322 - Guest Co-Host Dave Hilfman. Guest: John Heimlich, VP/Chief Economist, AFA

Summary

Airlines Confidential Podcast — Episode 322

Host: Scott McCartney
Guest Co-Host: Dave Hilfman
Special Guest: John Heimlich, VP/Chief Economist, Airlines for America (A4A)
Date: January 28, 2026

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Episode Overview

This episode, hosted by Scott McCartney with guest co-host Dave Hilfman, features an in-depth analysis of the key challenges and trends impacting the airline industry as 2026 gets underway. Highlights include a data-packed conversation with John Heimlich, chief economist for Airlines for America, discussion of the Wall Street Journal airline scorecard, operational shifts at major U.S. airlines, industry financial health, Spirit Airlines’ uncertain future, and the evolving realities of airline revenue and consumer trends amid what economists call the “K-shaped” economy.

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Key Discussion Points & Insights

1. Industry Updates & Banter

Early portions feature industry news, anecdotes, and personal stories, including:

• The Michael O’Leary (Ryanair) vs. Elon Musk (Starlink) spat:
  • O’Leary’s refusal to offer free Starlink Wi-Fi due to cost and operational fit sparked a public war of words.
  • "[O'Leary] launched a successful idiot sale once again capitalizing on media attention there. All you need to know about that one, right?" — Scott (00:42)
• Personal reflections on first-class travel (Emirates A380) and retirement parties for industry veterans.
• NFL playoff sidebar and its impact (or lack thereof) on airline revenue.
• Paying tribute to Glenn Howenstein’s career and reflecting on industry legends.

2. Winter Storm Disruptions & WSJ Airline Scorecard

[12:00–16:45]

• Severe winter storm: 45% of U.S. flights canceled in a single day, worst since the pandemic—expected to impact Q1 financials.
• WSJ Airline Scorecard highlights:
  • Southwest wins the 2025 scorecard after massive investments post-2022 meltdown (“Giving a lot of credit to CEO Bob Jordan and especially Andrew Waterson, COO”)
  • Allegiant places second, Delta slips to third, with operational metrics declining.
  • American Airlines ties with Frontier for last.
    • "If American is going to win back customers, it has to get serious about fixing its operation. ... Every year it seems there are promises that next year will be better and it just hasn't happened yet." — Scott (15:38)
• Reflecting on airline culture:
  • "What gets measured and rewarded gets managed. So whatever they're doing over there, they need to find the right metrics, reward them appropriately." — Dave (20:19)

3. Fleet, Hub Competition, and Corporate Contracts

[21:25–25:00]

• American’s Chicago hub faces pressure post-pandemic; United gaining turf.
• Discussion of corporate contracts and tipping points for business travel loyalty:
  • "You can hit a tipping point where more and more companies say, oh, wait a minute, United's got a much more robust schedule. We're going to switch our loyalty from American to United." — Scott (23:08)
• United’s growth and tech investment contrasted with American’s slow recovery.

4. U.S. Airline Financial Health & Earnings Wrap-up

[25:00–29:10]

• United posts over $1B in Q4 2025 profits; healthy margins.
• Alaska cautious on 2026 outlook, reflecting integration hiccups with Hawaiian acquisition.
• Spirit’s bankruptcy and Castle Lake’s (potential investor) position dissected:
  • "I'm just not sure this Castle Lake is the answer, Dave. ... Spirit needs an equity investor. I could be wrong, of course." — Scott (29:13)

5. Charlotte Hub & Investment Focus

[32:45–34:15]

• American Airlines clarifies Charlotte is no longer its most profitable hub, but significant investment—like a new flagship lounge—remains planned.

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Featured Interview: John Heimlich, A4A Chief Economist

6. 2025 Airline Industry Wrap-Up: Trends and Turmoil

[37:48–43:50]

• 2025 echoes 2024:
  • Overcapacity in early year, weak yields, “paired-back” growth in Q3
  • Major government shutdowns, tariffs, ATC disruptions, and international travel setbacks.
• “The aggregate again will be single digit profit margins” — John (41:34)
• Diversity in airline results; some in the black, others—especially lower-cost carriers—in the red.

7. 2026 Outlook: Cautious Optimism & Capacity Discipline

[42:24–47:04]

• Optimism for 2026: macroeconomic stability, no new shutdowns, and the FIFA World Cup driving international demand.
• Industry-wide focus on disciplined capacity growth, especially among LCCs and ULCCs.
• Improved fleet arrivals, “product enhancements” such as premium seating and lounges across airlines.

8. Risks & Challenges: Labor, Supply Chain, and Policy

[43:50–47:50]

• Major risk is not so much demand/capacity cycle as workforce and MRO (maintenance, repair, overhaul) backlogs.
  • “Aircraft maintenance technicians ... is still a few years away from being where we need that capacity to be” — John (46:42)

9. Spirit Airlines’ Future and Market Effects

[47:04–51:34]

• Unclear outcome for Spirit—new investments, sale, or potential liquidation.
• Sectoral impact if Spirit disappears:
  • “I think there are some of its compadres in the lower cost sector that would stand to benefit from not having Spirit there as an independent entity.” — John (49:20)
  • Frontier cited as the most likely immediate beneficiary.

10. The K-Shaped Economy: Impacts on Airline Demand & Strategy

[51:34–58:48]

• Stark divergence in household spending power:
  • Top 10% of U.S. earners account for 50% of economy-wide spending; top 20% for 63%.
  • Main cabin demand weakness, premium cabins and corporate/international outpacing domestic leisure.
  • “If you are not exposed to that [business/international] and you are not exposed to international long haul. You are at a disadvantage.” — John (54:04)
• Airlines exposed to lower-income travelers face demand softness amid higher costs for necessities.

11. Affordability, Revenue Models, and Fare Dynamics

[58:48–64:29]

• Airline fares continue to drop in real (inflation-adjusted) terms, even as other consumer costs rise.

• Airlines offset falling yields with higher load factors, ancillary revenues, and “product differentiation.” Loyalty, credit card deals, and diversified revenue streams cushion against tiny margins.

  • Notable Quote:
    “It’s gotten pretty hard to make money just from flying people around. ... And so, I think that’s part of why they have diversified their revenue bases.” — John (62:38)

• Ongoing debate: Do premium customers subsidize the back of the plane, or vice versa? Both, but premium reliability “sustains service frequency.”

12. Is Basic Economy Transformative?

[65:22–72:46]

• Agreement with Doug Parker: Basic Economy + removal of change fees is “transformative,” not merely tactical price-match.

• Enhanced ability to segment, upsell, and build loyalty, rather than forcing all to buy same product.

• Airlines have clearer merchandising and customer value propositions; technology now enables granular price and product differentiation.

  • Notable Quote:
    "It's not all about price, you know, it's ultimately value. And am I getting something better or worthwhile for my money?" — John (71:28)

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Notable Quotes & Memorable Moments

• “What gets measured and rewarded gets managed.” — Dave Hilfman on how to fix American Airlines’ operational culture (20:19)
• “Reliability is something an airline has to make a priority for it to really happen.” — Scott (16:00)
• “There is a sizable match of capacity now in the form of basic economies ... There needs to be over time, some rationalization of underperforming routes, underperforming capacity.” — John Heimlich (50:10)
• “All you need to know is it’s a commodity business. And in a commodity business, you’re only as smart as your dumbest competitor.” — David Bonderman, recounted by Scott (71:45)
• “It's not all about price, you know, it's ultimately value. ... Am I getting something better or worthwhile for my money?” — John (71:28)

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Important Timestamps

• 00:42 — Musk/O’Leary “idiot” spat recap
• 12:40–16:45 — 2025 WSJ Airline Scorecard breakdown
• 25:00–29:10 — U.S. airline financial health & Spirit/Castle Lake
• 36:58–73:19 — Interview with John Heimlich (see topic breakdown above)
• 74:46 — Listener Q: Southwest’s outlook and bag/seat fee revenue impact

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Listener Q&A: Southwest’s 2026 Outlook

[74:46–78:23]

• Southwest’s move to bag and seat fees brings in over $1B/year. No evidence of customer exodus; financial outlook strong for 2026.
• Key issue: Will results be enough to satisfy Elliott Management and protect existing leadership?
• A changed traveler mindset—once opposed to add-on fees, now accepting (if not loving) them—has smoothed the way for revenue gains.

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Takeaways

• Operational Excellence Pays: Southwest’s WSJ performance shows results when reliability and technology are prioritized.
• Airlines Are Evolving: The premiumization trend and unbundled product strategies (“basic economy”) are permanent fixtures, responding both to the “K-shaped” consumer economy and new technological capabilities.
• Industry Still Vulnerable: Capacity discipline, workforce and supply chain issues, and macroeconomic/policy disruptions (shutdowns, tariffs) remain constant threats.
• Spirit’s Fate Matters, But Isn’t Decisive: The industry can adapt, but other low-cost carriers may seize Spirit assets/routes in a shake-up.
• Loyalty, Value, and Diversification: Success increasingly depends on airlines moving beyond pure price competition, cultivating loyalty, and finding non-fare revenue streams.

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This summary offers a comprehensive, structured guide to the episode, capturing major themes, insights, and actionable takeaways for airline industry enthusiasts and insiders.

Transcript

[John Heimlich]

Airlines confidential with Scott McCartney is made possible with support from RTX, Collins Aerospace,

[Dave Hilfman]

Pratt and Whitney and Raytheon.

[John Heimlich]

Connecting and protecting our world. Visit rtx.com infinityflight the leader in Cadet Academy flight training programs. Infinityflight.com Ontario International Airport in Southern California, SoCal so Easy Florida flyontario.com and by

[Dave Hilfman]

Cirium, the world's most trusted source of

[John Heimlich]

aviation analytics, cerium.com we also welcome your business support.

[Scott McCartney]

Contact us at airlinesconfidential.com welcome to Airlines Confidential. I'm Scott McCartney and we have so much to talk about this week that I'm going to do some speed podcasting like here's a story. Elon Musk called Michael o' Leary an idiot for not wanting his starLink Internet service. O' Leary called Musk an idiot. And O' Leary launched a successful idiot sale once again capitalizing on media attention there. All you need to know about that one, right? Dave Hilfman, welcome back, Dave.

[Dave Hilfman]

Thanks, Scott. It's great to be back on with you and the Airlines Confidential audience. And yes, that's all you need to know about Michael o' Leary and his gang at Ryanair. Truly master marketeers. And I mean, who doesn't love Michael o' Leary except for, you know, maybe a few European regulators? And I just love him. I mean, he's obviously brilliant, amazing things the shareholders at Ryanair and you know, carries tens of millions of humans around the European continent. So anyway, it was, it was hilarious to see that whole match pissing match, I guess you could say, between he and wouldn't you say Elon probably should have given Ryanair the Starlink service for free. I mean, considering all the attention that has been raised and generated, I mean, all airlines might end up with this Starlink service. So anyway, we'll see how it plays out, right? Scott?

[Scott McCartney]

Yeah, no, the Starlink thing's interesting. My understanding is, and some airlines want to offer it for, for free to customers. That, that's a, that's a condition of, of getting it with, with Elon. You have to offer it for free, but then you gotta pay Starlink for the, for the service. And by the way, there is a fuel burn issue and so you know, it's gonna cost the airline something to do it. And Michael o' Leary's point was we fly short flights and we're, we're a bare bones discount airline and we're not offering free Internet to everybody.

[Dave Hilfman]

We, well, his, most of his decisions have been spot on, so I wouldn't want to question him. I figure at some point they'll figure it all out and everybody will benefit. Well, hey Scott, I know we do have so much to talk about in this show before we get going. I did. I wanted to congratulate you. I've listened to a bunch of the podcasts, you know, the last couple of months since I've last been on. Loved Oscar show. Of course, he's always incredible. And Maya Lieberman and Mr. Harteveld and Charles Duncan and anyway, just great episodes, obviously have these, these fun and these sharp co hosts and, and then you've got some great guests that have been on, just really impressive. And I know that the audience of Airlines Confidential continues to grow at a pretty fast clip. So again, that's in very large part to you and your team that does all this great work and the research. So anyway, just want to let you know it's just been great shows and I'm sure the audience agrees with me and again, keeps growing, so you got to love it.

[Scott McCartney]

Thank you, Dave. And thank you to all the, all the guest co hosts. This has just been so much fun and such a delight and I'm so glad listeners have enjoyed it.

[Dave Hilfman]

Yeah, no, no, great stuff. And I know all the guest co hosts have been thoroughly enjoying the opportunity. I did want to mention, of course, with all the NFL action and of course, I, I know you've got a global audience, but for those in the US in particular, congrats to the fans of the New England Patriots as well as the Seattle Seahawks. Pretty spectacular games. I know not everybody's happy about these results. Condolences, of course, to the folks in the LA area. For the Rams fans and obviously the Broncos fans. They're all great teams. Should be pretty proud of what they did for the season. I mean, it's pretty amazing stories. And now of course, ending back up at Levi's Stadium in the San Francisco area in about two weeks. In fact, my oldest son, Marshall and I, the last super bowl went to was at that game in 2016. I don't know if you remember that one, but which one was maybe Elway's last game or anyway, one of those guys. It was a spectacular game. Oh, no. Peyton Manning. Maybe that was it. Peyton Manning about 20 years old ago. Yeah, but it was, it was so much fun there. And you know, I know that for the airlines they, you know, I always think this might be revenue generative, but it really isn't because, you know, a lot of business travel tends to stay away from when you got these big events. But I figure it's got to Be good for San Francisco and, and all that's going on. So that's, that was one thing I wanted to mention. Third, I know you've already talked about Glenn Howenstein and many people have saluted his extraordinary career as he's retiring at the end of February. But I did want to also another shout out to him. I may have mentioned at the last podcast after we'd heard about his retirement, but what an extraordinary guy. Amazing mind. Now I will tell you during the Continental days, Glenn of course was running scheduling, I was in running sales. I won all the arguments with Glenn. I just want you to know that he thinks he won. But the customer always wins, baby. And Glenn, love you. You did brilliant work. All the carriers that you were involved with, Continental, Alitalia, obviously his amazing run at Delta and wishing him the very best. I mean we're going to get him on as a guest at some point, right? For hours and hours.

[Scott McCartney]

Yes, absolutely. And, and by the way, I've been working, working to get Michael o' Leary on too. So I both, both, I hope sometime in the future. Oh, not to look forward to.

[Dave Hilfman]

Yeah, they would be spectacular, both those guys. So anyway, Glenn, congrats. As Scott Kirby mentioned in the earnings call, he was saying something about as only Scott to say. Boy, his timing of retirement was spectacular in light of United's ascent and all that's going on. But Glenn, really such amazing contribution to the entire airline industry and I, I am sure he's going to have a spectacular time in retirement. He may show up doing some little thing here or there like a number of us who've retired from maybe the full time grind, but we love the industry and still like to be involved here and there. So anyway, good, good, good luck Glenn. Enjoy yourself. Well deserved. Finally, before we get into me to the show sky as you know, very blessed that I get to go back and forth between San Diego, California and Melbourne, Australia with family on both sides of the Pacific. I did spend the holidays there with my two kids, well, Marshall, 22 and of course my little boy Jordan, 6, my wife Suzanne. But on the return, you know, Marcel Fuchs, who I think you've met and know was retiring from United Airlines after a very distinguished, lengthy, successful career. He was VP International Sales and they had a big retirement party for me. He's based over in London. So I decided to go ahead and cash my 401k out and buy a swanky ticket up front on Emirates flying from Melbourne to Dubai to London Heathrow. And I gotta tell you, that was quite Spectacular service. I mean between the what seemed like a, you know, 20 foot bed to, I don't know, 10 foot theater screen, the caviar, the Dom. Now the one disappointment is I thought the, I thought Jennifer Aniston was included with the shower scenario. I, I mean I did take the 5 minute shower, had to, because I'd never flown on a 380. Always wanted to do that and finally got a chance. 14 hours from Melbourne to Dubai and about another 7 and a half Dubai to London. But, but yeah, as it turns out, Jennifer was not a part of the shower thing, but it was amazing. So I'm shouting out to the fine folks at Emirates for, for that. I mean, I did help their bottom line for sure, but had a great time, good flights. Marcel's party was amazing. You know, my, my former, essentially my successor, Doreen Burst, the SAP of worldwide sales, United. She and her team did a beautiful job celebrating Marcel who really was pretty legendary in the airline business. So it was just great to, to be able to salute him in his retirement. A lot of good folks you would have known there beyond Doreen. You had, I saw Mark Schwab, you know, former United CEO star.

[Scott McCartney]

Yeah, we've, we've had Mark on, I think.

[Dave Hilfman]

Yeah. Graham Atkinson, you know, used to be at United, saw my old buddy Bob Schumacher, you know, used to be running lots of Europe for us at Continental Land United before he retired a couple years ago. So anyway, just, just a great time. So I had to bring you up to speed on that and I hope the audience don't will indulge me with all of that. But it was what, what a great holiday and what a great flight experience. Have you, you, we talked about that. A380, right? You've done that many times or at least once or what?

[Scott McCartney]

I've done Emirates business class once. It was an A380. Done cutter business class. But yeah, never had the shower.

[Dave Hilfman]

One day, pal, you're going to go ahead and cash that for 1k. Might just be worth it.

[Scott McCartney]

Might just be worth, I don't know, a five minute shower on an airplane just does not sound like a good time to me.

[Dave Hilfman]

Well, it's quite the adventure. The turbulence is extraordinary and you know, we're gonna have to have a sidebar on that. Well, listen, we, we know there's lots of earnings to talk about. We also, of course, very serious, on a serious note, in the middle of a terrible storm that has gripped much of the country. Kind of extraordinary. You know, we have news about spirit and when don't we have news about spirit, Scott. I mean, we have news about spirit all the time. And maybe most importantly, we do have that famous Wall Street Journal annual scorecard of airline performance, which of course I know is near and dear to you since you created it. The man, the myth, legend. And of course, if all that isn't enough, we have a special guest as well, John Heimlich. Well, we know John Heimlich. He's the famous chief economist for Airlines for America. And again, congrats on the fact that you created that whole, whole WSJ Airlines scorecard which has carried on your legacy. Carries on in many ways.

[Scott McCartney]

I know. Well, and I love that they have carried it on because I do think it's important. So I had a great conversation with John. I love to check in with John from time to time just to get a read on the airline economy. And yes, my recollection is John is related to the Heimlich of the maneuver. So. Yeah, yeah, yeah, I think he is. You know, Dave, you, you mentioned the, the storms Sunday was really quite remarkable for According to Cirium, 45% of all the flights in the US were canceled. Was the highest cancellation day since the pandemic. The storm covered two thirds of the country. Snow, ice and record cold temperatures just been really tough. And, and, and no doubt that's going to be a hit to airline first quarter results. So let's talk about the Wall Street Journal scorecard because as you noted, it is really important to me and I do think it's important to the industry. It is the, I think the most thorough, data driven report card on airline performance. It matters to travelers. I know it matters to airlines because several of them, I know, track the same metrics that the Journal scorecard uses.

[Dave Hilfman]

Oh, in a big way, Scott.

[Scott McCartney]

In a big way. Yeah.

[Dave Hilfman]

I know that a lot of boardrooms followed this and all.

[Scott McCartney]

Yeah. So. And it's been going for 18 years now. And what's really fascinating this year is that Southwest Airlines was the winner. And that's really the culmination of huge investment in time and technology and manpower and equipment that Southwest started really after the Christmas 2022 meltdown. I think you have to give a lot of credit to CEO Bob Jordan for making this a priority and even more than that, to Andrew Waterson, who's the chief operating officer and no stranger to airlines confidential. Andrew really has been the brains and the driving force behind the operational turnaround. You know, it's considering the year that Southwest had really quite an achievement. They had major layoffs, they're completely remaking their operation by moving to check baggage fees and starting assigned seats and fees for preferred seats and extra legroom seats and all that. So much change might be a distraction for the operation. Yet Southwest has managed to not only keep its eye on the ball, but improve significantly. Really remarkable. Just an outstanding performance and a reminder that I think to all of us, right to every airline, that reliability is something an airline has to make a priority for it to really happen. A few other interesting notes from this year's survey. Allegiant finished second ahead of Delta. Again, great job Allegiant. A lot of change there too. So running a good operation doesn't have to be a high cost endeavor and in fact just quite the opposite. As we said many times, it's actually cheaper to run a good operation than it is to run a bad operation. Delta slipped to third and I think that's notable. Really something to watch. Richard Anderson and his team really made reliability and the WSJ scorecard a real priority and a marketing prize with the business travelers. Now Chief Operating Officer Gil west is gone. He's the CEO of Hertz. Dave Holtz, another key to the stellar operation at Delta. He's not at mainline Delta. The chief operating officer's job responsibilities are split between two executives. Delta used to be an absolute marvel at the lowest percentage of canceled flights. Last year it was in the middle of the pack in canceled flights. Number four. It was number five in both two hour tarmac delays and in mishandled baggage. So is Delta slipping or will it rebound? I think clearly something to watch. Speaking of slipping, American tied with Frontier for last place and that just can't be acceptable to American Airlines. American was number seven in on time arrivals, number nine of nine major airlines in the percentage of canceled flights, number eight in both mishandled baggage and involuntary bumping. If American is going to win back customers, it has to get serious about fixing its operation. It's been near the bottom of this scorecard for a long time and every year it seems there are promises that next year will be better and it just hasn't happened yet. As I said before, I think this has become a cultural thing at American and it's going to take a massive effort to change that culture. Dave, you saw Gordon Bethune change the operational culture at Continental Airlines. He did it by demanding accountability, by rewarding frontline employees with bonuses when the airline finished in the top three each month. He did it by creating a culture of winning. Do you think American can turn its operation around?

[Dave Hilfman]

Well, great Question, Scott, and before I even get to that, just a couple of comments about some of the things you mentioned. Southwest, I mean, we certainly weren't shy about busting their chops last year, right as they were trying to figure out what they're going to do, obviously had that Elliott Investment management all over them. They had to make some changes whether they wanted to or not. And maybe they did and just were going at it slower before Elliot accelerated the process. But hats off to them for really going through massive change, not just, you know, huge commercial decisions about, you know, deciding ultimately to go to assigned seating and provide extra legroom and preferred seats and all the things that they're going to be doing and have been doing. And you've got unleashing this upcoming week. You know, I don't. I know a number of the folks at Southwest and, you know, really good folks. I knew Dave Harvey probably best. He left, I think, last year, a year and a half ago on the sales side. But Tom Doxy, who I know you've met, just an incredible guy. I knew him from his days at United. He left and then went on to Breeze and then, and then they picked him up Southwest.

[Scott McCartney]

But now the chief, chief financial officer.

[Dave Hilfman]

Yeah, yeah. CFO at Southwest, clearly, you know, very sharp, obviously on the financial side, as you should be if you're the cfo. But he's such a great culture guy and a communicator. I give him a lot of credit for probably bringing some, some new energy and focus and they've really done some great things. So anyway, just shout out on those guys as it relates to Delta. You know, again, amazing track record. You're right. Some of these numbers have slipped. I don't know, you know, if that's for some good reasons. And they figure it was just temporary or, you know, some kind of extraneous issues. But I'm sure Mr. Bastian, and particularly if he hears this show, will be, you know, getting his lieutenants together. I'm sure they're looking at those numbers now and will, you know, Delta's pretty strong about responding. If they see any weakness in their numbers, time will tell. And like I said, there have been changes there and more, more that have that are coming with Glenn's retirement. But hopefully Ed will agree to come on the show. Maybe he can tell us about all the great things he's going to do down the road to get those numbers back.

[John Heimlich]

But.

[Dave Hilfman]

And then finally on American Listen, I do think they can make these changes. You know, I've talked about them many times. And never like to say anything but positive things, you know, from my perspective. But, you know, they clearly had their challenges. They've had them for a long time. I mean, you and I both have agreed that they need to be more like a speedboat in making these course corrections and turning around and less like an aircraft carrier, which they seem to have been behaving like. Because in the end, these reliability issues which Continental got so focused on, was about specifically the business travelers who obviously traditionally pay more. You love all your customers. Some you just happen to love more than others, and that's the folks that pay more. And usually those are business customers. So, you know, I kind of believe between the talent they have in American, I mean, it's not like they have a big a bad order book. In fact, they had one of the best order books. And I know they've had those new deliveries going on for a while now, but it just feels like they can't seem to execute upon what maybe is a good strategy. Now, the one thing I know you and I have chatted about, I mean, listen to the United's earnings call, and I know we're going to get to that a bit, but I mean, things like, you know, growing Chicago hair, you know, on steroids, when you could probably find ways to reinvest some of those resources into more reliable operations in your current areas around the country. Again, I know I'm a little biased because I'm coming from the Alumni Airlines side at United, but anyway, American, I know they have the ability, they've certainly proved it in the past, but, yeah, nothing gives you a lot of confidence to date that they have got a good handle on it. I'm hopeful for, for them and their employee group and all their, their customers, they have that. They, they do get it, what Gordon always said, and I know I've mentioned it multiple times in these podcasts, and it was just such a critical part of Continental success. I think it's carried on to United. But what gets measured and rewarded gets managed. So whatever they're doing over there, they need to find the right metrics, reward them appropriately. If they do that, I would think that ultimately those issues will get managed properly and they'll come back. So I guess we're going to find out, right, Scott?

[Scott McCartney]

Yeah, yeah, yeah. I mean, the Chicago battle is interesting. You know, American retired a lot of airplanes with the pandemic and, and, and then deliveries got slowed by all kinds of issues at the oem, at the manufacturers. So, you know, they had a plane shortage. They focused on Other areas in Chicago and they're, you know, trying to race to, to build back and it's going to be tough because they ceded a lot of territory to United in Chicago.

[Dave Hilfman]

Oh, Matt. Massive territory. And I did enjoy the line where Scott Kirby talked about, you know, United's drawn the line in the sand and, you know, he means it and I know you know him well and you know, again, I can't. I know American feels they have a natural right to that Chicago, big base of operations. But, you know, time changes, you know, things change. You know, I often wonder, should they have been refocusing some of that down to Miami or do you go over to Philly and build that up? We already know that, that what they've done in Charlotte and, and I think we'll chat a bit more about that down the road. But anyway, I have a lot of respect for American Airlines and, and their important business doesn't mean, you know, when I certainly, when I was working at United, we really didn't like them a lot. And that was just purely professional. But, you know, we wanted to beat the crap out of them. And, and that's the beauty of the airline business, which, you know, Robert Crandall used to talk about the most civilized form of warfare out there. And that's the beauty of it. That's why consumers benefit. People get better. As, you know, carriers try to find ways to win their business. American just seems to have, I don't

[Scott McCartney]

know, you know, Dave, the, the tough thing, I think is that, and this is your world, right? The corporate, corporate contracts, you can hit a tipping point where more and more companies say, oh, wait a minute, United's got a much more robust schedule. We're going to switch our loyalty from American to United. And I think that's happened with a lot of companies in Los Angeles switch to Delta in particular, and certainly New York as well. And so where is the tipping point when you start losing corporate contracts? Then your profitability really takes a hit and it gets hard to compete because the other guys got the more profitable customers and more of them, right?

[Dave Hilfman]

No, that's exactly right. And again, I know American, they're proud. They will say they're investing billions between the fleet and facilities and their technology. I mean, I think based on what you see in the numbers, and again, you know, a lot of anecdotal comments about this, but I talked to a lot of people, of course, still in the corporate managed travel industry, be it on the buyer side or all these top travel agency and top travel management companies, I mean, they said United just, they just had some special sauce. It's kind of the magic as of late. Not that American didn't have it for a long time and was beating United and then that all turned around and, and we'll see. But you're right, you, it's just those, the scale of your service and then all the investments that in particular in Chicago with United's made and they will go on and on about, you know, their technology and the soft product and the hard product and you can go find every, every aspect. I think American just needs to accelerate and I know we've talked about this in the things in 2025 we mentioned this. I'm sure they will say they're doing it and they'll be back on the show at some point to articulate all that. But at least thus far, they just don't have, hasn't seemed to be quite, they haven't quite got the magic yet. And who knows when they will, you know, talk, you know, talking about those earnings. And United put out their fourth quarter earnings and so did Alaska Airlines, I think JetBlue, American and Southwest all released this week after, after our recording of this podcast. But you know, I just said 2026 could be a record year and certainly 2025 was a damn good one for, for UAL. In the fourth quarter, United had more than 1 billion in profits, which is not too shabby. And you and I have been around the airline business for many decades and just even be able to say a billion dollars in a quarter is something kind of extraordinary. I know it hasn't been so much so the last maybe decade outside of the pandemic time period. But it's still kind of hard to believe when you've been in the airline business and you can say that in a quarter, but everything was up for them. Capacity and passenger traffic, revenue and earnings. Ticket prices measured in yield was down a bit for United, but their operating margin was a very healthy 9% and its net earnings margin was almost 7%. So really good for any airline. You know, Alaska was weaker. It put out a cautious 2026 forecast. And I gotta say, when you looked at their forecast on EPS, range was from $3.50 a share to 650. I'd say that's pretty cautious, but I don't think I've ever seen quite that wide a range. I'm not the financial expert or checking out the investment side of it that much. But anyway, it was interesting. But they are making progress with their Hawaiian Airlines integration. Alaska's capacity was up a bit 2.2%. But compare that to United 6.5% capacity increase. And. And despite more seats for sale, passenger traffic was actually down a bit. So Alaska did increase its yield nearly 3%. Remember, that's one where United was down a bit. So basically, Alaska was holding out for slightly higher ticket prices, or at least they weren't discounting as much as the others. Bottom line for Alaska was that net income earnings, they were $21 million. Unfortunately, that was down 70% from 71 million in the same period a year earlier. That's a net margin of less than 1%. And Alaska operating margin was only 2%. So basically you'd call it weak profits, but hey, profits nonetheless, which in the airline business, again, it's changed. We've seen carriers become so much healthier and their balance sheets repaired. And I got to give credit. Alaska, just here in San Diego, they have a huge growth push, and it helps that they've got the new terminal here and all that. So obviously, I think they were, I'm sure, disappointed relative to what they would have liked to have seen. But considering all the change and activity over at Alaska, you know, I guess they're. They're proud of their employees and all the change they've gone through this past year, especially with the Hawaiian integration and all the other things. They've got cooking and international launches and everything else forthcoming. But, you know, I'll give them credit. Their, you know, customer service still seems to be great and I love all the growth in San Diego. And hey, one final note of interest, Scott. There was a report that our friends at Spirit Airlines, who we've certainly busted their chops enough. I know they've good people trying to hang in there doing what's best for their employee group and their customer base. I know they were in discussion with an alternative investment firm. Castle Lake sounds a little like a wine to me, a nice Chardonnay. But anyway, maybe that's the new investor Spirit needs to get out of bankruptcy as a standalone airline. I don't know. Scott, what do you think?

[Scott McCartney]

I'm just not sure this Castle Lake is the answer, Dave. I looked it up. This is a private credit firm, so not private equity, and that's a significant distinction. Castle Lake, not particularly large, but the important thing is it provides debt, not equity investment. They call it debt capital, which seems misleading to me. Is it debt or is it capital? But I don't know. In 2024, Castle Lake sold a majority stake in itself to Brookfield Corp. A large investment Management firm and private credit has had its own issues of late. Not saying that applies to Castle Lake, but the whole private credit arena with regard to Spirit, I'm just not sure what asset Spirit has left to collateralize with more debt. Right. In the past, Castle Lake has done deals where it buys another company's loan portfolio. So perhaps it's looking to buy up some of Spirit's existing debt and then hope that you can make some money. The airline comes out of bankruptcy, improves the debt, gets more valuable, and they make some money that way. But this doesn't look to me like a firm that would bring in new money, that would, you know, invest big money in exchange for stock, new equity in a new Spirit. And that's what Spirit needs. It needs an equity investor. I could be wrong, of course. There's also a possibility that Castle Lake sees this as an opportunity to get control of assets that could be broken up and sold off. So I think that, you know more questions than answers with all of this. So one other item I want to mention, Dave. Last week we had a listener question about why American Airlines wasn't investing more in its hub in Charlotte. I had said that Charlotte was American's most profitable hub, but also one where there wasn't really a direct competitive threat. So more assets were now going to Chicago and to Dallas and to other places, including New York and Los Angeles, where American faces more competitive threats. Well, American called to say Charlotte wasn't its most profitable hub. That was actually something that Vasuraja had told me years ago, so perhaps no longer accurate. Also may depend on how you count profitability. American, however, would not say what is the most profitable hub. Now, I suspect if not Charlotte, then it must be Dallas, Fort Worth. Who knows, maybe Miami. But American also noted that it has announced it will build a flagship lounge in Charlotte. This goes to the question of investment in Charlotte, the flagship lounge, that's the top tier of Americans lounges. American has flagship lounges in Chicago, Dallas, Los Angeles, Miami and Philadelphia. So coming to Charlotte, but American hasn't yet announced when construction would begin on that flagship lounge in Charlotte.

[Dave Hilfman]

Well, Scott, thanks. That great, great recap on that. And candidly, I think it's an outrage that American, you know, would call and tell you that, well, Charlotte isn't our most profitable hub, but fail to, you know, provide the good, exciting details on what is. I guess maybe there's some investment or regulatory restraints around them and all that. But, hey, whatever they're doing when it comes to these lounges, I think it's Absolutely essential. Especially with, for your high yield, you know, business class, first class international travelers, you just got to have it. It's kind of competitive necessity and I think it's not only great for your product and for your most important customer or most valuable customers, but you know, I think there's revenue associated that with you know, their credit card partnerships and I know that that doesn't always equate to the business class lounges. That's usually more for like in their case the Admirals Club. But, but anything to help enhance their hubs again since we we probably busted their chaps and up. I mean anything that is better for their customer service and you know, the, you know, for their employees to be proud of the product, the hard product they've got at their facilities is a good thing. So I'll tip their hat if they're going to do that in Charlotte. That's obviously been a great hub for them, whether it's most profitable anymore or not. I guess nobody really knows or they're they're saying yes, maybe or no. I have to believe Dallas Fort Worth, there's the big engine. But I could be wrong on that one one.

[Scott McCartney]

Yeah, sure, sure. No, and, and you know, to the listeners original question, the the fact that there are flagship lounges elsewhere and they're just now getting to it in Charlotte, I think, you know, but American's point was hey, we are making investment in Charlotte, so want to make that clear.

[Dave Hilfman]

Yep, good move.

[Scott McCartney]

And speaking of investment in airlines Confidential, it's time now to thank our sponsors who make the this podcast possible. We want to thank Ontario International Airport for its support. Ontario International Airport is celebrating a decade of local control. Thanks to public support, the local community reclaimed Ont, revived it as a vital gateway in Southern California and ensured the airport is ready to soar even higher in the years to come. Visit flyontario.com 10 to learn the story and find out how you can join the year long celebration of how a decade of local control has turned ONT into one of California's fastest growing and most economical airports. And thanks to rtx, RTX believes no challenge is too great. No question, too big, no answer out of reach. That's why RTX never stops striving. The RTX Global team works with Collins Aerospace, Pratt and Whitney and Raytheon to inspire, innovate and drive progress for generations to come. RTX pushes the boundaries of known science and finds new ways to connect and protect our world. Visit rtx.com to learn more.

[Dave Hilfman]

We also want to thank Infinity Flight Academy, the leader in cadet academy training programs for helping us bring this podcast to you. Whether you're looking to build a custom pipeline or strengthen your existing cadet program, Infinity Flight Academy delivers consistent airline ready results. And for those of you listening who've always dreamed of flying, or you know someone who has had that dream, Infinity Flight has trained thousands of students, many now flying for major airlines around the world. So Learn more at infinityflight.com, infinity Flight Academy, where future airline pilots take off. And finally, we appreciate our friends at Cirium for helping to make this podcast possible. Cirium offers the most accurate and precise data and analytics to enable airlines to optimize their planning, operations and passenger services. The right intelligence drives operational efficiencies, enables you to predict market share shifts, and helps airlines respond quickly to maximize revenue, manage cost and seize commercial opportunities. So visit cirium.com for more information.

[Scott McCartney]

All right, let's turn to my discussion last week with John Heimlich of Airlines for America. John Heimlich is a familiar voice to regular airlines confidential listeners. He's vice President and Chief Economist for Airlines for America, which He joined in April 2001. Prior to A4A, Heimlich spent five years at United Airlines in financial planning, financial analysis, and international and regulatory affairs. In the latter role, he worked on competition matters, mergers, route cases, and antitrust immunity for alliances. A native of Kent, Ohio, and a die hard Cleveland sports fan, John holds an undergraduate degree from Cornell and a master's degree in public policy from Harvard's Kennedy School of Government. Welcome back John. It's great to have you with us.

[John Heimlich]

Thanks Scott. Happy 2026. Thrilled to be back and one more year of the Brown saying there's always next year.

[Scott McCartney]

Well, hey, could be worse. You could be a Cowboys fan, you know.

[John Heimlich]

Well, I don't know we can debate that one, but Right.

[Scott McCartney]

Okay. Well, let's start with looking back. Wrap up 2025 for us. My 30,000 foot view and listeners have heard a lot of this I think, but my view is it was a year that started with a lot of promise and predictions of record earnings and stuff and then it turned into a very challenging year for airlines. There were international feuds, tariffs and immigration that reduced international travel and in some cases like Canada, significantly. Then we had a long government shutdown. Along the way we had major disruptions with air traffic control and the result was weaker demand, too much capacity, and airlines scrambling to take capacity out so they could boost prices, which did seem to happen towards the end of the year. But is that about it? How do you see the year?

[John Heimlich]

That is a great synopsis, Scott. I would say in many ways it was a redux of 2024, with the exception of some of the larger governmental policy and shutdown implications that we found in 2025. So yeah, started off the year very strong, you may remember, and many of your listeners remember heading into the summer there was a sense of overcapacity with weakening yields and deteriorating loads and airlines paired their growth plans quite a bit in the summer 2024. And things sort of started to inflect positively late August, maybe September. And that's almost exactly what happened again in 2025 in a more pronounced way in the sense that we had, you know, the duplicate Chapter 11 filings by Spirit, which I know we'll probably get to. We'll probably get to. And things came to more of a head.

[Scott McCartney]

Yeah.

[John Heimlich]

There. I think we also have a similar although we only have two carriers, US Carriers who've reported their results thus far and we've got another one coming up, I think most of the analyst community expects a similar spectrum of results, diverse set of results that we did in 2024. So. Yes, good synopsis.

[Scott McCartney]

Yeah.

[John Heimlich]

Just, just if I could add one data point.

[Scott McCartney]

Sure.

[John Heimlich]

On the parebacks, at least for this year, I don't remember what the planning for third quarter, the July, August, September period had been for domestic capacity, but just to give your listeners a sense of contrast, the second quarter growth was 2.5% year over year. Domestic available seat miles in the schedules, two and a half. In the third quarter it was 0.4.

[Scott McCartney]

Huh.

[John Heimlich]

So it was a significant pullback by any means in the third quarter to sort of rationalize that domestic supply, demand balance.

[Scott McCartney]

And it wasn't just Spirit. Right. I mean Spirit, you know, got rid of 100 airplanes, half of its fleet, but everybody was, you know, down some.

[John Heimlich]

That's right. At least domestically. Every really, every carrier scaled back. Really everyone across, across the board. That's right.

[Scott McCartney]

Yeah.

[John Heimlich]

They didn't all shrink, but they pared back their growth plans.

[Scott McCartney]

Sure. Yeah. So how did the year end up financially, 2025, do you think? I mean, we don't have everybody reporting, but what.

[John Heimlich]

Yeah, the, the, the aggregate again will be single digit profit margins, I think in the aggregate with peeling the onion at the great diversity of results. So, you know, look, we already have United Delta out of the box, Alaska expected to be the third in the black tomorrow when they come out. And then we'll probably have a group in the middle and, and some particularly at the lower cost end with some in, in the red. So yeah, it's very similar to what we saw in, in 2024. Some carriers were able to pay down some debt, but I think for the most part even those carriers who are reporting in the black might be a little softer results than what they had in 24.

[Scott McCartney]

Okay, and how are we looking for 2026?

[John Heimlich]

Well, here we go again with optimism. Early in the year there was a little, just like the stock market, it's been a wild ride the past week or so on the outlook for the year. But I think there is overall confidence in the macro picture. We do have a little feather in our caps with the FIFA World cup games this summer, which accrue some benefit to the airlines. And the tariff picture seems largely settled. Knock on wood, no more shutdowns. And where if nothing else, stable on air traffic control. Best case we improve. I would say we're going in with optimism. But the big source of optimism really in the industry this year is at the micro level, not the macro level. And what I mean by that is sort of a more cautious disposition on capacity and in particular in the lower cost sector, which, which really benefits all the carriers in the business. And then many carriers of course have significant product enhancements coming out this year. They have the more optimistic outlook for their fleet arrivals from the equipment and manufacturers. And so there are reasons to be sanguine for 2026 as of now.

[Scott McCartney]

Yeah, yeah. This may be sort of. It occurred to me when you mentioned the premium products so often in the history of airlines. You plan your fleet for the up cycle and then the down cycle comes just as everything comes online. Is there a risk here of that? And I'm curious what you think about other risks for 2020, say oil prices, for example, really low. Are. I don't know what, what keeps you up at night, John, from, from an airline perspective.

[Dave Hilfman]

Yeah.

[John Heimlich]

I think that you're, you're right about historically that was the case where the aircraft coming in at the wrong time. I think that was has been especially true for a couple of the ultra low cost carriers where they just didn't have enough demand to themselves to absorb that additional capacity. And I think for the rest of the business the pent up replacement needs are so significant that it's not a problem where it's more, okay, we finally get to park that old one that we held on to a little longer where we're waiting for the delivery.

[Scott McCartney]

Yeah.

[John Heimlich]

So I think the answer depends on where you sit in the industry. And I'm less concerned about that. I think airlines have also gotten much better at managing their off peak capacity and moving airplanes around and are pretty agile about that. They're not sort of as stuck or, or as prone to over order as perhaps some of their predecessors were two, three decades ago.

[Scott McCartney]

Yeah.

[John Heimlich]

What keeps me up at night?

[Dave Hilfman]

I.

[John Heimlich]

You know we've seen how profound policy debates have had on the marketplace and how that translates to consumers. Whether it's where they think interest rates are going to, whether they think there's going to be a trade war in the transatlantic, whether people feel comfortable coming to the United States or feel like they have to share an incremental amount of social media history either in reality or what they perceive to be the case. Those are the big issues. I think more at the macro level, at the sort of micro level and across the airline industry. I think most people are feeling good about their aircraft deliveries. United did mention on its call something that a lot of airlines remain concerned about which is engine availability as a gating factor for capacity. Not only the availability for keeping aircraft flying but also for turnaround times on maintenance. I think that sort of MRO sector is still a bit backlogged in terms of the human resources they need. That was sort of a multi year issue that we got back on track with pilot availability. But aircraft maintenance technicians, either employed by the airlines or employed by MRO shops is still a few years away from being where we need that capacity to be.

[Scott McCartney]

Huh. And that, and that's a manpower issue, not a Pratt and Whitney fan blade issue.

[John Heimlich]

Right. So not just the manufacturers themselves but all these independent shops that, that we need both in the US and abroad to do that work. It's largely manpower. In some cases it's in. It's been parts.

[Scott McCartney]

Yeah.

[John Heimlich]

And materials. And some of that stems back to the Russia Ukraine conflict and the availability of materials worldwide and some related to the pandemic. But I've even read many articles that it's not uniquely an aviation issue that Ford Motor Company and others were having trouble getting the maintenance technicians and engineers they needed.

[Scott McCartney]

Interesting, Interesting. All right. I'm curious about the Spirit Airlines situation and what it might mean for the rest of the industry. As we know, it's unclear at this point what the outcome of the second bankruptcy will be. It seems clear that something may be coming soon or has to come soon. There was report out today. Maybe there's. There's talks with a potential new investor. So could be a new capital infusion that would keep Spirit going. Does seem like there's Always someone willing to bet on airlines, whether that's wise investment or not. Maybe Spirit gets acquired by another airline or maybe it liquidates. That's something we haven't seen a major airline do in a long, long time. I was trying to think you might have a better idea. Was the last one Braniff?

[John Heimlich]

Well, someone pointed out Midway Airlines, which granted wasn't as large as Braniff, but Midway in the early 2000s might have been the last one of any comparable size because Spirit's influence is much greater than Midways was at the time. But yes, those things are rare.

[Scott McCartney]

Yeah, for sure.

[John Heimlich]

Outright sensation.

[Scott McCartney]

Yeah. So does 2026 really hinge on the outcome of Spirit? What would it do to the industry if it doesn't keep going?

[John Heimlich]

Yeah, so I don't think it. I think most other carriers have figured out a path with or without Spirit, but I think there are some of its compadres in the lower cost sector that would stand to benefit from not having Spirit there as an independent entity, either because of its head to head, you know, route performance or because of its assets, gates and other things. It's at some location so where they could perhaps have a larger footprint. So I think for a couple brands I'm not going to name, it's of greater interest to see a change in Spirits.

[Scott McCartney]

Well, I'll name one of them would be Frontier.

[John Heimlich]

Well, perhaps. I think. Yeah, I think, I think there's this ongoing question about how much room from a demand perspective there is for that particular model or something akin to it. And I think people under, you know, to circle back to your interview with Doug Parker a couple of weeks ago, you know, there is a sizable match of capacity now in the form of basic economies, even though, yeah. It is not flying under a sole livery and that there's a lot of demand being absorbed by those basic economy seats or by full scale ulc. And something has got to give and you know, there needs to be over time, you know, some rationalization of underperforming routes, underperforming capacity. And you know, we've seen it in the regional sector and now we're seeing it in the ultra low cost sector. And people are either carving out their niche in terms of the business model or otherwise finding a way to cope with too many airplanes for too few new markets, especially when they're very high gauge airplanes for thinner markets. What's left to penetrate?

[Scott McCartney]

Right. So you put a 200 seat, a 320 in a little tiny market kind of thing.

[John Heimlich]

Yeah, that's the example of the mismatch we're talking about in an age where circling back to the macro economy for a moment, we've seen this from Muzi's analytics data that the top 10% of U.S. income earners account for half of all consumer expenditures across the economy. Not in aviation.

[Scott McCartney]

Right.

[John Heimlich]

10%, half the expenditures. If you crank that up to the top 20%, you get to 63% of expenditures. You know, this is that K shaped thing that people are talking about and it's very present in our industry. So that's why you see more and more carriers trying to match or differentiate by product because price alone isn't going to get you what you want. We're not just talking about extra legroom or in seat power. We're also talking about a jetway to your airplane and 247 customer service and ability to rebook via apps. It's sort of everything matters. And if it's not enough to differentiate by price when everyone has some sort of low fare option, you're going to have to retool. And it's the loyalty program. It's everything. Right?

[Scott McCartney]

Yeah. Well, I really wanted to talk about this K shaped economy and what it means for airlines. The idea as I understand it, is some consumers, as you said, are seeing growing income and spending power and really taking on more and more of the economy. And then there are other folks who are are seeing eroding financial strength and they're the, the lower leg of the K. So what does this mean for airlines long, long term?

[John Heimlich]

Well, it's partly a bet on how durable you think the premium phenomenon is. But you hear many carriers saying almost all of our increase in capacity, you know, in 2025 or 2026 is coming in premium seating. And look now this year some of the highlights are of course Southwest in a few days rolling out its extra legroom product in seat power, all that very publicly talking about lounges and transoceanic service and JetBlue. I think in the second half of this year rolling out its first class product more more broadly across the fleet and you know, Frontier in its own way doing many of the same things and most of the revenue acceleration and booking acceleration has been at the upper end of the product segment. I think one thing we heard a term we heard repeatedly from all airlines of all shapes and sizes last year was domestic main cabin weakness. Domestic main camp and weakness. Yeah, we heard that premium revenues outgrowing that international generally outperforming domestic. And the last few months bright spot has also been corporate and business travel. So if you are not exposed to that and you are not exposed to international long haul. You are at a disadvantage. So that is manifesting itself in the earnings results and the earnings calls. Yeah. Let me just stepping to the macro moment and I just recently updated all my CPI data, but just to throw out a few numbers, if we compare full year consumer price index data for 2025 versus 2019, they have air travel prices 3.5% lower and the overall CPI was 26% higher. So that is a stark contrast. But if you, if you peel the onion on the overall all items a bit, and I know lately fuel has been lower, but over that six year time frame, gasoline up 20%, groceries 30%.

[Scott McCartney]

Yeah.

[Dave Hilfman]

Mortgage.

[John Heimlich]

Mortgage and rent both up 31%. Restaurants 34%, electricity 37%. So those are just some basic household items. And really with the exception of restaurants, maybe things you absolutely need. Groceries, rent, electricity and to an extent gasoline. And if you think about the airline clientele, the portion of the clientele that's most exposed to that level inflation are the lower income tiers who don't have the same substantial housing values or, or stock market portfolios and 401ks and such.

[Scott McCartney]

Yeah.

[John Heimlich]

So it affects who can afford what product. And the airlines that depend most on the clientele that is exposed to these affordability issues are working very, very hard and rapidly to, to retool to that new reality. Especially when you combine that with the whole cost convergence phenomenon that many of other of your guests have talked about.

[Scott McCartney]

Right, right. I mean it's such an interesting issue and you know, this is really more of a, I guess marketing question or whatever, but that squeeze on the affordability, squeeze on the consumers, that sort of more the typical low cost carrier customer. It just strikes me that I'm not sure the answer to that is put in first class seats because then you're, you know, those folks aren't going to be able to afford first class seats if they're struggling to afford the ticket in the first place. So you have to attract new customers and I'm not sure you're going to tear them away from the other guys.

[John Heimlich]

Yeah, my answer would be it can't be the only tool in your toolkit. Yeah, I mean it may be helpful for sure and you may get some upgrades, but it can't be your sole value proposition. So I think that's why you're saying things with loyalty programs and debit cards and international routes. But a lot of it is, you know, network strategy and fleet strategy and making sure you're not over ordering and it's investments in it. There's so many nuts to crack here.

[Scott McCartney]

Yeah.

[John Heimlich]

And you know, maybe there just were too many seats in total going after too few customers. So if you can, yeah. If you can give some of the higher value customers at least a reason to consider your airline, sure, it will help. But I agree it's not, can't be the whole solution.

[Scott McCartney]

Yeah, yeah. The CPI data by the way, this has always been a fascination for me. Over history we have seen airline ticket prices, when you adjust for inflation, keep coming down. And with the consolidation we've had in the industry and a lot of people ringing hands about oh, what it's going to cost to travel, it just keeps coming down and can that continue? And maybe we're not looking at it the right way that when you add in all the fees and the other part of the economy, ticket prices aren't as good a measure anymore of the total cost of travel. But what do you, what do you think is, can the industry continue to, or does the industry have to keep ticket prices coming down?

[John Heimlich]

Well, the answer, it's a good question and the answer is yes. With conditions. You know, there were two solutions broadly historically to falling real yields, real fares. One was better unit cost performance over time. Obviously aircraft were a big part of that. Operations work roles and things and automation. Right. Supplant. You know, remember after 9, 11, we saw the closure of city ticket offices and tickets by mail and a lot of, you know, phone reservation agents, which is now limited to a higher value segment of your clientele. The other big thing, especially in the 2000s and to an extent the 2010s was load factor. The best way to offset. Right. The falling yields is to have fuller planes.

[Scott McCartney]

Yeah.

[John Heimlich]

And we saw, you know, 10, 20 points, maybe not 20, but I have a slide somewhere about historical actual and break even load factors. And yeah, you know, in the 70s break even was closer to 50%. And then we got it, there was a rule of thumb it was 2/3 to be full and now it's, it's probably high 70s just to avoid losing money.

[Scott McCartney]

Right.

[John Heimlich]

So that's why even, you know, we hear airlines aspire to double digit margins. But that's why it's such a high hurdle to get there is that phenomenon. So now, so the issue with 20, 24 and 25, you know, when we talked about the capacity inflection over the summer is you never want, you know, airlines always want fuller planes and higher yields. What you, you don't want to see both Go negative. And that's what largely in the spring and early summer of 24 and 25, they were seeing loads and yields both go south.

[Scott McCartney]

Right.

[John Heimlich]

And that's when things like hit the fan and oh, we've got to rationalize. So even last year, by the way, most of the year across every geographic entity, major geographic entity, except for Trans Pacific, we saw loads fall like over the course of last year, 1 1/2 to 2 points average in domestic Atlantic, Latin and even Mexico. So at the same time where yields certainly in real terms were going south. So now I think there's this, you know, United mention, you know, we're trying things on with global procurement. We're using automation where we, I'm just using them as an example because their call was yesterday and.

[Scott McCartney]

Right.

[John Heimlich]

Delta spoke about this. But it's, you know, and how they do MRO and ops reliability, it really is everything. So it's cost control and efficiencies. You've also talked about AI displacing some corporate headcount over time. And then on the revenue side, it's as you've spoken to, it's gotten pretty hard to make money just from flying people around. So you bring in better cargo revenues, better loyalty revenues and a better mix of customers and that whole ecosystem between loyalty and passenger revenues. And so I think that's part of why they have diversified their revenue basis. And some people bonk at that, but it's really a customer benefit because not only does chasing the loyalty give airlines an incentive to invest in their product, either, you know, the airplane, the apps, the airport facilities, lounges, but it also takes pressure off fares for customers because there's another way to make money. It doesn't have to all fall on the ticket price.

[Scott McCartney]

Right.

[John Heimlich]

That's a bit of a long but hopefully comprehensive answer to your question.

[Scott McCartney]

No, it's a very good answer. And there's also the age old debate of, well, does the premium customer subsidize the discount customer on each airplane, the back of the airplane, or is it the back of the airplane subsidizing the front of the airplane? You know, I've always thought it was both. Right. And you really have to have both to make it work.

[John Heimlich]

Yeah, it's probably both. But I do think probably lately the demand for premium is at least helping sustain more air service frequency than we would see otherwise.

[Scott McCartney]

Right, right. And if you can make money off your credit card program, then you can offer cheaper tickets to get more people on the airplane.

[John Heimlich]

Yeah. And there are little things, you know, we've heard some airlines talk about, you know, many have upgraded their food. I have a chart on that. Food expenditures per passenger mile. Now, you know, now there's competition on, I think we're seeing, you know, ordering even your economy class meal ahead of time and reducing waste, introducing that, reducing. So you, perhaps you get better quality, you know, what food you're getting. But also if you're reducing waste, there's probably a cost benefit there as well.

[Scott McCartney]

So one other thing, John, I'd love your take from an economist's perspective on Doug Parker's assertion about basic economy. And you mentioned this a little bit before, but Doug thinks that basic economy has been really transformative for the industry and it's much more than just big airlines matching prices of the discount guys. Basic economy with the better technology that airlines have is enabled buy up opportunities of all kinds, not just in discount airline markets or where you face discount airline competition. Also proven to be a way, maybe a much better way for airlines to sort of differentiate or segregate business customers from leisure customers. Replaces all the Saturday night stay restrictions or advance purchase restrictions that frustrated people and just ultimately didn't work. So what do you think? Is basic economy transformative or is it just a sort of a tactical way to match?

[John Heimlich]

Yeah, I tend to agree very much with Doug and that was such a fantastic discussion you had with him. I think it is transformative, especially in concert with the widespread elimination of change fees. So it gave people a lot more, it's really a twofer and it gave people a lot more feeling of flexibility, particularly in uncertain times. Reduced a great deal of friction. Probably some carriers who had historically very liberal change policies probably lost some of their competitor advantage when we saw a more widespread reduction in the application of change fees. You hit on technology and allowing carriers to differentiate in their pricing displays and things. I think that's right. There's something that's often underestimated or underappreciated. It's also that carriers have gotten much smarter, better about how they price the different products.

[Scott McCartney]

Yeah.

[John Heimlich]

And you know, as you know and when you wrote the middle seat column, it was often this, you know, 4 to 1, 5 to 1 differential. It was first class or everyone else.

[Scott McCartney]

Right.

[John Heimlich]

And it was, you know, the common, well, I can't fly first, I need to win the lottery. Yeah, but it's not like that now for, you know, some attainable increment, you can get a better than otherwise experience and that can entail a lot of different things. For food, it's legroom, it's lounge access, whatever, but they are attainable. Especially now you bring in the loyalty program because you, it's not always cash out of hand, it's loyalty, credit card points and other, you know, you get benefits for your grocery shopping. So in my view, it's, it's made the premium more attainable. And it has also been, as you say, for many carriers, a solution to the market share they had been hemorrhaging to your more bare bones customer who didn't care as much about the experience. Especially when you say, hey, for the same price, you know, I can go to Prague on this one and not just, you know, Portland.

[Scott McCartney]

Right, right.

[John Heimlich]

On this other carrier. So I, I do think so. And, and you know, I often, I, I, I moderated a panel recently where I had John Kirby on, and John started his career at People Express. And I've often thought People Express was way ahead of its time and this wasn't a new concept to have that bare bones offering. But then many years later, I talked to Monty Brewer after his years as CEO of Air Canada, and you know, he came up with these fair families right. At Air Canada as a way to compete with WestJet when you know what they were offering. The customer for the same price wasn't the same package, whether it was bags or anything else. And they needed to have a diverse set. So there was a fair matching option that was apples to apples with WestJet. And I feel like that happened before we saw that kind of thing happen in the U.S. oh, totally.

[Scott McCartney]

I think you and I were at a conference. It was at George Washington or somewhere where I remember Monty was there. We were talking about fair families.

[Dave Hilfman]

Okay.

[John Heimlich]

Yeah.

[Scott McCartney]

And how they did it.

[John Heimlich]

Yeah, I think some have called it like the car wash model. Right. You get the basic, the silver, the platinum and all that.

[Scott McCartney]

Yeah. And what I remember about it was I think you had to buy up up to get seat assignments together. I mean, it was sort of the start of, hey, wait a minute, what about a family of four traveling together? You're forcing them to buy up to sit together. Anyway, that was one of the issues with it.

[John Heimlich]

Yeah, there were bumps along the way in merchandising and marketing, but I think it smoothed out where the value proposition is clear. Look, you pay less, you get less, you pay more. And it's not like you have to pay a thousand more to get something that's meaningfully better. And that in combination with very significant relaxation and change fees and whatnot, I think has gotten us to a more stable industry. And of course, we we haven't even talked about global scale and international. All those other ingredients come into it. And we're seeing, I think, a general, you know, pull up in the marketplace, where I tell people, you know, I've done many interviews with GAO on competition over the years. And I urge them, like, when people think about purchasing a new smartphone, they don't just think about price, they think about what's the better product. What am I getting for this?

[Scott McCartney]

Yeah.

[John Heimlich]

And I hope when you write about competition in the airline industry, you think about that, too. It's not all about price, you know, it's ultimately value. And am I getting something better or worthwhile for my money?

[Scott McCartney]

Yeah. No. Well, but that's a huge change in the business.

[John Heimlich]

It is, it is. You know, figured out, many airlines have figured out a way to decommoditize.

[Scott McCartney]

Yeah. No. When I first started covering airline, I've told this story before, but David Bonderman, of blessed memory, you know, I had breakfast with him, said, what do I need to know about the airline business? And he said, all you need to know is it's a commodity business. And in a commodity business, you're only as smart as your dumbest competitor.

[John Heimlich]

Yeah. And. And to circle back to your interview with Doug again, you know, he was speculating, I can't remember the time period, maybe it was the 80s, early 80s, but about why didn't American do X, Y and Z at the time with their leg room and seating. But his. I think the speculation was that they didn't have the technology or infrastructure.

[Scott McCartney]

Yeah.

[John Heimlich]

To do what made sense economically. And that's. That is one major explanation for what the airlines are able to do today that I think has helped get away from the price only competition.

[Scott McCartney]

Yeah. Well, you know, the GDS has had limitations, and you could, you could load so many prices, but you certainly couldn't load, you know, this, this seat costs $59 and that seat cost $79.

[John Heimlich]

That's right.

[Scott McCartney]

All right, John, it's been fascinating. Thank you so much. Let's hope for a good year for, for the industry and for travelers. And I look forward to checking in with you again from time to time. Thanks so much for all your insights.

[John Heimlich]

You bet. So great to talk with you, Scott. Thanks for having me on.

[Scott McCartney]

All right, we'll be back with more on Airline's Confidential in just a minute.

[John Heimlich]

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[Dave Hilfman]

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[John Heimlich]

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[Dave Hilfman]

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[Scott McCartney]

Thanks again to John for a really helpful and insightful discussion.

[Dave Hilfman]

Yeah, adding my thanks, John, you're the man doing a great job at Airlines for America, so well done, sir. So, hey, Scott. In the mailbag this week, Daniel from Ocean City, New Jersey, one of the beautiful spots in the Garden State, he asks a very timely question. So he says, I'd love to get your perspective on your hometown airline and its prospects for 2026. And of course, I was trying to figure out which hometown airline was he talking about, Southwest or American. But in this case, it is about Southwest. So he says, hey, Southwest figures to get about 850 million in bag fees and another several hundred million in seat assignment fees and maybe extra legroom fees this year. Capacity hasn't dipped. The stock price is already up 3 to 4% this year after being up about 25% last year. So am I being overly rosy in thinking that 2026 could be a tremendous year for Southwest? So what do you think, Scott?

[Scott McCartney]

I think Daniel is right on target here. I think there is a lot of money coming in. All indications are that, you know, the fear was, would Southwest lose customers because it was no longer giving away this stuff for free. And Southwest used to argue we're going to lose more than we bring in, but that's not happening. Southwest doesn't seem to be losing customers. And in fact, the money is coming in. And as Daniel outlined, coming in, you know, more than, well, more than a billion dollars a year. So 2026, you know, there's so many factors in the airline business, right? What are, what are oil prices going to do? What's the economy going to do? What, how is it going to be affected by political turbulence or tariffs or, you know, immigration or whatever. But bottom line, I think, yeah, it's, it could be a very rosy year for Southwest. And as I've said before, this is a really important question because if it's rosy enough for Elliott Management to sell, then Southwest can reconstitute its board with board members that Southwest wants. And if that stock price doesn't get up higher, then come Valentine's Day, Elliott Management can probably force a complete management turnover and oust the CEO Bob Jordan, oust Andrew Waterson, and put in their own folks. So this is a really important issue. But as you outlined it, Daniel, I'm with you. I think the money's coming in. The stock price will go up more as investors see that. Now, other people would argue, hey, investors have they know this? They've already taken this into account. Stock price about $42 on Monday this week. Is that enough for Elliott Management? No, probably not. So, you know, we'll see what happens. But I think Southwest is. Is hitting on a lot of all the cylinders are firing right now. It's really impressive to see what they've done.

[Dave Hilfman]

Yeah, they have clearly been executing on what has not been an easy strategy. And, you know, all the challenges go with literally remaking in some ways, your DNA. And I know they would always say, hey, our DNA has never changed. It's all family culture. But they've gone through a lot of bumps in the road. But. But they, again, hats off to them, under a lot of stress. And as you and I've talked about many times, I happen to agree with you on the fact that I never thought for a second they wouldn't do better financially. It may not be popular with everybody, but none of the airlines that ultimately ended up maybe unbundling, if you will, and started to, you know, pay. Pay by the drink, so to speak, whether it's bag fees or, you know, seat assignments or better seats or more legroom. You know, everybody loves to get stuff if they know it as one price and didn't have to pay extra. They may not like it, but they will pay for it. And sure enough, Scott, as we talked about a lot during last year, Southwest has seen the results. Now, people are willing to pay for these things. And listen, for folks that didn't want to check bags, that's a better deal for them. Right. They presumably are not paying for other people or subsidizing people that do want to check bags.

[Scott McCartney]

It's customer choice, you know, Dave, and it's fascinating because I think both can be true. If southwest did this 10 years ago, I'm not sure it would go this well because I just think the traveling public is more used to paying all the extra fees. And it's accepted, as you said, it may not be liked, but it's tolerated. And so I think Southwest had that going for it, doing this now. And you could also argue, hey, where else are these travelers going to go? If you don't want to pay bag fees, you have no choice now, right? Got to pay a bag fee whether you're flying United, Delta, American, you know, JetBlue, anybody, certainly spirit, Frontier, whatever. All right, well, that's it for another edition of Airlines Confidential. Thank you so much, Dave. This has been a ton of fun.

[Dave Hilfman]

Thanks so much to you, Scott, and to the audience out there. Thanks for listening. It means so much to us. Have a great week everyone and look forward to talking with you down the road.

[Scott McCartney]

Thank you. Thank you all for listening and hope everyone has a safe and warm and productive week.

[Dave Hilfman]

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