Originally Posted by
HIREME
I understand they pay a set fee, but the money still flows to the other companies...theoretically, they could cut cost by keeping it in the family. Indirectly, through the contract, they are paying for all those things...a business has to bid the contract with those costs accounted for... Delta would be cost neutral on many of those items that are unique to individual companies. I realize they don't "pay the rent" but they pay the people who pay the rent enough to pay it and make a profit. If they do it themselves, they can use their own teams/facilities/people without causing 9 diff. companies to profit.
I've owned a couple businesses and grew up in an entrepreneurial family with a successful business...we used contractors at times, but only when it made sense...ie>too much work at the time but not sure if it will continue into slower seasons/can't keep up with hiring demands. Long term, it made no financial sense unless you are using them for leverage. Even then, you are paying a premium for their services. Sure, you get rid of some headaches by using another company, but you pay a price. I can't imagine having as many as Delta does. It cannot possibly make sense long term.
Lots and lots of misinformation on how the agreements with the regionals work. Here are the facts.
All of the regionals (WO and contract) work under a cost plus arrangement. They get reimbursed for the costs of operating the flight, plus a set margin, assuming they hit the pre-determined performance targets. Period. As long as regional airline X hits the completion/A14 numbers, regional X makes money. Period.
Here is why it is makes sense to use a contract carrier rather than a wholly owned: Assume you have two carriers, X (WO) and Y (contract). Both hit all the targets. Both are flying under an agreement that Delta will pay them cost plus 10%.
Now assume that Both operate a flight from ATL - MCO and Delta sells $1500 worth of tickets to fly on each flight. Carrier X has higher labor costs, and it costs them $1500 to operate the flight, so Delta pays Carrier X $1500 plus $150 margin or $1650 to operate the flight. Overall, Delta loses $150 to operate that flight. Carrier Y, however, is a "bottom feeder" and Delta only has to pay their costs of $1200 plus $120 margin or a total of $1320 to operate the flight. Now Delta makes $180 to operate the flight.
It is that simple. Either make $180 or lose $120 to operate the flight is a no-brainer. That is why the "keep it in the family" argument does not work.