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knope2001
Posts: 2288
Joined: Wed Jun 01, 2005 5:54 am

Midwest's Cost Of Delayed BE1 Retirement

Tue Oct 30, 2007 2:35 am

When Midwest agreed with Great Lakes to take over their BE1 flying back in February, Skyway still submitted bids for the four EAS markets of Escanaba, Ironwood, Manistee and Iron Mountain to cover any interim flying between the end of the current contract (5/27/07) and the actaul date Great Lake started up. These proposals are pretty detailed in both cost and revenue. Great Lakes has still not set a date to take the flying over, and those proposals can give us a good indication of how that delay is affecting Midwest's financial results.

A common misperceptioni s that EAS flying is guaranteed profitable. There's no guarantee. You bid your projected costs and revenue, and the contract builds in a 5% profit. But if actual revenue is less or actual costs are higher, they can be losers.

Here are details, with stats for all four cities lumped together and are shown per day:

Skyway's bid
159.9 pax per day
$10,181 revenue per day
$19,670 cost per day
$10,458 subsidy per day
$969 profit per day

The 159.9 pax per day was based on last year's traffic plus a margin of growth smilar to recent years. (Midwest has seen solid growth in these markets.) Instead, traffic fell well short of those projections, and actually dropped signficantly at ESC, IMT and IWD, just as trafffic has fallen at the bulk of Michigan airports year-over-year.

In addition, the DoT filed an adjustment to their subsidy, basically saying that they'd only subsidize the interim Skyway service at the same rate that Great Lakes bid for. So they are getting less subsidy than they requested for this interim period, too.

Using actual traffic fromt the 3rd quarter and actual subsidy, here's how the four EAS markets look instead:

119.7 pax per day (actual 3rd quarter)
$7,633 revenue per day
$19,670 cost per day
$8,693 subsidy per day (actual based on modified DoT ruling)
$3,344 loss per day

On the basis of reduced traffic and reduced subsidy alone, the EAS flying lost Midwest over $0.3m in the 3rd quarter. That of course assumes costs and revenue were unchanged between February (when they filed this proposal) and now. Any changes in those areas could have made that $300k loss on EAS flying higher or lower.

We don't know what sort of profit or loss the other BE1 flying returned for Midwest in the quarter, but as the BE1's continue to be retired the EAS flying is the majority.

The EAS bids are an unusual opportunity to see specifics on cost and revenue for the BE1 flying, and the numbers do not look very favorable. The longer it takes for Great Lakes to take over, the more it appears to be hurting their bottom line.
 
freshlove1
Posts: 1245
Joined: Thu Jan 15, 2004 1:38 pm

RE: Midwest's Cost Of Delayed BE1 Retirement

Tue Oct 30, 2007 3:01 am

Yes but Skyway can basically name their price for the time that they are being forced to fly the routes until Great Lakes takes over. It is basically like Skyway telling the Government or whoever that it will cost this much to fly it and if we can't get this much we wont do it (cancel the flights daily) so then the Government raises the per fee departure amount to something that is agreed upon and favorable for both then Skyway continues to fly it until Great Lakes comes in. Air Midwest is currently doing the same thing in DUJ,FKL, LWB, and AHN until Gulfstream comes in. They are being forced to fly but are getting more $$$ to fly the route until Gulfstream arrives.
 
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knope2001
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Joined: Wed Jun 01, 2005 5:54 am

RE: Midwest's Cost Of Delayed BE1 Retirement

Tue Oct 30, 2007 11:40 am

Quoting Freshlove1 (Reply 1):
Yes but Skyway can basically name their price for the time that they are being forced to fly the routes until Great Lakes takes over. It is basically like Skyway telling the Government or whoever that it will cost this much to fly it and if we can't get this much we wont do it (cancel the flights daily) so then the Government raises the per fee departure amount to something that is agreed upon and favorable for both then Skyway continues to fly it until Great Lakes comes in.

Not at all... that's exactly what the DoT denied with their final order on June 6, 2007 in this case. The DoT said no, they're not going to pay the higher rate requested for the interim period. Neither with the DoT up the subsidy if traffic or revenue falls short of projection.

That, coupled with the statewide drop in traffic at most Michigan airports (as opposed to the increases projected) mean Skyway's revenue on these routes is likely well short of meeting costs.