see it. I see figures quoted on these boards all the time with no reference. Quest for truth...

Jim- I still stick by the fact that it is possible (but not probable) for Mesa to have a loss in some markets that have revenue guarantee contracts.

Now...what does this all mean, anyways? Well...as I keep stating and as nobody seems to get...even if Mesa profits, that doesn't mean that U would profit on those routes. U's cost structure is much higher than Mesa's (I don't see many U employees willingly giving up their salaries for Mesa salaries) and U would have significant losses if they took on this flying. The same revenue amount goes much further if outsourcing than if inhousing in this situation. Just b/c Mesa might be able to profit at $X does not mean that U could. It's simple math and it's ridiculous to get wound up over something that isn't really there.

 

[BoeingBoy]

Ch. 12,

I'll agree with this point - it is certainly possible that Mesa loses money on some routes. I presume (but really don't know) that the contract is not so specific that it spells out different rates for different routes, and as we all know a longer segment costs less per ASM than a shorter segment. So my assumption is that the contract is based on "averages".

Where I'll disagree somewhat is that "U's cost structure is much higher than Mesa's" or that the "fee for departure" does not effectively guarantee them a profit.

As to the first part of that, "cost structure" is a generic term. Mesa's CASM is marginally lower than U's mainline, despite all the costs borne by US Air by virtue of the fee for departure contract. Since the W/O'ed don't report separate financial data, it's impossible to tell if Mesa's CASM is lower than theirs or not - especially PSA which also flys RJ's - when you compare apples to apples.

On the second point, Mesa is on the verge of becoming a "major" airline (over $1 billion in revenues per year) - with 3rd fiscal quarter (2nd calendar quarter) operating profit of over $22 million (9 - 10% of revenues). Remember that the fee for departure contract eliminates seasonal variability from their financial results.

Finally, I have seen the "8% profit" figure bandied about, but can certainly not substantiate it. But given the profit numbers above (which are pretty consistant with past results), it seems to be at least what they're making, whether guaranteed or not.

Jim

 

[Ch. 12]

Jim-

I agree that Mesa is generating great cash flows and revenues from their revenue guarantees. But the profit is because of their lower costs. The first alert to U's cost structure being significantly higher is that with Mesa only flying short stages and U having a combination of short and long haul, U's CASM would be lower if all else was held constant (same pay rates, etc). But...with U having a higher CASM and a longer stage length, that should alert you to the fact that U has much higher costs.

So...point is that Mesa can receive $5,000 on a flight and profit b/c costs are only $4,000 vs. U getting the same $5,000 but having costs of $6,000. So yes...Mesa can essentially guarantee themselves a profit but just b/c they profit, it doesn't mean that anyone could at that revenue level.

I think you and I are thinking along the same lines, but most of my beef is with other posters here that make it sound like Mesa is robbing profit from U. That's simply not true b/c it is cheaper for U to outsource then inhouse for these routes.

 

[BoeingBoy]

Ch. 12,

I guess we'll just have to disagree to some point because I believe it's impossible to accurately make an apples to apples comparison, even comparing Mesa to a W/O like PSA so it's RJ's vs RJ's. Unless you have access to data that I don't have, that is.

There are too many costs that end up being borne by some part of U instead of Mesa that any accurate comparison of "cost structure" (either trip cost or CASM) is impossible, at least with the data I have available. So, for example, if PSA only had to pay the expense catagories that Mesa has to pay under the fee for departure contract, would their costs be higher than Mesa's or not? I simply don't have the info to know the answer. If you do, then you have access to a lot of data that is not readily available.

Jim

 

[flyin2low]

it's impossible to tell if Mesa's CASM is lower than theirs or not - especially PSA which also flys RJ's - when you compare apples to apples.

That's what you should be comparing, not mainline vs mesa. I tend to think that PSA can operate the same flights at the same casm's. The current concessionary contract at PSA is equal to or worse than mesa's. With PSA eventually putting 48 CRJ701's and 37 CRJ200's into the wholly owned fleet, this should sway the number towards dumping mesa completely.