Plain English with Derek Thompson - Why Air Travel Is a Hot Mess Right Now

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0:02

From the host that brought you to coding.

Westworld and Westworld the re capitals comes the ringer, Prestige TV podcast on West world, I’m doing Robinson.

I’m Danny Heifetz and I’m David Shoemaker, welcome to West Road.

Season 4 in the prestige TV podcast feed where we’re going to break down every episode of Westworld season.

0:20

For every Monday, the day after the show comes out on the prestige TV podcast feed.

Where are we?

Get your podcast but get them on Spotify.

I don’t want to be dramatic but lately.

Doesn’t it feel like everything is just sort of falling apart?

0:39

Like not catastrophically things aren’t entirely miserable.

It just it’s feels like we’re surrounded by systems that aren’t working the way they should be working.

And we’ve done episodes on some of these systems.

Oil markets are completely screwed up right now.

Prices are skyrocketing production is lagging.

0:56

We’ve had a baby formula shortage and before that a used car shortage and before A microchip shortage and before that, a supply chain gun cup.

It just feels like every industry you turn to.

It’s a big hot mess.

The latest example, I’ve noticed is the airline industry and air travel this past weekend.

1:16

Thousands of flights were cancelled in the US and people were stranded in airports 48 hours or longer this happened in Chicago in d.c.

Atlanta in Canada.

I don’t know how many listeners we have in Toronto, the news makes it sound like you guys are going to storm Pearson International like it’s the best deal.

1:32

Like the weights have been so bad.

So infamously bad.

I read they’ve had a call to police on some occasions to deal with the Mets.

And in Amsterdam schiphol airport reportedly.

Had a six-hour security line.

Imagine what it’s like to be in a six hour security line, you’re in line for three hours and you’re halfway to the gate.

1:55

Now, if you’re such a silly minded person, you might be thinking.

All right, Derek you can do this forever.

I mean, these are just random SOB stories with flying.

There are always random SOB stories.

Where’s the data?

Where’s the meat?

Okay, here’s the Data on a typical day about 1 in 100, flights are cancelled one percent cancellation rate last week.

2:17

JetBlue American and Delta collectively canceled about nine to ten percent of their flights between Thursday and Saturday.

One in ten of their flights canceled on major carriers and some experts say if you’re planning to fly at all this summer, things will only get worse.

2:37

Today’s guest, today’s economic explainer in Residence.

Is Scott guys, he is the founder of Scott’s cheap flights, a newsletter and business with more than 2 million members.

And in this episode, we talk about the economics of Airlines.

2:52

Why the major carriers are having this summer from hell?

And why the decline of business travel is, like, a cannonball.

In a lake, whose Ripple effects are wrecking, all sorts of havoc, So in the biggest picture, no, it’s not.

Just you a lot of things really are falling apart air travel.

3:10

This summer really is a mess.

I want to know why, and I want to know when does this, he’ll stop.

I’m Derek Thompson.

This is plain English.

3:45

Scott guys, welcome to the podcast.

Thanks for having me there Scott.

There are so many moving pieces here and we’re going to get into every single moving piece, but I want to kick us off with a clear thesis statement.

So like imagine you’re having dinner with an old friend, you order drinks and he’s telling you about all these stories is reading about this summer.

4:04

Turning into a season of Hell in air travel, thousands of cancelled flights over the weekend, friends stranded for hours in airports in the US and Canada and Europe needs to ask.

Not, you’re an expert here.

Big big picture.

What the hell is going on?

What is your 60 second?

4:21

Answer to that question.

My 60 second answer is that the amount of turmoil in the airline industry in the overall travel industry over the past two years is unlike anything we’ve ever seen in modern travel, even the 9/11 attacks, you know, airplane base, cause so much turmoil across the world and across the globe caused a fire.

4:45

Percent seven percent drop in overall travel.

Whereas when you look at 20:20 travel figures down 70% and his still had ramifications since then.

And so when you rewind to where Airlines were looking down the barrel in March of 2020, they weren’t worried that this was going to, you know, turn a profitable year to an unprofitable year.

5:04

They were worried about surviving in to 2021.

They were word where we going to be around.

And so some many of the decisions that they were making in March and April 20, We’re in that mindset of how can we batten down the hatches to make sure that we come out of this thing alive as a company, rather than one that is being sold off for parts?

5:26

And so that, you know, laying off folks, where necessary doing the sorts of employee buyout offering early retirement, shedding Pilots selling airplanes retiring.

Aircraft all sorts of decisions to try to make sure that they come out the other end.

5:43

But now with the high benefit of hi I’m saying seeing the rapid travel rebound, we are now paying the price for those sorts of decisions.

You know, they they sort of wrote the check back then thinking that they that they would really be facing a dire situation, but when it turned out to be not as bad for a travel industry perspective, we’re now struggling to try to rebound and fill that capacity as the demand really Spike.

6:09

This is a story that pandemic I mean it industry after industry.

It’s so fascinating that the Democrats.

Everyone thinks the world is going to implode.

And in fact much of the world does, implode people cut back massively, whether it’s retailers with the oil industry or hear the airline industry and then for a variety of reasons.

6:28

When demand surges a year later a year and a half, two years later, the supply-demand imbalance is so janky.

That there’s all sorts of problems with the service oil prices Skyrocket.

There’s an inventory crisis in retail and there’s a travel snafu, just all over the place in air travel.

6:45

It sounds like what we have to do now is go back to 2020.

I want you to tell me how the airline’s responded to the economic crisis.

The pandemic in terms of Pilots ground, crew and planes.

What did they do in those three categories that has essentially made the bed that were sleeping in today?

7:07

That’s right.

So across the board errands, you know, Delta is shedding 30% of their employees knew almost 30,000 people from their staff.

Eric and laying off 30% of their of their staff.

Or, you know, whether it’s through buyouts early, retirements or otherwise Airlines were really trying to cut and become as lean as possible to reduce those operating expenses with the anticipation that they were not going to be making much money over the next.

7:33

However, many years they took it in terms of aircraft, you know, retiring many of the older gas-guzzling planes using this as an opportunity to try to reduce This, their fleets in many cases either either to have stopped having to pay up keep an operating expenses on them or to be able to sell them elsewhere.

7:52

And again, get some kind of petty cash for those older planes and those types of things, you know, certain helped, improve the balance sheet throughout 2020, but with the benefit of hindsight, would they have made the same decision if they had known how quickly travel demand would rebound, if they had known how quickly, folks would want to get back out and start traveling.

8:13

It almost certainly Not almost certainly not because they assumed that this was going to be a four, five, six year recovery period.

Not the sort of 12 to 18 month recovery period that ended up coming to pass.

And so, when travel demand started rebounding, much quicker than they anticipated, the airlines were caught flat-footed and trying to then play catch-up make it clear for me, why is it so hard to hire Pilots?

8:40

Why is it so hard to bring more airplanes online?

Like, why is that a Rudder that just takes a long time to turn?

Yeah, there are few things that make it difficult to be able to hire pilots and rebound quickly.

First is the fact that it’s not an entry level job, it takes years of training and many airlines stopped.

9:00

Not in addition to shedding existing pilot, stop hiring early in the pandemic and so then have been trying to play catch-up since then seeing that travel demand rebound.

Second the fact that there are many regulatory requirements around being a pilot.

That constrict the supply for there’s a mandatory retirement age for Pilots. 65 years old, there are mandatory training and requirements for US based Pilots.

9:25

They have to fly 1500 hours before they are allowed to fly those commercial planes that do not apply for instance, for international pilot.

So if you’re an international Pilot, Flying a flight into JFK, you do not have to have that 1,500, our requirement the way you do.

9:41

If you’re a pilot for American or Delta ditto similar, Story with aircraft where Boeing doesn’t have just tons of 787s or 737 sitting in a warehouse waiting for Airlines to come pick them up, or put in their orders.

9:57

They have a years long delay.

In that manufacturing process, that is plagued with the same sort of supply chain.

Disruptions that so many other parts of the economy are.

So I think I get everything that you’re saying, there’s not enough planes, there’s not enough grounds crew.

There’s not enough Pilots, the entire service.

10:15

Model is woefully understaffed.

So that whenever there’s a storm or a cancellation, there’s no redundancy or resiliency in the system.

And so you get these cascading cancellations, I think I got all of that, here’s my question.

Why is this happening now, like, wasn’t all this obvious, 18 months ago that we’d have vaccines, wasn’t it?

10:35

Obvious, 6-12 months ago that Americans were like, okay, I’m done with this.

Get me the hell out of my house.

Why does it feel like this Mayhem is coming to a head now, Now, it’s a labor Supply issue.

It’s a labor shortage issue in large part because airlines are not immune to the same sort of hiring challenges that every single sector of the economy is currently facing.

10:57

You know, if and it’s not just the airline’s it’s TSA it’s the government employees at the airport.

If you live in Milwaukee and your net, you know, it looking for an entry level job, you could go and you could become a transportation security officer right now.

11:13

There’s a job posting in Milwaukee.

The pace has it starts at $19 and 41 cents, or you could go on Amazon’s website and see that.

There’s also a job starting in the Milwaukee area at $19.50.

So the exact same pay for two very different jobs.

11:29

Now, if you’re talking about working a job in January in Milwaukee, would you rather be helping unload and load bags in the dead of winter in Milwaukee, or in a climate-controlled environment in a warehouse, you know, working for Amazon, that’s the type of trade off in decision that a lot of folks are having to make and why airlines are finding it difficult to try to hire up in this sort of strong, labor environment and so the lack of you know the the airline still down a significant number of ploys compared to where they were in 2019.

12:06

TSA still working on trying to hire up those labor shortages are causing the types of delays and Now, even take something like the pilots wear when there are the sorts of cancellations that occur, when there’s bad weather in normal times, they might have a reserve crew of Pilots or flight attendants that they can call in that, they can fill in to be able to bridge that Gap.

12:30

But when you don’t have enough Pilots to be able to meet those, those sorts of demands in normal times, things operate great, but as soon as the cancellation start, as soon as a few pasta Pilots call in sick as soon, As there’s a wave of covid that causes a lot of people to call and stick.

12:48

All of a sudden there is not the reserve in place to be able to bridge that Gap.

In the result is a huge swath of delays and cancellations like we’ve been seeing recently people that were paying attention in 2022.

Some of the federal, bailouts might be screaming at the back of their head.

13:06

The airline shouldn’t be in this position because they got 50 billion dollars from the treasury Department.

Gary left who writes about the airline industry at the Side view from the wing has been very critical of the airline’s for shedding staff despite getting this bailout and I want you to respond to something that he wrote he wrote quote, the airline’s pocketed, these subsidies and found mostly but not entirely legal ways to still drop employees.

13:31

Delta actually reduced employee headcount 31 percent now they’re hiring back people but on the non-union management side, many are green it’s not just number of employees but experience they Lost a lot of people who knew how to run Airlines and quote to what extent do you hold the airline’s?

13:52

Similarly, at faults as Gary does here.

In terms of taking 50 billion dollars, still shedding all this work force and leaving them in a situation where I mean II suppose the relatively profitable now demand is really strong but they are nearly in a position to satisfy it.

14:08

Look, I’m sympathetic to the view that Airline should have done a better job of retaining, the sorts of employees that they Supposed to be retaining as a result of receiving those bailouts but where I sort of have a slightly different view is just viewing.

How existential the Potential Threat was going back to March and April 2020.

14:28

It is very easy to look in hindsight to see how the course of the pandemic played out and how the travel demand rebounded far quicker than anybody expected.

But when you go back and read these sort of, not only the outlook on the course of the pandemic, but the outlook on the course of the air, Airline industry.

14:46

It was going to be a 56.

Decade long slog to get back to any sense of normalcy, not the two-year, you know, 24-month us long to get back to profitability as basically every Airline now is currently profitable.

15:03

So, this energy defense, I think I fall somewhere between you and Gary left on this one.

I take your point that the airlines in 2020, thought they were looking at an extinction-level event.

But so did the government?

That’s why we bailed them out.

15:19

That’s why they got a fifty four billion dollar lifeline and they still had all these people go.

Another basically, Outsourcing their pain on to consumers in the form of cancellations and delays.

So speaking of the consumers, what about us?

15:35

The Flyers, are we doing anything different in 2022?

That is contributing to these delays and cancellations.

Yeah, absolutely.

So Dean the number of people traveling today is still down about 10% from where it was pre-pandemic, but that belies a sort of makeup a change, that’s happened.

15:55

Where Leisure Travel is almost fully rebounded today.

Compared to pre-pandemic, where’s business travel is still down 30% now.

Why does that matter?

It matters because Leisure Travelers tend to be a more inexperienced when it comes to travel.

They might need more support from the airlines you know handling their itinerary ahead of time then.

16:14

Seasoned business travel.

They might need more time going through security, don’t remember to, you know, take their shoes off or to take their laptop outer oh you can’t actually bring that water bottle through security.

They might need more help.

You know, time getting onto the plane boarding.

16:30

All these sort of little micro events that at Grand scale, start to really impact when you see these sort of lines at many airports through security.

That’s a result of each person may be taking extra 10, 15, 20, S, then you would expect x 1,000 2,000, 3,000 passengers that.

16:51

So even though demand Leisure Travel demand people, taking vacations is almost fully rebounded.

The fact that there aren’t enough flights on the schedule to meet that demand.

The fact that the schedule is still down 15-20 percent because they are ons.

Don’t have enough Pilots planes and crew means that high demand low supply, high airfares.

17:12

And so when folks see these Ordinarily High summer, air fares when they go to search for their flights.

That is a direct result of the fact that planes that Airlines don’t have enough aircraft and Pilots to operate and so, we’re seeing higher fares today than we would have.

17:30

If those sorts of decisions had been different in 2020, someone else that I talked to this week about the air travel, mask was Laurie Garrow.

Who’s a professor at Georgia Tech who writes and talks a lot about the airline industry and she directed me T2 FlightAware, which is a website that tracks these statistics of the airline industry.

17:50

So for a sabermetrics nerd, like me, this was a very, very fun.

Three hours spent looking at calculating flight, cancellation rates.

I want to share with you some data that I found from FlightAware, because this is, this is really, really interesting.

So, on a typical day about 1 in 100, flights are cancelled one percent.

18:09

Last Thursday, JetBlue canceled 14% of its flights on Thursday and Friday, American canceled, 10% of its flights on Friday, Saturday Sunday, Delta cancelled 8% of its flights.

So those major carriers collectively, canceled nearly one in 10 of their fights last Friday.

18:27

Like, my prayers to you.

If you were flying Delta, American or JetBlue last weekend because it was an absolute nightmare.

That here’s the weird part.

Frontier Spirit.

Not a lot of people’s favorite airlines that they travel a lot.

Frontier cancelled 1% of their flights Spirit cancelled 1%.

18:44

Their flights Southwest also cancelled only 1% of their flights.

Why are the major carriers having the major problems?

While the budget carriers seem to at least according to the flight of our data?

Basically the operating as normal?

Yeah.

So there are few things happening here.

19:01

First is that today’s Airline gloating about not having cancellations is going to be tomorrow’s.

Airline Medics is is experiencing its own meltdown.

So I yeah I’m not representing the company of Frontier spirit.

Exact, I don’t want to pretend as though spirit and Frontier don’t ever experienced their own ways of meltdowns.

19:20

They absolutely do that.

Having been said, there are few factors, I think why we’re seeing more higher rates of cancellations among me, sort of Legacy full-service.

A understand the budget.

Airlines first, is the fact that many of the budget Airlines like spirit and and others have already trimmed their summer schedules, you know, Spirit, JetBlue Alaska.

19:44

Many of these months ago, realized we are facing a summer schedule right now, where we don’t have enough Pilots to operate the schedule that we had planned.

We don’t have enough crew.

Even though the demand is there, and we schedule these flights in anticipation at, we’d be able to sell them, we just don’t have enough capacity to operate them.

20:04

So we better cancel them months in advance rather than having to have the day of cancellation that causes all sorts of headaches.

Not only for travelers, but for the airline Well, and so they did a little bit more advanced preparation than some of the Legacy full-service Airlines, which I think can suffer sometimes from hubris thinking.

20:24

Delta, for instance has told a story about itself for years that it was the operational area.

It was the one with operational excellence it didn’t have these sorts of meltdowns that would plague other Airlines and I think is now paying a little bit of a price for that hubris second many of the Legacy Airlines have hubs that are tend to be in crowded, especially Northeast.

20:44

Corridors, you know, New York area, Chicago area Boston that can suffer from more of these sort of compounding cancellations when things go bad.

So, maybe it’s a thunderstorm.

We’re all of a sudden flights not only out of Newark, a United Hub or JFK, you know, Delta and historically, and American Hub is, all of a sudden impacted in a major way.

21:08

And those cancellations tend to be get more key insulation.

It doesn’t tend to be a one-off event because of Flight from JFK to Miami, that gets cancelled all of a sudden results in a further, cancellation for that flight.

That was supposed to fly out of Miami afterwards.

21:24

It tends to have a cascading effect.

The other thing you’re making me think of is that I asked the question a few minutes ago.

Why is this happening now?

Well, look at the calendar.

It is late June.

When do thunderstorms peak in America right around now, right in June and July, so that we don’t have to go into a full thing about It change to you know you don’t want to necessarily points every lightning bolt and say that’s climate change, that’s climate change.

21:49

But generally speaking global warming should increase the frequency and ferocity of Storms and we’re just seeing a lot of Storms.

And last few weeks that when they hit Chicago, when they hit Atlanta, when they hit some major Hub that the major carriers are flying through it.

Absolutely devastates, the entire schedule and you end up with a situation where one in 10 of the flights are cancelled, Another point that I want to go back to is that you were talking about some of the changes between business travel and Leisure Travel does, the does that shift effect where people are flying as well.

22:24

Like, for example when you’re we have a business travel situation, you have a lot of people that are connecting through and maybe Dallas or Chicago maybe flying into San Francisco.

But is it the case that today you have many more flights that are going to beach destinations because you have fewer people going to conferences and more people going Two beaches.

22:42

How does that affect the big picture here?

Absolutely.

Right.

Look, the two airports with the biggest growth in the amount of seats available seat miles to those airports.

Since summer, 2019 are Miami up, 17% in Las Vegas up. 10% some of the airports with the biggest declines in the number of flights and available seats.

23:05

Those cities.

San Francisco down, 26% Detroit down 25%.

You know, Chicago O’Hare, down, 18 percent.

These are really Business, Heavy destinations.

And so, while Leisure Travel is fully rebounded, the business travel is still down anywhere between 25 and 30 percent.

23:24

And there are huge knock-on effects for those disparities because historically the budget Airlines have had the Leisure traveler as their bread and butter Spirit Airlines does not have any sort of significant amount of Business travel within its portfolio.

23:43

It is serving those customers who want to fly to Miami and get there as cheap as possible.

American Airlines Delta United.

Sure, they fly plenty of leisure Travelers, but at the end of the day, where they’re making the most amount of money is with those business Travelers.

They are you know, four, five, six, seven times more profitable on a per person basis than a leisure travel and they Orient their entire operation around serving those business Travelers.

24:08

So that’s not only where they fly flying.

More to Chicago, San Francisco, New York, historically, but also in terms of how they construct the playing, you know, having these larger business class cabins, having more lounges at the airport, how to having more service and corporate contracts in service of those business passengers.

24:29

And so when a global pandemic comes along that causes business travel to reduce significantly because his leisure travel to only dip and then come back, much more quickly.

All of us, the The board realized the name of the game.

The battle right now for travel is among attracting those Leisure Travelers.

24:49

And so, in a sense, the big, the full-service Airlines Delta and American and United are playing away games.

The budget Airlines have home-field Advantage because the market for travel right now, is almost purely among those Leisure Travelers and they’ve been serving them for years.

25:06

And so, whether it’s adding capacity or flying those types of flights to, To those Leisure destination.

Favorites, Miami Cancun, Hawaii, Las Vegas, budget Airlines know how to do it.

And this is why you’ve seen budget Airlines.

Have the basically eating all the growth over the past three years, Allegiant up 17% in their schedule.

25:27

Since 2019 Spirit up 7%, Frontier up 6%, where’s Delta Down?

18 percent United American each down, you know, eight, nine, ten percent and this is both a short-term, As a result of the pandemic, but also a long-term Trend that over the past 20, 25 years, almost all the growth in the airline industry has gone to those Leisure Airlines those budget Airlines.

25:52

Whereas, every single year the Legacy orange lose about a percentage point of market share.

And this is some been something that’s been going on over the years.

And this is why you see the full service Airlines try to compete by offering for instance, basic economy seats, you know, when Delta, Launch basic economy, a decade ago, they called them Spirit match fares.

26:16

This was their way of trying to compete with Spirit Airlines with, for the, those Leisure Travelers who don’t care about the expansion.

Don’t care about being pampered.

They just want the cheapest flight possible.

This is so interesting.

It is.

I feel like I could do like a whole segment or a whole episode and just this spillover effects of the decline of business travel because I’ve been writing things down, is even talking, and it seems to me that it has several effects.

26:39

I just want to list them all here and make sure that I The entire sort of second order effect named number one historically business class has subsidized economy.

So as business class has eroded as it’s declined by 30% that probably puts upward pressure on prices for economy, all things equal, number two, it probably also means slightly lower prices for business class, right?

27:03

If demand, for business class seats is eroding that it probably means that you’re going to price those lowered order to attract people that are Merely Rich rather than rich and spending money.

That’s actually belonging to the company.

Number three, fewer flights to Chicago, San Francisco, New York City places where there are lots of business travel, lots of conferences and more flights to places like Miami and Vegas for people more purely go for leisure number four, big Advantage for the budget carriers and more chaos for the major carriers.

27:32

The major carriers have to do an adjustment because their business models, relied on a healthy business class economy whereas it’s the budget airlines that are like The economy is moving into exactly the sort of consumer demographic that we have always served.

So we don’t have to do very many adjustments at all.

27:49

Is that the full picture?

Would you say of the spillover effects, the decline of business?

Or is there something else absolutely looking into whole skill upheaval in how Airlines approach pricing of fairs?

Because historically what they’ve tried to do is to price their tickets depending on who they think was buying that ticket if they thought it was going to be a business traveler buying This ticket, they wanted the price to be quite a bit higher because that business traveler doesn’t care what it, caused it to their company paying.

28:16

Whereas if they’re selling it to a Leisure traveler, they want to bring the price down because they know an expensive ticket.

He’s going to mean that purchase isn’t going to happen versus a lower price means they’ll actually make the sale.

Let me give you one quick clustered of example here.

Take a last-minute, flight.

28:33

Many people have it in their heads that when an airline has a plane that’s about to depart and there are ten Seats unsold on that plane.

The airline in the last week or two before that flight, should to try to fill those seats.

28:48

Probably slashed the price to try to sell as many of those ten seats as possible, right?

And that’s what airlines historically did, they would cut the price on last minute tickets to try to fill those seats, but there was a famous research paper done in.

I believe the 1970s that looked at who was actually buying these last-minute tickets and it turned out.

29:06

It didn’t tend to be leisure travelers to vacationers you.

And I attended to be Business Travelers, who didn’t make their plans until the last minute and who didn’t care what the price cost.

And so from an airline perspective, they thought their game.

They were playing was trying to sell the most seats possible.

But the game, they realize they ought to be playing with trying to make the most money possible.

29:26

And to make the most money, they instead of slashing the price on those last-minute tickets to fill as many seats as possible.

They should actually raise the price.

On those last-minute tickets to try to extract as much money as possible from those business Traveler And this, why even today last-minute flights tend to be quite a bit more expensive than flights booked even a month or two ahead of time.

29:48

Those types of ramification of the Aaron’s, trying to differentiate between Leisure Travelers and business Travelers, has been the name of the game for airline pricing for decades.

That’s so interesting, I’ve always wondered that I’ve always wondered why our last minute tickets to expensive.

30:04

The seat is going to go unfilled.

I if I give you 50 cents, you would make 50 cents more than you would otherwise make if I didn’t put my buttons.

See, but you’re saying, don’t think about it, as an empty seat, think about it with the price sensitivity of the kind of person who’s likely to buy that empty seats and the eternity pretty price insensitive because their business Travelers.

30:21

Let me give you one other example.

So many folks, you know see like we saw a deal at scheduled flights just a day ago that was flights to Paris for $340 round trip this fall.

When people would say, you know, see them be how the heck can Airlines even afford to sell it ticket to Paris for 40 bucks round trip.

30:42

And the reason why is to take out, you know, 10,000 foot view of the airline industry.

Just a 30-second overview decades ago.

The airline industry, relied almost exclusively on economy airfare to fund their operations to make their money today.

31:00

It was actually makes in many cases, the majority of their revenue on things other than economy airfare they make it on selling premium sees you know premium economy business class Class.

They’ve gotten much better at actually selling those seats.

You know, decade ago?

Delta’s, only sold 13 percent of their first class seats.

31:19

Today they sell over 60% of them so they make more money from that their credit card game is so strong.

You know American Airlines lost money flying on every plane that they flew in 2018 but the reason why they turned a profit on the year was billions and billions of dollars in credit card contracts and frequent flyer miles sales.

31:39

They make it on selling cargo and on selling corporate contract on selling commissions.

When you book a flight and they say, do you want a car rental?

Do you want a hotel that’s all free money for the airlines.

There’s so many revenue streams.

Now, for airlines that make it, that your economy are for just isn’t nearly as important to them as it historically had been.

32:01

And this is why they’re that sort of diversification of revenue streams has caused us to see the types of Cheaper fares and economy.

Economy today than we had seen historically.

It’s absolutely fascinating and I truly had no idea.

I’m so interested in companies that nominally appear to be in the business of like the name on the tin, but it turns out that their business is really in something that’s only tangentially related and what they’re actually selling is essentially a lost leader or at least just a minority item on their on their earnings report.

32:34

That’s absolutely fascinating.

The last thing I wanted to ask you about possible reasons why we’re in this mess is about competition and Regulatory policy.

So US law prevents foreign carriers from operating on domestic routes.

And so, as demand for domestic routes surges from a pandemic low to a current high, you’re in a situation where you don’t have the capacity from domestic carriers themselves.

33:01

And you’ve also told all the foreign airlines that you don’t even want them to try to fly from, you know, Pittsburgh to Oklahoma City.

And this is going to have all the effects that you would typically expect to.

From protectionism, higher prices, more consolidation, less competition a little bit less Innovation.

We just had an episode a few weeks ago about the ways this can go wrong, when one node in the domestic system fails in baby formula.

33:24

For example, we have a protectionist system when it comes to baby formula Abbott Labs collapses in Chicago or some sorry, Michigan, their lab turns out to have it terrible bacterial infection that shut down.

And as a result, there’s this awful baby formula shortage 20 said, have you done any thinking?

33:40

About the degree to which regulatory policy and protectionism makes America’s Airlines particularly on resilient particularly fragile to the sort of problems that we’re currently experiencing.

Yeah, so one of the one of the most kind of front and center issues being discussed in the airline industry right now, is this question of pilot training is 15:00 the proper amount of air time.

34:07

We should be expecting from Pilots to For we certified them to fly commercial Jets.

And on the one hand, it’s easy to say, well, you know you can’t be too careful.

It’s on the one hand I don’t want to die.

Right.

Exactly.

Exactly like like and you can just imagine the attack ads and somebody votes to decrease that requirement.

34:29

And then all of a sudden there’s a there’s one crash and and it just, you know, it the Optics are horrendous.

On the other hand, the u.s. is a bit of an outlier on this issue.

Most other countries do not require any Ethan near that level of training ahead of being certified.

34:47

The u.s. historically has not required that level of of training air.

Travel is incredibly safe compared to virtually every other mode of transportation.

I mean, you look at the number of of your per mile risk of death in flying versus driving or anything else.

35:05

It is just a, totally, totally different ball wax.

And so there, I think real Intimate questions, is that the proper amount?

Especially, considering that foreign Pilots are allowed to operate, foreign airlines flying to JFK, flying to San Francisco, flying to LAX without having that same level of requirement that having Ben Ben Ben said, this is It’s hard to find a quick overnight fix that.

35:31

Will result in more more flights, more pilots more just overall supply of air travel because These sorts of things tend to take months to years to unfurl.

I mean, airlines are already putting these sorts of investments in training of new pilots, but again, that’s something that pays dividends months, two years down the line.

35:53

So, the billion-dollar question at long last, when does this end?

When can we expect traveling to feel a bit more normal?

Yeah, what I like to say is that cheap, flights aren’t Gone, Forever.

They’re just on for this summer and I think that’s actually true as well.

36:10

For the types of travel chaos.

We have seen recently that the types of crazy, you know, rolling.

Delays cancellations is a predominantly a side effect of the fact of the amount of demand for travel right now.

And the reason why it’s so high right now is not just because so many folks are making up for trips.

36:30

They haven’t been able to take over the past couple of years, excited to get back out and travel again, but also because Summer is always the most popular time of year to travel and that’s a story both of good weather.

Other but also, primarily one of the academic calendar.

So many parents families, students teachers can only travel during these three months and so when you have that funneling effect, not only is demand a lot higher but it really kind of strange the system and adds a lot of pressure to the system where you don’t, you know, when one flight gets cancelled and then has a cascading effect.

37:03

There’s not much slack in the system to be able to cut that off and so it tends to Ripple a lot quicker.

Think of it as a Black line, you know, when it’s really taught one, wave is going to really go a long way when there’s a little bit more slack, it tends to Peter out much quicker.

37:19

And so I think when you’re talking about when will these things start to ease, when will we see fares?

Get quite a bit cheaper.

When will we see fewer cancellations and delays and craziness?

I think it’s going to be after Labor Day.

I think we’re talking about flight since mid-september and Beyond, and that’s just a function of travel demand, starting to decrease and then you have fewer lines.

37:40

It secured.

T.

You have less people traveling causing these sorts of high fairs.

You have letting you know, more pilots and planes in reserve to be able to come in when there is a thunderstorm, when there is a, it meltdown, when there is the type of thing that those sorts of reserves can help protect prevent a kitang catastrophic wave of cancellations and delays and so bad news for the short-term, good news for the fall and Beyond so everything, you’re describing Is, I’ve compared it to the pinched hose economy, but the economy shutdown in 2020, demand plummeted Supply was taken offline.

38:20

But then, demand came roaring back in 2021 and 2022 and Supply couldn’t keep up.

And as a result, you just get chaos down the line.

And I call it the pinched hose effect because it’s like if you pinch a hose in the garden, all this water gets blocked.

That’s demand.

And then you release it, and the hose goes Haywire.

38:36

It’s flopping.

All over the place.

You don’t know where it’s gonna flop.

You just definitely not.

The flopping is going.

Happen.

It’s just pure chaos and at the end of the day I just think the entire economy is just one pinch toes after another look at the inventory overhang and Retail oil markets being screwy.

38:52

Baby formula shortage Airline mess.

It’s all the same story.

It’s all demand, outstripping Supply, creating weirdness.

So I feel bad for listeners who come to the show to hear stories that aren’t basically.

Hey demand is outstripping Supply.

39:08

Again, we have no capacity to Feel that was people want to buy, but in missed you after mystery, it is notable that it all comes down to this demand is out running Supply.

So, Scott, thank you again for walking us through this.

Incredibly interesting.

39:23

Incredibly frustrating subject telling me about business travel.

That particular was really fascinating, I really appreciate it.

Thanks man.

My pleasure.

Thank you so much for having me Derek.

Thank you very much for listening.

Plain English is produced by Devon man.

See, if you have a comment, a concern, a question and idea for a future show, please email us at plain English, at Spotify.com, that’s plain, no space English at Spotify.com.