Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wasn't, and I'm Tracy Alloway. Tracy, I, I
Speaker 1: flew recently on my first flight without a mask mandate.
Speaker 1: How was it? Was it a totally different experience. I
Speaker 1: actually it was more different than I would have expected.
Speaker 1: Like I got on the plane and I was like, oh,
Speaker 1: this is so like something just felt like it was
Speaker 1: like I knew the different thing, which is that no
Speaker 1: one was wearing masks, but also like it just felt
Speaker 1: everything just felt like a little bit freer and different.
Speaker 1: It was very like it was. It was noticed. It
Speaker 1: was very noticeable in a way that's a really hard
Speaker 1: door to look. I grew up in Tokyo and wearing
Speaker 1: masks was not a massive issue. It was just something
Speaker 1: that people did when they were sick on public transport
Speaker 1: or in an office or place with lots of people.
Speaker 1: So I don't know, I have mixed feelings about it,
Speaker 1: but I'm glad you enjoyed the maskless feeling. It makes
Speaker 1: traveling with kids a lot easier to not have to
Speaker 1: like always be adjusting their their ear strap on their
Speaker 1: mask or something. I can see that, and obviously you
Speaker 1: can drink and eat as much as you want, exactly right. So, UH,
Speaker 1: lots going on though in air travel, because we know
Speaker 1: that it's booming. We know that things are picking up,
Speaker 1: although I don't know about business class or sorry business travel,
Speaker 1: but we know travel is picking up. We know that
Speaker 1: the mask mandate is gone. Um. We also know that
Speaker 1: oil prices like jet fuel costs have gone up a lot,
Speaker 1: and actually in some places there's even a shortage. There
Speaker 1: was a story recently that the airport in Austin actually
Speaker 1: had to cancel some flights because there literally wasn't a
Speaker 1: jet fuel available. And it sort of speaks to one
Speaker 1: of our themes that we have about, you know, the
Speaker 1: revenge of the real Like it doesn't matter what the
Speaker 1: price of jet fuel is if there's simply not enough
Speaker 1: of it in a specific location. Yeah, it's also sort
Speaker 1: of like a list of times, worst of time scenario
Speaker 1: for the airline industry. So lockdowns are ending, at least
Speaker 1: in the West. The mass mandates are being lifted. People
Speaker 1: are getting out and traveling again. But at the same
Speaker 1: time you might have higher costs. Well, you do have
Speaker 1: higher costs with his UH air fuel, right, air fuel
Speaker 1: is high and inflation is high, and that you know,
Speaker 1: obviously burdened people. But it feels like after two years,
Speaker 1: even with inflation, even with economic uncertainty of various sorts,
Speaker 1: like people really want to travel at least for leisure.
Speaker 1: I would like to travel. That is true, I recommend it.
Speaker 1: So today we're gonna be speaking. So we actually had
Speaker 1: this guest on recently, I think in February, but we
Speaker 1: recorded the episode about a week before the war, before
Speaker 1: the invasion. We had to change up our schedule due
Speaker 1: to news, and then so much happened that we're like,
Speaker 1: you know what, rather than trying to find just like
Speaker 1: the right time to publish it, so much is going on,
Speaker 1: all the things we talked about, why don't we just
Speaker 1: have them back on for a fresh episode, a take
Speaker 1: to the episode, the public episode of the of the
Speaker 1: conversation that never got out there. So this is either
Speaker 1: a signal of a return to normality or something major
Speaker 1: is going to happen in the next week again and
Speaker 1: we're going to have to re record well hopefully this
Speaker 1: hopefully the public here's this conversation. I'm very excited we're
Speaker 1: going to bring back to the show. H Scott Kays
Speaker 1: He is the founder of the website Scott's Cheap Flights,
Speaker 1: and he knows everything about how the airline aviation industry
Speaker 1: works and what's going on to us. Scott, thank you
Speaker 1: for coming back on odd lots. So great to be here.
Speaker 1: Thank you both for having me. What happened with Austin?
Speaker 1: And there was I don't know if it was just Austin,
Speaker 1: but there was something like there wasn't enough jet fuel.
Speaker 1: They're like, what happened there? Yeah, Austin is a little
Speaker 1: bit of a special case. The Austin bergs from airport because, uh,
Speaker 1: for a couple of reasons. One, it is one of
Speaker 1: the fastest expanding airports in the country, one of the
Speaker 1: fast expanding metro areas in the country, and so the
Speaker 1: airlines and the infrastructure in place that the airport is
Speaker 1: having trouble keeping up. And so where you see that
Speaker 1: come to a head recently is with jet fuel, where,
Speaker 1: unlike most major airports which are actually directly connected to
Speaker 1: fuel pipelines, the Austin airport is actually not connected to one.
Speaker 1: Fuel actually has to be trucked in from a pipeline
Speaker 1: I believe about fifteen miles away or so, and so
Speaker 1: with the expansion not only of the number of planes,
Speaker 1: but with larger and larger planes, more international flights, you know,
Speaker 1: flights to the Netherlands and elsewhere. What you're seeing is
Speaker 1: that the airport infrastructure just can't provide the fuel necessary
Speaker 1: and airlines having to take some pretty extraordinary steps as
Speaker 1: a result, including flying in airplanes with enough fuel to
Speaker 1: be able to fly out to their destination. They call
Speaker 1: that tankering or other sorts of mitigation tactics. Unfortunately, this
Speaker 1: is something that is not especially widespread. Austin is a
Speaker 1: little bit of a special case. But you know, look
Speaker 1: there's some concern that between jet fuel prices and jet
Speaker 1: fuel availability, that's become a larger and larger problem in
Speaker 1: other areas as kind of we get back to a
Speaker 1: new normal after the past couple of years. So I
Speaker 1: wanted to like stay on the topic, but I actually
Speaker 1: just flew out of Austin. I mentioned an intro, and
Speaker 1: I took a flight recently, but actually, like one more
Speaker 1: question about this, and I know it's not that timely,
Speaker 1: but I'm curious, Like Austin has grown just an insane
Speaker 1: amount in the last twenty years, particularly ten years, just
Speaker 1: like unbelievable at the number of conferences and events and
Speaker 1: population growth, Like what does that due to it an airport,
Speaker 1: because I can't imagine that like airports are easy to
Speaker 1: just like build more gags on. It is very difficult
Speaker 1: to and and and a time consuming process to expand
Speaker 1: in airport's capacity. Now, the Austin situation is especially different
Speaker 1: than in many cases, in part because they an old terminal,
Speaker 1: the South Terminal, that is not exactly sufficient for today's
Speaker 1: demand out of flights in there, and so there's been
Speaker 1: a lot of discussion with the local government of trying
Speaker 1: to expand it, but been a lot of kind of
Speaker 1: regulatory roadblocks and doing that. Even in the best of times,
Speaker 1: trying to expand airports and build new infrastructure is not
Speaker 1: a month's process. It's not a one or two year process.
Speaker 1: It tends to be a five to ten year uh
Speaker 1: project and sides and part why it takes goes so slow.
Speaker 1: A funny thing though, happened early in the pandemic where
Speaker 1: airports like Salt Lake City again another one that has
Speaker 1: expanded the metro population significantly over the past decade, they
Speaker 1: were already undergoing an airport expansion process that they're actually
Speaker 1: you know, you never hear these words so much in
Speaker 1: infrastructure these days, but they have completed it ahead of schedule.
Speaker 1: And the reason why was because the passenger volume, obviously
Speaker 1: early in the pandemic dropped and so what that meant
Speaker 1: was that they could shut down airport for significantly more
Speaker 1: greater swaths of time, significantly greater parts of the day
Speaker 1: in order to complete the construction and not disrupt air
Speaker 1: travel the way it would have in normal times. So
Speaker 1: there was a kind of a brief window there where
Speaker 1: you could actually complete some of this airport infrastructure projects
Speaker 1: ahead of schedule. That that window is fortunately closed as
Speaker 1: air air travel is rebounding. But it's a it's a
Speaker 1: difficult timely thing. I'm getting a flashbacks to covering keythrow
Speaker 1: airport slots in the building of Terminal five as a
Speaker 1: baby transport reporter in London. But uh, nevertheless, um, you
Speaker 1: mentioned mitigation of fuel costs there, and you know this
Speaker 1: is something airlines do, being large consumers of jet fuel,
Speaker 1: They buy their future needs and they hedge what they
Speaker 1: need to get what does it look like right now
Speaker 1: in terms of hedging. So we have this big spike
Speaker 1: in the price of crude oil. Is all of that
Speaker 1: going to flow through into airline underlying costs or is
Speaker 1: there some mitigation here. There's gonna be a significant amount
Speaker 1: that flows through to the airline's costs, and then obviously
Speaker 1: some of that will get passed onto consumers. I mean,
Speaker 1: just to take stock today, the price, the spot price
Speaker 1: of a gallon of jet fuel is three dollars uh
Speaker 1: and one cents, which is almost at least when nominal terms,
Speaker 1: where it was at that record high in two thousand
Speaker 1: and eight when it reached three dollars and eighty nine cents,
Speaker 1: and so it is very, very high. And just to
Speaker 1: underscore how important this is for airlines, jet fuel is
Speaker 1: the number two expense at airlines. There are no airlines
Speaker 1: with significant you know, there are no airlines with electric
Speaker 1: airplanes and commercial operation, no airlines with significant sustainable aviation
Speaker 1: fuel or all other alternative fuels. They're all basically exposed
Speaker 1: to the price of oil in a pretty major way.
Speaker 1: But I'm glad you brought up hedging because that's historically
Speaker 1: one of the ways that airlines have tried to navigate
Speaker 1: this world where they have are exposed to the price
Speaker 1: of oil. Where you saw this really come to a
Speaker 1: head was during the oh eight oil seven O eight
Speaker 1: oil crisis, where a lot of the airlines we're seeing,
Speaker 1: even in the face of a recession, their prices be
Speaker 1: going way way up again because the price of a
Speaker 1: barrel of oil hit a hundred and forty seven dollars.
Speaker 1: So as a result, the airlines were actually kind of
Speaker 1: late to the game of oil hedging, and they frankly
Speaker 1: had a pretty bad experience dipping their toes in andto
Speaker 1: they got into it too late. They ended up timing
Speaker 1: it just they basically started hedging right around the peak
Speaker 1: and ended up losing billions and billions and billions of
Speaker 1: dollars in the process. Uh. And so there are a
Speaker 1: few kind of legacy effects of that experience for the airline.
Speaker 1: For most of the US airlines, they just got out
Speaker 1: of hedging entirely after the experience. They said, this is just,
Speaker 1: you know, a sort of scheme to enrich Wall Street
Speaker 1: bankers were not going to play it anymore, will mostly
Speaker 1: just rely on the spot price of jet fuel dealt
Speaker 1: them took a slightly different path and actually purchasing an
Speaker 1: oil refinery in Pennsylvania so they could have at least
Speaker 1: some control over the UH sort of production and refining process,
Speaker 1: and this still kind of helps supply some of their
Speaker 1: airplanes in the New York City metro area. But by
Speaker 1: and large, the airlines just decide we are getting out
Speaker 1: of with the major exception of Southwest, which still engages
Speaker 1: in hedging today. But where you see this conduct having
Speaker 1: an interesting ripple effect is that is not the case
Speaker 1: with European airlines. European airlines by and large do still
Speaker 1: do a lot of fuel hedging, and so what that
Speaker 1: ends up meaning is that the European airlines are obviously
Speaker 1: seeing much lower fuel costs today compared to the US airlines,
Speaker 1: which are having to pay the spot price. So if
Speaker 1: you think about a flight between the US and Europe,
Speaker 1: most of the cheapest fares today on flights to Europe
Speaker 1: are actually on European airlines. Like I was teching a
Speaker 1: look at a flight from New York to Switzerland, cheapest
Speaker 1: airline to fly on it right now is s A
Speaker 1: S with a Scandinavian airline, And many of those European
Speaker 1: airlines are able to offer lower fares as a result
Speaker 1: because they're not paying the current inflated prices of jet
Speaker 1: fuel and so that ends up having ripple effects for
Speaker 1: your Deltas and your Americans and your Uniteds which have
Speaker 1: to decide do we charge a more expensive fair and
Speaker 1: risk you know, being undercut on price and all our
Speaker 1: customers buying their flights on s A S or Lufthansa
Speaker 1: or British Airways, or do we lower our fares and
Speaker 1: compete on price but then end up having to eat
Speaker 1: the cost of higher fuel. And it's a I don't
Speaker 1: envy the folks in revenue management who are having to
Speaker 1: make these decisions today. I'm kind of surprised. I would have, like,
Speaker 1: my assumption would be that there's a market price of
Speaker 1: a ticket or you know, roughly, and that the company
Speaker 1: and the airlines that are paying uh that are hedged
Speaker 1: or making more money, and the airlines that are spot
Speaker 1: are going to pay less. I'm kind of surprised that
Speaker 1: there is a noticeable enough difference or that companies or
Speaker 1: that airlines can afford to charge significantly more for a
Speaker 1: given route than their competitors just because they happen to
Speaker 1: be paying more at a given moment for their their
Speaker 1: fuel cost. Yeah, one of the one of the most
Speaker 1: interesting things. And I would say, most unique things about
Speaker 1: the airline industry compared to other industries is just the
Speaker 1: volatility of airfare. It is unlike anything else we purchase.
Speaker 1: It is the most volatile purchase that consumers regularly make.
Speaker 1: And there are a few kind of unique challenges for
Speaker 1: the airlines and why that's the case. One is air
Speaker 1: airplane seats are what are called rival goods. You know,
Speaker 1: if I buy a seat, that same seat can't be
Speaker 1: sold to someone else. It's only uh can be sold
Speaker 1: to one person. Two, you have spoilage. You know, as
Speaker 1: soon as the airplane door closes, any seats that are
Speaker 1: unsold are are are spoiled. You can't get any money
Speaker 1: for them, and so they have to try to sell
Speaker 1: them by that date. But then three, you have sort
Speaker 1: of unpredict stability of demand. When you know you have
Speaker 1: to kind of project forward when you think travelers are
Speaker 1: going to purchase, when you think business travelers might purchase,
Speaker 1: what you think the world will look like, three, six,
Speaker 1: nine months from now. It's almost akin to having to
Speaker 1: buying a futures contract where you have to guess today
Speaker 1: what the kind of outlook will look like nine months
Speaker 1: from now. And that's why it's such a difficult thing,
Speaker 1: and why airfare tends to be so so volatile. Yeah,
Speaker 1: there was a consultant I wish I could remember his name,
Speaker 1: but he used to describe airlines very similar to a
Speaker 1: grocery store in the sense that you know, you have
Speaker 1: a thing that might not be worth it, Well, it's
Speaker 1: not going to be worth as much in a day
Speaker 1: or two. You know, the plane is leaving, whether it's
Speaker 1: full or not, sort of similar to the way fruit
Speaker 1: or vegetables would spoil. So you kind of need to
Speaker 1: sell that produce or that product when you can. And
Speaker 1: on that note, one thing I was wondering is, okay,
Speaker 1: you have all this pent up. Well, first of all,
Speaker 1: how much pent up demand do you see for air travel?
Speaker 1: And then secondly, are you expecting a big ramp up
Speaker 1: in capacity by airlines to respond to it. Yes, So
Speaker 1: I would say that there has been a significant amount
Speaker 1: of pent up demand until pretty recently. I think it's
Speaker 1: really kind of getting released this spring and into this summer,
Speaker 1: and I think by the fall we're going to start
Speaker 1: to enter a sort of period of stability similar to
Speaker 1: like we saw pre pandemic. You know, I think these
Speaker 1: next kind of four or five six months or where
Speaker 1: we're seeing that pent up demand getting released. But I'm
Speaker 1: glad that you called out capacity, because while demand is
Speaker 1: close to recovered, especially domestic demand, and I would say
Speaker 1: leisure demand vacationers visiting families and relatives, is actually higher
Speaker 1: today than it was pre pandemic. And obviously it's just
Speaker 1: the dearth of business travel that's resulting in lower overall
Speaker 1: travel numbers. Capacity is actually still down quite a bit
Speaker 1: from where it was pre pandemic, about about fifteen percent,
Speaker 1: but some routes, you know, especially trans Pacific ones, still
Speaker 1: down as much as seventy from where it was. Think
Speaker 1: about flights to China. The actual volume of travel from
Speaker 1: US and China right now is down from where it
Speaker 1: was pre pandemic. It is unbelievable, both how important it
Speaker 1: was in and just how absent it is today. But
Speaker 1: that kind of diminishment, well, you know, the main story
Speaker 1: that get talk gets talked about is how travel demand
Speaker 1: is kind of rebounding very very quickly, much quicker than
Speaker 1: most analysts expected, and that's causing probably the single greatest
Speaker 1: cause of why we're seeing such a bump in overall
Speaker 1: airfare prices. The capacity not rebounding quite as quickly over
Speaker 1: the past six nine months, in large part due to
Speaker 1: this ongoing pilot shortage, is a pretty signific a con
Speaker 1: factor that I think ought to deserve a lot of
Speaker 1: credit for the higher fares as well, that the airline
Speaker 1: airlines aren't able to operate as many flights as they
Speaker 1: would like to because they just don't have the capacity,
Speaker 1: they don't have the crew, and in some cases they
Speaker 1: don't have the planes to be able to do so
Speaker 1: that they would like to. And that just gets into
Speaker 1: you know, our favorite topic of supply chains, whether it's
Speaker 1: the labor supply chain of training and certifying new pilots,
Speaker 1: or whether it's the aircraft supply chain of building and
Speaker 1: shipping out new planes. So I think this is actually
Speaker 1: a good spot to tell us where exactly do we
Speaker 1: stand in terms of relative levels. I mean, you mentioned
Speaker 1: U as China, but for the various categories, whether it's
Speaker 1: domestic leisure, international leisure, business travel, like, where are we
Speaker 1: versus I guess the benchmarks. Yeah, so compared to domestic
Speaker 1: air travel is currently down about five percent, but again
Speaker 1: I think that belies the the the sort of makeup
Speaker 1: difference today versus pre pandemic, where it's much more weighted
Speaker 1: towards leisure travel. Leisure travel is higher today than it
Speaker 1: was pre pandemic. One of the reasons actually, why when
Speaker 1: you got down an airplane I'm assuming Trason Joe, when
Speaker 1: you're going to be flying soon or when you flow recently,
Speaker 1: that airplane I can pretty safely guess was completely full
Speaker 1: or almost completely full. And the reason why is that
Speaker 1: airlines are having to sell far more seats today than
Speaker 1: they used to make up for that lack of business travel.
Speaker 1: You know, historically they would want to keep some number
Speaker 1: of seats unsold up until the last few weeks or
Speaker 1: last few days before departure in order to take advantage
Speaker 1: of those late per purchasing but price insensitive business travelers. Today,
Speaker 1: they know that those business travelers aren't quite as prevalent
Speaker 1: as they used to be, and so they have to
Speaker 1: sell more seats to account for that. They know leisure
Speaker 1: travels the ballgame, and that's why airplanes on average today
Speaker 1: are more full than they were pre pandemic. You know,
Speaker 1: today a planes eight nine percent full on average versus
Speaker 1: the same week in it was eighty six percent full.
Speaker 1: Not not a whole lot of elbow room. But international too,
Speaker 1: you know, just to touch briefly on it is still
Speaker 1: down quite a bit compared to pre pandemic. It depends
Speaker 1: a little bit region to region. Mexico is actually up
Speaker 1: and been one of these sort of success stories, and travel,
Speaker 1: if you will, over the past year is significantly higher
Speaker 1: today in terms of travel demand than it was pre pandemic.
Speaker 1: Actually higher more passenger volume between the US and Mexico
Speaker 1: today than the same month in But international to let's say,
Speaker 1: Europe still down, you know, to Canada down, close to down,
Speaker 1: over across the Pacific down, and so that's where you're starting.
Speaker 1: You're really seeing kind of airlines hoping that we're going
Speaker 1: to see a rebound, and especially hoping that we're going
Speaker 1: to see the end of the requirement that you show
Speaker 1: a recent negative test to get back into the US,
Speaker 1: even if you've been fully vaccinated. I want to ask
Speaker 1: you more about testing your harms and also labor shortages.
Speaker 1: But before we do, there was a moment post two
Speaker 1: thousand eight when a bunch of airlines started or new
Speaker 1: startups began experimenting with business class only airlines, and part
Speaker 1: of that was in response to higher oil prices, and
Speaker 1: the thinking was, well, most planes, most airlines make the
Speaker 1: majority of their money from business class passion passengers. The
Speaker 1: business class passengers are essentially subsidizing economy, so why not
Speaker 1: just cut out economy and have this class only carriers
Speaker 1: for popular roots like London to New York or London
Speaker 1: to Paris or wherever. And it didn't work out so well.
Speaker 1: But I'm wondering what happens in the current cycle, because
Speaker 1: on the one hand, you have very high fuel prices.
Speaker 1: On the other hand, you have business class travel still missing,
Speaker 1: and no one's quite sure whether or not it's coming back.
Speaker 1: So maybe airlines want to focus on leisure. But how
Speaker 1: did they do that? What sort of creative ways are
Speaker 1: you seeing of responding to the current environment. Yeah, let
Speaker 1: me let me give you just a brief Let me
Speaker 1: give you a couple of data points here. When you
Speaker 1: look at Delta's financials in versus the number of seats
Speaker 1: that they had on a plane that were premium, you know,
Speaker 1: premium economy business class first class in eleven was nine percent,
Speaker 1: that it almost tripled to and the percentage of the
Speaker 1: first class seats that they sold that they didn't give
Speaker 1: away for free or you know, giveaway to somebody who
Speaker 1: is well dressed or something like that that they actually
Speaker 1: sold and got money for. Inn was but En was
Speaker 1: six and so as what what that is telling us
Speaker 1: is that the premium section of the airlines are where
Speaker 1: the airlines are seeing the significant growth in their revenue.
Speaker 1: That it is becoming increasingly important to airlines to be
Speaker 1: able to monetize the front of the plane. And so
Speaker 1: that's why you see airlines not only building out larger
Speaker 1: business class cabins, but also building out you know, premium economy,
Speaker 1: something that didn't really exist a decade ago but now
Speaker 1: is a pretty it's a big money maker for the
Speaker 1: airlines because it only the premium economy seats are only
Speaker 1: about thirty to fifty larger than a regular economy seat,
Speaker 1: but they generally charged double the price for it. So
Speaker 1: you can see how that works out pretty well in
Speaker 1: the airline's favor. Singapore Airlines just announced in the past
Speaker 1: week that their business class section and of their airplanes
Speaker 1: was actually selling out now before economy was. And now
Speaker 1: it's a you know, stark reversal of what was happening
Speaker 1: pre pandemic. And so I think you're seeing a couple factors.
Speaker 1: By and large, the airlines are marketing more towards affluent
Speaker 1: leisure travelers rather than primarily business travelers in order to
Speaker 1: sell these premium seats. And secondarily, I think they're getting
Speaker 1: much better at sort of the pricing mechanisms to reach them,
Speaker 1: you know, not just having a sort of one size
Speaker 1: fits all, very high inflated price. And then there are
Speaker 1: a lot of unsold seats and maybe they'd give them
Speaker 1: away to two elite members and instead being able to
Speaker 1: do much more sort of dynamic pricing. I don't know
Speaker 1: if you had this offer one your recent flights, but
Speaker 1: what they'll do many times if they have a number
Speaker 1: of unsold business or premium economy seats when you go
Speaker 1: to check in or nearing the flight datas, they'll actually
Speaker 1: hold something of an auction on it. Will they ask,
Speaker 1: you know, hey, how much would you be willing to
Speaker 1: pay to upgrade to be since class? You know, and
Speaker 1: you can put in your bid and if it gets accepted,
Speaker 1: they get it. And and and so the airlines have
Speaker 1: just gotten much better at monetizing that kind of scarce
Speaker 1: space on an airplane. And so when you the last
Speaker 1: data point here is that when you look at Delta's
Speaker 1: revenue over the past decade eighteen, their overall revenue grew
Speaker 1: by nine billion dollars, it was up, but their economy
Speaker 1: ticket revenue actually fell by one billion dollars. And that's
Speaker 1: because they're getting so much better at at diversifying their
Speaker 1: business model away from the old model of just relying
Speaker 1: solely on economy ticket revenue. Yeah. I was on a
Speaker 1: flight recently and there was some offered a bid on
Speaker 1: business and I was like, this is too confusing. I
Speaker 1: don't want to, Like, I don't engage in some like
Speaker 1: complicated financial derivative just to fly. You know. The other
Speaker 1: thing is also it's like if there's a power outlet
Speaker 1: and working WiFi, Like, I don't care if I'm in coach.
Speaker 1: I'm just happy serving my phone for five or six hours,
Speaker 1: So I really don't mind. Anyway, that's a divergence. So
Speaker 1: we've talked about what's going on with volumes and what's
Speaker 1: going on with leisure volumes, of what's going on with travel,
Speaker 1: what's going on with price, and how much is price
Speaker 1: you know, in the coming months predictable because we've seen
Speaker 1: um a pretty big jump in airfares over the last
Speaker 1: several months. I think it was like a huge one
Speaker 1: month jump in the last uh CPI report. But how predictable,
Speaker 1: like is it? Can you extrapolate and say, okay, as
Speaker 1: things normalized further and as a bunch of people take
Speaker 1: trips this summer, that we're going to see further upward
Speaker 1: price pressure or like what can we say confidently about
Speaker 1: the sort of like aggregate trajectory of airfares? Yeah, so
Speaker 1: you're you're absolutely right. In uh March of two, we
Speaker 1: saw the single highest one month jump in airfare on record.
Speaker 1: It was up eleven per cent, and that you know,
Speaker 1: goes in line with the one over the past twelve months,
Speaker 1: it's up twenty four percent. But when you dig a
Speaker 1: little bit deeper and you zoom out a little bit,
Speaker 1: you see that over the past two years compared to
Speaker 1: you know where we were in in March, air fares
Speaker 1: down five percent today compared to then, compared to five
Speaker 1: years ago, down compared to a decade ago. Air fare
Speaker 1: is down thirty and those are in real numbers and
Speaker 1: inflation adjusted, And so I think, you know, look, a
Speaker 1: lot of folks are understandably confused, upset, not happy with
Speaker 1: seeing the price of flights going up. In the near term,
Speaker 1: it is, it is absolutely going way, way up. But
Speaker 1: I think if you if you take a bit of
Speaker 1: a longer term perspective, you see that we're actually still
Speaker 1: living in what I call the golden age of cheap flights.
Speaker 1: It's never been cheaper to fly as it has been
Speaker 1: since about mid While we're on this topic of of
Speaker 1: kind of average airfare increasing, prices of flights generally going up,
Speaker 1: I think the most important thing to recognize is that
Speaker 1: two things can be true at the same time. First,
Speaker 1: average airfare can be increasing, and second, cheap flights can
Speaker 1: still be plentiful. You know, in March, as the average
Speaker 1: fares went up that record spike of eleven percent, a
Speaker 1: few deals that you know, we found in sent Scot's
Speaker 1: Flights members, like three hundred dollars round trip to Paris,
Speaker 1: going to Costa Rica for a hundred and ninety three
Speaker 1: dollars round trip, Hawaii for a hundred and ninety seven
Speaker 1: dollars round trip. These are all on full service airlines,
Speaker 1: and so airfare is rather than it's being something with
Speaker 1: a sort of narrow curve and all kind of clustering
Speaker 1: around the average air fare. Airfare is something instead that
Speaker 1: has a super super wide distribution. You have expensive flights
Speaker 1: and you have cheap flights. You know, I recently took
Speaker 1: a flight to Boston. Uh you know, I paid two
Speaker 1: hundred dollars round trip, but for my flight from Portland,
Speaker 1: Oregon to Boston. And that's the person sitting next to me,
Speaker 1: what did they pay for this flight? And they paid
Speaker 1: six hundred dollars for it. So between the two of us,
Speaker 1: we paid four hundred dollars, but neither of us actually
Speaker 1: paid that average fair four hundred dollars. We either paid
Speaker 1: two hundred or six hundred, and so air average airfairs
Speaker 1: can absolutely be going up, but there can still be
Speaker 1: a plethora of cheap flights available. And that's I think
Speaker 1: kind of different than a lot of other goods of
Speaker 1: services that we tend to purchase. So I have a
Speaker 1: slightly existential question. But there used to be this great chart,
Speaker 1: and probably one of my all time favorite charts, although
Speaker 1: I haven't seen an updated version for a long time,
Speaker 1: but it basically showed airlines average cost of capital versus
Speaker 1: airlines average return on capital, and you could see throughout
Speaker 1: modern history cost of capital was basically more than the
Speaker 1: return on capital, and historically airlines have been extremely unprofitable.
Speaker 1: Maybe they have these boom bust cycles, but I think
Speaker 1: over time they tend to to lose money. How long,
Speaker 1: you know, given the rising pressures, labor costs, fuel costs,
Speaker 1: none of that seems like it's going to go away
Speaker 1: anytime soon. But will we always have the option to
Speaker 1: travel at a reasonable amount to wherever we want to
Speaker 1: in the world? Essentially? Yeah, So, I mean this is
Speaker 1: somewhat of a recent phenomenon being able to travel, especially
Speaker 1: long haul travel, at much more affordable prices than we
Speaker 1: have historically. You know, to touch on your first point
Speaker 1: about airline financials, Look, we've all heard the Richard Branson
Speaker 1: joke about how the quickest way to become a millionaires
Speaker 1: to have a billion dollars and buy an airline. You know,
Speaker 1: I think that underscores a certain truth when even in
Speaker 1: pre pandemic times, airlines tend to lose money on flights
Speaker 1: and actually make it up on other things. So in
Speaker 1: when you looked at air American airlines financials, the revenue
Speaker 1: from every of what are called available seat miles, they
Speaker 1: made about fourteen point four cents off of but the
Speaker 1: cost for a per available seat mile was fourteen point
Speaker 1: nine cents, So they were actually losing money on every
Speaker 1: plane that they flew. And where they made it up
Speaker 1: and why they turned a profit was from the billions
Speaker 1: of dollars that they made selling miles, frequent flyer miles
Speaker 1: to banks and credit cards. And so the airline business
Speaker 1: model is one that has significantly changed over the past decade,
Speaker 1: or really over the past thirty forty years, but especially
Speaker 1: over the past decade, where historically airlines relied almost entirely
Speaker 1: on economy air fare to fund their revenue and to
Speaker 1: fund their operations, to one today where they make a
Speaker 1: majority of their revenue on things other than economy air fare.
Speaker 1: They make it, you know, we talked about the front
Speaker 1: of the plane selling business and premium economy seats. They
Speaker 1: make it on selling frequent flyer miles and credit cards.
Speaker 1: They make it on corporate contracts, they make it selling cargo.
Speaker 1: They make it certainly on ancillary fees, bags and seats selection.
Speaker 1: They make it on commission selling you know, hotels and
Speaker 1: car rentals after you purchase your flight. And so what
Speaker 1: it means is that they have all these revenue streams
Speaker 1: today that they didn't use to. That makes them fly
Speaker 1: a little bit certainly much more diversified, but also more
Speaker 1: resilient than they used to be. Uh. And this is
Speaker 1: why Tracy, to your point, the economy airfare has followen
Speaker 1: so much over the past decade while we're living in
Speaker 1: this golden age of cheap flights. You know, think of
Speaker 1: it like a restaurant where economy seats are are the
Speaker 1: states the main course that's essentially sold at cost, maybe
Speaker 1: there's a very slight profit margin. The premium seats, frequent
Speaker 1: flyer miles commissions. Those are you know, the sodas, the alcohol,
Speaker 1: the salads, the things that get marked up at a
Speaker 1: huge profit. And so if they if the airline you know,
Speaker 1: didn't have those sort of answerers, those high profit or
Speaker 1: high margin products, they would be much more difficult for them.
Speaker 1: And that's why historically it was. But they've been able
Speaker 1: to generate those while while combining it with the sort
Speaker 1: of low margin parts of the travel experience, like buying
Speaker 1: your economy ticket. And so that's why I think the
Speaker 1: because the business model has changed, why I'm pretty bullish
Speaker 1: on the outlook for cheap flights generally that I think
Speaker 1: the just the model has changed that's going to continue
Speaker 1: to allow these cheap economy air fairs, whether you're flying
Speaker 1: to mescal or but especially if you're flying long hault
Speaker 1: places like Europe, places like South America or beyond. So
Speaker 1: I have a question, and it's kind of a big picture,
Speaker 1: but you know all of these when we talk about
Speaker 1: the state of the economy and we talk about normalization,
Speaker 1: there's always this question of, like, well, how much of
Speaker 1: what we're experiencing now, whether it's inflation or other disruptions,
Speaker 1: is a function of the fact that things are still
Speaker 1: weird because of the pandemic versus some sort of new normal.
Speaker 1: And of course that's a huge question for economists trying
Speaker 1: to evaluate the inflationary environment. But just from like an
Speaker 1: airline specific industry, are there things yet that you feel
Speaker 1: comfortable saying this is going this about air travel is
Speaker 1: going to be fundamentally different than it was in and
Speaker 1: this is a new shift. This is some new trend
Speaker 1: that's emerged that was not the case, and it's not
Speaker 1: likely to revert. Like do you see like structural changes
Speaker 1: having taken place as a result of what we've all
Speaker 1: experienced over the last two years. Sure, I'll give you
Speaker 1: one from a consumer perspective and one from an industry perspective.
Speaker 1: So from a consumer perspective, one of the things that
Speaker 1: is absolutely changed today from pre pandemic is that you
Speaker 1: have a lot more flexibility to change your plans after
Speaker 1: you book your flights than you used to. Historically, when
Speaker 1: you booked your flight, you're pretty well locked in, and
Speaker 1: if you wanted to even just change your the dates
Speaker 1: that you're going to fly on, you had to pay
Speaker 1: first a penalty of you know, two hundred, three hundred,
Speaker 1: sometimes four hundred dollars or more. Uh, in addition to
Speaker 1: any fair difference. But one of the things that airlines
Speaker 1: across the board did early in the pandemic was to
Speaker 1: get rid of those change fees, because they their assumption
Speaker 1: was that travelers needed to be able to uh feel
Speaker 1: confident that they could change their plans, that they could
Speaker 1: have flexibility later if they were gonna have any hope
Speaker 1: of booking flights today. Uh. So, across the board, airlines
Speaker 1: kind of really trumpeted that they were permanently getting rid
Speaker 1: of change fees. Uh. And so now when you book
Speaker 1: your flight, you know you can you can if you
Speaker 1: decide you don't want to take that Memorial Day trip
Speaker 1: like you'd originally book, you can just push it back
Speaker 1: till later in the summer. You can push back to
Speaker 1: the fall, to the winter, whenever. It Not only I
Speaker 1: think is a real benefit for consumers to be able
Speaker 1: to have that flexibility automatical a but the airlines like
Speaker 1: it too, because it's one of the areas of differentiation
Speaker 1: and upsell that they that they tend to not make
Speaker 1: this available if you book a basic economy ticket, and
Speaker 1: so that encourages folks then to pay slightly more to
Speaker 1: purchase a main economy ticket and be able to have
Speaker 1: that flexibility. One of the major changes from an industry
Speaker 1: perspective is this ongoing pilot shortage where the airlines are
Speaker 1: still kind of paying for some of the decisions that
Speaker 1: they made early in the pandemic, you know, rewind to
Speaker 1: March April. Airlines, this was an existential question for them,
Speaker 1: are we going to survive this as an airline? Not
Speaker 1: just are we going to be a smaller coming out
Speaker 1: of this, but will we exist at all? And so
Speaker 1: airlines virtually overnight UH stopped hiring new pilots and other personnel,
Speaker 1: and they stopped doing a lot of the training, and
Speaker 1: they started offering a lot of buyouts, early retirements and
Speaker 1: whatnot across the board and ess actually for pilots, and
Speaker 1: so by the time travel started rebound, travel demand started rebounding.
Speaker 1: That happened much quicker than the analysts or any of
Speaker 1: the airlines expected. The airlines were caught pretty flat footed
Speaker 1: that they didn't have as many pilots, not to mention
Speaker 1: all the the airplane supply chain issues, but they just
Speaker 1: didn't have enough pilots to be able to fly the
Speaker 1: number of planes they wanted. And so they've been quickly
Speaker 1: trying to ramp up in order to deal with that,
Speaker 1: by you know that doing everything from starting their own
Speaker 1: flight schools to increasing pay. In many cases, they're actually
Speaker 1: poaching the large kind of mainline airlines like Delta and
Speaker 1: American are actually poaching airlines either from the smaller budget
Speaker 1: airlines who have lower pay, or maybe they're poaching them
Speaker 1: from what are called regional airlines that fly you know,
Speaker 1: smaller planes to smaller airports, and so u the large
Speaker 1: airlines have been able to navigate this pretty well. They're
Speaker 1: close to where they want to be from a pilot perspective,
Speaker 1: or at least there's a light at the end of
Speaker 1: the tunnel by the end of this year that they'll
Speaker 1: have the number of sort of pilots and overall personnel
Speaker 1: that they'd like. But who's really struggling with this are
Speaker 1: the regional airline So I think you know, your small
Speaker 1: flights took places in Montana to Reno to you know,
Speaker 1: Colorado Springs, places like that that rely on regional airline service,
Speaker 1: where that's where you're seeing a ton of the cancelations,
Speaker 1: a ton of the schedule cuts, and a lot less
Speaker 1: capacity today than you had in nineteen. It's just much
Speaker 1: more difficult to fly to some of the smaller cities
Speaker 1: and destinations than it used to be because of this
Speaker 1: pilot shortage that I think is going to be we're
Speaker 1: still going to be dealing with for the next year
Speaker 1: or two at least. So two questions here, but one
Speaker 1: where do new pilots come from? And I realized that
Speaker 1: might sound like a weird question, but it used to
Speaker 1: be that you would get a lot of X Air
Speaker 1: Force pilots at least to the U S who would
Speaker 1: migrate into commercial and that's certainly what my dad did,
Speaker 1: And what's the value proposition for being a pilot now,
Speaker 1: especially if you're someone who has to start out on
Speaker 1: a regional carrier where the schedules suck and there's a
Speaker 1: lot of stress and maybe you're not making enough money initially.
Speaker 1: And then speaking of a lot of stress and the
Speaker 1: schedules sucking, um, what's going on with flight attendants at
Speaker 1: the moment, because it seems like there's some pressures on
Speaker 1: that supply of labor as well. Yeah, absolutely so, I
Speaker 1: mean in terms of sourcing of new pilots, yes, absolutely,
Speaker 1: you know X X military, X air Force is it
Speaker 1: was has historically been a pretty big abundance supply of
Speaker 1: commercial pilots. And then you know, just just there are
Speaker 1: also folks who go to school, come out of college
Speaker 1: with the intention of getting into the airline industry. And
Speaker 1: there are a lot of flight training schools where folks
Speaker 1: go into in many cases, pretty significant debt in order
Speaker 1: to get certified as a commercial pilot. And and you know,
Speaker 1: in some ways that there's a similarity with the medical
Speaker 1: profession where we think of you know, doctors is relatively
Speaker 1: well compensated, but there is a big ramp up time
Speaker 1: there's a lot of training, a lot of schooling that's required,
Speaker 1: and a lot of regulatory requirements in terms of the
Speaker 1: amount of training you need. In the US to be
Speaker 1: a commercial pilot, you have to have had fifteen hundred
Speaker 1: hours in the cockpit or other training. And so that
Speaker 1: ends up kind of limiting the amount of supply and
Speaker 1: and making it difficult for airlines to be able to
Speaker 1: quickly higher up. I mean, I don't you know, it's
Speaker 1: not an entry level job where they can just quickly
Speaker 1: meet demand. That it takes. You know, it's a matter
Speaker 1: of months and years to be able to train and
Speaker 1: high up new pilots. And that's why so many of
Speaker 1: the airlines are getting into actually owning and operating many
Speaker 1: of the new flight schools themselves, because they want to.
Speaker 1: They can't. They don't feel like they can rely on
Speaker 1: the supply of new pilots in the way that they
Speaker 1: that they used to. And you know, the the other
Speaker 1: area where it's kind of smilar to the medical profession
Speaker 1: in some ways is that the entry level pay, the
Speaker 1: initial pay is actually much lower than many folks realize.
Speaker 1: You know, it tends to be forty K fifty K
Speaker 1: many times starting out if you're flying for one of
Speaker 1: the regional airlines who are really kind of small, you know,
Speaker 1: nine seat type of aircraft, and it can take a
Speaker 1: while to get to you quote unquote the big leagues,
Speaker 1: where not only do you have a lot more prestige,
Speaker 1: a lot more pay, a lot more more kind of
Speaker 1: desirable flight schedules in general, uh, in terms of you know,
Speaker 1: we talk about the pilot shortage, and that feels like
Speaker 1: in many ways where the most pressing part of the
Speaker 1: labor shortage of the airline industry is. But I think
Speaker 1: you really kind of raise a good point that that
Speaker 1: it's not the only aspect of airlines that are struggling
Speaker 1: with labor. You know, you see uh, you see it
Speaker 1: in phone agents. You know, I don't know if you
Speaker 1: ever had to call an airline in the past two years,
Speaker 1: but the weights tend to be you know, measured in hours,
Speaker 1: if not as sometimes to be able to get through
Speaker 1: to a phone agent. And it's measured oftentimes in other
Speaker 1: sort of ancillary services, not just flight attendant, is not
Speaker 1: just gate agents, but think about the baggage handlers or
Speaker 1: folks who are refueling the plane, the ground support at
Speaker 1: an airline. Those tend to be more entry level jobs,
Speaker 1: but they tend to pay. They're they're competing in many
Speaker 1: ways with these sort of similarly if not better paying
Speaker 1: warehouse jobs that that folks might be able to get.
Speaker 1: And so if you are looking for one of these
Speaker 1: types of jobs, do you take the eighteen dollar an
Speaker 1: hour job kind of taking and loading bags off a
Speaker 1: plane in January in Chicago, or do you take the
Speaker 1: similarly paid job working on Amazon warehouse where at least
Speaker 1: it's temperature controlled and other sorts of uh, you know,
Speaker 1: not having to deal with the kind of Chicago winters
Speaker 1: in the same type of way. And so I think
Speaker 1: that competition is become becoming more difficult for airlines today
Speaker 1: than it used to, and why they're seeing uh, labor
Speaker 1: shortages across the board, not just with pilots. You know.
Speaker 1: Tracy mentioned flight attendants, and of course the mask mandate
Speaker 1: just in the last week when we're recording this UM
Speaker 1: went away. And I'm sort of curious about perception. So
Speaker 1: here's my guess as too. And I don't know because
Speaker 1: I haven't seen any like official surveys, but my guess
Speaker 1: as to the perception of among flight attendants is probably
Speaker 1: there's some mix. I'm guessing most people don't like having
Speaker 1: to wear a mask all day while they're work, That's
Speaker 1: what I was gonna say. I'm guessing there's sort of universal,
Speaker 1: um sort of displeasure at having been essentially deputized to
Speaker 1: enforce one of the most sort of divisive things over
Speaker 1: the last two years, their job which they never you know,
Speaker 1: signed up to get in the middle of this sort
Speaker 1: of culture war whatever you want to call it, of
Speaker 1: enforcing mask mandates. How much talk to us a little
Speaker 1: bit about that. How much of a burden was that?
Speaker 1: How much did that contribute to what I believe there's
Speaker 1: been an uptick and sort of air rage incident and
Speaker 1: what uh sort of the aftermath in terms of inclination
Speaker 1: to fly and other things now that the mass mandate
Speaker 1: has gone. Yeah, I think that's exactly right. You know,
Speaker 1: being a flight attendant is not an easy job, but
Speaker 1: none of them signed up to have to also be
Speaker 1: a bouncer at thirty thousand feet Like it's just trying
Speaker 1: to make those decisions, and in many cases having physical
Speaker 1: harm inflicted on them from these incidents was really, uh,
Speaker 1: pretty awful to see. And so I think, um, whether
Speaker 1: the root cause of that is because of the mass mandate,
Speaker 1: or whether the root causes more sort of systemic because
Speaker 1: you see, you know, across the board in society, a
Speaker 1: lot of types of the incidents are are on the rise.
Speaker 1: It's it's a little bit hard to say, but I
Speaker 1: think the general trend, at least over the past few months,
Speaker 1: uh and sentiment among fighting has been trending towards wanting
Speaker 1: the mandate to be lifted. It's obviously a contrast between
Speaker 1: the folks who are the most exposed to everybody who's
Speaker 1: coming onto a plane and and and and any germs
Speaker 1: they might be bringing. But also there are the folks
Speaker 1: who are having to wear masks all day every day
Speaker 1: at their job, and so as in much of society,
Speaker 1: there's a real kind of diversity of opinion. There fortunately
Speaker 1: a lot of the sort of safety mechanisms that exists
Speaker 1: on airplanes, between the HEPA filters that constantly changed the
Speaker 1: air the onboard you know, oxygen is constantly coming into
Speaker 1: the plane from the outside during a flight, the downward airflow.
Speaker 1: The fact that people are quiet tends to fortunately mean
Speaker 1: that there's not nearly the amount of in plane transmission
Speaker 1: that a lot of folks might have assumed early in
Speaker 1: the pandemic, but that doesn't mean that it never happens.
Speaker 1: And so the last thing I'll say on this is
Speaker 1: that the UH in there was no federal mandate that
Speaker 1: that airplane airons had to our transportation had to have
Speaker 1: require mass. But you saw across the board all the
Speaker 1: US airlines require it voluntarily because that's where they felt
Speaker 1: like the sentiment was, where where you know, the the
Speaker 1: demand was today Now that with the mask mandate gone,
Speaker 1: zero airlines voluntarily required, and I think that kind of
Speaker 1: reflects where they see, you know, the folks with money
Speaker 1: on the line here see that it is they're going
Speaker 1: to take advantage of demand in a greater way without
Speaker 1: having without imposing a mandate than with one. So you
Speaker 1: touched on this earlier, but just on the topic of
Speaker 1: the mask mandate rolling off, we still have vaccination and
Speaker 1: testing requirements for a lot of international travel. How much
Speaker 1: of a drag is that still on air travel and
Speaker 1: how much would you expect demand to pick up once
Speaker 1: those are removed. It's significant, you know, the international travel
Speaker 1: still down anywhere from fifteen to thirty percent today, why
Speaker 1: whereas domestic travel has largely rebounded essentially on parity with
Speaker 1: where it was in and I think the single largest
Speaker 1: reason why you see that disparity is because of the
Speaker 1: requirement that all travelers flying on an airplane to the US,
Speaker 1: even Americans who have been fully vaccinated, have to show
Speaker 1: a negative test that they took one day before their flight.
Speaker 1: And what that means is that, you know, especially in
Speaker 1: the world now where there are many breakthrough infections, folks
Speaker 1: who have been fully vaccinated and boosting still able to
Speaker 1: contract the virus. A lot of folks have, I think
Speaker 1: pretty reasonable worry that if they take that trip to Barcelona,
Speaker 1: they take that trip to Cancoon and they catch or
Speaker 1: breakthrough infection, they're going to be stranded in a foreign
Speaker 1: country for seven and fourteen days. Not only the expense
Speaker 1: and hassle of that, but also the you know, I
Speaker 1: don't know any pet care, any work obligations. It's just
Speaker 1: the downside. Risk is a lot higher today than it
Speaker 1: used to be in twenty nineteen, and so I think
Speaker 1: you see a lot of those folks who might have
Speaker 1: otherwise been interested in taking that that trip to your
Speaker 1: that trip to Latin America instead traveling domestically. And why
Speaker 1: you see the kind of balance of international versus domestic
Speaker 1: trips waited today towards domestic. There's rumors, there's you know,
Speaker 1: tongues are wagging right now that the uh the test
Speaker 1: requirement could end sometime in the next month or two.
Speaker 1: If that comes to past, I would anticipate we're going
Speaker 1: to see a pretty big jump in international travel moving forward.
Speaker 1: I think that this is probably the big, single largest roadblock.
Speaker 1: I think it will still be some time until it
Speaker 1: gets back to parity, but I think you'll see a
Speaker 1: pretty large jump because you won't have that same concern
Speaker 1: about about breakthrough infections impacting your ability to get home
Speaker 1: that you would today. You speaking of international travel, and
Speaker 1: you mentioned that US China travel is down, and in
Speaker 1: a way, I'm surprised it's not. Maybe it is, but
Speaker 1: you know, one of the stories of the last decade,
Speaker 1: I think in international tourism was this rise of the
Speaker 1: Chinese middle class. Tourism class going all over the world.
Speaker 1: I assume for some carriers in some country is a
Speaker 1: huge source of tourism demand and travel. And I don't
Speaker 1: think it's obvious that it's gonna come back anytime soon.
Speaker 1: I mean, obviously, like China is as lockdown or more
Speaker 1: locked down than it ever has been. And I know,
Speaker 1: who knows how long that last. That must really blow
Speaker 1: a whole uh for a lot of like airlines budgets,
Speaker 1: and I assume some countries even for whom that was
Speaker 1: a major source of tourism dollars. Yeah, and it's both
Speaker 1: tourism dollars in certain you know countries and economies have
Speaker 1: more exposure to that than than others. But it's also airfare,
Speaker 1: especially to elsewhere in Asia. One of the main reasons
Speaker 1: why we saw so many cheap flights across the Pacific
Speaker 1: where you know, two places like Vietnam, Thailand, Singapore, Bali, etcetera,
Speaker 1: was because of the rise of Chinese airlines that they
Speaker 1: were really kind of flooding the market with a significantly
Speaker 1: more capacity that had a downward pressure on overall prices.
Speaker 1: You know, you see the same story play out not
Speaker 1: just domestically but increasingly internationally, where budget airlines are just
Speaker 1: more airline capacity at large having a really kind of
Speaker 1: downward impact on prices. Because the single largest determinant of
Speaker 1: how many cheap flights you see on around is just
Speaker 1: how much competition there is between airlines, and so the
Speaker 1: the removal of many, you know, the the vast, vast
Speaker 1: majority of Chinese airlines on these long haul international flights
Speaker 1: is one of the reasons why we see so few
Speaker 1: cheap flights right now across the Pacific, even as a
Speaker 1: lot of countries really kind of open up their tourism
Speaker 1: doors in mass over the past couple of months, you know, Thailand, Singapore, Vietnam, elsewhere,
Speaker 1: most of Southeast Asia is now open for tourism. But
Speaker 1: you haven't seen the same rebound in capacity or the
Speaker 1: same cheap fares that we saw in twenty nineteen. And
Speaker 1: I think the single biggest reason why is you don't
Speaker 1: have the Chinese carriers kind of adding to that capacity
Speaker 1: and depressing air fare prices. I have one of their
Speaker 1: sort of like actually international question, and this is definitely
Speaker 1: something that we couldn't have talked about when we talked
Speaker 1: in February, But what is your understanding of the situation
Speaker 1: with um the Russian airline industry, Because in addition obviously
Speaker 1: to being cut off from much of the world, you know,
Speaker 1: their import or their export restrictions, and I have to
Speaker 1: assume that makes it difficult to service or get parts
Speaker 1: for key airlines, although I guess, or key airplans, although
Speaker 1: I'm not sure. And then I seem to recall that
Speaker 1: Saber one of the key some of the key software
Speaker 1: that they used cut them off, like what has happened
Speaker 1: or what's going on? Or what's your read if if
Speaker 1: you contain anything on what's happened to plane travel in Russia. Yeah,
Speaker 1: the domestic Russian travel market has been one of the
Speaker 1: largest growing over the past decade. It is a you know,
Speaker 1: major major purchaser of Boeing planes and others, and so,
Speaker 1: you know, and and by and large leasing their aircraft
Speaker 1: in most cases from Western aircraft lessers. And so when
Speaker 1: they made the decision to effectively nationalize the airlines, the
Speaker 1: airplanes that they had, even if you took a very
Speaker 1: best case scenario look at at you know that somehow
Speaker 1: things are significantly improved over the next year or two,
Speaker 1: the aircraft that exists in Russia today are essentially a
Speaker 1: total loss for those lessers. And the reason why is
Speaker 1: that in order for aircraft to continue to be so perviceable,
Speaker 1: in order for them to continue to be underwritten by
Speaker 1: insurance companies, in order for them to be sold to
Speaker 1: other airlines down down the line, they need to have
Speaker 1: impeccable maintenance records, and without the sort of Western support,
Speaker 1: without the parts and without the access to these sort
Speaker 1: of manuals and expertise that exist at Boeing and at
Speaker 1: some of the other aircraft parts suppliers, they just can't
Speaker 1: do that. One of the things that's different about the
Speaker 1: aircraft industry that than than many other industries is that
Speaker 1: when you buy a Boeing plane, when you buy you know,
Speaker 1: a certain you know, Pratt and Whitney engine or Rolls
Speaker 1: Royce engine, you don't get the full sort of manual
Speaker 1: to how that thing operates. And in most cases you
Speaker 1: actually have to still be in touch with the aircraft manufacturer,
Speaker 1: with the engine manufacturer for maintenance, for repairs, things like that,
Speaker 1: where they actually have dedicated teams working with you. And
Speaker 1: because it's a you know, an intellectual property issue and
Speaker 1: a proprietary issue, that now all of that is effectively
Speaker 1: cut off. And so that's why it's such a big
Speaker 1: deal of the Russian aircraft industry being cut off from
Speaker 1: the kind of Western world. Now what do they end
Speaker 1: up doing, Like does every does aeroflot just start using
Speaker 1: two polufs or something like that. Like, there are Russian
Speaker 1: made aircraft, although I'm not sure how many people would
Speaker 1: want to be flying on them. Yeah, they're West They're
Speaker 1: they're Russian made planes. There are Chinese. Chinese domestic industry
Speaker 1: is starting to grow. They just kind of roll are
Speaker 1: rolling out their first domestically manufactured one. But those still
Speaker 1: include a lot of Western technologies, especially from airlines like Lufthansa,
Speaker 1: and so it's not a holy independent thing and probably
Speaker 1: can't operate with a certain amount of Western support. What
Speaker 1: they're likely doing. I have no idea what Russia's long
Speaker 1: term plan or even medium term plan is for their aircraft,
Speaker 1: but the short term plan at least is to be
Speaker 1: able to take a lot of the planes that they
Speaker 1: have and designate some of them to essentially just be
Speaker 1: for parts for scrap, you know, where if if if
Speaker 1: some parts starts to needs maintenance, needs replacement, needs repair,
Speaker 1: they take it from one of these other aircraft. It's
Speaker 1: a model that has been used in the past and
Speaker 1: other kind of severely sanctioned economies, but it is it
Speaker 1: is absolutely more of a band aid, more of a
Speaker 1: short term fixed than something that's sustainable over the long run.
Speaker 1: So before we go, Scott, I mean, I think this
Speaker 1: summer is probably gonna be pretty wild for travel, probably
Speaker 1: fairly expensive, everyone getting You know, after two years, many
Speaker 1: people are going to be traveling or doing vacations in
Speaker 1: a real way for the first time. Jet fuel costs
Speaker 1: are up. What did you know, Scott's cheap flights? So
Speaker 1: what's your what's your tip for anyone? I'd say, who
Speaker 1: wants to take a take a vacation this uh, this summer?
Speaker 1: What's your what's your big tip for them? Two very
Speaker 1: quick tips. One, if you are just hoping to take
Speaker 1: a vacation you really want to go somewhere cheap, but
Speaker 1: you don't care where or when. Instead of deciding where
Speaker 1: you want to go and when you want to go,
Speaker 1: and then look at airfare, take that same three step
Speaker 1: process and flip it on its head. Step one, where
Speaker 1: are their cheap flights out of my home airport? If
Speaker 1: you live in New York, Oh, there was you know,
Speaker 1: just in the past week, there were flights to Barcelona
Speaker 1: for two round trip, Santorini for five sixty six, or
Speaker 1: Hawaii for four fifty. Oh, I'd love to go to
Speaker 1: Barcelona two eighty six, choose your destination and then choose
Speaker 1: the dates that work for you. By setting prices the
Speaker 1: top priority rather than the last priority. That's how you
Speaker 1: get cheap flights, and that's how you end up with
Speaker 1: three vacations for the price you used to pay for one.
Speaker 1: Last thing I'll say is that if you have a
Speaker 1: specific trip, you need to be at X destination on
Speaker 1: why dates they It's really really critical to get your
Speaker 1: timing of when you book your flights right. I use
Speaker 1: the WHAT model of the Goldilocks windows. So the best
Speaker 1: time for when cheap flights are most likely to pop
Speaker 1: up is not too early, not too late, just right
Speaker 1: in the middle. If you're traveling domestically, one to three
Speaker 1: months ahead of time is typically when you see those
Speaker 1: cheap flights most likely to pop up. For international flights,
Speaker 1: two to eight months is typically when you see those.
Speaker 1: But if you're traveling during a peak travel period middle
Speaker 1: of Summer, Christmas, New Year's Dublin for St. Patrick's Day,
Speaker 1: add a couple of months to those recommendations. All right, Scott,
Speaker 1: great to have you back back for your first episode.
Speaker 1: I don't know how to describe it, but great to
Speaker 1: have you back. We'll definitely have you on again and
Speaker 1: appreciate all your insights. That was great, This is so
Speaker 1: much fun. Thank you both for having me Tracy, I'm
Speaker 1: really glad we had Scott back. It really does feel like,
Speaker 1: at least in domestically and maybe US Europe and US
Speaker 1: Mexico and some other routes, travel is just about to
Speaker 1: get It's just going to get even more crazy for
Speaker 1: a while, well barring some sort of event that makes
Speaker 1: us have to mothball this episode, like I don't know,
Speaker 1: solar spots flare up or something like that. So pessimistic, Yeah,
Speaker 1: I don't know. It just feels like it's been NonStop
Speaker 1: over the past month or so. But anyway, Yes, that
Speaker 1: was a really interesting conversation. One thing that struck me,
Speaker 1: and again, my expertise in airlines sort of ended. Um,
Speaker 1: I guess it would have been right around two thousand eight, Yeah,
Speaker 1: right around the financial crisis. But it is interesting to
Speaker 1: see how this historically loss making industry continues to adapt
Speaker 1: and survive in really the worst of work circumstances. So actually,
Speaker 1: I thought that was really interesting and I didn't appreciate
Speaker 1: the degree to which these UH airlines have really diversified
Speaker 1: their revenue stream and so you know, he mentioned, you know,
Speaker 1: there's the old cliche like how to become a millionaire
Speaker 1: like by and be a billionaire and then buy an
Speaker 1: airline or whatever it is. But my impression is that
Speaker 1: it's just a much in the core business has become
Speaker 1: less volatile. If you have all these ancillary revenues, if
Speaker 1: you have ways of selling business class tickets to leave
Speaker 1: your travelers, it seems like you can really sort of
Speaker 1: smooth things out a little bit, and not quite that
Speaker 1: would be quite so boom and bust. And it's interesting,
Speaker 1: like I feel like it's when we were kids, like
Speaker 1: airlines were going bankrupt all the time, like big ones.
Speaker 1: You know what happened up My dad worked for Brand
Speaker 1: if I remember, they went bankrupt and he was out
Speaker 1: of a job. It was definitely boom bust cycle for sure.
Speaker 1: And it feels like I don't know if like an
Speaker 1: airline is like a good business, but it doesn't feel
Speaker 1: like a terrible business these days. Uh maybe maybe, I
Speaker 1: want to say, I hope so so historically I feel
Speaker 1: like what tends to get the airline. So, yes, there
Speaker 1: are unforeseen circumstances like the nine eleven terrorism attacks or
Speaker 1: something like a global pandemic things like that. But historically
Speaker 1: what tends to get the airlines is their own behavior,
Speaker 1: where for instance, they end up annoying all their consumers
Speaker 1: by charging ancillary fees and revenue and pushing all of
Speaker 1: that onto them, or they over expand and start price
Speaker 1: wars that then hurt everyone. It's kind of crazy. Like
Speaker 1: I'm looking at a chart right now in the terminal
Speaker 1: like Delta Airlines a d A. Like the stock just
Speaker 1: goes sideways. It's like it's basically exactly where it was
Speaker 1: in the middle like late right now, and so it's
Speaker 1: it's doing pretty well in nineteen and then of course
Speaker 1: the stock plunged in spring. But like they're not like
Speaker 1: it's sort of yeah, they're not likely to go bankrupt,
Speaker 1: but they're not exactly Like they're not the right tail
Speaker 1: is not there. They're not huge moneymakers. This is very true. Alright,
Speaker 1: shall we leave it there. Let's leave it there. This
Speaker 1: has been another episode of the All Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can find me on Twitter at Tracy
Speaker 1: Halloway and I'm Joe Why Isn't Though? You could follow
Speaker 1: me on Twitter at the Stalwart check out Scott Kais
Speaker 1: of Scott's Chief Flights. He's at s M Kais. Follow
Speaker 1: our producer Carmen Rodriguez at Carmen Rman. Followed the Bloomberg
Speaker 1: head of podcast Francesca Lead at Francesca Today, and check
Speaker 1: out all of our podcasts Bloomberg under the handle at podcasts.
Speaker 1: Thanks for listening,