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Airlines Confidential Podcast
345 - Scott McCartney with Guest Co-Host Maya Leibman
00:57:58
This week: Scott McCartney with Guest Co-Host May…
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- [00:04]
A
Airlines confidential with Scott McCartney is made possible with support from RTX. RTX has the vision, expertise and scale to see the future of flight and build it. RTX.com infinityflight the leader in Cadet Academy flight training programs. Infinityflight.com Ontario International Airport in Southern California. SoCal so Easy FlyOntario.com the executive MBA in aviation at the University of Colorado Denver Business UCDenver. EDU and by Cirium, the world's most trusted source of aviation analytics. Cirium.com we also welcome your business support. Contact us at airlinesconfidential.com we're back. Welcome to Airlines Confidential. I'm Scott. Scott McCartney. Hoping everyone had a great Fourth of July, a terrific summer so far, and an exciting and enjoyable World Cup. We've now entered that most American season earnings season. It comes around four times a year, and it tells us a lot about how the world is spinning. Some big things have happened around the airline world over the past week, so we have a lot to talk about. And I'm thrilled to welcome back longtime airline executive Maya Liebman, direct from London and to help us sort it all out.
- [01:38]
B
Happy to be here, Scott. Hey, listen, I noticed you were off last week. Were you by any chance at a special wedding in Madison Square Garden?
- [01:48]
A
No, unfortunately, my invitation didn't arrive in time. What about you?
- [01:55]
B
Yeah, I miss the wedding, too, but I was actually in Paris seeing Bad Bunny. I mean. Yeah. When Taylor asked me to sign an NDA about the wedding, that was just too much, too much of a restriction on my civil liberties. So.
- [02:09]
A
Yeah.
- [02:10]
B
But seriously, now, I've seen, we've talked about it on this before, Taylor, Coldplay, Bad Bunny, all within the last year and a half or so. And, you know, they're just all such amazing performers. And the fans who are there are just so fun and friendly and just a little bit rabid, I would say.
- [02:27]
A
Yeah. Kind of like a World Cup.
- [02:29]
B
Yeah.
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A
So. So speaking of rabid fans, Maya, this is the six weeks every four years where Americans pretend to care about soc. How's it been watching the World cup over there?
- [02:42]
B
Yeah, it's definitely a big experience here. It's all people can talk about. For the first several weeks, there was like such outrage over the hydration break. I mean, it was literally all anyone could talk about. But I watched the England Norway match, and I have to say that watching a World cup match in a proper English pub with like 200 people packed into a room like the size of a Manhattan studio apartment, that's an experience, you know, all goes in and just the roof comes off. I often joke that in this country there's a lot of emphasis on shared misery. It's like, oh, it's so rainy and it's so hot and the trains are never on time and. But I have to say last night was pure, shared joy. I mean, like literally people hugging, high fiving strangers. You know, I think by the time this episode airs, we're already going to know how they did against Argentina. But until then, we have a few days with a lot of people with very big smiles over here.
- [03:41]
A
Yeah, yeah, no, it's, it's, it has been really exciting and yeah, you know, it's been fun around Dallas. I was downtown with a whole bunch of Argentina fans earlier in the tournament.
- [03:53]
B
I heard they took over Clyde Warren Park.
- [03:56]
A
They did, they did. I was showing my brother and sister around Clyde Warren park and they, and they came, they had rented campers and the campers just parked right beside the food trucks. And it was, was a scene and so much fun.
- [04:11]
B
That's awesome.
- [04:12]
A
Yeah. All right, so, Maya, speaking of English institutions, do you have a favorite for the winning suitor for EasyJet?
- [04:21]
B
Okay, that's a different bet. You know, but it's interesting you say institution, Scott, because, you know, when Americans think of European carriers, they often think of like British Airways and Air France mostly because those are the ones that fly to the US and that's what we're familiar with. But get this stat. EasyJet carried 93 million passengers last year. That is double what BA carried and to double the number of destinations.
- [04:45]
A
Yeah.
- [04:45]
B
You know, of course on an ask and a revenue basis, they're smaller than ba. But to think that twice as many people are getting on an EasyJet flight than on a BA flight and it truly makes it an institution here. But I think we're going to talk about EasyJet a little bit more later. Scott, you started explaining that we are in earnings season and that has started with Delta being out of the gates first as usual. What do you make of Delta's earnings?
- [05:09]
A
Yeah, I think it's really important. Really fascinating. Delta's earnings came out Friday. Always the first to kick off the earnings season. Opening day for earnings season, if you will, and usually comes with its own fireworks. This was a little, a little sedate, but I think really more significant than people realized when the, when the numbers came out, Delta's profit fell significantly to 1.6 billion from 2.12 billion. And that was totally expected because of higher oil prices. As listeners know, the Iran war and the closing of the Strait of hormuz has led to dramatically higher jet fuel prices. Delta said it spent $4.1 billion on fuel and the three months ended June 30, and that was the highest quarterly fuel cost in the company's history. That $4.1 billion fuel bill was up 67%, $1.6 billion higher than a year ago. But Delta earnings were only $500 million lower because of higher ticket prices and because Delta owns an oil refinery that produced handsome profits of its own.
- [06:32]
B
That is incredible. Let me just take those one at a time. So let's start with the refinery. Get this. Delta said that 577 million of its 1.6 billion in net income came from the refinery. So that's like 36% of their earnings. I mean, that blows me away. Yeah, I mean, they're not an oil company that happens to fly airplanes. They're an airline.
- [06:54]
A
And now they're getting to that oil company.
- [06:58]
B
Get it up over 50%. And, you know, you. Then you are an oil company or refining company. You know, it's. It's. You know, in 2012, when they bought that refinery, there were so many of us that thought it was just like some bizarre stunt. And to be fair, for many years, it really was a mixed bag. But, you know, right now, it looks like a genius move. Of course, during an oil shock, it's not hard for it to look like a great move when you've got this sort of widening crack spread and everything, you know, in a different market with low and stable oil prices, or let's say the refinery catches on fire, it doesn't seem like such a smart move. But right now, yeah, I think they're getting some kudos for some genius thinking on the revenue side. As you said, Delta said that their customers aren't shrinking away from higher ticket prices. Premium ticket revenue, so we're talking first class, business class, that sort of thing, was up 17%. And when you just look at regular coach tickets, those were up 8%. And Delta's capacity was only 1% larger. So this isn't like they have a ton more passengers. This isn't volume. This is yield. People are paying more across the board. Total passenger revenue was up 13%. Cargo revenue was up. Frequent flyer revenue was up. And they said that higher, you know, fares are expected to last. Except, you know, Wall street wasn't real impressed. And Delta shares were down about 2% on Friday at their close. And airlines were down across the board.
- [08:31]
A
Yeah, I think the stock market really was hoping for more. And stock market Gets kind of irrational that way. It's like expecting Messi to score a goal in every World cup game. Does. Does do that most of the time, but not all the time. Yeah, but you know, Delta shares are still up more than 25% year to date after the Friday drop. Delta has way outperformed United and American in terms of stock market gains this year. And maybe investor expectations have just plain gotten too high. For the record, it's interesting when you look at the whole industry. Frontier Stock is up 52% so far this year, and that's after a major drop on Friday. That's all largely on the hope that the loss of Spirit Airlines from the marketplace will give Frontier room to start making money again. JetBlue and Allegiant are up about 25% year to date, kind of in line with Delta again. JetBlue and Allegiant, beneficiaries of Spirit's demise. Southwest is up 17%. United's up 11%. Americans up 9%. In Alaska is flat compared to the start of the year. Maya, I think the oil price shock has exposed a remarkable structural shift in the airline industry, and we're only beginning to appreciate what's going on. I think there is structural change in consumer demand for air travel. Post pandemic travel is much more important to people young and old. Experiences are more important to many than a couch or a new car. And I say this as a guy who just spent a car on the experience of a Disney cruise for myself and 13 family members. And it was an incredible, incredible experience. And exactly how we do want to spend our money. Just consider this year. And those stock gains I just talked about seems kind of crazy. Jet fuel prices are up 67% compared to a year ago. And instead of talking about, we might have in the past talking, having to talk about airline bankruptcies and layoffs, certainly layoffs and wage cuts and aircraft order cancellations and all the shrinking and craziness that comes with oil price shocks of the past. We're talking about which airlines have the biggest stock market gains. We're talking about consumer demand remaining strong in the face of significant fare increases. Normally, consumers cut back on travel in the face of rising prices at the gas pump and the grocery stores. Companies cut back on business trips in the face of profit pressure and inflation. Travel is discretionary, or so we used to think, something you can pretty easily do without. I think there's a difference here. People feel like they can't do without it. What we see is different. Consumers are saying travel is still Important. And travel isn't a commodity product anymore. It used to be you get from point A to point B. If you paid less than somebody else, you sort of felt smug about it. Now if you pay more for that extra legroom seat and the slumps in the back are unhappy, you feel smug because you bought yourself some comfort. Consumers care about service and perks and leg room and lines and everything else. So buy up for a better experience. And Delta has been the leader at mining that consumer gold. One example of this shift, by the way, I saw a report right after the Delta earnings. Morgan Stanley said they started out saying that Delta, quote, supported the view that they and likely the industry are on a path to structurally higher margins led by revenues for the first time in years, providing further justification for a multiple re rating of quality carriers. I think this is, you know, we say this permanent until the next recession or whatever, but I think this is really significant change. All this could change once summer is over and demand suddenly drops in the face of high ticket prices. But I don't think so. I think this is lasting change in consumer behavior, not just at Delta, but across the industry. What do you think?
- [13:15]
B
All right, I will give you that. I do believe that people are leaning more into experience over material goods. I think we see that in a lot of experience based industries. I think that people are definitely selling up to make their life easier when traveling. One of my favorite quotes is, you know, whoever said getting there was half the fun hasn't experienced modern day air travel. And yeah, that extra leg room and the priority boarding, things like that, they can make a big difference in how your vacation gets started or how your business trip goes. But I think there's one thing that we have to remember and that is supply is really constrained right now. I read that because of the engine issues, 4 out of every 10 A320neos is out of service right now. Yeah, on top of that, we all know about the production issues at Boeing certification for the triple 7X and the for the max 7S. I read something else, that Southwest is going to be waiting longer for the Max 7 than it took to design the original 737. They have 270 on order and they're getting zero this year. So Boeing can't build fast enough what's been certified and they can't certify what the airlines need. There's spirit. You know, I know airlines are working quickly to backfill that capacity, but, but that is, you know, several points that came out relatively quickly. So I think we need to be careful about attributing all of this to a fundamental change and fair strength and you know, sort of a permanent shift in consumer behavior.
- [14:59]
A
Yeah, no, that, that's true. And Ed Bastian a week ago before, before the earnings made the point that, you know, he was asked when are fares going to come down? And he said when it's supply and demand, when capacity goes up. Right. So if, if the supply chain, if the, you know, but it's going to take years for the engine issues to get resolved. It's going to take years for, for Boeing and Airbus to ramp up. It's going to take decades for a new narrow body airplane to, to hit the market.
- [15:32]
B
Yeah. And that's, that's why, I don't get why stock prices are depressed. Because this is like every analyst dream about the industry where there's a, you know, a strong economy, people want to travel, they want to spend money and supply is, is constrained. And you know, and, and oil prices are high. I mean this is like exactly what they want. I don't get why stock prices are suffering, but it's.
- [16:00]
A
Yeah. And, and by the way, one other constraint is, is air traffic control, which is so interesting. And the FAA just extended the limits on Chicago o'. Hare. And you know, that's a place where United and American are going head to head. And if they had the airplanes and the landing, they're not slots because it's not slot controlled, but they're essentially slots. If they could add more to Chicago, they sure as heck would. And so that's also an area where constraint really comes into the marketplace.
- [16:40]
B
Yeah. And you know, constraint at airports like Austin, you know, that have reached this capacity and that it's going to take a while to build additional infrastructure.
- [16:49]
A
Yeah, yeah. Las Vegas is overcrowded. Yeah. Lots of places.
- [16:54]
B
Yeah. All right. One sad news item we need to mention which is a little bit more aviation than airlines specifically. But aviation pioneer Wally Funko passed away this week. She was 87. And five years ago she became the oldest woman to travel to space. She was like a total pioneer. First female civilian flight instructor at Fort Sill, Oklahoma. First female FAA inspector. She earned her air transport rating in 1968. She was only the 58th woman in the US to do so. She applied to three commercial airlines, but was turned away because, because of being a woman. In 1974, she became the first female air safety investigator for the NTSB and investigated 450 incidents over 11 years. She was an accomplished air racer. She worked as a flight instructor in her career, she accumulated more than 18,600 hours in her logbook. She was part of actually NASA's Mercury 13 training crew. And although women did well, they were alongside the men. They just weren't part of the vision to go into space at that time. So she waited 60 years and at age 82, she was included in Blue Origin's New Shepard mission. And that made her the oldest person in space. Do you know who was the oldest before her? Who she displaced? Scott.
- [18:24]
A
I think I did. Didn't John Glenn go back up?
- [18:28]
B
Yeah, we talked about that on a previous episode. Yes, good. Good memory. She displaced John Glenn. So that's a pretty good record.
- [18:39]
A
Yeah. Really.
- [18:41]
B
My favorite is I was reading about her. She asked, when asked about marriage, she said she was married to airplanes. So blue skies and tail winds. Wally Funk.
- [18:51]
A
Yeah, she was a character with the she kind of had her 15 minutes of fame when she did the Blue Origin space flight. I think a lot of people didn't know about Wally Funk, so it was great that they got to. And she lived in Grapevine, Texas, and she was very much part of the local Dallas Fort Worth aviation scene.
- [19:17]
B
Did you meet her?
- [19:18]
A
No, I never did. Never did. But I have friends who actually knew her well. Yeah.
- [19:25]
B
That's awesome.
- [19:26]
A
She's just a terrific person. She'll be missed. All right, before we get to more news, and lots of important news still to talk about, let's take a moment to thank our sponsors. We want to thank Ontario International Airport, which just launched the ONT BOLD program, a proposed vision to transform the airport's facilities to streamline the passenger journey while also creating jobs, growing the regional economy, and building on ont's legacy as a global gateway. The program includes plans for a new terminal, a multi story parking garage, upgrades to existing terminals, enhanced roadways and new utilities. The ONT BOLD program is early in the planning phase. Visit flyontario.com bold to learn more and join the journey to Ont's boldest chapter yet. Thanks as well to the Executive MBA in Aviation at the University of Colorado Denver for its sponsorship. The Executive MBA in Aviation at CU Denver is the first degree of its kind, taught by industry experts and designed for ambitious leaders from across the aviation ecosystem. With classes located at Denver International Airport and week long residencies in Washington, D.C. and at airports around the world, students experience a hybrid, flexible course structure that balances in person and online classes without career interruption. Go to Business ucdenver. Edu to learn more. Let me add our fellow co host Charles Duncan did an Interesting session, I think on LinkedIn talking about, with some other folks talking about the need for advanced degrees in aviation, specifically for advanced degrees geared towards aviation because there's so many unique things and how important it is for the industry to have really to have future leaders educated in aviation issues.
- [21:30]
B
Yeah, like I said last time, I wish I could have gone to this. I feel like it's such great preparation for a career in this crazy industry.
- [21:40]
A
Yeah, yeah. It's a terrific program. And they are right now signing up the next class which will start. I'm starting to gear up for my next class in January. Also thanks to longtime sponsor rtx. At rtx, a century of aerospace and defense innovation shapes a unique perspective. It takes more than technology alone to rapidly advance the future of flight and strengthen global security. It takes the vision to see what's next, adapting expertise and scaling manufacturing capability to deliver where and when it matters most. Perspective is everything RTX. Visit RTX.com to learn more.
- [22:23]
B
So Scott, there was more Delta airline news and this gets right back to the issue you had raised of air travel no longer being a commodity and instead being a product with lots of of choice for consumers. This has been talked about for some time and other airlines are doing a bit of this. It's actually really popular here in Europe and I'll talk about that in a minute. But Delta launch basic business. So this is a lower price business class product with some of the amenities stripped out. So you know, basic economy, you get the economy seat, not much else. With basic business you get the business class seat and the onboard service that comes with it. But you don't get as many checked bags and you have to pay a fee to change or cancel your reservation. You earn fewer frequent flyer miles. You don't get to use special dedicated business class check in lanes. You can't use the fancy Delta One lounges, you know, unless you have some separate membership that gets you in. As I said, you know this, this is really exists with pretty much all the European carriers here within Europe. And I've used it a lot as I've traveled around because you know, there's more amenities I would say in the lower level there's multiple levels of business class products like fast track security at Heathrow, which is really important if you're traveling, you know, an airline that you don't usually and you still get lounge access with a lot of the sort of lower fare business class products. But the real downside where they really get you is the no refundability or change ability and the difference between as you're going through the booking path, you'll see the fare for it'll post like the lowest business class fare and then you click on it thinking, oh, that's a pretty good deal. And then it's a real shock between that fare and the truly flexible, you know, with all the bells and whistles, the, the true business class fare. I mean it can sometimes be like 3 or 4x what the sort of basic product is.
- [24:27]
A
Wow.
- [24:28]
B
So, yeah, so it's hard to sell up to that. For me, I go through as I'm and I literally just gone through this in the last week as I was booking a flight and you know, it's all about this paradox of choice. You know, we think we want more choice, but then when we have it, we're sort of paralyzed. Like it takes me a lot longer to make a decision because I sit there and ultimately I go for sort of a, one of the middle tier business class products. And then I spend like the next three or four weeks with this anxiety about whether I'm going to have to change my trip or not or whether it's going to get canceled. And so, you know, it's, I think it, it will, you know, we'll, we'll see sort of how it plays out in the US on these long haul flights. But here in Europe, it's already a really well established product.
- [25:18]
A
Yeah, I think it's really interesting because the business class cabin, that's going to be a misnomer. It already is kind of a misnomer. Right. Because there are a lot of leisure passengers who are buying up to that. And so this allows Delta to really yield, manage that and to create distinctions between business and leisure passengers in business class. I think it's going to be really interesting for, you know, for premium leisure travelers who want the business class seat and they're planning their trip months in advance and they're, you know, going on, you know, safari or going on a cruise or going, you know, wherever. Right. They don't need that flexibility and they, you know, may have lounge access some other way and they may. So, you know, in sort of the Ben Baldanza tradition of why are you paying for things you don't use?
- [26:17]
B
Yeah.
- [26:19]
A
You know, I think there's a lot to this. I think it allows Delta to relieve a little of the overcrowding of lounges by taking that privilege away from some of the customers. And it also, I think allows, you know, you say in Europe it's already 3 or 4x. Right. It allows more differentiation in pricing, what we saw with Coach was that BASIC became, you know, the new, it's the new low price. But it wasn't a lower price. It was take the existing low price and call it Basic because in, in most of the cases they were already matching discount carriers. Right. But then that allows you to create more buy up opportunities. And so the net result was you can increase the total yield out of your Coach cabin with that. And I would expect the same would happen out of the business class cabin.
- [27:19]
B
Yeah, I think you're right. And it gives the airlines a lot of opportunity to experiment with what people are willing to pay for, what component of the travel experience is the most valuable. American already does this in a certain way where if you need to refund your business class ticket and you're willing to accept it as a travel credit rather than a refund back to your credit card, then you can get a lower fare. You know, you can get the lowest business class fare. So, you know, I think there's going to be a lot of activity in this and a lot of experimentation because you're right, you know, there's, it just creates more opportunities to sort of do what airlines have always done, which is some degree of price discrimination. And. Yeah, you know what it is that people are willing to pay for?
- [28:13]
A
Yeah, no, and they're, you know, people will complain. Oh, they're taking away perks from, from business class. Well, no, what, what they're really saying is if you want those perks, you got to pay, pay more for them. And so if you want, if you want lounge access by the fare with lounge access. Yeah, and, and you know, for Dawn, I'm not a big lounge user. If you, if I, if I'm not going to use it, if I'm running to the flight 10 minutes before boarding, you know, why am I paying for lounge use that I'm never going to use?
- [28:44]
B
Is that the kind of traveler you are? Are you a last minute show up person?
- [28:48]
A
No. Well, in my, in my younger days, I definitely was. Now I'm more. Make sure I get there in time to be able to use the bathroom. All right, Maya. The takeover news of the week was that Apollo Global Management, which is the huge private equity firm with something like a trillion dollars under management, started by Leon Black. Apollo swept in with a higher bid for EasyJet after the airline had already agreed in principle to a deal with another private investor, Castle Lake. Both these suitors have a lot of experience with airlines and aircraft. And I think this is fascinating. Apollo owned a controlling stake in sun country that it recently sold to Allegiant. It also has stakes or had stakes in AeroMexico, Atlas Air, SAS, Air France, KLM and Swissport. One of the folks involved in this, no doubt, is David Siegel, who's been on the podcast before. David is a senior advisor at Apollo. He was vice chairman at Spirit. He's currently chairman at Atlas, Volutea and Swissport, all Apollo owned entities. Obviously, Dave Siegel is a really experienced airline guy who knows this buyout business well. Apollo offered 7.15 pounds per share for EasyJet, which was 3.6 higher than the 6.9 pounds per share that Castle Lake had agreed to pay. The bid is worth US$7.7 billion. Perhaps even more significantly, Apollo said it quote believes in EasyJet's current strategy. Close quote. That's thought to be a very different approach from Castle Lake. There's been a lot of speculation that Castle Lake saw value in breaking up EasyJet, selling different parts of the operation to different airlines around Europe, or taking EasyJet's fleet and doing a bunch of sale leaseback deals. Castle Lake is primarily an aircraft leasing company. The sale leaseback thing is really important. Other airlines, particularly in the low cost world, have done this. You can raise a lot of cash selling the airplane you own and then leasing it back from the leasing company you sell it to. Leasing companies love it because it's cash out the door up front, but then they get the airplane and they get the long term lease payments. They're making money long term and for the airline, yeah, you get that cash up front, but you're raising your operating costs long term down the road, kicking the can a little bit down the road. But that immediate cash windfall can be helpful to airlines and certainly very attractive to private equity buyers who may want to take the cash and then get out. EasyJet has 356 Airbus aircraft and 208 of them are owned. So there's potential there for a big cash windfall in those 208 owned airplanes. It's worth noting too that even with the higher bid, EasyJet comes pretty cheap. The airline has struggled quite a bit post pandemic and its share price, while nearly double what it was before the takeover talk, is still about half of what it was before the pandemic. I think it's fascinating to see private equity firms investing in struggling or depressed airlines at this stage stage, much like David Bonderman did back in the 1990s and he made a ton of money doing it. Buy the underperforming airline juice up the performance. Maybe management changes. Maybe you sell off this, that or the other thing. Maybe you stop doing certain things that are losing a lot of money and then things look better. Then you can take it public and make a killing. I wonder, just wonder. Just silly speculation, but I wonder if some US Airlines with underperforming share prices aren't getting more vulnerable to this as private equity takes more interest in the airline industry. We already saw this with Southwest. That was a. Southwest was very vulnerable because the share price was low and because there was an obvious revenue boost that they could have simply by charging bag fees and assigned seats and things like that. With that one, you didn't have to buy the whole airline. Elliott Management bought a stake, they pressured change. That to many was was obvious and then they made good money fast. So I'd put Alaska in the underperforming stock price category. And unless it can start finding good profits after the Hawaiian acquisition. Alaska has a lot of potential ahead, I think. But today its market capitalization of 5.6 billion is less than half of what it was in 2017. The company was worth 12 billion then. That was right after it acquired Virgin America. And I'd put American Airlines in this category as well. Although we're talking big bucks with the 35 billion in debt that American has that a buyer would have to assume still you could buy all of American shares for about 11.2 billion. That's the current market capitalization. That's a current price. If you were going to buy American, there would be a premium on that. But the current market capitalization, 11.2 billion. That's half of what Southwest is worth right now. In fact, the restaurant chain Texas Roadhouse is worth more than than American Airlines right now. United Airlines has a market capitalization of 40 billion. Delta is worth 57 billion. Delta isn't five times the size of American. Right. They're similar sizes in terms of the airline operation, the ASMs. But Delta is worth five times more than American in the stock market. And you could look at American and say there's a lot of potential there, as we've talked about many times before and plans underway to fix things, but a lot of potential there to fix things and get it earning better profits. Bottom line. Maya, I think it's fascinating that we're seeing big time investors turning their attention to the airline industry which for so long has been shunned as, you know, sort of an uninvestable place. And as Doug Parker has talked about many times, consolidation, everything else his goal was to get airlines to where they would be investable. And we've talked about Warren Buffett coming in and how significant all that is. I think investors see the changes in travel demand that we've been talking about. I think they see the decommoditization and the increased earnings potential and they see some airlines ahead of others and that underperformance by the laggards, that creates opportunities to make some big money. So we live in very interesting times. What do you think?
- [36:17]
B
All right, well, first, going back to EasyJet, you know, I think it's interesting that, you know, first it flies all over Europe, but the headquarters is here in London at Luton Airport. So it's not a flag carrier per se, but people here think of it as a British airline. And I think there's going to be some real sensitivity here about a major US peace firm taking control of such a national institution.
- [36:42]
A
Yeah, great point.
- [36:43]
B
I think it's really interesting that the UK rules around ownership are so much more permissive than either the eu, you know, where I think you have to, you know, the EU member has to have a majority stake, or the US, where I think foreign interest can't take more than 25% of an airline. So I think it's interesting that they're even in this situation where these USPE companies can come in and talk about buying EasyJet.
- [37:13]
A
Do they have to set up like a UK office to actually be the owner or can it just be a US owned British airline? And what would that mean for traffic rights elsewhere in Europe?
- [37:26]
B
That's a really good question. And I don't know. That's a question for someone with more of a regulatory background. But I, you know, the fact that they can even sit here and buy it, whether they're going to have to have a UK office or something for the EU. So EasyJet's got this weird subsidiary structure where they have the UK subsidiary. I think they've got one in the EU and one specifically like in Switzerland.
- [37:49]
A
Oh, right, yeah.
- [37:50]
B
They have to do it for Covid or something. And so for the EU components, they will definitely need some sort of EU partner. And I think they both said that they were going to figure out, you know, who like some Irish investors or they were going to figure out how they were going to get around the EU ownership issues. But for the UK subsidiary, I don't think they need anything like that. I don't know if they need a UK office or not. I mean, I can't imagine that Apollo doesn't have one. But, but I think it's interesting, you know, what you said about Apollo saying that they believe in easyjet strategy. I think they also said that they, that they aren't going to change the name. And you know, Stelios, the founder, you know, who created this whole juggernaut and his family, I think still owns like 15 and collect royalty. And so keeping him happy isn't exactly optional. And so that may tip the scales for EasyJet in terms of who they want to be the acquirer.
- [38:55]
A
Right.
- [38:56]
B
But as for your other comment about PE gobbling up airlines, another one of my favorite quotes is the one, you know, you've heard a million times. But, you know, if you want to make a million dollars in the airline industry, then just start with a billion. Yeah, I think that there are not very many people who are making a killing in the airline industry. I think it is really tricky. And I think you mentioned, God, Berkshire Hathaway, you know, I think they've, they've gotten burned a couple times and so, and maybe getting back into it to get burned again. You never know. I mean, it's just a really, really volatile industry.
- [39:30]
A
Yeah, yeah. No, I mean, I, you know, I think you need to get in and get out quick. And, and that was the beauty of the Southwest situation, because they could get in and get out quick. Oscar, Oscar Munoz, first time we talked about it, said, well, they're there for a good time, they're not there for a long time.
- [39:51]
B
Yeah.
- [39:52]
A
And, but that's kind of how you have to approach the airline industry because sooner or later there's going to be another pandemic or another whatever, you know, and, and, and then it gets tough to, to get out when, you know, the companies are suddenly worth half what they used to be. You know, people have asked me, well, what, what's the difference between Southwest and, and American? And you know, I think, I think that's the issue. Fixing American profits, that's a much longer term thing. And so it becomes much riskier and becomes less clear. But there's also huge potential there. And you know, I think the same with, with Alaska. You know, I think people, we've, we've said before JetBlue would be an obvious candidate, except it's, it's got a lot of debt. Very, very heavy on the debt front. So that gets expensive for what you get with JetBlue. I don't know, I just think it's fascinating to see that Morgan Stanley report I read. If you really believe that the industry is going to have structurally higher margins, then there are some Underperforming companies out there that could do a lot better in the future.
- [41:17]
B
All right, we shall see. We'll. We'll revisit this in a few years and see if your crystal ball was right.
- [41:25]
A
Yeah, Right.
- [41:26]
B
In other interesting news, Scott, So Air Canada picked its new CEO. He is Uncle Vandervurft, currently the CEO of SAS Group and the parent of Scandinavian Airlines. Vanderwerf has led SAS for five years. Before that, he was CEO of Avianca in Colombia, and he's had senior roles at Aeromexico KM and Qatar Airways. He'll replace Michael Russo, who you may recall was pressured into retirement because he didn't offer condolences. In French. After the Air Canada accident at LaGuardia Airport in March, Rousseau delivered a recorded message in English only. And Canadian law requires communications in English and French. Rousseau, who's been at Air Canada for much of his career, had promised to learn more French after he became CEO. So before you ask, yes, Vanderbur does speak French. He's Dutch, and he speaks English, French, and Dutch, along with some Spanish, Italian, and Swedish. And if I butchered his name, it's because I need to learn more languages. Like, you know, I'll be honest. When I heard about Russo getting fired over this, I thought it was really absurd. I just think there's so many people holding high offices that are doing truly corrupt and illegal acts with impunity that for someone to lose their job over this seemed just completely ridiculous. But that's easy for me to say. I don't have sort of the cultural anxiety of the French Canadians watching my. You know, my. My cultural identity being eroded over time. But I still think it's ridiculous. I'm sorry.
- [43:08]
A
Yeah, no, but I totally, totally agree. And blaming Rousseau, man, I'd blame the corporate communications people. I mean, you know, it seems like you. This is not a new issue. You knew that. You know, send out the. The number two or the number three or the head of safety or the head of. You know, send somebody else out to do the message because you know what's going to happen. I mean, it just. I don't know. On the other hand, Uncle Van der Wer, amazing, you know, background and record on multiple continents. So it's going to be fascinating to see what he can do with Air Canada.
- [43:58]
B
Yeah.
- [43:59]
A
All right. Before we get to the mailbag, I want to thank Infinity Flight Academy for its sponsorship. The path to the flight deck starts long before a pilot reaches the airlines. At an Infinity Flight Academy, they're proud to serve as a flight training partner for the American Airlines Cadet Academy, helping prepare the next generation of professional airline pilots. Infinity Flight Academy's training is structured, standardized and built around the discipline today's airlines expect from day one. For future pilots pursuing a career at the highest level, Infinity Flight Academy is proud to be part of that journey. Infinity Flight Academy training tomorrow's airline pilots through the American Airlines Cadet Academy. And thanks as well to Cirium for making this podcast possible. 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. I'll just add Speaking of Cirium, I don't personally know Anko Vanderwerff, but I know that when he was at Scandinavian he was very intent on moving that airline up the Cirium rankings because I'm involved in the Cerium on Time Performance board and I thought it was very interesting the CEO who really understood that reliability was important to his business and saw the Cirium rankings as an important path to show the industry and customers that it was a reliable airline.
- [45:54]
B
Well, it sounds like he's got the right priorities. Turning to the mailbags Michael had an interesting and informative comment on your discussion a few weeks ago about there's an air traffic controller who cleared a Delta flight to land after clearing an American flight flight to take off on an intersecting Runway. The Delta pilot had to do a go around to avoid a potential conflict and Michael says hello Scott, Just a quick note on the near collision discussion. I think the discussion highlighted the challenge of this information being readily available at our fingertips. He's talking about ATC recordings, a cars, transmissions, etc. The discussion included that Americans should have noticed the conflicting instruction. What was missed is that the most commonly circulated audio and radar overlay from the incident was sped up to eliminate white space. The American airplane held in position after being cleared for takeoff for approximately one minute without ever communicating the need for same to atc so there was no conflict when the controller could cleared them for takeoff. The clearance was made with more than adequate time and spacing. The delay in the takeoff roll is what caused the conflict. The controller of course could have noticed that the aircraft was not rolling and subsequently canceled their takeoff clearance as the conflict became inevitable and technology would have been great to support that effort. There was a very similar incident in April 2014 at Newark during a previous Runway construction project in which an ExpressJet Embraer 145 delayed takeoff roll on Runway 4R causing a very close call and a near mid air collision with a 737 landing Runway 29. These facts of course will become apparent in the NTSB report, but the sites that get the information out quickly are edited to improve viewership and generate clicks. It's best not to use them to speculate or or if so, to take them with a high grain of salt. I think the same challenge is rapidly approaching with decoding a pilot a car's messages. Look forward to the show each week. What do you think Scott?
- [48:07]
A
Excellent, excellent point Michael. Many, many thanks for that both understanding of how it all works and I didn't realize that those recordings were edited. Makes total sense that that one minute of white space was taken out. But that changes everything, right? So yes, it becomes a very different situation. And your point about not speculating based on the recordings and everything else, I think in this situation just shows that that is great advice. Spot on. So thank you very much for that. Okay Maya, here's one close to home for both of us. Your Texas home at least. Jason from Chicago asks, with Avelo announcing its first routes out of McKinney, Texas, north of Dallas, how do you think you'll see the legacies respond by adding their own routes from this much needed resource in the Dallas Metroplex. This is the first new commercial airport without the archaic right amendment restrictions. Southwest is maxed out on gate capacity at Dallas Love Field, and most recently the ventures into Houston Intercontinental and Chicago o' Hare failed. So the long speculation of them adding flights to Dallas Fort Worth, the larger airport 12 miles to the west, seems less likely these days. But American and Southwest have a huge customer base in the Metroplex. Either or both of them adding fringe service to their other hubs might be a welcome addition versus fighting the traffic and parking congestion at Love Field or dfw. So what he's talking about there is American Southwest adding flights at McKinney to say Chicago for American or Charlotte. And for Southwest, maybe Nashville or maybe Houston Hobby or who knows where. Parking not as much a concern at dfw, but it's not cheap either. And then Jason also says, I don't think Avelo is going to have a slam dunk like it had with New Haven. I expect the other airlines to respond swiftly at McKinney. Even the airport would only commit to allowing Avello first rights to two of the four gates. Your thoughts? Since this is in your backyard. Love the shows. What do you Think Maya.
- [50:48]
B
Oh, first just some background for people who this is not their backyard. Avelo is going to start service at McKinney. The airport code used to be TKI and now it's changing to DTX and they're starting in November to four Florida destinations plus Vegas. And the city of McKinney has built a three gate passenger terminal expandable to five gates. And the city at one point said it was talking to two airlines. I think Avelo at this point is the only one that signed up so far. Traditionally, McKinney, this airport has really just been corporate and private aviation. Big corporates like Texas Instruments and Toyota have their jet fleets there. I think you did some of your flight training there. Isn't that right Scott?
- [51:33]
A
Yeah, a ton of them, man. I've got my logbook has hundreds of touch and goes at and what was then TKI DTX by the way is a great identifier for Dallas, Texas. I mean that was just sitting there.
- [51:47]
B
Yeah, that is good. And it's, it's really convenient for you know, these suburbs north of, of Dallas like Plano and going up with, you know, to Frisco and Allen and Salina and Prosper. So you know, first off I just, I remember when the tollway ended at Plano, know.
- [52:07]
A
Right.
- [52:08]
B
And I was looking up some of the stats there. In 1995, Frisco ISD the, the school district there had four schools total and now they have 77 and they have 12 high schools out of that 77. I mean it's, it's a huge, it's a city, it's not a suburb. And they're wealthy suburbs. Prosper has a median household income over 200,000. So you know, Aello thinks that these markets are underserved and you know, they're not wrong. But what Jason asked about was, you know, what is the response going to be? And the, you know, for, for American and Southwest, it's the same problem that they have, you know, with American. Do they want to operate at Love and does Southwest want to operate at dfw? It really breaks up your operation. You can really only have local traffic, traffic at the other airport that you are serving because so much the, you know, the, the, the, the center of gravity is at the other airport. You can't create a connecting, another connecting hub, you know, just half an hour drive away. So I don't see that American and Southwest are going to suddenly start trying to fly out of McKin. What I do think you'll see is more competitive pricing for those destinations out of Love Field and DFW as a response. There's real beauty at a small airport where you can just rock up and park immediately outside. But at the end of the day, there are these huge, beautiful highways that take you from Frisco straight into the north end of DFW airport. And it's not that much more convenient to get to McKinney from some of these places. So I think really what you're going to see is lower pricing out of Love Field and DFW as a response rather than actual service beginning by AA and Southwest out of McKinney.
- [54:04]
A
Yeah, yeah, yeah. No, I, it's. It's fascinating. I do think it's a great move for Avelo. Right. This is exactly the kind of, you know, differentiation that low cost startups like that need and great situation for them. The interesting thing with Southwest, I mean, I would agree. I don't think Americans gonna play the play there. DFW has gotten so huge and so powerful and between, you know, frequent flyer program and destinations and schedule and everything else, people will certainly keep driving to dfw. But what's fascinating, I think is Southwest because they are maxed out at Love Field. And Love Field is about to embark on a $2.3 billion rebuilding of the head house, the term. They're going to knock down garage A and build it out and it'll have lounges for Southwest and everything else. But I think the city of Dallas wants more gates. There is this sort of the last vestiges of the right amendment where the five parties involved in that agreed not to add gates. But it can be undone if anybody wants it to be undone. And I think the city of Dallas wants it to be undone. Now there will be neighborhood pushback and all, but you have to get Congress to approve this. Well, there's, you know, even if the local Dallas people are opposed to this, everybody else in, in, you know, the other 49 states and all would love to see more service at Love Field. Yeah, so I don't think that's a problem. Now there are issues with the roadway into Love Field. Mockingbird Wayne, you know, has. If you can't put a whole lot, if you double traffic on that, it's. It would be a nightmare. So it'll be interesting to see how they handle that. But I think more gates are coming to Love Field. And the point of all this is I think Southwest can use this as leverage to say, hey, if we can't, we got to grow. Dallas is our home. You know, there's no we got to grow. So it's either going to be at Love Field or it's going to be at McKinney and maybe it ends up being both. I don't know.
- [56:41]
B
Yeah.
- [56:42]
A
Very interesting situation. And I do think for startups and low cost guys, we're going to see more and more alternate airport stuff because as we've talked about, they have to find a unique niche and something different. And this is a way to differentiate.
- [57:03]
B
Yeah. And something low cost.
- [57:05]
A
Yeah. People who live up there, you know, and they're only, they're only starting to leisure destinations. Right. But quick trip to Vegas. Sure. You know, let's go out of McKinney and try Avello. It'll be fun. All right, that's all for another edition of Airlines Confidential. Thank you so much, Maya. This has been great. And if good luck is. Is appropriate for the future of the World Cup. All to you. Good luck.
- [57:34]
B
I don't know what you say. If you say break a leg or anything.
- [57:37]
A
Yeah. I don't know. But however it works out, I'll be back next week with co host Oscar Bunoz. So thanks everyone and we look forward to more.
- [57:50]
B
Yeah, thanks, Scott. A lot of fun. So long, everyone. Thanks for listening.
- [57:54]
A
This podcast is produced by Mass media info@massmedia.net.