Scott McCartney (4:23)

Absolutely, absolutely. And yeah, I think that the Scott Hamilton interview is, I think people will really appreciate his insights. I know we did. So looking forward to that. So I want to start with Elliott Management beginning its exit from Southwest Airlines. Elliot filed a 13D with the securities and Exchange Commission late last week saying it sold about 4.5 million shares during the first three weeks of January at prices between $41.30 a share and $42.84 a share. That leaves Elliot with about 9% of Southwest shares. And I think there will be more 13D filings in the future with Elliot sales. Southwest shares closed last week above $54 a share. So Elliott still has. Where's my number? 46.6 million shares. With the stock above 50 is talking 54. There's a lot more profits for Elliott to cash in on and I think it's pretty clear that they will. Southwest had a board of directors meeting this past week. I suspect there won't be many more of those that include the five directors that were nominated a year ago by Elliott. Southwest files its proxy statement approximately first week of April. It was April 4th last year. That's the filing that will include new SL of directors to be voted on at the company's annual meeting in May. And I think we're going to see a lot of change there. So by then, almost, almost certainly Elliott will have exited with handsome profits at Southwest, and they can claim victory and go on to the next what whatever. Southwest can get back to doing what it wants to do. It's really quite amazing. And speaking of sales, another curious thing. Spirit Airlines sold its last two preferential Chicago O' Hare gates, this time to United Airlines for $30.2 million. That's a very similar price to what American paid for Spirit's other two gates in the same terminal at o'. Hare. The sale has to be approved by the bankruptcy court in New York before the gates can be transferred. I think that'll happen quickly. Spirit, by the way, can still serve o' Hare if it wants by using common use gates. What do you think of all that, Charles? Wow.

Charles Duncan (7:04)

Well, look, I mean, it raised my eyebrows when I saw the original news of American Airlines buying two gates from Spirit for $30 million. It's a lot of money, Scott.

Scott McCartney (7:15)

Yeah. And there's a risk here that the city may reallocate, right?

Charles Duncan (7:21)

Well, as we've talked about. Absolutely. So it's $15 million a gate and you might lose it after. Now, this clearly ties in, and we spoke about it last week, into this battle for market share and supremacy in Chicago. And the United team is not about to let American grow. And Scott Kirby even used the phrase he's drawn a line in the sand. And so these two gates will certainly support United's efforts in that regard. But it is an awful lot of money, these sort of sums. The first thing my mind went to was what it cost to buy a pair of slots at Heathrow is sort of in that in this same ballpark, $15 million and those, you know, they have either or lose it rules. And it's only one flight on, you know, a wide body typically. But I mean, it's again, a lot of money and an asset you might lose. So, again, just, yeah, the, the battle in o' Hare this year, and I think in particular over the summer, is going to be something to watch and behold. And speaking of that watching and so forth, United's flight attendants rejected a few weeks ago a tentative agreement. And I understand they're back to the table this week. And, you know, one of the sticking points in the negotiations is less about economics and more about how flight attendant Schedules are built. And if they are built sort of old school on a sheet of paper with lines that are chosen or more with what's called a preferential bidding system and automated tools that take in the flight attendant preferences. Preferences and build schedules. So we'll certainly wish them much luck. And it kind of relates also, Scott, to the American Airlines situation. We mentioned that Robert Isom reminded his employees when they complained about low profit sharing rates that the employees at American are being paid higher salaries than their peers at United because they've not signed new agreements. So anyway, hopefully the United folks will get their rates up to speed and so forth. But the, the unhappiness at American just, just continues. Yeah, Lieutenant Union last week voted to approve a no confidence resolution for CEO Robert Isom. And you know, they're particularly upset about this profit sharing, you know, check size. And you know, both United and Delta's employees will get much larger checks later this year, this spring when those are paid out. And you know, and we also broug up with Dave Seymour, but the flight attendants have been complaining about long waits to talk to crew scheduling and waiting for hotel accommodations. And I know Robert Isom addressed that in his employee meetings, but I think in some ways it was sort of adding fuel to the fire, so to speak. And now we also hear the American pilots are considering a similar no confidence voted American. And some senior American executives in the flight department did meet with union leaders last week. And CEO Robert Isom said late in the week that he was open to meeting with leaders of the pilots union to discuss the airline's strategy for the future as well as its relatively poor financial performance here in recent years. So a lot going on at American that continues. And you know, as I was reflecting on this, Scott, it reminded me we've talked a lot even in recent weeks about Gordon Bethune and the turnaround at Continental and so forth. And you know, this whole notion of profit sharing reminded me of Gordon, you know, back in the day. And this is now 25, 30 years ago, Gordon would always record a weekly voicemail. This is before Frontline employees had devices and emails and so forth. And it was kind of a state of the union for employees. And our on time performance in those days would pay every employee $100. When we were first place and on time, that's a 14 arrivals within 14 minutes. And we get $65 if we were in second or third place. And I, on several occasions, Gordon would record this weekly message and we had maybe come in second or third. But, you know, he felt we deserved to get first place for some reason, maybe there had been a snowstorm in Houston and we couldn't de ice airplanes there, whatever it was. And so Gordon would personally say, hey, I've called the payroll department and I've authorized $100 check to all employees and you'll get it next week. And I gotta tell you, I mean, as a junior employee in those days in the 90s, you loved the fact that your CEO had, you know, cared about your, you know, your, the money in your wallet and would kind of go out of his way to reward good performance. And that really inspired, I think, the whole team to work together, you know, to drive better performance and just to be motivated to, to, to do what the CEO wanted, you know, and, and I think that was a critical part of the turnaround there in the story at Continental and I think a real contrast to what we're seeing at American with these no confidence votes and, you know, the hand wringing over 0.3% profit sharing checks and so forth, which admittedly, you know, I think, you know, all, all know are quite small. But.

Scott McCartney (12:30)

Yeah, yeah, I'm glad you brought that up. I mean, Gordon was so smart about how he went about it. He, he, he insisted that it come as a separate check. Right.

Charles Duncan (12:40)

And payroll taxes were never deducted from that check. And so you got 100 and I'll tell you, meaningful money. You know, that's right. We all, I mean, the, the flight attendants, the gate agents, the other team, like we all want that hundred dollar check, you know, each month.

Scott McCartney (12:56)

Yeah.

Charles Duncan (12:57)

And it drove performance. It absolutely did.

Scott McCartney (12:59)

And no, and he, he used that, he told stories about, you know, employee who said, I, I can, I can buy, you know, cereal for my kids because those cereal, you know, sugary cereal, those are expensive. And we didn't do that. But now I take that check or, or, you know, that's my beer money fund. Or, you know, that's, that's this. Or I bought my wife a valentine.

Charles Duncan (13:25)

Yes, more beer money. Not that I need more beer, but sure.

Scott Hamilton (13:29)

Yes, it did.

Scott McCartney (13:31)

And it had an amazing effect because employees started holding each other accountable. Right. And you know, I want the 100 check. What do you mean you can't get, you know, the catering truck over here in time or that kind of thing. And it, you know, I mean, I remember people at other airlines saying, oh, he's just, he's just paying for, for good performance or something. Well, that's what you do, you know, that's what it's all about. We're not doing this for free. So, anyway, I, you know, I think you're absolutely right. It was interesting, the Dave Seymour interview. I think employees at American, from what I heard, really appreciated it and also disagreed with it in some ways, and that's totally fine. I think David Seymour wanted to get a lot of information out to employees from his perspective of how things went, and the podcast can do that. And at the same time, I heard from pilots in particular at American who said, well, you know, he glossed over some stuff, or, you know, flight attendants saying no, completely undersold how bad it was, or whatever. So, you know, I think, look, I think it was important for employees to hear from him that way. And I'm sure there was internal as well, but in that sense, it was useful. But I think it also fueled a lot more of this discussion about how American is being managed and more to come on that. I'm of two minds on this labor issue at American.

Charles Duncan (15:22)

What are they?

Scott McCartney (15:23)

Look, do I think no confidence votes by the unions is going to prompt the board to fire the CEO? Not at all. Not in the least. In fact, it may, if anything, have the opposite effect of digging in your heels and saying, is our guy and all that. You know, I think Robert Isom is a smart manager, but as I've said before, I think they. They very much have a leadership issue there, and that's what we're seeing. And the other, you know, my other school of thought on this is, as I've said many times before, I do think once you lose labor, it's over. And so that's a significant challenge. Now, do I think Robert Ison can repair the relationship with unions and get things. Yeah. If American starts winning and all, then people will rally behind him. But there's got to be some results. There's got to be some performance. And I think there also has to be better communications and motivation. And, you know, Super Bowl Sunday is the ultimate time to talk about this, because I do think the airline CEO is very much the football coach, and your job is to fire up the employees to do a good job, as Gordon successfully did. However, you're going to do that. But you got to do it, because once they do lose confidence in you and don't feel motivated to work hard, then, you know, it's. It's over. It may take a couple years, but it's over.

Charles Duncan (17:02)

Yeah. You know, we talked last week and, you know, about the amazing turnaround at Southwest, and it ties into the Elliott story, you know, we mentioned a couple minutes ago.

Scott McCartney (17:10)

Yeah.

Charles Duncan (17:10)

In My mind, you know, I mean, I think it's an interesting point about Robert Isom and the team in American. They absolutely can do the same thing. And I think a lot of people were naysayers and didn't think Southwest could turn it around. And they, they did.

Scott McCartney (17:22)

Right?

Charles Duncan (17:22)

It's gotta be, it's gotta be different and radical and you know, big change, not small, incremental, modest changes, I think to really move the needle.

Scott McCartney (17:33)

And that's right. That's right. And you know, you know, Southwest had a built in enemy, right, Elliot, management and let's, you know, we gotta save the company. But I think American does too. You got a built in enemy here at Scott Kirby and United. And you know, Kirby's using that to great success. And Americans should be and should have a long time ago said, you know what, this guy now runs one of our biggest competitors, if not the biggest competitor. And we all know him well, but we also know he's going to want to kill us. So let's, you know, we got to get going. Well, Charles, one other story that I think is worth noting. Our friends at Cirium, one of our great sponsors, had some interesting numbers on transatlantic summer bookings. This seems all the more timely to me as we watch the Olympics in Italy and hear widespread booing of Americans as well as some small protests. Cerium looks at data from online travel agencies and bookings through global distribution systems. So it's sort of half of the universe. What they don't have are bookings made directly with airlines. But this is travel agency stuff online and brick and mortar. And they found that bookings for July trips from the US to Europe are so far down more than 7%. This is bookings, this isn't price. So just the number of reservations made and paid for, down 7%. But bookings for travel the other way, originating in Europe, bound for the US in July, those were down more than 14%. So twice as twice as much. This is, we're talking about bookings made between early October, about October 7th and the end of January. So pretty good period of time. And what they do is compare bookings made the same period a year earlier for what in this case would be July 2025 travel last year compared to bookings for July 2026. Travel bookings can always rebound, especially if airlines start discounting more. But this could turn into a serious headwind for airlines this year, I think.

Charles Duncan (20:00)

Yeah, Scott, I'll tell you, I mean, I'm surprised to hear this. I mean, as I reflect back over the past handful of years, certainly from the onset of the pandemic or the post pandemic travel period. The US has sort of driven the US Point of sale has driven strength in the transatlantic markets as Europeans have been down and less likely to visit the US And I think that's been for in more recent times from the political reasons, but also just a matter of currencies and the strong dollar making it more expensive for Europeans to visit. I had been expecting things this summer to be stronger from the European side. Anecdotally, I've had a lot of conversations with people who were excited about coming over to the World cup and watching soccer at different points, places around the US and indeed in Mexico and Canada as well. My own brother who lives in Barcelona just won a lottery and he and his son are coming over to see Spain play Saudi Arabia. I think they won tickets for that. So yeah, so I had been expecting maybe things to equalize a little bit. So certainly.

Scott McCartney (21:08)

Plus the dollar is weak. So the US Is on sale for Europeans. Right?

Charles Duncan (21:13)

Yeah, it's certainly cheaper than it has been the last couple of years. So this, this bears watching because certainly the transatlantic has been very, very strong for the last few years and certainly would hate to see it soften. But anyway, this is always a, you know, industry of cycles and, and this may be an early, an early signal of what's to come this summer. We'll have to watch. Put a pin in that and keep, keep an eye on it.

Scott McCartney (21:39)

Yeah, yeah, absolutely. All right, time now to thank our sponsors. We want to thank Infinity Flight Academy, the leader in cadet academy training programs, for helping us bring the podcast to you. Whether you're looking to build a custom pipeline or strengthen your existing cadet Academy, Infinity Flight Academy delivers consistent airline ready results. And for those of you listening who've always dreamed of flying or know someone who has dreamed of flying, Infiniti Flight has trained thousands of students, many now flying from major airlines around the world. Learn more@infinityflight.com Infinity Flight Academy, where future airline pilots take off. In addition, thanks to Cirium not just for the data, but for supporting airlines Confidential, Cirium offers the most accurate and precise data and analytics to enable airlines to optimize planning, operations and passenger services. The right intelligence drives operational efficiencies, enables you to predict market shifts, and helps airlines respond quickly to maximize revenue, manage costs and seize commercial opportunity. Visit cirium.com for more.

Charles Duncan (22:50)

We also want to thank Ontario International Airport, which 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 we want to thank RTX for helping to make this podcast possible. 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 across 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.

Scott McCartney (24:05)

Okay, let's bring in Scott Hamilton for a deep look at where Boeing has been and where it's going. Scott Hamilton is as savvy and knowledgeable about commercial airplanes as anyone I know. Scott has spent more than four decades in the commercial aviation industry. He's founder and Managing Director of Liam Company, an independent, data driven, highly respected analytical firm that is more than 25 years old. With his partner Bjorn Firm, Liam provides aviation consultation focusing on business strategy, competitive intelligence and aircraft economic analysis. Before creating Liam, Scott co founded Link Raven Ltd. Which published the internationally distributed Commercial Aviation Report and Commercial Aviation Value Report and organized conferences in Asia, Europe and the Americas under the Commercial Aviation Events banner. And now Scott has a new book called the Rise and Fall of Boeing and the Way Back. It's a sequel of sorts to his earlier book called Air the Global Combat between Airbus and Boeing. Scott, it's great to have you with us on Airlines Confidential.

Scott Hamilton (25:15)

I'm happy to be here. Thank you for having me.

Scott McCartney (25:18)

So we always start with what we affectionately call the Ben Baldanza question because Ben taught me this was a great way to start and people always have interesting stories. Ben always started interviews this way. And the question is, how'd you get into this crazy business?

Scott Hamilton (25:35)

Well, I actually fell in love with airlines back in, oh, 1964 when I was 13 years old and had my very first commercial airline flight on an Ozark Airlines F27 high wing turboprop between Chicago and Peoria. And you know, the F27 with that high wing had another obstructive view of the ground. Chicago to Peoria is not a long way, so we were at a fairly low altitude and it had those big oval windows and I was just enthralled and then to skip Forward in, in 1979, I went to work for the very first Midway Airlines in Chicago as their first corporate communications PR director. And in one fashion or another, in one sector or another, I have been with the commercial aviation business ever since. Almost 50 years.

Scott McCartney (26:29)

Interesting. We were just talking about Midway because I think it was the last airline of significant size to liquidate. You know, I was thinking Braniff, but somebody pointed out to me Midway so.

Scott Hamilton (26:45)

Well, yeah, Midway liquidated in 1991 and it was after Eastern collapsed.

Scott McCartney (26:55)

Yeah.

Scott Hamilton (26:56)

Yeah. So that may be that maybe.

Scott McCartney (26:59)

Wow. Yeah.

Charles Duncan (27:00)

And I remember the mid. I think it was Midway two that then relocated to Raleigh Durham, an airport Scott and I are both familiar with. And Scott, they had they branded their first class Carolina Class, which as a UNC. I remember that in the mid-90s was, was, was pretty cool. So I think that was Midway two anyway. But hey Scott, thanks for that. I was, I was, I was impressed with your Fokker Turboprop between Chicago and Peoria. That's awesome. Yeah, to, to think about. But let's jump in. It's great to have you on, on the podcast with us. I'd love to just jump in and, and kind of go straight to your book and your great perspective and deep experience with Boeing. And question for you is that conventional wisdom has had it that Boeing really its troubles and it began with the McDonnell Douglas merger and I guess sort of specifically that Harry Stonecipher and the group that came over from McDonnell Douglas brought really a financial mindset and a focus on boosting the stock price as being first and foremost and more important than the engineering culture that existed at Boeing prior to the acquisition of McDonnell Douglas. But you suggest in the book that that change in perspective began before the merger. Can you tell us more about that?

Scott Hamilton (28:24)

It did. I was interviewing an engineer retired from Boeing who said, well, no, Harry Stonecipher didn't bring shareholder value to the company. Phil Condit brought shareholder value to the company. And I, I was kind of taken back because Phil, of course, was a lifetime Boeing engineer and he had worked his way up to become CEO. And so that was my first frankly tip off that shareholder value had occurred before the 1997 merger. And I went back and looked into some of the old SEC filings and sure enough, the first time that I could tell that the term shareholder value showed up in SEC filings was in 1996, the year before the merger. And then as I continued to do some research for the book, I found out that it was indeed Phil Konda, who introduced shareholder value. And he did that after he had a conversation with Jack Welch, the CEO for 20 years of general Electric, who really had created the shareholder value philosophy, if you will. And. And there was a conversation that was related to me that between Phil and Jack Welch. And Jack told Phil, if you want to be a hero on Wall street, beat the guidance by 5 cents a share. And sure enough, then I did some more research and I actually found an article in the Seattle Times that made reference to Phil Condit and talking about shareholder value. It all goes back to Phil and Jack Welch. That predates Harry.

Scott McCartney (30:11)

That's so interesting. And of course, Jack Welch at the time was sort of the king of corporate America. CEOs seemed to have the Midas touch and had a legion of not only followers, but also lieutenants who went out into corporate America and took the GE cost cutting shareholder value philosophy. Talk a little bit about the tenures of the Boeing CEOs, because Jim McEnheary was very much a GE guy. Right? Talked about Condit and Stone Cipher. What about the others?

Scott Hamilton (30:52)

Well, that's the other thing too. People like to point to Harry as being the bad guy. And no doubt that Harry took the shareholder value and really ran with it. When he came over with the McDonnell Douglas merger, Harry had been an employee for GE for, I don't know, 23 years or something like that. And he went to become CEO of Hamilton Sunstrand, or at that time was just Sunstrand, and then on to McDonnell Douglas. And it was Harry who infamously said something along the lines that, you know, we need to change this from an engineering company to a company that's more aligned with financial performance. You know, that does fall to Harry. But every board of directors after that and every CEO after that could have changed direction of the company, and they did not. So you talk about Harry's thing. You know, remember it was also Harry who, who launched the 787 program and then he had to resign because he got involved in a sexual scandal at Boeing. Then McNerney comes in, and McNerney was CEO for 10 years. And he was another lifetime employee of The Jack Welch GE, which Jack Welch hated. The unions. And McNerney started what I call the war on unions. And that continued throughout his tenure. Tenure. He was followed by Dennis Muhlenberg, who was a lifetime Boeing employee. He was an aerospace engineer, but he was always on the defense side. He didn't have a lot of exposure to the commercial side by the time he became CEO. And he pretty much Declined to go out and learn much about the commercial side, which became a point of contention between him and Ray Connor, who had become CEO of Boeing Commercial Airplane during the Muhlenberg era.

Scott McCartney (33:12)

Muhlenberg's, as I recall, a bit of an odd duck. Not much there in terms of people skills, right?

Scott Hamilton (33:21)

Well, yes and no. He was an avid bicyclist.

Charles Duncan (33:29)

Yes. I remember he would bring his bike on the BBJ on trip trips, as I understand, or even had a trainer there.

Scott Hamilton (33:36)

Yep.

Scott McCartney (33:36)

Yeah.

Scott Hamilton (33:36)

And. But he would. He would actually, when he was CEO of Boeing Defense, he would go bicycling with. With the labor unions down there. So he had that relationship. But if. If you want to talk about cliches, I characterize Muhlenberg as your typical engineer where he's all about numbers and his people skills are lacking. And I think that was really demonstrated in how he handled the MAX crashes. The MAX crisis.

Scott McCartney (34:10)

Right.

Scott Hamilton (34:10)

He was very emotionless. And when he would get up there at whatever the event or whatever video that Boeing put together at the time, it was clear that he was scripted. And when David Calhoun replaced Muhlenberg, when Muhlenberg was fired because of his handling of the MAX crisis, or even when Calhoun became CEO, before he chairman of the board, before he actually replaced Muilenburg and would appear on cnbc With Phil LeBeau, you could just tell the difference in style of how Muhlenberg would handle things, the issues, and how Calhoun would handle the issues. And Calhoun was much more, what I call, human in how he approached things. Yeah, Calhoun could go off the cuff, and sometimes he actually went off the cuff and stepped on his toes. But Calhoun was much more spontaneous and much more revealing of how emotional an event would. Would affect him, whereas Dennis was just this mechanical engineer reading off of a script. And. And yeah, we're sorry about all this, but, oh, by the way, every accident has a series of events, and so it's really the pilot's fault, you know, so any. And. And he's not wrong that every accident has a series of events.

Charles Duncan (35:47)

Right.

Scott Hamilton (35:48)

But, boy, he. He just was not a good face for Boeing during those times.

Charles Duncan (35:54)

Right. Well, hey, I'd love to just maybe dig a little bit deeper. Boeing has had so many challenges over, gosh, the past decade plus or so, but I think it's fair to say the MAX crisis was probably the deepest and biggest challenge that they've faced. Did anything surprise you coming out of those? The investigations of both of the MAX crashes and what transpired? Anything in your research that's worth sharing with our listeners?

Scott Hamilton (36:29)

Well, the arrogance and disdain in which Boeing, some people in the Boeing engineering and flight departments held the FAA was, was a surprise and was disappointing. Now, there's just no question that the, that the FAA's level of competence, like any other organizations, has its ups and downs, but the FAA is woefully understaffed. It's woefully underfunded. And, and when people looked at that investigation, said, well, this is all the FAA's fault. No, it's not. It's really Congress's fault because they never funded the FAA to allow for the proper staffing and so on. And this is true with the Food and Drug Administration and other government oversight agencies as well. But what emerged out of the MAX crisis was this thesis that Boeing consciously skimped on safety in the name of shareholder value. And I never have bought into that. What I bought into is that the skimping on safety became a byproduct, but as a strategy, there is nothing in it for Boeing to build an unsafe airplane consciously. It was the Boeing arrogance that was really laid out there and the Boeing complacency. Well, this has never happened before, so it won't happen in the future. And it's the complacency and arrogance that had just become such a widespread overhanging factor in how Boeing declined the way it did.

Charles Duncan (38:20)

That's interesting. I mean, yeah, two arrogance and complacency, neither good and combined, result in this terrible, a tragedy, two tragedies.

Scott McCartney (38:33)

So I want to ask a little more about that because I, you know, I understand, and maybe this is the arrogance, but the thing that stands out for me of the 737 Max is not the lousy design work. And, you know, you can't excuse it, but I understand, I think, where, you know, how it came about. But the real problem was the active effort to hide it and hide it from the faa, hide it from airlines and pilots who are going to be flying the airplane. And then, and maybe particularly sensitive about it is my, my colleague at the Wall Street Journal, Andy Pastor, who was breaking a lot of these stories. You can't imagine the PR effort that Boeing mounted with executives tromping into the Wall Street Journal headquarters to say that Andy was wrong and Andy was right about everything. And that was an active campaign to hide what they did as well. So the lying, the active campaign, is that from the arrogance or something else?

Scott Hamilton (39:55)

Something else, yeah.

Scott McCartney (39:57)

So what do you think?

Scott Hamilton (39:58)

I give it to you in one word, Scott. Lawyers. The Boeing communications campaign was being run by corporate general counsel and One of the things that I learned in Rise and Fall research was that Chicago, where the corporation was headquartered at the time, the Chicago executives, and this goes to Judge Michael Ludwig, who is the corporate counsel of Boeing, they ran their own set of corporate communications, whereas the BCA in Seattle, corporate communications, they were kind of left out to dry. Oh, and this. This was. This was all. This was all about mitigating the liabilities. And Chicago hired its own outside crisis management pr. Seattle hired its own outside crisis management pr. And there were. There were very distinct differences in how Seattle and how Chicago thought the crisis should be handled. And Chicago was in charge. So Chicago prevailed.

Scott McCartney (41:25)

Yeah, yeah. But the line to the FAA and the lying to pilots, that predates the lawyers, right?

Scott Hamilton (41:36)

Well, yeah, I'll answer it this way, because I can't really speak to the lying per se, but it's all, again, about limiting liabilities. You know, one of the things that came out of the MAX crisis was that Lion Air wanted simulator training, and Boeing told him, well, you don't need it. And this whole thing that. The Maneuvering Augmentation Characteristics System, mcas, which was at the root of these two crashes, it was removed from the flight manuals. The pilots didn't know about it, and so on. Well, I talked to some former retired engineers over at Boeing who said, well, the program runs in the background, and they drew the analogy that you sit at your desk and your computer is running programs in the background that you can't do anything with them and you can't do anything about them. And so why do you need to even know about them? That was the analogy they had.

Scott McCartney (42:47)

Yeah, except that it wasn't in the background when it pushes the nose of the airplane down off the ground. I mean, it was. I flew in a Boeing simulator, by the way. I flew 737 with the lion Air scenario and flew it with the original MCAS software and then with the fix. And it was night and day. And when I went through that, I mean, it was so insidious. It pushes the nose of the airplane down based on false data, and you think you've recovered from that, and you get the airplane going up again after, you know, the terror of seeing the nose pointed right into the ground. And this is all happening at low altitude, right? Yeah. And you think you're okay. And 30 seconds later, MCAS fires again with more authority, pushing the nose down. And this keeps happening time and time again. It was, you know, it was a system that I don't. No pilot would ever design that way. And yet they weren't even told about it.

Scott Hamilton (44:01)

Well, and here's a bit where the complacency comes in. There is a similar system. It wasn't called MCAS, but it operated in a similar way on the 767. And so, well, it worked on the 767, so why won't it work on the 737? Yeah, but getting to your. More directly to your point about line, let's remember that Boeing and Airbus. Airbus is guilty of this, too. When there's a. A major crash, the first thing that the OEMs do is to point the fingers at the cockpit.

Scott McCartney (44:39)

Yeah, yeah, yeah.

Scott Hamilton (44:41)

Lots of examples about that over the decades.

Scott McCartney (44:44)

Sure. Yeah. Yeah. All right, let's. Now we go from that to The Alaska Flight 1282 door plug blowout, which seems to result from sloppy work on the factory floor. Right. And that's different from sloppy or arrogant or whatever design work. Or is it. Did you find commonality in both cases or were they different root causes? What do you think?

Scott Hamilton (45:15)

This was just sloppy work on the factory floor. Now, as we now know with this door plug blowout, the problem originated at Spirit Aerosystem, which was the company at the time that built the 737 fuselages and installed all the doors, including the store plug. And the airplane gets over to Boeing on the factory floor, and the Boeing factory workers see a problem with this door, this door plug, and so they open up the door to fix the problem. And there happens to be some shift changing going on. And somewhere along the line, the people who worked on the door plug did not record their actions. Now, that's a violation of procedure. That's sloppy. But over the history of aviation, it's not unknown for whether it's at an airline or at a manufacturer in this case, it's not unknown that somebody at a shift change doesn't record something. And the problem continues unchecked, unrecognized, and an accident happens. This is again, recorded history.

Scott McCartney (46:42)

Wow.

Charles Duncan (46:43)

Well, hopefully maybe I'll shift gears, Scott, here a little bit and just. I'm curious. We've not mentioned, and maybe we can't call him the new CEO anymore, but the current CEO, Kelly Ortberg. It seems, certainly, from my perspective and the press coverage and hearing from customers, that Boeing's been making a lot of progress and deliveries are picking up for sure. Quality seems to be better, customers seem happier. Even folks like Michael o' Leary at Ryanair have been saying, you know, positive things about Boeing of late. What's your view on that? Scott. And has Boeing really changed? Are you optimistic about the direction they're pointed in now or do you have still concerns?

Scott Hamilton (47:28)

Well, I'm optimistic and there are some concerns and I always caveat my optimism and progress reports that we never know what unknown unknowns that are outside Boeing's control will pop up that can derail all of this. So with that caveat, yes, Kelly Ortberg, who assumed office on August 8, 2024, is finally bringing Boeing in the right direction. The quality control and the safety protocols are being improved. The progress is being made because the FAA is allowing Boeing to increase its production rates on the 737 line, which will bring in the badly needed cash flow and eventually the profits are still not making money, the production rate is still too low, but they're closing the gap. And so, yes, they're making progress. Now. One of the things that I have a concern about is when Kelly came In again on August 8, he said, well, we need to reset labor relations. And he came in at a very awkward time for him because the labor contract with the IM sub 51 union, which is a union that, that actually touches the airplanes on the assembly lines and puts them together, that contract was expiring on September 12. And so negotiations were already underway before Kelly walked in the door and he had 34 days before the contract expired and the union was just fired up. They'd been beaten down by McNerney for 10 years, by Muhlenberg, Lester, but still a little beat up. And, and they were loaded for bear and they were going to walk out regardless. The only thing that would have prevented them to walk out would be for wanting to give them their defined pension back, which was never going to happen. And probably a 100% raise. Oh, yeah, well, sure, we'll stay. But they walked out for 53 days. And within 30 days of the walkout, Boeing nearly ran out of money.

Charles Duncan (49:49)

Money.

Scott Hamilton (49:49)

And they were, they were headed for bankruptcy, quite frankly. And in late October they did this 24 billion dollar debt and equity deal, which say them. But in the end, Ortberg had to pretty much cave into the union on almost everything that they asked for. Now Boeing is obviously in a much better position than it was in October of 2024. And you had a different district, I am 837 in St. Louis, go out on strike, but they only had 3,200 members versus the 33,000 over at Seattle. And those union members in St. Louis were working on programs Boeing was losing money on anyway. And Boeing's financial picture was Very different. And Boeing could. Could was bargaining from a position of strength, not weakness. And that strike lasted over 100 days. Well, where's the union reset? You know, with only 3200 members, something with that union would have cost Boeing less than the strike cost. But they were taking the hard line. Now, the real indicator is going to be this year when Boeing enters the contract negotiations with the engineering union spia. And I think this is going to be the one where we see whether or not there's a labor reset or if there's more of the hardball.

Scott McCartney (51:18)

That's very interesting. Very interesting. So I don't know if that affects this or not, but I'm curious. Airlines are eagerly awaiting several models that Boeing hasn't been able to get certified yet. The Max 7, the Max 10, and the new Triple 7. Where does all that stand?

Scott Hamilton (51:37)

Hurry up and wait.

Scott McCartney (51:42)

They've been doing that for years.

Scott Hamilton (51:44)

Yeah, well, you know, it's just like the Army. Hurry up and wait some more. Southwest Airlines publicly has said that they expect the Max 7 to be certified in August and to put the airplane into service in 2027. I don't know what the basis is that they identified August. I think that's a pretty risky forecast. The Max 10 has moved to the next phase of its flight testing. They hope, and when I say they, I mean, you know, everybody, the airlines, Boeing, everybody hopes that the Max 10 will be certified before the end of the year. The Triple seven, the certification, which also has been moving to the right ever since the MAX crisis happened because it got caught up in the negative halo effect of that certification issue. They hope for certification of that by the end of the year and EIS in 2027. I would not be the least bit surprised if certification doesn't slip into next year. But it's more hurry up and wait. However, what is progress is that Boeing is going to open the north line for the 737 production at Everett this summer with Max 8 and Max 9 airplanes, which already are certified, so that they can start warming up that line, getting the learning curve, training the employees who have never built a 737, so that when the Max 10 does finally get certified, they are advanced into, okay, now we got 10. Let's, let's move forward. So that's a big positive.

Charles Duncan (53:31)

Yeah, you know, I think that really will be very interesting. I mean, the 37's always been assembled in Renton, and I know it's all broad. You know, Everett's still in the Puget Sound area, but it'll be interesting to see, you know, narrowbodies rolling out of Everett in addition to the 777X and widebody programs. That's, that's going to be fascinating. Hey Scott, maybe just one final question. Thank you so much for joining us and sharing your wisdom and perspective on all things Boeing. Once we get these latest programs certified, there's already work kind of underway and everyone's turning their attention and minds toward new aircraft programs and design. And a lot of that also depends on the engine manufacturers and getting, you know, step function improvement and inefficiency from, from the power plants. But what's your perspective on, you know, Boeing producing a new airplane? I mean, you think we'll see an announcement soon or what would you expect for timeline? And what will that airplane look like, do you think?

Scott Hamilton (54:35)

Well, Charlie, how are you defending defining the word soon?

Charles Duncan (54:39)

Yeah, that is a great question. Well, I mean, however you'd like to define it. But I mean is it something we'll see in the next few years or, or not? I mean, I think back to, I mean the MAX of course was launched because Boeing didn't want to do a clean sheet 737, you know, or a clean sheet to replace or compete with the neo, you know. So I mean ultimately I think they need to do something new. But what do you think? When will we see it?

Scott Hamilton (55:05)

Well, so you're, the way you framed your question. You're assuming that Boeing's next to airplane is going to be a single aisle replacement for the.

Charles Duncan (55:17)

Huh.

Scott Hamilton (55:18)

I don't see Boeing announcing a program to replace the 737 until, I don't see the announcement coming until 2030 or later because they have a backlog on the 737 that extends to, well, they're sold out basically to 2032 right now and then they have, you know, orders going beyond that. Now it is all dependent upon the engine. Boeing's hand could be forced by Airbus which doesn't have this, you know, recovery that Boeing still has to do. And, and Airbus is waiting to see how soon the engine makers are going to, to have an engine ready for an airplane. But Boeing doesn't want to be the first mover on the single aisle. That said, I think that Boeing's next airplane is actually going to be a twin aisle airplane. I think the new mid market airplane is going to be resurrected in some form and I think that program

Scott McCartney (56:29)

might

Scott Hamilton (56:29)

be, you notice I'm using all these, these ambiguous words here. I think that program could happen and be announced as early as the fourth quarter of 2028. Okay, now why do I say the fourth quarter? Because the IAM 751 contract is up in September of 2028 and the current contract is includes provision that the next airplane will be built in Puget Sound, but with a contract up for a renegotiation, Boeing being Boeing, they're going to use that as leverage for the next contract. And I see no reason for going to make any announcement until the next labor contract is renegotiated. Interesting.

Charles Duncan (57:17)

And Scott, the NMA or the new middle market aircraft, I mean that would be from a. I hear you, you expect and I appreciate you've got lots of wiggle room in there, but it would be a twin aisle and somewhere in the 757-7878 kind of 200, 250 seat seating capacity. Is that the sort of right size to be thinking about or.

Scott Hamilton (57:41)

Yeah, 220 to 280 seats. Yeah. Okay, four to 5,000 mile nautical mile range. Got it.

Scott McCartney (57:51)

But they looked at that and I thought airlines had rejected the idea of the mid sized twin aisle plane.

Scott Hamilton (58:02)

Well, Dennis Muilenburg was about to launch the NMA toward the end of 2019 when the Max crisis happened. Now David Calhoun never liked the airplane. The CFO at the time, Greg Smith, never liked the airplane. But Dennis apparently was about in a position where he could persuade the board to green light the airplane. And then the MAX crisis happened. Muhlenberg is fired, Calhoun comes in, he kills the R and D on the enemy, then Covid happens and then, you know, then it just goes on and on. Now we are six, seven years later, the remaining middle of the market fleet is six and seven years older. There are still a bunch of airplanes that have to be replaced. One of the inhibitors to that is the 321XLR from Airbus is at the bottom end of that middle of the market and it's now entering service. And so that takes some of the sales away.

Scott McCartney (59:11)

And it's been selling like crazy because Boeing doesn't have anything to match it.

Scott Hamilton (59:15)

Right. But the anime would on the smaller version would compete with the 321XLR, but it would also fill in the gap and take out the rest of the 757s and 767s, A330 CEOs and it would be a replacement for the 7878 which Boeing doesn't want to build anyway. And they're like only 24 in backlog and all of that. And from Boeing's perspective, more importantly, if you go with that airplane, you're protecting the return on investment and the backlog of the 737 where the real money is interesting. Now the problem is Boeing doesn't have an engine for that either and the only manufacturer who's developing an engine in that thrust category is Rolls Royce and Boeing and Rolls Royce have been pretty unhappy with the Rolls Royce performance on the 787, as I'm sure you both are well familiar with.

Scott McCartney (60:16)

All very fascinating, Scott. Well, we look forward to keeping track of it with you and checking in from time to time. The book is the Rise and Fall of Boeing and the Way Back and congratulations on the book. Congratulations on all you do reporting on Boeing and everything else and we deeply appreciate it. Great to have you on. Scott.

Scott Hamilton (60:40)

Well, thank you for having me again. I really appreciate it.

Charles Duncan (60:43)

We enjoyed it. Thank you.

Scott McCartney (60:44)

All right. We will be right back with more on airlines, confidential promotional support provided by

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Scott McCartney (61:04)

Thanks again to Scott for just a great discussion and really a lot of insights into Boeing. So important and really appreciate his book and all he does. All right. In the mailbag, Charles Reagan from Los Angeles has an interesting question. I think you can help with it. Reagan says, I don't think this has been covered before, but having someone explain the economics of hub operations might be a great segment. I've worked in corporate finance forever and I'm still puzzled when someone mentions one hub being more profitable than another if measured solely on origination and destination traffic. It's a simple topic, but their use as connecting points and connecting passengers via Chicago vs Dallas, for example, add significant complexity and could skew the results. The economics of selecting hubs could be in scope, in other words, selecting Salt Lake City, whereas St. Louis or Cleveland or Cincinnati were loser hubs. I'm sure you get the picture. Reagan says, I thought of this as you mentioned American and Charlotte and the topic of of hub selection, focus and measurement has been in my head for a while. Thank you and best regards, Reagan. Charles, you ran United Chicago hub and have dealt with this in many different capacities at WestJet and others. What do you think?

Charles Duncan (62:31)

Yeah. So Scott, I'm gonna put a plug in and so I'll take a stab at this, but I suggest we bring back Professor Doug Parker and have him get dissertation on on hub economics and spend some time just as he did with pricing, but that'd be great.

Scott McCartney (62:47)

Yes, we'll do that.

Charles Duncan (62:49)

Really, really good. But listen, off the top of my head, Reagan, you're, you're, you're hitting on an important point. And I scribbled down just a few thoughts, but no doubt we can give this a more thorough and fulsome response. But, you know, the first element of success is the cost of a hub. And you mentioned American and Charlotte and, and to my knowledge, the Charlotte hub is the lowest cost, and that's measured by cost per employment, the lowest cost hub in the US and I think their CPE is about $3 per passenger. And Christina Casodis on our podcast a few months ago mentioned that after all of their terminal renovations, new construction in Pittsburgh, I think they're around $17 for a sense of relativity. And there are many airports in the country that are well above that. But I think 17 is about the current half average in the U.S. so if you have a $3 cost per employment versus 10, 15, 20, 30, you can imagine how the economics of operating that hub can vary widely. Another element in addition to cost is the size of the local market. For a hub to really work and be successful, you want a large local market and connections, not one over the other. And that's why I think when you look at a place like Dallas, compared to a Pittsburgh or Kansas City or some other places, you know, Cincinnati that you've mentioned, the Dallas market's much larger. The local population, the local catchment area can support a great level of flight frequency. And then you, you pile on the connections, which, which allows you to offer even more. So the local market size is really important. A hub will never work if it's in a place without a local market as its foundation. The third thing I think about with hubs is its geographic location. So the more central, the better. Circuity or flying out of the way will add cost and also add travel time, which will make that hub uncompetitive. And then two other elements that I am reminded of from the great book Hard Landing mentions this. But when you have a big hub, or any hub, as you add one flight, the costs increase in a linear fashion. You've got to get one more gate, one more ground crew, ground equipment, and airplane and so on. So as you add flights, they increase in a linear fashion, but with each flight you add, the revenues increase exponentially. And so because you're adding one gate, one flight, but then connections maybe to 30, 50, 60 other destinations. And so that becomes a really positive flywheel effect on the revenue side. And it's why you see United and American both fighting to add more flights in Chicago, for example, because they each get a disproportionately stronger benefit as they make the hub bigger and so forth. So it's the cost of the hub, the size of the local market, the geographic location of the hub, and then just overall larger hubs will do better because of that exponential revenue growth effect over cost. So hopefully that, that gives you a little bit Reagan to work with. But I think we should, I think we should circle this and come back and cover it in a more fulsome way. Scott, that would be my recommendation.

Scott McCartney (66:00)

Yeah, no, I think you're right. I think you're right. I, I, I would just underscore the, the local market effect. I mean, I think it, you know, at the, at the end of the day it's so important, but at the end of the day that is how you capture the local market. Be the, be the hub operator, right. That, you know, United in Houston, American and Dallas, they, you know, except for Southwest and at nearby airports, they own the local market because they are the hub carrier. And hub carrier can obviously offer the most service. And an interesting thing about how you revenue manage a hub, you know, I always remind myself, if you had a choice, you would always take the local ticket. In other words, let's say somebody flying from Albuquerque to Dallas to New York. Well, I would rather have an Albuquerque Dallas round trip passenger and a Dallas New York round trip passenger than I would one connecting passenger. Right. Somebody takes up in each direction. You take up two seats each way. But are we going to sell two tickets for that or are we going to sell one ticket and you're going to get a higher yield out of those seats if you can capture more local people. And yet the pricing often doesn't reflect that. Right. Because it's cheaper to do a connection. So it's always a tricky thing. And when we start talking about the profitability of a hub, it's really going to matter how much of the traffic is local OND traffic and how much is connecting traffic. Because a hub that is purely connecting traffic isn't going to be very, very profitable. There was a time when people said, oh well, what we need are not waypoints. Put it in Kansas City or somewhere in the middle of the country where you have lots of Runway capacity and that's an interesting idea. But a hub's not going to work without the local traffic. And I think that's why you see hubs in smaller Cities, Kansas City, St. Louis, Cincinnati, whatever, you know, ultimately didn't work because there wasn't enough local traffic to really support the profitability.

Charles Duncan (68:35)

Scott, you're right.

Scott McCartney (68:36)

Yeah, it's a really interesting thing and also interesting, you know, the profitability of flights and all in the hub. You drill down into it, well, what's the, what's the formula the airline uses? If I've got a connecting passenger, how much of the, you know, my, my example, how much of that ticket from New York to Albuquerque gets a portion to the Dallas flight and how much gets a portion to the Dallas, Albuquerque flight?

Charles Duncan (69:02)

Now, Scott, we're Getting into the 201 or the 30 level, 301 level course revenue allocation and the cost allocations are, are critical. And I, I've spent hours on that, you know, inside airlines around, you know, how you do that and you can. Anyway, it gets very, it gets complicated very quickly. But yeah, and even, you know, we're

Scott McCartney (69:25)

talking about last week about, well, is. Is Charlotte the most profitable hub? Is Dallas whatever. Well, what's your definition of most profitable? Is it. Is it per passenger or is it in total, you know, does. Does DFW generate a billion dollar, you know, whatever?

Charles Duncan (69:41)

Well, and Scott, I had also heard that America's most profitable hub was with Charlotte as well. And I know you were corrected on that point as you shared a few weeks ago. And I haven't looked at this super recently, but from in the recent past, the Charlotte hub is the lowest cost hub, as I mentioned a couple of months ago. And then also I believe the Charlotte hub is the hub with the largest hub carrier market share. And I believe American share in Charlotte is in the low 90s. And so you combine a high market share with the low costs and that certainly is a recipe for financial success. And they've done well. The only downside of a Charlotte well or two, I can think of one, that facility is sort of a mess to get through. It's got lots of different wings that have been added on and transiting through. It's hard to find your way going

Scott McCartney (70:37)

from terminal A to terminal S that

Charles Duncan (70:40)

also supports the low cost. But the other thing is typically the secondary hub in a region and clearly Charlotte is smaller than Atlanta and they're, they're close to one another. Usually the set, you know, the, the number two player doesn't perform as well. And so they're usually second fiddle in most of those O D connecting journeys relative to Delta's powerhouse in Atlanta. But, but I do think Charlotte, with those lower costs and that high Market share for American does very well for those guys.

Scott Hamilton (71:06)

Yeah.

Scott McCartney (71:06)

No, and sort of to drive home the point about the local market, you would say why in the world would Delta try and create a hub at LaGuardia Airport? Right. The most congested. That would be the last place you'd want to have a hub operation because you have a lot of extra flights.

Charles Duncan (71:25)

Absolutely.

Scott McCartney (71:27)

Yeah. And the answer is because then you can capture a higher percentage of the local market. And in New York City, that is a gold mine, as it has proven to be for Delta.

Charles Duncan (71:38)

Right.

Scott McCartney (71:39)

And they made the operation work and still run an on time operation with that Hoben at LaGuardia. All right. On another topic, we heard from a couple of people in Tuscaloosa, Alabama about our discussion about commercial airline service to Tuscaloosa. Charles, it seems we pretty much hit the nail on the head. It's kind of what we heard from Tuscaloosa people. So Jeff from Tuscaloosa sent news. Jeff says thank you for your feedback on Tuscaloosa. We agree there is an opportunity and wanted to mention we kickstart our Runway extension next month and we're just approved for a new terminal. All things we have heard from air carriers during past discussions. Great job on the podcast. So you, you had talked about Runway length and that's clearly an issue. They're going to build a Runway extension and they've been approved for a new terminal. I suspect that they have good expressions of interest from airlines who want to serve there. So good job.

Charles Duncan (72:47)

You know, I loved this one. I mean, first just confirms we know a little bit something about what we're talking about on this topic and I love it. But it's great to hear from the folks in Tuscaloosa directly. And I must say, you know, I get, I'm sure you do a lot of air service questions, you know, frequently about why can't we have air service from this place to that place? And my default is usually to be pretty negative. But when, when we read this question last week, I think it makes a lot of sense and certainly wish them luck and would love to see a Tuscaloosa Atlanta service feeding into that, the power hub, for example. And yay, Tuscaloosa Charlotte might work as well. I mean, back to that catchment area in the Southeast. So wish them luck and we'll be following their progress here in the months ahead.

Scott McCartney (73:30)

Absolutely, absolutely. All right, well, that's all for another edition of Airlines Confidential. Thank you once again, Charles. And yes, even congratulations. We'll see you in March.

Charles Duncan (73:43)

Yes, we will, Scott. I promise. I'm not going to gloat here, but it was a great win. And hey, thanks as always, always for letting me join and want to just thank our listeners too, for their attention and for tuning in, downloading each week and all the feedback. Wish you, Scott, a great week and wish all of our listeners a great week ahead.

Scott McCartney (74:00)

All right, thanks so much. Have a great week, everyone.

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