Airlines Confidential Podcast

Episode 329: Scott McCartney with "Professor" Doug Parker on Route & Hub Profitability
Date: March 18, 2026
Host: Scott McCartney
Guest: Doug Parker ("Professor," former airline CEO)

Episode Overview

This episode dives deep into the complexities of airline route and hub profitability, responding to a listener question about how airlines measure the financial performance of specific routes and hubs. Doug Parker brings his industry expertise — and professorial touch — to explain the real-world mechanics and strategic implications of profitability analyses, with Scott McCartney acting as "the diligent student." Along the way, they discuss Southwest’s strategic retreat from O’Hare, the impact of rising jet fuel prices, Spirit Airlines’ bankruptcy, and a passionate debate about whether business jets pay their “fair share” for use of the national airspace.

Key Discussion Points & Insights

1. The O’Hare Capacity Crunch & Southwest’s Exit

[01:23 – 04:47]

• FAA is concerned about potential overcapacity at Chicago O’Hare with both United and American expanding aggressively.
  • “Neither American or United is going to unilaterally agree to pull back. ... There’s not nearly enough capacity at O’Hare for what they both want to do. So something’s got to be done.” — Doug Parker [02:04]
• Southwest pulls out of O’Hare: Cites profitability challenges as a small player in a hub dominated by others; will consolidate Chicago operations at Midway.
  • “As a small player at airports dominated by bigger airlines, Southwest no doubt found it harder to make money.” — Scott McCartney [04:23]
• Southwest is also pulling out of Washington Dulles, preferring to focus on airports where it’s stronger.

2. Industry Updates: TSA Shortages, Persian Gulf Conflict, Spirit Bankruptcy

[05:00 – 10:24]

• TSA labor shortage: Extended waits due to government shutdown affecting screener pay.
• Middle East conflict pushes jet fuel prices:
  • Jet fuel up nearly 65% in a matter of weeks, from $2.40 to close to $4 per gallon.
  • Airlines have tried to increase fares in response, but it’s unclear if those increases will stick.
• Spirit Airlines bankruptcy update:
  • Filing outlines a $300 million term loan and plans to shrink fleet from 214 to possibly under 80 aircraft.
  • No detailed financial projections disclosed yet, delays attributed to jet fuel price volatility.
  • “If fuel prices stay high, it just makes it all that much harder for Spirit, and it’s plenty hard to begin with.” — Scott McCartney [10:19]

3. The Real Impact of Jet Fuel Price Spikes

[10:24 – 12:59]

• Short-term pain, long-term resilience:
  • Airlines struggle to immediately adjust to sudden fuel price spikes.
  • But evidence shows that, over time, the industry adapts — profits were strong even at $100+/barrel oil in 2013-2014.
  • “It takes time to adjust. But if this is the new normal, airlines will get to where they adjust to this.” — Doug Parker [11:29]
  • Main consequence: slower growth, possible shakeout among weaker airlines, fare hikes likely.

Deep Dive: Airline Route & Hub Profitability 101 — A Masterclass with Doug Parker

[15:54 – 54:25]

Introduction: Why Route Profitability Matters

• Route profitability is among the most closely guarded airline secrets; vital for managing where and when an airline flies.
  • “If you don’t know how your routes are performing financially, you’re lost as a leadership team.” — Doug Parker [16:45]
• Unlike many financial metrics, route profitability data is almost never seen outside airline walls.

Cost Allocation: Why Airlines Aren’t Like Shoe Stores

[19:04 – 25:00]

• Retail businesses can allocate expenses and revenues per store easily.
• For airlines, every flight uses overlapping resources (aircraft, pilots, crews, ground staff) and involves complex allocation.
• Example: Allocating pilot costs to a DFW–Panama City route is based on aircraft type and fleet-wide block hour costs, not individual pilot salaries per flight.

“Frankly, there isn’t really a single expense you can just pull off the general ledger and attribute to this [flight].” — Doug Parker [23:06]

Economic vs. Accounting Costs

[25:00 – 28:00]

• Airlines often use “economic cost” for management decisions, not strict accounting (GAAP) numbers.
• Aircraft ownership cost: Assigned based on prevailing market lease rates, not what is actually paid, to reflect true economic cost.

Revenue Allocation: The Complexity of Connections and Networks

[29:06 – 34:57]

• Revenue per flight must account for connecting passengers—who may have paid for multileg itineraries, not just one flight segment.
• Credit card loyalty program revenue (from, e.g., Citibank): Allocated to routes based on where points/miles are redeemed.
  • “It’s just a distribution system for seats ... the bank is paying American Airlines to give seats to the bank’s customers.” — Doug Parker [33:19]

The “Network Effect” and the Limits of Fully Allocated Contribution (“FACT”)

[35:19 – 41:50]

• Fully allocated profitability at the route level can be “almost meaningless” due to:
  1. Fixed costs that won’t vanish if a flight goes away.
  2. Network connectivity: Cancelling a route may destroy connecting revenue realized elsewhere in the network.
  • “Some routes live off the beyond revenue they create and they should get credit for that, for that creation.” — Doug Parker [40:14]
  • Example: A Midland–DFW flight may look marginal on its own but brings in lucrative connecting passengers.

Sophisticated Profitability Metrics: VABSO

[43:08 – 46:45]

• Airlines develop several alternate profitability metrics (e.g., VABSO: Variable Allocated cost, Plus Beyond, Net of Spill, Ownership fixed).
• These account for:
  • Exclusion of fixed overhead and aircraft costs (since these rarely change if you remove a frequency/route).
  • Inclusion of connecting revenue (“beyond revenue”), net of displacement (“spill”).
  • The result: Most hub/spoke routes show positive margins on these measures.

“VABSO does reflect the contribution that each individual route’s making to the system. And that’s why you never see an airline significantly reduce capacity in an economic downturn.” — Doug Parker [47:02]

• This explains why airlines typically reduce utilization—not fleet size—in downturns.

Application: Decision-Making & Competitive Dynamics

[48:04 – 53:09]

• Airlines use VABSO (or equivalent) to compare cities and routes:
  • Looking for highest margin opportunity.
  • Focus as much on relative performance and trends as absolute numbers.
• FACT (fully allocated) profit is still used at aggregate levels, especially for an entire hub or the airline overall, but not for single routes.

“It always struck me, ... how much change in a competing service could have on our routes’ VABSO performance... Delta adds one flight in the market that we were in, you know, just, you can just see it, the change in that month.” — Doug Parker [51:18]

• Hubs: Airlines aim for each hub to be fully allocated profitable, recognizing that whole-hub closures could, in theory, enable cost reductions.

Evolution: No More “Development Routes” or “Strategic Losses”

[54:25 – 55:39]

• Airlines no longer keep loss-making routes for “strategic” reasons for long:
  • “If routes are losing money, they get cut these days. It’s a whole different world than it used to be.” — Scott McCartney [55:39]
  • Frequent flyer mileage redemptions are now accounted for, especially as banks are funding so much of loyalty revenue.

AI & Future of Profitability Analysis

[55:39 – 56:15]

• AI may accelerate some calculations but the logic and business context remain critical: “...this is everything I’ve described is not done manually, by the way.” — Doug Parker [55:54]

Memorable Quotes & Moments

• “We’re not coming to you this week from O’Hare... O’Hare is getting so crowded… the FAA has told us there is no room for podcasts...” — Scott’s opening joke [00:03]
• “I was not planning on doing a class every time, primarily because I don’t think it’s that interesting to the listeners. ... It requires some work from me and I'm, I've been done working for a while now.” — Doug Parker [15:54]
• “This individual flight is going to show up on a report as break even to slightly negative on a fully allocated basis... the definition of a low-margin business.” — Doug Parker [35:21]
• “Focusing on VABSO... tells our scheduling and revenue management teams what we want to tell them: Given this fleet of airplanes that you have at your disposal, go maximize the contribution they can produce as a system.” — Doug Parker [48:04]
• “No one in their right mind would set up a business this way.” — Doug Parker, on how the US funds air traffic control [68:16]

[Mailbag Segment] Business Aviation & “Fair Share” Debate

[57:46 – 69:02]

Listener Adam challenges Scott’s claims about business jets not paying their fair share.

[57:46 – 66:30]

• Adam’s argument: Business jets pay more in fuel taxes per gallon than airlines; with less infrastructure usage, this is fair.

Scott’s detailed rebuttal:

• Airlines pay significantly more per flight to support the airspace—fuel tax is only one (minor) part; the key is ticket taxes and passenger facility charges.
  • Example: One airline flight (737 with 150 passengers) brings almost $2,000 for a two-hour trip into the trust fund; equivalent business jet brings just $110.
  • “If private jets were paying their fair share, NBAA wouldn’t lobby so hard to keep the current system in place... The current system gives them virtually a free ride in terms of air traffic control, and that’s just wrong.” — Scott McCartney [65:36]
• Larger issue: The business jet lobby has been a barrier to US ATC modernization due to funding reform fears.

“Not to go all Bernie Sanders on you, Doug, but the NBAA has tremendous clout in Washington because the people who ride business jets are big donors...” — Scott McCartney [65:43]

Doug agrees, pointing out airlines were even willing to keep business jet costs stable for sake of modernization, but fix-all solutions are tough to enact.

Episode Conclusion

Scott closes by thanking Doug Parker for his candid insights and classroom-style explanation. Listeners are encouraged to tune in for the next episode with guest Robin Hayes (Airbus U.S. CEO).

Notable Timestamps By Section

• O’Hare and Southwest’s Departure: [01:23 – 04:47]
• Jet Fuel Impact, Spirit Bankruptcy: [05:00 – 12:59]
• Airline Route Profitability Class Begins: [15:54]
• Cost Allocation Analogy: [19:04]
• Aircraft Ownership Costs: [25:00]
• Revenue Allocation and Frequent Flyer/Credit Card: [29:06]
• The “Network Effect” in Profitability: [35:19]
• VABSO & Strategic Network Analysis: [43:08, 46:45]
• Changing Industry Attitudes on Loss-Making Routes: [54:25]
• AI Discussion: [55:39]
• Mailbag “Fair Share” Debate: [57:46 – 69:02]

Takeaways for Listeners

• Airline route profitability is complicated. True financial analysis requires sophisticated allocation of costs and “network” thinking that differs dramatically from most other businesses.
• Network effect is everything. Routes that appear unprofitable in isolation may provide crucial connectivity and revenue.
• Airlines typically don't react to downturns by grounding planes—due to high fixed costs and network revenue impacts.
• Business aviation currently pays much less for ATC usage than airlines on a per-flight basis, a sore point in national aviation policy.
• Industry practices and profitability models have evolved; rarely are loss-making routes kept “for strategic reasons” anymore.

This episode is a comprehensive masterclass for airline geeks, industry professionals, and anyone curious about how airlines make (or lose) money on the routes they fly.