The short answer is, the majors save money by contracting the work out. The long answer is complex, but probably has to do with a collection of savings that have root in market prices and cost determination. A large part of airline operating costs are for general labor. You can be sure the airlines prefer to contract the work out when the markets offer cheaper labor. By this you get a ton of cheaper workers, and by this I mean not just pilots, but everyone from the office clerk to the top exec to the shop help.

I spent quite a few years working in engineering, and my experience was that direct hire employees and contract engineers can be found at all of the companies I worked for. Direct hire engineers are paid much less than contracted engineer wages, by a factor of almost two. Yet year after year these companies actively retain both types of employees side by side, and they have no problem paying the seemingly high hourly rate paid the contractors for the same work.

But why? The answer is a bit hard to grasp at first pass; in a nutshell it is cheaper to use the contract workers than the direct people, and you need both in varying proportions to get the optimum deal. By the time the direct hire employee is provided their full benefits, job perks, performance bonus, 401k matching, pension, vacation weeks, severance pay, stock matching, on and on- the final bill has easily run beyond that of a seemingly overpaid contract engineer who gets one lump sum out the door, no more overhead. You can pay the contract engineer one fat hourly wage, a large amount on face value, and then forget everything else that has to with that employee. In turn, the contract houses compete with one another rigorously for engineering talent trying to get the best worker for less per hour. It is solely the effect of the markets in driving down labor rates on their side. When the markets are good, you use the markets and the contract houses. When the markets are poor, you direct-hire. This also explains why both types of worker are always found in one quantity or another at most large firms. The balance is a moving target.

It is not hard to extend the above idea to the situation between mainline airlines and their regional counterparts. The mainline company can save money by pushing the responsibility, which by the way includes a huge dose of legal liability, onto the contracting company or regional airline. When the markets are strong, you do this, and when the markets are poor, you buy the whole regional operation out and run it yourself. So if you want to know why the regional model has grown so much in recent years, it is because it is an effective way to drive down overall costs. We know that less pilots are willing to take the low pay now, so as labor becomes more expensive the markets may obtain less price advantage than previously seen. If that is the case, no doubt you will see more major airlines taking back their regional flying.