B (2:36)

But we are here in North America, so none of this matters. Everything's fine. I think. Oh no, that's not how that goes. Well, the flights in that region running at a trickle. We were talking about this earlier. If we were based in the Middle east, we would have probably had like 20 emergency pods by now or something like this. But it's definitely interesting times when your network is being disrupted by ballistic missiles and drones. Drones. Not a common thing you would think, but also kind of a pretty lame excuse, but whatever, you know, for the, for those stranded in the Middle East. What a show that is unfolding in front of them. There was a dog fight. Yeah, you were telling me over one of the beaches in dubai with a UAE F16 engaged one of the Iranian drones with an air to air missile. This is wild, man.

A (3:25)

Yeah, well, let's put it this way. I've spoken to a lot of airline folks in the region over the past 10 days with that in mind. The recurring concern is that there's a long term effect on the flows of people to places like Dubai and Doha. Look, the image of these super connecting hubs and their urban centers is getting really tarnished by war coming to their doorstep.

B (3:47)

Absolutely. As. And it's kind of shocking actually because it's not like this is a region that has been perfectly quiet and peaceful for the last decades while we're talking about it forever. Forever. But this is, it feels a little bit different this time, especially with so many civilian targets that have kind of been included here and really disrupted things. But then again, it has been such a resilient region over time. So you and Brian got into this when, when you interviewed Sir Tim Clark last year. You know, you've got what, 40 years of emirates growing like a weed through three Gulf Wars. Are we calling this a war? I said, but you know, global financial crisis, pandemics, on and on. This is the first time that it feels like there could be a real risk to what's going on. It's not just a blip in an area that while it may be surrounded by chaos, has generally been safe and stable. And people don't really know where this is going to go yet, I suppose. But I know, you know, one manufacturer's assessment in general with regional conflicts like this says it's typically like a 10% traffic hangover for about 8 to 10 months. This could be more, could be. We just, we don't really know because it's still early days. But there's no question that there is a big impact all around the region right now.

A (5:12)

Yeah, like this is, you know, dropping a boulder into a rushing torrent. Like what's, what's your sense of like the disruption on passenger flows? How, how is this being handled, not just obviously in the region, but how the other global carriers are adapting to it?

B (5:26)

Yeah, well, I think they've all had to start using different maps now. So instead of where we can't fly, the maps now show where they can fly. It's easier to do that now. But really, I mean, when you think about this. So we've already seen this where traffic flows to India have changed. This is largely between North America and India. That is a Middle east dominated route. Right. People go through the Middle east in droves to get there. And now we're seeing some shifting where I know last weekend Air Canada added some more flights to Delhi at the last minute to try and get people over there. I wouldn't be surprised to see if US Carriers do that as well. But even if they don't, you've got a surge of people going through Europe to get to India as well. And that's in a perverse way this, this is good news for the European carriers that people are starting to think that way. But will they continue to think that way and not want to risk some of the uncertainty of going through the Middle east even when that opens back up? And then you do see some of the old routes going again, where people are coming from Australia, New Zealand, they're going back through the US or Canada to get over to Europe. You know, the low cost, low fares of the Middle east carriers had really taken so much of that traffic over time to the point where like Air New Zealand stopped flying the London LA route, which went on to Auckland because there just wasn't enough traffic going that way anymore. So, you know, there are people doing that again because they're trying to avoid the Middle East. What I really want to know is what is the long term impact on this? And I don't really have a way of knowing that yet. You know, it's going to come down to people's level of comfort versus how much money they're willing to spend when, when airlines are, are up to full speed again and how regular it is. You know, I think one of the differences here, you think about Tel Aviv, Tel Aviv has shut down or had air service shut down a million Times over the last, well, pick any year. But even in the last couple of years with various attacks and wars and everything that's going on, we've seen airlines suspend service for long periods of time. But other than a small number on El Al, most people are not connecting over Tel Aviv. So this is a completely different situation when you have the big connecting hubs in Dubai and Doha that are impacted by this. And so that's where I'm particularly curious this to see how that shakes out. Now, John, we can talk about this region. It is not our primary focus. We tend to focus more on North America. But I do want to really just zoom out here for a minute and think about what the global impact is, not just the localized impact here, you know, not just on demand, but oil prices, things like that. Let's talk about that a little bit.

A (8:32)

Yeah, that's where the whiplash is. I think the prevailing feeling amongst the airline execs that I've spoken to in the last few days, particularly in North America, are like asked once, how's your whiplash with oil prices, you know, spiking and coming back down? And it's like, oh, my neck is sore. You know, it's like the insanity of this business where, you know, everyone wants a steady state business to be able to make investments and attract shareholders and, and long term capital flows. And it's like, oh no, no, we're gonna, we're gonna stick a grenade in the whole middle of your operation. And that's what oil is right now. This. There we are in the middle of an oil shock one way or another. Where the price will end up settling is anyone's guess. But look, as of March 9th, which was yesterday, as a point of recording here, oil briefly spiked to $116 a barrel. Crude oil, that's a 75% increase from a few weeks earlier. Things settled down a bit after strategic reserves were opened and there really was an indication from the White House that maybe things are winding down, maybe they weren't, but enough to allow the price to settle between 80 and $90 a barrel, actually. In fact, the US Energy Information Administration said that it's. Its overall expectation for the second quarter was that it's going to. Oil is going to hover around about $85 a barrel.

B (9:50)

Well, the good news for me is that I sold all of my barrels at $116 that I had sitting in my yard. So I really hit it at the top there.

A (9:58)

Brilliant man. You and Jed Clampett.

B (10:00)

That's right. But I think what you said is important here. First of all, anyone who came into this industry looking for a steady business is not smart.

A (10:11)

But go sell insurance or you know.

B (10:15)

Yeah, go, yeah, get into the paper business. No, even that.

A (10:18)

No, don't even know. No, no, no, no.

B (10:20)

Yeah, but, so that is obviously an issue. But airlines can manage the closer they are to some sort of steady state. Maybe that's $116 a barrel oil, maybe it's $30 a barrel oil. But wherever you are, if it stays in that range, you can create your company to work with what's there. It's these wild swings that make it impossible to plan. And that's what's unfortunate is that so much of this is, is, well, self inflicted by the US Government with the way that they talk about their initiatives, the way that they go into different places. And so you really can't sit here and think, okay, well we're just going to be beholden to what happens in the market. And all this because you don't know what words are going to come out of someone's mouth the next day. And so maybe we're at 85, maybe that's a good place for it to have hover for a while. But we also don't know what's going to be said tomorrow. And that's why this is so exhausting for a lot of people. And while most airlines can manage in a steady state, there are some airlines that can't manage in any state. So let's keep that in mind as well. They may be in more trouble here. But, but I digress.

A (11:30)

Indeed. So, you know, look, I think there's, there's twofold here. There's, how long is this going to last? What's, what is, how do political leaders around the world sort of respond to this. But I think one of the, the triggering event here obviously really centers on the Strait of Hormuz. So for those of you who are not Middle Eastern geography experts, this is an intensely strategic waterway off of Iran's southern coast that connects the Gulf, Persian or Arabian depending on your geopolitical persuasion, and all of its oil distribution terminals spread across the coastal cities there to the rest of the world. In terms of oil flows to Asia up to Europe. And this is not just oil coming from Iran. This is oil coming out of the entire region. Those tankers that flow through the strait, on a normal day, they're full of crude, liquefied natural gas, other refined products, and they head to markets all over the world, like 20 to 30% of the world's oil travels through the strait on any given day, and right now it's effectively closed as Iran has sent drones to attack multiple ships moving through the area. This means that insurance companies are like, nope, I'm not going to insure any ships. The US Government says maybe they'll insure ships so they, so they go through. But again, there might be US Navy involvement escorting ships to protect them. But again, this is what makes this so volatile that a huge amount of the flows of global energy are fundamentally disrupted from reaching market.

B (13:03)

Now, I wrote about some of this myself, actually, and if people do want the visual aid, I did have a little homemade map of the Strait of Hormuz. No actual jokes in this map. It's a real map. There's no Godzilla on this one. But this is a really fascinating point here because it's not technically closed, but Iran says if you're not their friend, you can't go through. And everything that's going on, this is a mess. But let's back out a little bit here because that's the whole point of us doing this podcast, is we can go deeper onto things that we may not necessarily do the same elsewhere. Let's do a little short lesson on crude oil and how that translates into jet fuel and what we're talking about here. John.

A (13:44)

Okay, let's do it. So a barrel of oil is 42 gallons, and 1 barrel of oil is refined into various outputs. Gasoline, diesel fuel, propane, butane, marine vessel oil, and yes, jet fuel. Interestingly enough, jet fuel only accounts for about 7 to 9% of that barrel as it's processed. So that means when a supply shock hits, jet fuel gets hammered disproportionately as refiners and oil traders fill gasoline and diesel demand first. So a barrel of crude oil may be 80 to $90, but the crack spread price for a barrel of jet fuel ends up significantly higher. On March 3rd, right after this began, European crack spreads were over $100 a barrel above crude, and US spreads were trading between 86 and $89 a barrel. I mean, that's a huge divergence here.

B (14:40)

And this is bad for everyone. But it's particularly bad for Europe, right?

A (14:44)

Oh, hugely, hugely. Look, the Middle east accounts for 50% of Europe's jet fuel imports. That is according to data that I found from Kepler and Vortexa that was actually reported by Argus Media. Give give credit there. When you begin to unpack how it got this bad, though, you begin to appreciate the kind of own goal that European energy strategy has been as they've sort of transitioned away from fossil fuels. This is a moment where the energy transition taking place there. Renewables, all essential, of course, given climate change has left the continent also really vulnerable. Look, in 2022, Russia was cut off from Europe after that country's full scale invasion of Ukraine. In response, Europe used economic sanctions as a way to sever oil flowing into Europe as a key funding source for Russia's war. Compound that with. According to an IATA report, four European refineries stopped processing crude last year alone. That took another 400,000 barrels of capacity from the market. IATA actually said this was due to, quote, declining demand for traditional fuels, competition from new and more efficient large scale refineries, and stringent environmental regulations that have rendered many older refineries unviable, end quote. But look, I had a kind of summed it up neatly in this report, which is actually fairly recent, published just last November, quote, this growing reliance on imports combined with uneven infrastructure development underscores the risk of localized shortages and price volatility, particularly if geopolitical shocks or sanctions constrain global jet fuel availability further. That looks really prescient. Okay, so let's, let's step back from the big oil picture and delve into what this means for US Airlines. Where are we in terms of the real impact here? Obviously, fares are going to get hit first. Capacity. What's, what's the deal?

B (16:39)

So we know exactly how much the US Airlines paid for fuel last year, right? So that's, that's a place to here. In 2025, United Airlines consumed 4.6 billion gallons of fuel, which was roughly 25% of the total U. S Airline usage last year. Remember, United does a lot of long haul flying. That was the least amount of money the company had spent in the past three years. Paying an average of $2.44 per gallon at the pump, making up 21% of its total operating expenses, spending $11.4 billion with a B. So that's about 11% more than it consumed in 2023. Though according to serum data, scheduled capacity last year was 13% higher. United posted full year pre tax earnings of $4.3 billion. And then even just using a basic calculation, that means that if we do go up to $4 a gallon just to give us a round number to look at, that means $7.2 billion higher fuel bill. That more than wipes out its profitability. The same goes for all these airlines, except for the ones who weren't profitable to start with. But Delta had an average price of 2 gallon in 2025, it was $9.8 billion, 17% of its total operating expense. So that that'd be an increase in his fuel bill of 7.15 billion in a year when it generated a $6.2 billion pre tax profit and a pre tax margin of 9.8%.

A (18:19)

Not great at all.

B (18:20)

Fairs need to rise, sir.

A (18:23)

Well, look, those are the big guys and, and Delta and United have obviously been represented nearly all of the profit that was made in the industry last year in the U.S. but look, turning matters back here at home, given everything that we know about Spirit's bankruptcy exit plan, and you guys did a great job of unpacking that last week, what do you make of their prospects for an environment, a fuel environment, that is radically different than just a few weeks ago? And obviously in the context of their plans to keep a mostly a320 CEO fleet. Oh God, that's a leading question.

B (19:00)

Did you want me to answer, sir? No. Look, if the creditors were skittish before, this ain't gonna help. That much is clear. But rising fuel costs, it just makes a tougher case for any ULCC because they rely on keeping fares as low as possible and they can't do that when their costs are gonna be higher. But specifically on the A320 CEO fleet, I don't think it changes anything about their strategy. It just means that, you know, with low ownership costs, they may have to sit those airplanes even more on off peak times where they, they can't cover their costs. So I do not have high hopes for Spirit in this world right now.

A (19:44)

Definitely does not help. By the way, whatever happened to fuel hedging for the US Carriers?

B (19:49)

Oh, yes, it's, it's much less of a thing these days than it used to be. Remember in 2008 when Southwest was hedged and used that to stay profitable, Unlike everyone else, they should have used it to fix their business, but that's a whole different issue. Anyway, Southwest recently decided it would hedge no longer. Hedging has gotten more expensive with volatility. So, you know, some airlines gave this up years ago. Southwest is just a recent one to do that. And that doesn't really bother me in most cases because of the expense, but it certainly makes for higher costs in the immediate term for airlines that used to have more buffer. In Europe, fuel hedging is still more prevalent than in the US so British Airways, for example, through IAG, their parent, said on March 10 that it is holding off on fare increases because of its hedges. That gives it a Little more room to wait it out and see if this is going to be long lasting. And Ryanair certainly looks like the smartest guy in the room, having locked in 80% of its fuel purchasing at $67 a barrel all the through April of next year. Then again, if oil crashes to $30 a barrel, Ryanair will look like the dumbest guy in the room. So that's always the risk you take?

A (21:10)

Well, yeah, it's a huge risk. That's why hedging is gambling. But that's how it works sometimes.

B (21:15)

So I know we, we can't get through a discussion with you, John, without talking about aircraft manufacturers. So what does this all mean from their perspective?

A (21:23)

Well, look, this still isn't as bad for Boeing and Airbus customers as 2008 when oil hit $148 per barrel. Look, if you go back in time to July of 08 when that peak hit on July 11 of that year, two days later, mostly by coincidence, but also very much timely, CFM, the joint venture between GE and Safran, launched the Leapx engine. We know that today is the Leap 1A and the Leap 1B and the Leap 1C on the A320 Neo 737 Max and Comax C919. Look, they were touting 16 better fuel efficiency at that point. And they even talked about, you know, paying $4 a gallon in jet fuel at the pump at that point. The Pratt geared turbofan was launched about six, seven months earlier at the end of 2007 with Mitsubishi and Bombardier on the MRJ, the Mitsubishi Regional jet and also the C series. But look, it would take another eight years before either of these engines entered service. This business moves at a glacial pace. Of course, back then, everything collapsed a few months later as the global financial crisis took hold. But Airbus launched the NEO coming out of the downturn in December 2010. Boeing followed suit with the Max in July 2011. The memories of that 2008 oil peak combined with very low interest rates meant that Boeing and Airbus got to accumulate record backlogs for both the 737 Max and a 321 Neo that have been only coming off of their production lines for less than a decade. Look, here we are more than a decade and a half since that crisis. And those programs now have found themselves not being able to get airplanes fast enough to the airlines who need them. That was before this crisis Covid hit supply chains meant to crimp an airline capacity as global GDP is now 25% larger than in 2019 so the need for capacity is greater than ever. It's not equal across the world, but there is a healthy demand for new airplanes and that looks unchanged at this point.

B (23:29)

All right, so everyone's, everyone's just doing their thing, working on these long timelines that it just doesn't have an impact yet, but I suppose could if this becomes more of a structural change for some reason. But for now, everyone's just kind of doing their thing.

A (23:45)

Yeah, no one's getting out of line, but I think that's the thesis for now. Look, capital expenditures look really tough when you're potentially hemorrhaging billions of dollars. Like Richard Abalafia, who heads up the aerodynamic advisory team, has an old adage that I think rings true here. He says when airlines make money, they order airplanes. If they continue to make money, they take delivery of those airplanes. This is a very cyclical business and these are long lead time items. Look, I think it's going to be really interesting to see what types of airplanes are going to be needed in the years ahead. I think generally wide body demand has been surging continuously as a replacement need for older airplanes. Look, Boeing and Airbus last year delivered something like just north of half the number of wide body airplanes that they did in 2018. Look, the pandemic recovery has not happened yet on the widebody front. I think there's an interesting element that kind of collides with this coming full circle on the conversation. All these airspace closures really do underscore the need for longer range. Look, not to connect more distant points, but to just get around closed airspace. And I think it's really interesting as we kind of watch this unfold with the tanker situation on the water and also cargo transport. The same goes for a coming generation of super freighters, like a 350 freighter, triple 7 dash 8F which are going to be here in the, in the coming years, which will effectively take delivery of some goods off of the water, which we've increasingly seen them being threatened as a result of this conflict and others. So I think it's going to be interesting to, to watch that play out, especially when a lower unit cost option is available, when there's a crap ton of performance in These, you know, 100 plus ton payload freighters that are coming to the market.

B (25:34)

All right, so that's just one piece of the pie here. Even as we talk about the importance of this. Oil is not the only cost issue right now that that's showing its head, right?

A (25:47)

Oh, no, completely. I mean, look, we've talked how many times about the role engines are playing on this entire business. The reality is that like a sustained major spike in oil and jet fuel price is colliding with aircraft and engine maintenance primarily engine that's driven up costs heavily. I think I heard recently that maintenance prices are up 35% over the last several years. This is driven by the new technology engines that were born during the 2008 oil peak. They're scarce and aircraft manufacturers are trying to keep up in the production coming out of out of ge. Safran and Pratt right now are also disproportionately based on history going to spares for the fleet to address groundings of aircraft durability issues. But also you know as the GTF deals with powder metal issues as those engines head to the shop for refurbishment, the fuel price over the last few years there was a consensus in the industry that that those costs were effectively completely eating the fuel burn benefit of those engines. I'll be extremely curious to see the math on that as we roll through this oil shock and whether or not those start penciling out in the positive again.

B (27:04)

You've been listening to the Air Show. If you have suggestions or questions for us, or if you're interested in sponsoring the podcast, go to our website theairshowpodcast.com to get in touch.

A (27:15)

Leo Duran produced and edited this episode. Our theme music is by Joshua Mosher. Thanks for listening and we'll be back soon. Sam.