Odd Lots - This Is What's Next for the Future of Air Travel

Episode Date: May 5, 2022

The aviation industry has never seen a disruption like what it's experienced over the last two years with the pandemic. Air travel ground to a virtual halt initially, but has slowly been climbing out of a hole, with leisure travel in particular starting to boom. So what's next for travelers and carriers? On this episode, we speak with Scott Keyes of ScottsCheapFlights.com about the future of travel and the business model of flying. See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a big line. It's a lot. It's a firm. a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com

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Tracy, I flew recently on my first flight without a mask mandate. How was it? Was it a totally different experience? Actually, it was more different than I would have expected. Like, I got on the plane and I was like, oh, this is so like, something just felt like, it was like I knew the different thing, which is that no one was wearing masks. But also like it just like felt, everything just felt like a little bit freer and different. It was very like, it was, it was very noticeable in a way that's like really hard to get. Look, I grew up in Tokyo and wearing masks was not a massive issue.

It was just something that people did when they were sick on public transport or in an office or a place with lots of people. So I don't know. I have mixed feelings about it, but I'm glad you enjoyed the maskless feeling. It makes traveling with kids a lot easier to not have to like always be adjusting their ear strap on their mask or something. I can see that. And obviously you can drink and eat as much as you want. Exactly right. So lots going on, though, in air travel, because we know that it's booming. We know that things are picking up, although I don't know about business class, or sorry, business travel,

but we know travel is picking up. We know that the mask mandate is gone. We also know that oil prices, like jet fuel costs have gone up a lot. And actually, in some places there's even a shortage. There was a story recently that the airport in Austin actually had to cancel some flights because there literally wasn't jet fuel available. And it sort of speaks to one of our themes that we have about, you know, the revenge of the real. Like, it doesn't matter what the price of jet fuel is if there's simply not enough of it in a specific location. Yeah. It's also sort of like a best of times, worst of time scenario for the airline industry. So lockdowns are ending, at least in the West. The mask mandates are being lifted. People are getting out and traveling again. But at the same time,

you might have higher costs. Well, you do have higher costs, vis air fuel. Right. Air fuel is high and inflation is high and that, you know, obviously burdens people. But it feels like after two years, even with inflation, even with economic uncertainty of various sorts, like people really like want to travel, at least for leisure. I would like to travel. That is true. I recommend it. So today we're going to be speaking. So we actually had this guest on recently, I think in February. But we recorded the episode about a week before the war, before the invasion. We had to change up our schedule due to news. And then so much happened that we're like, you know what, rather than trying to find just like the right time to publish it, so much is going on.

All the things we talked about. Why don't we just have them back on for a fresh episode, a take two, the episode, the public episode of the conversation that never got out there. So this is either a signal of a return to normality or something major is going to happen in the next week again, and we're going to have to re-record. Well, hopefully this, hopefully the public hears this conversation. I'm very excited we're going to bring back to the show. Scott Kies, he is the founder of the website, Scott's Cheap Flights, and he knows everything about how the airline aviation industry works and what's going on. So Scott, thank you for coming back on Odd Lots. So great to be here.

Thank you both for having me. What happened with Austin? And there was, I don't know if it was just Austin, but there was something like there wasn't enough jet fuel there. Like, what happened there? Yeah, Austin is a little bit of a special case of the Austin Bergstrom Airport because for a couple reasons. One, it is one of the fastest expanding airports in the country, one of the fastest expanding

metro areas in the country. And so the airlines and the infrastructure in place at the airport is having trouble keeping up. And so where you see that come to a head recently is with jet fuel, where unlike most major airports, which are actually directly connected to fuel pipelines, the Austin airport is actually not connected to one. Fuel actually has to be trucked in from a pipeline, and I believe about 15 miles away or so. And so with the expansion, not only of the number of planes, but with larger and larger planes, more international flights, you know, flights to the Netherlands and elsewhere, what you're seeing is that the airport infrastructure just can't provide the fuel necessary.

And airlines having to take some pretty extraordinary steps as a result, including flying in airplanes with enough fuel to be able to fly out to their destination. They call that tankering or other sorts of mitigation tactics. Now, fortunately, this is something that is not especially widespread. Austin is a little bit of a special case. But, you know, look, there's some concern that between jet fuel prices and jet fuel availability, this has become a larger and larger problem in other areas as kind of we get back to a new normal after the past couple years. So I wanted to, like, stay on the topic, but I actually just flew out of Austin. And I mentioned in the intro, I took a flight recently.

But actually, like, one more question about this. And I know it's not that timely. But I'm curious, like, Austin has grown just an insane amount. in the last 20, particularly 10 years, just like unbelievable, the number of conferences and events and population growth. Like, what does that do to an airport? Because I can't imagine that, like, airports are easy to just, like, build more gates on. It is very difficult to, and a time-consuming process to expand an airport's capacity. Now, the Austin situation is especially different than in many cases, in part because they had an old terminal, the South terminal that is not exactly sufficient for

today's demand out of flights in there. And so there's been a lot of discussion with the local government of trying to expand it, but been a lot of kind of regulatory roadblocks in doing that. And even in the best of times, trying to expand airports and build new infrastructure is not a month's process. It's not a one or two year process. It tends to be a five to 10 year project. And so that's in part why it goes so slow. A funny thing, though, happened early in the pandemic where airports like Salt Lake City, again, another one that has expanded the metro population significantly over the past decade, they were already undergoing an airport expansion process that they're actually, you know, you never hear these words so much in infrastructure these days,

but they have completed it ahead of schedule. And the reason why was because the passenger volume, obviously early in the pandemic, dropped 80, 90 percent. And so what that meant was that they could shut down the airport. for significantly more greater swaths of time, significantly greater parts of the day in order to complete the construction and not disrupt air travel the way it would have in normal time. So there was a kind of a brief window there where you could actually complete some of this airport infrastructure projects ahead of schedule that that window is fortunately closed as air travel

is rebounding, but it's a difficult, timely thing. I'm getting flashbacks to covering Heathrow airport slots in the building of Terminal 5 as a baby transport reporter in London. But nevertheless, you mentioned mitigation of fuel costs there. And this is something airlines do, being large consumers of jet fuel, they buy their future needs and they hedge what they need to get. What does it look like right now in terms of hedging? So we have this big spike in the price of crude oil. oil, is all of that going to flow through into airlines' underlying costs, or is there some mitigation here?

There's going to be a significant amount that flows through to the airline's costs, and then obviously some of that will get passed on to consumers. I mean, just to take stock today, the spot price of a gallon of jet fuel is $3.61, which is almost at least in nominal terms where it was at that record high in 2008 when it reached $3.89. And so it is very, very high. And just to underscore how important this is for airlines, jet fuel is the number two expense at airlines. There are no airlines with significant, you know, there are no airlines with electric airplanes and commercial operation, no airlines with significant sustainable aviation fuel or other alternative fuels. They are all basically exposed to the price of

oil in a pretty major way. But I'm glad you brought up hedging because that's, historically one of the ways that airlines have tried to navigate this world where they are exposed to the price of oil. Where you saw this really come to a head was during the 0-7-08 oil crisis, where a lot of the airlines were seeing, even in the face of a recession, their prices going way, way up, again, because the price of a barrel of oil hit $147. So as a result, the airlines were actually kind of late to the game of oil hedging. They frankly had a pretty bad experience dipping their toes in it. They got into it too late. They ended up timing it just they basically started hedging right around the peak and ended up losing billions and billions and billions of dollars in the process. And so there were a few kind of legacy effects of that experience for the airline.

For most of the U.S. airlines, they just got out of hedging entirely after the experience. They said this is just, you know, a sort of scheme to enrich Wall Street bankers. we're not going to play it anymore. We'll mostly just rely on the spot price of jet fuel. Delta took a slightly different path in actually purchasing an oil refinery in Pennsylvania so they could have at least some control over the sort of production and refining process, and this still kind of helps supply some of their airplanes in the New York City metro area. But by and large, the airlines just decided we are getting out of it, with the major exception of Southwest, which still engages in hedging today. But where you see this kind of having an interesting ripple effect is that is not the

case with European airlines. European airlines, by and large, do still do a lot of fuel hedging. And so what that ends up meaning is that the European airlines are obviously seeing much lower fuel cost today compared to the U.S. airlines, which are having to pay the spot price. So if you think about a flight between the U.S. and Europe, most of the cheapest fares today on flight, unfortunately, flights to Europe are actually on European airlines. Like I was taking a look at a flight from New York to Switzerland. The cheapest airline to fly on it right now is SAS with a Scandinavian airline. And many of those European airlines are able to offer lower fares as a result because they're not paying the current inflated prices of jet fuel. And so that ends up having ripple effects for your deltas and your

Americans and your United's, which have to decide, do we charge a more expensive fare and risk, you know, being undercut on price and all our customers buying their flights on SAS or Lufthansa or British Airways, or do we lower our fares and compete on price but then end up having to eat the cost of higher fuel? And it's a, I don't envy the folks in revenue management who are having to make these decisions today. I'm kind of surprised. I would have, like my assumption would be that there's a market price of a ticket or, you know, roughly, and that the company and the airlines that are paying. that are hedged or making more money and the airlines that are spot are going to pay less,

I'm kind of surprised that there is a noticeable enough difference or that companies or that airlines can afford to charge significantly more for a given route than their competitors just because they happen to be paying more at a given moment for their fuel cost. Yeah, one of the most interesting things and I would say most unique things about the airline industry compared to other industries is just the volatility of air. airfare. It is unlike anything else we purchase, it is the most volatile purchase that consumers regularly make. And there are a few kind of unique challenges for the airlines and why that's the case. One is airplane seats are what are called rival goods. You know, if I buy a seat,

that same seat can't be sold to someone else. It's only can be sold to one person. Two, you have spoilage. You know, as soon as the airplane door closes, any seats that are unsold are are spoiled. You can't get any money for them. And so they have to try to sell them by that date. But then three, you have sort of unpredictability of demand. When, you know, you have to kind of project forward when you think travelers are going to purchase, when you think business travelers might purchase, what you think the world will look like three, six, nine months from now. It's almost akin to having to buying a futures contract where you have to guess today what the kind of outlook will look like nine months from now, and that's why it's such a difficult thing and why airfare tends to be so,

so volatile. Yeah, there was a consultant, I wish I could remember his name, but he used to describe airlines very similar to a grocery store in the sense that, you know, you have a thing that might not be worth it. Well, it's not going to be worth as much in a day or two. You know, the plane is leaving, whether it's full or not, sort of similar to the way fruit or vegetables would spoil. So you kind of need to sell. that produce or that product when you can. And on that note, one thing I was wondering is, okay, you have all this pent up, well, first of all, how much pent up demand do you see for air travel? And then secondly, are you expecting a big ramp up in capacity by airlines to respond to it?

Yeah. So I would say that there has been a significant amount of pent up demand until pretty recent. I think it's really kind of getting released this spring and into this summer. And I think by the fall, we're going to start to enter a sort of period of stability similar to like we saw pre-pandemic. You know, I think these next kind of four or five, six months are where we're seeing that pent-up demand getting released. But I'm glad that you called out capacity because while demand is close to recovered, especially domestic demand, and I would say leisure demand, vacationers, visiting families and relatives is actually higher to. than it was pre-pandemic. And obviously, it's just the dearth of business travel that's resulting in lower overall travel numbers. Capacity is actually still down quite a bit from where it was pre-pandemic. So about 15%, but some routes, you know, especially trans-Pacific ones, still down as much as 70%

from where it was. Think about flights to China. The actual volume of travel between U.S. and China right now is down 99% from where it was pre-pandemic. It is unbelievable, both how important it was in 2019 and just how absent it is today. But that kind of diminishment, well, you know, the main story that gets talked about is how travel demand is kind of rebounding very, very quickly, much quicker than most analysts expected. And that's causing probably the single greatest cause of why we're seeing such a bump in overall airfare prices. The capacity not rebounding quite as quickly over the past six, nine months, in large part due to this ongoing pilot shortage is a pretty significant factor that I think ought to deserve a lot of credit for the higher fares as well.

That the airlines aren't able to operate as many flights as they would like to because they just don't have the capacity, they don't have the crew, and in some case, they don't have the planes to be able to do so that they would like to. And that just gets into our favorite topic of supply chains, whether it's the labor supply chain of training and certified new pilots, or whether it's the aircraft supply chain of building and shipping out new planes. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. On markets are massive, murky, and let's be real.

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Yeah, so compared to 2019, domestic air travel is currently down about 5%. But again, I think that belies the sort of make-up difference today versus pre-pandemic, where it's much more weighted towards leisure travel. Leisure travel is higher today than it was pre-pandemic. One of the reasons actually why when you got down an airplane, I'm assuming, Tracy and Joe, when you're going to be flying soon or when you flow recently, that airplane, I can pretty safely guess, was completely full or almost completely full. And the reason why is that airlines are having to sell far more seats today than they used to to make up for that a lack of business travel. You know, historically, they would want to keep some number of seats unsold up until the last few weeks or last few days. before departure in order to take advantage of those late purchasing, but price insensitive business travelers. Today, they know that those business travelers aren't quite as prevalent as they used to be, and so they have to sell more seats to account for that. They know leisure travels the ballgame, and that's why airplanes on average today are more full than they were pre-pandemic.

You know, today a plane's 89% full on average versus the same week in 2019, it was 86% full. Not a whole lot of elbow room, but international too, you know, just to touch briefly on it, is still down quite a bit compared to pre-pandemic. It depends a little bit region to region. Mexico is actually up and been one of the sort of success stories and travel, if you will, over the past year is significantly higher today in terms of travel demand than it was pre-pandemic, actually 25% higher, more passenger volume between the U.S. and Mexico today. than the same month in 2019.

But international to, let's say, Europe, still down 20, 25%, you know, to Canada, down close to 50%, down across the Pacific down 80%. And so that's where you're really seeing kind of airlines hoping that we're going to see a rebound and especially hoping that we're going to see the end of the requirement that you show a recent negative test to get back into the U.S. even if you've been fully vaccinated. I want to ask you more about testing requirements and also labor shortages. But before we do, there was a moment post-2008 when a bunch of airlines started or new startups began experimenting with business class-only airlines. And part of that was in response to higher oil prices.

And the thinking was, well, most planes, most airlines make the majority of their money from business class passengers. The business class passengers are essentially subsidized. economy. So why not just cut out economy and have business class only carriers for popular routes like London to New York or London to Paris or wherever? And it didn't work out so well. But I'm wondering what happens in the current cycle. Because on the one hand, you have very high fuel prices. On the other hand, you have business class travel still missing and no one's quite sure whether or not it's coming back. So maybe airlines want to focus on leisure. But how did they do that. What sort of creative ways are you seeing of responding to the current environment?

Yeah, let me give you just a brief. Let me give you a couple data points here. When you look at Delta's financials in 2011 versus 2019, the number of seats that they had on a plane that were premium, you know, premium economy, business class, first class in 2011 was 9%. By 2019, that it almost tripled to 24%. And the percentage of the first class seats that they sold, that they didn't give away for free or, you know, give away to somebody who was well-dressed or something like that, that they actually sold and got money for. In 2011 was 13%, but in 2019 was 60%. And so what that is telling us is that the premium section of the airlines are where the airlines are seeing the significant growth in their revenue, that it is becoming increasingly important to airlines to be able to monetize

the front of the plane. And so that's why you see airlines not only building out larger business class cabins, but also building out, you know, premium economy, something that didn't really exist a decade ago. But now is a pretty, it's a big moneymaker for the airlines because it all the premium economy seats are only about 30 to 50% larger than a regular economy seat. But they generally charge double the price for it. So you can see how that works out pretty well in the airlines favor. Singapore Airlines just announced in the past week that their business class section of their airplanes was actually selling out now before economy was. And now it's a, you know, stark reversal of what was happening pre-pandemic. And so I think you're seeing a couple

factors. By and large, the airlines are marketing more towards affluent leisure travelers, rather than primarily business travelers in order to sell these premium seats. And secondarily, I think they're getting much better at sort of the pricing mechanisms to reach them, you know, not just having a sort of one-size-fits-all, very high inflated price, and then there are a lot of unsold seats, and maybe they give them away to elite members. And instead, being able to do much more sort of dynamic pricing, I don't know if you had this offer won your recent flights, but what they'll do many times if they have a number of unsold business or premium economy seats

when you go to check in or nearing the flight date is they'll actually hold something of an auction on it. Well, they'll ask, you know, hey, how much would you be willing to pay to upgrade to business class? You know, and you can put in your bid and if it gets accepted, they get it. And so the airlines have just gotten much better at monetizing that kind of scarce space on an airplane. And so when you, the last data point here is that when you look at Delta's revenue over the past decade, 2011 to 2018, their overall revenue grew by $9 billion. It was up 25%. But their economy ticket revenue actually fell by $1 billion. And that's because they're getting so much better at diversifying their business model away from the old model of just relying solely on economy ticket revenue.

Yeah, I was on a flight recently. some offer to bid on business. And I was like, this is too confusing. I don't want to, like, I don't want to engage in some, like, complicated financial derivative just to fly. You know, the other thing is also, it's like, if there's a power outlet and working Wi-Fi, like, I don't care if I'm in coach. I'm just happy surfing my phone for five or six hours.

So I really don't mind. Anyway, that's a divergent. So we've talked about what's going on with volumes and what's going on with leisure volumes and what's going on with biz travel. What's going on with price? how much is price, you know, in the coming months, predictable? Because we've seen a pretty big jump in airfares over the last several months. I think it was like a huge one month jump in the last CPI report. But how predictable, like is it, can you extrapolate and say, okay, as things normalized

further and as a bunch of people take trips this summer that we're going to see further upward price pressure? Or like, what can we say confidently about this sort of like aggregate, trajectory of airfares. Yeah, so you're absolutely right. In March of 2022, we saw the single highest one month jump in airfare on record. It was up 11%. And that goes in line with the one over the past 12 months. It's up 24%. But when you dig a little bit deeper and you just zoom out a little bit, you see that over the past two years compared to, you know, where we were in 2020, in March 2020, airfare is down 5% today compared to then compared to five years ago, down 25%. Compared to a decade ago, airfare is down 35%.

And those are in real numbers and inflation adjusted. And so I think, you know, look, a lot of folks are understandably confused, upset, not happy with seeing the price of flights going up in the near term. It is absolutely going way, way up. But I think if you take a bit of a longer term perspective, you see that we're actually still living in what I call the golden age of cheap flights. It's never been cheaper to fly as it has been since about mid-2015. While we're on this topic of kind of average airfare increasing prices of flights generally going up, I think the most important thing to recognize. is that two things can be true at the same time. First, average airfare can be increasing.

And second, cheap flights can still be plentiful. You know, in March, as the average fares went up that record spike of 11 percent, a few deals that, you know, we found in San Scotty Flight members were like $381 round trip to Paris, going to Costa Rica for $193 round trip, Hawaii for $197. round trip. These are all on full-service airlines. And so airfare is rather than it's being something with a sort of narrow curve and all kind of clustering around the average airfare, airfare is something instead that has a super, super wide distribution. You have expensive flights and you have cheap flights. You know, I recently took a flight to Boston. You know, I paid $200 round trip for my flight from Portland, Oregon to Boston. And I asked the person sitting next.

to me, what did they pay for this flight? And they paid $600 for it. So between the two of us, we paid $400, but neither of us actually paid that average fare of $400. We either paid $200 or $600. And so average airfares can absolutely be going up, but there can still be a plethora of cheap flights available. And that's, I think, kind of different than a lot of other goods or services that we tend to purchase. They say abs are made in the kitchen. Cool, but who has time for three hours of meal prep and a fridge full of Tupperware. That's why I started using Factor. Factor delivers fresh, never frozen, ready-to-eat-eat meals that are dietitian designed for balanced science-back nutrition. No prep, no cleanup, just heat, eat, and move on. I've got gym days, work days, super long

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A new era of 5 TV. It's streaming, but it's still TV. Well, glad that's settled. Bell, connection is everything. So I have a slightly existential question, but there used to be this great chart and probably one of my all-time favorite charts, although I haven't seen an updated version for a long time, but it basically showed airlines' average cost of capital versus airlines' average return on capital. And you could see throughout modern history, cost of capital was basically more than the return on capital. And historically, airlines have been extremely unprofitable. Maybe they have these boom-bust cycles. but I think over time they tend to lose money.

How long, you know, given the rising pressures, labor costs, fuel costs, none of that seems like it's going to go away anytime soon. But will we always have the option to travel at a reasonable amount to wherever we want to in the world, essentially? Yeah. So, I mean, this is somewhat of a recent phenomenon being able to travel, especially long-haul travel at much more affordable prices than we have historically. You know, to touch on your first point about airline financials,

look, we have all heard the Richard Branson joke about how the quickest way to become a millionaires to have a billion dollars and buy an airline. You know, I think that underscores a certain truth when even in pre-pandemic times, airlines tend to lose money on flights and actually make it up on other things. So in 2018, when you looked at American Airlines financials, the revenue. from every what are called available seat miles. They made about 14.4 cents off of, but the cost for a per available seat mile was 14.9 cents. So they were actually losing money on every plane that they flew and where they made it up and why they turned a profit in 2018 was from the billions of

dollars that they made selling miles, frequent flyer miles, to banks and credit cards. And so the airline business model is one that has significantly changed. over the past decade, really, over the past 30, 40 years, but especially over the past decade, where historically airlines relied almost entirely on economy airfare to fund their revenue and to fund their operations to one today where they make a majority of their revenue on things other than economy airfare. They make it, you know, we talked about the front of the plane, selling business and premium economy seats. They make it on selling frequent flyer miles and credit cards. They make it on corporate contracts. They make it.

selling cargo. They make it certainly on ancillary fees, bags and seat selection. They make it on commissions selling hotels and car rentals after you purchase your flight. And so what it means is that they have all these revenue streams today that they didn't use to that makes them frankly a little, certainly much more diversified, but also more resilient than they used to be. And this is why Tracy, to your point, economy airfare has fallen so much over the past decade why we're living in this golden age of cheap flights. You know, think of it like a restaurant where economy seats are the states, the main course that's essentially sold at cost. Maybe there's a very slight profit margin. The premium seats, frequent flyer miles commissions, those are, you know,

the sodas, the alcohol, the salads, the things that get marked up at a huge profit. And so if they, if the airline, you know, didn't have those sort of ancillors, those high profit or high margin products. They would be much more difficult for them. That's why historically it was, but they've been able to generate those while combining it with the sort of low margin parts of the travel experience like buying your economy ticket. So that's why I think because the business model has changed, why I'm pretty bullish on the outlook for cheap flights generally, that I think just the model has changed that it's going to continue to allow these cheap economy, airfares, whether you're flying domestic or, but especially if you're flying long haul to places

like Europe, places like South America or beyond. So I have a question and it's kind of big picture, but you know, all of these, when we talk about the state of the economy, we talk about normalization, there's always this question of like, well, how much of what we're experiencing now, whether it's inflation or other disruptions, is a function of the fact that things are still weird because of the pandemic versus some sort of new normal. And of course, that's a huge question for economists trying to evaluate the inflationary environment. But just from like an airline specific industry, are there things yet that you feel comfortable saying this is going, this about air travel is going to be fundamentally different than it was

in 2019? And this is a new shift. This is some new trend that's emerged that was not the case and is not likely to revert. Like, do you see like structural changes? having taken place as a result of what we've all experienced over the last two years. Sure, I'll give you one from a consumer perspective and one from an industry perspective. So from a consumer perspective, one of the things that has absolutely changed today from pre-pandemic is that you have a lot more flexibility to change your plans after you book your flights than you

used to. Historically, when you booked your flight, you were pretty well locked in. And if you wanted to even just change the dates that you were going to fly on, you have had to pay first a penalty of, you know, $200, $300, sometimes $400 or more in addition to any fair difference. But one of the things that airlines across the board did early in the pandemic was to get rid of those change fees because their assumption was that travelers needed to be able to feel confident that they could change their plans, that they could have flexibility later if they were going to have any hope of booking flights today. So,

across the board airlines kind of really trumpeted that they were permanently getting rid of change fees. And so now when you book your flight, you know, you can, you can, if you decide you don't want to take that Memorial Day trip like you'd originally booked, you can just push it back to later in the summer. You can push back to the fall, to the winter, whenever. It not only, I think, is a real benefit for consumers to be able to have that flexibility automatically. But the airlines like it, too, because it's one of the areas of differentiation and upsell that they tend to not make this available if you book a basic economy ticket. And so that encourages folks then to pay slightly more to purchase a main economy ticket

and be able to have that flexibility. One of the major changes from an industry perspective is this ongoing pilot shortage, where the airlines are still kind of paying for some of the decisions that they made early in the pandemic. You know, rewind to March, April, 2020. Airlines, this was an existential question for them. Are we going to survive this as an airline? Not just are we going to be a smaller coming out of this, but will we exist at all?

And so airlines virtually overnight stopped hiring new pilots and other personnel, and they stopped doing a lot of the training, and they started offering a lot of buyouts, early retirements and whatnot across the board, and especially for pilots. And so by the time travel started rebound, travel demand started rebounding, that happened much quicker than the analysts or any of the airlines expected. The airlines were caught pretty flat-footed, that they didn't have as many pilots, not to mention all the airplane supply chain issues, but they just didn't have enough pilots to be able to fly the number of planes they wanted. And so they've been quickly trying to ramp up in order to deal with that by, you know, doing everything from starting their own flight schools to, increasing pay. In many cases, they're actually poaching the large kind of mainline airlines, like Delta and American, are actually poaching airlines, either from the smaller budget airlines who have lower pay, or maybe they're poaching them from what are called regional airlines

that fly smaller planes to smaller airports. And so the large airlines have been able to navigate this pretty well. They're close to where they want to be from a pilot perspective, or at least there's a light at the end of the tunnel by the end of this year that they'll have the number of sort of pilots and overall personnel that they'd like, but who's really struggling with this are the regional airline. So I think, you know, your small flights to places in Montana, to Reno, to, you know, Colorado Springs, places like that that rely on regional airline service where that's where you're seeing a ton of the cancellations, a ton of the schedule cuts and a lot less capacity today than you had in 2019. It's just much more difficult to

fly to some of the smaller cities and destinations than it used to be because of this pilot shortage that I think is going to be, we're still going to be dealing with for the next year or two at least. So two questions here. But one, where do new pilots come from? And I realize that might sound like a weird question. But it used to be that you would get a lot of X Air Force pilots, at least in the U.S., who would migrate into commercial, and that's certainly what my dad did. And what's the value proposition for being a pilot now, especially if you're someone who has to start out on a regional carrier where the schedules suck and there's a lot of stress, and

maybe you're not making enough money initially? And then speaking of a lot of stress and the schedule's sucking, what's going on with flight attendants at the moment? Because it seems like there's some pressures on that supply of. labor as well. Yeah, absolutely. So, I mean, in terms of sourcing of new pilots, yes, absolutely, you know, ex-military, ex-air force is, it has historically been a pretty big, abundant supply of commercial pilots. And then, you know, just there are also folks who go to school, come out of, college with the intention of getting into the airline industry. And there are a lot of flight

training schools where folks go into, in many cases, pretty significant debt in order to get certified as a commercial pilot. And in some ways there's a similarity with the medical profession where we think of, you know, doctors is relatively well compensated, but there is a big ramp up time. There's a lot of training, a lot of schooling that's required and a lot of regulatory requirements in terms of the amount of training you need in the U.S. to be a commercial pilot. You have to have had 1,500 hours in the cockpit or other training. And so that ends up kind of limiting the amount of supply and making it difficult for airlines to be able to quickly higher up. I mean, I don't, you know, it's not an entry-level job where they can just quickly meet demand. It takes, you know, it's a

matter of months and years to be able to train and hire up new pilots. And that's why so many the airlines are getting into actually owning and operating many of the new flight schools themselves because they want to they can't they don't feel like they can rely on the supply of new pilots in the way that they that they used to and you know the the other area where it's kind of similar to the medical profession in some ways is that the entry level pay the initial pay is actually much lower than many folks realize you know it tends to be 40k 50k many times starting out if you're flying for one of the regional airlines or really kind of small you know nine seat type of aircraft and it can take a while to get to, you know, quote unquote, the big leagues where not only do you

have a lot more prestige, a lot more pay, a lot more kind of desirable flight schedules in general. In terms of else, you know, we talk about the pilot shortage and that feels like in many ways where the most pressing part of the labor shortage of the airline industry is, but I think you really kind of raise a good point that it's not the only aspect of airline. that are struggling with labor. You know, you see, you see it in phone agents. You know, I don't know if you've ever had to call an airline in the past two years, but the weights tend to be, you know, measured in hours, if not days sometimes, to be able to get through to a phone agent. And it's measured oftentimes in other sort of ancillary services, not just flight attendants, not just

gate agents, but think about the baggage handlers or folks who are refueling the plane, the ground support at an airline. Those tend to be more. entry-level jobs, but they tend to pay, they're competing in many ways with the sort of similarly, if not better-paying warehouse jobs that folks might be able to get. And so if you are looking for one of these types of jobs, do you take the $18 an hour job kind of taking and loading bags off a plane in January in Chicago? Or do you take the similarly paid job working on an Amazon warehouse, where at least it's temperature controlled and other sorts of, you know, not having to deal with the kind of Chicago winters in the same type of way. And so I think that competition is becoming

more difficult for airlines today than it used to and why they're seeing labor shortages across the board, not just with pilots. You know, Tracy mentioned flight attendants and, of course, the mask mandate just in the last week when we're recording this, went away. And, And I'm sort of curious about perception. So here's my guess as to, and I don't know because I haven't seen any like official surveys, but my guess as to the perception of among flight attendants is probably there's some mix. I'm guessing most people don't like having to wear a mask all day while they work. I think they don't like to enforce it.

But that's what I was just going to say. I'm guessing there's sort of universal sort of displeasure at having been essentially deputized to enforce one of the most sort of divisive things over the last two years, their job, which they never, you know, up to get in the middle of this sort of culture war or whatever you want to call it of enforcing mask mandates. How much talk to us a little bit about that? How much of a burden was that? How much did that contribute to when I believe there's been an uptick and sort of air rage incident? And what sort of the aftermath in terms of inclination to fly and other things now that the mask mandate is gone? Yeah, I think that's exactly right. You know, being a flight attendant

and it is not an easy job, but none of them signed up to have to also be a bouncer at 30,000 feet. Like it's just try to make those decisions. And in many cases, having physical harm inflicted on them from these incidents was really pretty awful to see. And so I think whether the root cause of that is because of the mask mandate or whether the root cause is more sort of systemic because you see, you know, across the board in society, a lot of types of incidents are on the wrong. rise. It's a little bit hard to say. But I think the general trend, at least over the past few months and sentiment among flight agencies, has been trending towards wanting the mandate to be lifted. It's obviously a contrast between the folks who are the most exposed to everybody who's

coming on to a plane and any germs they might be bringing. But also, they're the folks who are having to wear masks all day, every day at their job. And so as in much of society, there's a real kind of diversity of opinion there. Fortunately, a lot of the sort of safety mechanisms that exist on airplanes between the hepa filters that constantly change the air, the onboard oxygen is constantly coming into the plane from the outside during a flight, the downward airflow, the fact that people are quiet tends to fortunately mean that there's not nearly the amount of in-plane transmission that a lot of folks might have assumed early in the pandemic. But that doesn't mean that it never happens. And so the last thing I'll say on this is that in 2020, there was no federal mandate

that airlines had to, or transportation had to have require masks. But you saw across the board all the U.S. airlines require it voluntarily because that's where they felt like the sentiment was where the demand was. Today, now that with the mask mandate gone, zero airlines voluntarily require. And I think that kind of reflects where they see, you know, the folks with money on the line here see that they're going to take advantage of demand in a greater way without having, without imposing a mandate than with one. So you touched on this earlier, but just on the topic of the mask mandate rolling off, we still have vaccination and testing requirements for a lot of international travel. How much of a drag is that still on air travel? And how much would you accept? demand to pick up once those are removed? It's significant. You know, international travel still down anywhere from 15 to 30 percent today, whereas domestic travel has largely

rebounded essentially on parity with where it was in 2019. And I think the single largest reason why you see that disparity is because of the requirement that all travelers flying on an airplane to the U.S., even Americans who have been fully vaccinated have to show a negative test that they took one day before their flight. And what that means is that, you know, especially in a world now where there are many breakthrough infections, folks who have been fully vaccinated and boosting still able to contract the virus, a lot of folks have, I think, pretty reasonable worry that if they take that trip to Barcelona or they take that trip to Cancun and they catch a breakthrough infection, they're going to be stranded in a foreign country

for seven, ten, fourteen days, not only the expense and hassle of that, but also the, you know, any pet care, any work obligations. It's just the downside risk is a lot higher today than it used to be in 2019. And so I think you see a lot of those folks who might have otherwise been interested in taking that trip to Europe, that trip to Latin America, instead traveling domestically. and why you see the kind of balance of international versus domestic trips weighted today towards domestic. There's rumors, there's, you know, tongues are wagging right now that the test requirement could end sometime in the next month or two. If that comes to past, I would anticipate we're going to see a pretty big jump in international travel moving forward. I think that this is probably the single largest roadblock.

I think it'll still be some time until it gets back to parity. But I think you'll see a pretty large jump because you won't have that same concern about breakthrough infections impacting your ability to get home that you would today. Speaking of international travel, and you mentioned that U.S.-China travel is down 99%. And in a way, I'm surprised it's not 99.9%. or maybe it is. But, you know, one of the stories of the last decade, I think in international tourism, was this rise of the Chinese middle class, tourism class going all over the world. I assume for some carriers in some countries a huge source of tourism, demand, and travel. And I don't think it's

obvious that it's going to come back anytime soon. I mean, obviously, like China is as lockdown or more lockdown than it ever has been. And I, you know, who knows how long that lasts. That must like really blow a hole for a lot of like airlines budgets. And I assume some countries even for whom that was a major source of tourism dollars. Yeah. And it's both tourism dollars and certain, you know, countries and economies have more exposure to that than others. But it's also airfare, especially to elsewhere in Asia, one of the main reasons why we saw so many cheap flights across the Pacific, you know, to places like Vietnam, Thailand, Singapore, Bali, et cetera, was because of the rise of Chinese airlines, that they were really kind of flooding the market with

significantly more capacity that had a downward pressure on overall prices. You know, you see the same story play out, not just domestically, but increasingly internationally, where budget airlines are just more airline capacity writ large having a really kind of downward impact on prices, because the single largest determinant of how many cheap flights you see on a route is just how much competition there is between airlines. And so the removal of many, you know, the vast, vast majority of Chinese airlines on these long-haul international flights is one of the reasons why we see so few cheap flights right now across the Pacific, even as a lot of countries really kind of open up their tourism doors in mass over the past couple months, you know, Thailand, Singapore,

Vietnam, elsewhere. Most of Southeast Asia is now open for tourism, but you haven't seen the same rebound in capacity or the same cheap fares that we saw in 2019. And I think the single biggest reason why is you don't have the Chinese carriers kind of adding to that capacity and depressing airfare prices. I have one other sort of like actually international question. And this is definitely something that we couldn't have talked about when we talked in February. But what is your understanding of the situation with the Russian airline industry? Because in addition, obviously, to being cut off from much of the world, you know, there are import or there are export restrictions,

and I have to assume that makes it difficult to service or get parts for key airlines, although I guess, or key airplanes, although I'm not sure. And then I seem to recall that Sabre, one of the key, some of the key software that they use, cut them off. Like, what has happened or what's going on or what's your read, if you can say anything, on what's happened to plane travel on Russia? Yeah, the domestic Russian travel market has been one of the largest growing over the past decade. It is a major, major purchaser of Boeing planes and others.

And so, you know, and by and large, leasing their aircraft in most cases from Western aircraft lessers. And so when they made the decision to effectively nationalize the airlines, the airplanes that they had, even if you took a very best case scenario look at, you know, that somehow things are significantly improved over the next year or two, the aircraft that exist in Russia today are essentially a total loss for those lessors. And the reason why is that in order for aircraft to continue to be serviceable, in order for them to continue to be underwritten by insurance companies, in order for them to be sold to other airlines down the down the line, they need to have impeccable maintenance records. And without the sort of Western support, without the parts, and without the

access to these sort of manuals and expertise that exist at Boeing and at some of the other aircraft parts suppliers, they just can't do that. One of the things that's different about the aircraft industry than many other industries is that when you, you buy a Boeing plane, when you buy a certain, you know, Pratt and Whitney engine or Rolls-Roy's engine, you don't get the full sort of manual to how that thing operates. And in most cases, you actually have to still be in touch with the aircraft manufacturer, with the engine manufacturer for maintenance, for repairs, things like that, where they actually have dedicated teams working with you. And because it's a, you know, an intellectual property issue, a proprietary

issue that now all of that is effectively cut off. And so that's why it's such a big deal of the Russian aircraft industry being cut off from the kind of Western world now. What do they end up doing? Like, does Airflot just start using Tuoluffs or something like that? Like, there are Russian-made aircraft, although I'm not sure how many people would want to be flying on them. Yeah, they're Russian-made planes. There are Chinese, Chinese domestic industry is starting to grow, they just kind of are rolling out their first domestically manufactured one, but those still include a lot of Western technologies, especially from airlines like Lufthansa.

And so it's not a wholly independent thing and probably can't operate with a certain amount of Western support. What they're likely doing, I have no idea what Russia's long-term plan or even medium-term plan is for their aircraft, but the short-term plan, at least, is to be able to take. a lot of the planes that they have and designate some of them to essentially just be for parts, for scrap, you know, where if some part starts to needs maintenance, needs replacement, needs repair, they take it from one of these other aircraft. It's a model that has been used in the past in other kind of severely sanctioned economies, but it is absolutely more of a Band-Aid,

more of a short-term fix than something that's sustainable over the long run. So before we go, Scott, I mean, I think this summer is probably going to be pretty wild for travel, probably fairly expensive. Everyone getting, you know, after two years, many people are going to be traveling or doing vacations in a real way for the first time. Jet fuel costs are up. What do you know, Scott's cheap flight? So what's your tip for anyone, I'd say, who wants to take a, take a vacation this summer? What's your, what's your big tip for that? Two very quick tips.

One, if you are just hoping to take a vacation, you really want to go somewhere cheap, but you don't much care where or when. Instead of deciding where you want to go and when you want to go and then look at airfare, take that same three-step process and flip it on its head. Step one, where are there cheap flights out of my home airport? If you live in New York, oh, there was, you know, just in the past week, there were flights to Barcelona for 286 round trip, Santorini for 566 or Hawaii for, 450. Oh, I'd love to go to Barcelona at 286. Choose your destination and then choose the dates that work for you. By setting price is the top priority rather than the last priority, that's how you get cheap flights, and that's how you end up with three vacations for the price used to pay for one. Last thing I'll say is that if you have a specific trip, you need to be at X destination on Y dates.

It's really, really critical to get your timing of when you book your flights right. I use the model of the Goldilocks windows. So the best time for when cheap flights are most likely to pop up is not too early, not too late, just right in the middle. If you're traveling domestically, one to three months ahead of time is typically when you see those cheap flights most likely to pop up. For international flights, two to eight months is typically when you see those. But if you're traveling during a peak travel period, middle of summer, Christmas, New Year's, Dublin for St. Patrick's Day, add a couple months to those. recommendations. All right, Scott, great to have you back, back for your first episode. I don't know how to describe it, but great to have you back. We'll definitely have you on again and I appreciate

all your insights. That was great. This was so much fun. Thank you both for having me. Absolutely. That was really fun. Tracy, I'm really glad we had Scott back on. It really does feel like, at least in domestically, and maybe U.S. Europe and U.S. Mexico and some other routes, travel is just going to get even more crazy for a while. Well, barring some sort of event that makes us have to mothball this episode, like, I don't know, solar spots flare up or something like that. So pessimistic. Yeah, I don't know.

It just feels like it's been nonstop over the past month or so. But anyway, yes, that was a really interesting conversation. One thing that struck me, and again, my expertise in airlines sort of ended, I guess it would have been right around 2008. Yeah, right around the financial crisis. But it is interesting to see how this historically loss-making industry continues to adapt and survive in really the worst of work circumstances. So actually, I thought that was really interesting.

And I didn't appreciate the degree to which these airlines have really diversified their revenue stream. And so, you know, he mentioned, you know, there's the old cliche, like how to become a millionaire, like be a billionaire than buy an airline or whatever it is. But my impression is that it's just a much, the core business has become less volatile. If you have all these ancillary revenues, if you have ways of selling business class tickets to leisure travelers, it seems like you can really sort of smooth things out a little bit and not quite, not be quite so boom and bust. And it's interesting. Like I feel like when we were kids like airlines were going bankrupt,

all the time, like big ones. And, you know, what happened to pan-in? My dad worked for Braniff. I remember they went bankrupt and he was out of a job. It was definitely boom-bust cycle, for sure. And it feels like, I don't know if like an airline is like a good business, but it doesn't feel like a terrible business these days. Maybe.

Maybe. I want to say I hope so. So historically, I feel like what tends to get the airline. So, yes, there are unforeseen circumstances like the 9-11. 11 terrorism attacks or something like a global pandemic, things like that. But historically, what tends to get the airlines is their own behavior, where, for instance, they end up annoying all their consumers by charging ancillary fees and revenue and pushing all of that onto them.

Or they over-expand and start price wars that then hurt everyone. It's kind of crazy. Like I'm looking at a chart right now at the terminal like Delta Airlines DAL. Like the stock just goes sideways. is. It's basically exactly where it was in the middle, like, late 2014 right now. And so it's doing pretty well in 2018, 2019. And then, of course, the stock plunged in spring 2020. But, like, they're not, like, it's sort of, yeah, they're not likely to go bankrupt, but they're not exactly, like, huge. They're not, the right tail is not there. They're not huge money makers.

This is very true. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloy. You can find on Twitter at Tracy Allaway. And I'm Jill Wisenthall. You can follow me on Twitter at the stalwart. Check out Scott Kies of Scott's Cheap Flight. He's at SM Kyes. Follow our producer, Carmen Rodriguez, at Carmen Armin. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.