{audio:0:00:00} Ben, it’s a pleasure to have you with us, today. Could you start by laying out how you are looking at the potential impact, on travel demand, for both the leisure and business traveler, post-Covid?

{audio:0:00:14} Obviously, for both leisure and business travelers, there is going to be a sense of confidence needed that it’s okay to get back on an airplane, without taking undue risk. We all knew that there was some risk, in any sort of gathering, before, but we dealt with that and we understood those. In a post-Covid world, reintroducing flying and more densely packed sessions, is going to be something that people are going to have to get used to again. I think there are a couple of things.

{audio:0:00:48} I think leisure demand will rebound quite strongly, largely as a reaction to being cloistered for so long. Many people have probably had cancelled vacations for this summer and by summer 2021, I expect that people will want to get out more almost, as I said, as a reaction to being stuck home with the kids. For others, it will just be, let’s get out more. I think leisure travel will rebound well. It may take a little while, but I think people will. Obviously, they need discretionary income to do that and when you take into account the fact that people, maybe, haven’t been working as much, that may delay some return to the leisure side also.

{audio:0:01:33} On the business side, I think there’s two things. I think there’s a certain kind of business travel that will rebound as soon as people are comfortable being on airplanes again. Sales work, for example, will be strong. I think the ability to inspect and audit facilities, plants, things like that, will be good. But I also think that there is a portion of business that will either never come back or take a long, long time to come back. That’s business that has become comfortable with this sort of format, with Zoom, Microsoft Teams, Skype, BlueJeans, name your favorite platform. The people who buy business, so the businesses who pay for their company’s travel, some of them will say, we understand why we need to pay for this trip over here. But why do we need to keep paying for travel, for business that has worked very well, for the last six, eight, 12 months in some cases.

{audio:0:02:35} Let me give you an example. I serve on a couple of corporate boards. I don’t know that every board meeting has to be held in person. It’s nice to have them in person and it’s nice to have a dinner and lunch with people. But the reality is, the business of what the board does – for normal companies, the board meets four or five times a year – maybe you could two of these meetings by video or maybe two, in person. But you could choose a mix. In that case, you could cut some expenses out of a company.

{audio:0:03:07} There are other things where the video chat is going to be just as effective and it will save a lot of money for a company. Business will say, I’m going to pay for this travel, but I’m not going to pay for that travel. I actually think that business travel, on the one hand, will come back sooner, because businesses will want their people to travel, for the needs they have to. On the other hand, it won’t come back as complete. Whereas, I think leisure travel will take a little longer to spool up, but once it comes back, will be quite strong. That’s my sense.

{audio:0:03:45} How would you compare the demand, potential bounce back, for Covid, versus 2008 and also 9/11, between that leisure and business traveler?

{audio:0:03:59} 9/11 affected everyone, obviously, because there was a sense that it was not safe to be on an airplane because of what might happen on an airplane. Changes in security, changes physically, on the airplane, making the cockpit harder to enter and the attendants putting the cart, when the captain has to use the restroom, all those things, we’ve just got used to them. The fear that something bad is going to happen to me, on board, in terms of somebody taking over the airplane has now gone, but it took years and years for the industry to recover from 9/11, in terms of the US industry, in terms of the amount of traffic coming back.

{audio:0:04:44} The 2008 financial crisis affected both business and leisure travel. Business, because obviously, banks travel a lot and a lot of the financial collapse hit a lot of businesses. But interestingly, what people didn’t necessarily realize before that is, a lot of the leisure travel, especially higher-end leisure travel or longer-term packages, like Beaches and Sandals Resorts and things like that, a lot of that travel, the industry realized was funded, based on home-equity loans and when the housing markets collapsed, those loans were no longer available. Some people think of the financial crisis as a business thing, but it really affected the leisure market, as well. People couldn’t finance their vacations anymore, so they took shorter vacations or stayed at home and didn’t fly as much.

{audio:0:05:43} That recovered more quickly and, again, leisure came back full and business came back full, eventually. 9/11 was probably four to five years, before demand was back. The financial crisis, maybe about two years, before demand was back. In this case, I really see, what I’m calling a U U shape recovery. I’ll tell you what I mean by U U. The first U is getting volume back. The volume is going to come back, I think the way I said. Strong in leisure and a little weaker in business, because of the amount that won’t come back. The industry will adapt its capacity, accordingly. But I think the volume is going to come back, probably, by maybe 2023. But on a day in the future, which I can’t predict exactly when that will be right now, or a month in the future, there will be a point when the industry carries as much global traffic as we used to carry, before Covid.

{audio:0:06:56} On that day, I don’t think the rate, meaning the average ticket price, is going to be the same. The industry is going to have to buy back a lot of that traffic, with a lot of incentive. They are clearly going to have to build confidence by workers and customers all wearing facial coverings, by making sure that they understand how clean the plane is, that people can be comfortable and can clean their own areas. Maybe more protections in the airports, like taking temperatures and other things. All of that is going to have to happen and people will get comfortable with that.

{audio:0:07:31} But at the same time, I think the industry is still going to have to use low prices to say, now here’s a great deal. When you say, okay, I think I can be safe on this plane, because of the protection and I’ve got this screaming deal to this bucket list location, I’m going to go. I think, for airlines and you might put a British Airways in this category, a Lufthansa, an American Airlines, a United, carriers that carry a lot of business traffic. By business traffic, I mean the business pays for the ticket, not the customer paying for the ticket. Not necessarily the intent of the travel, but the fact that somebody else is paying for it. It’s going to take those kind of carriers a second U, to recover the rate and to get the average rate back to be compensatory with the cost structure of the industry.

{audio:0:08:29} I think that carriers, like the Ryanair or like a JetBlue, in the US, will recover more quickly, even though it won’t be quick, than a carrier that carries a lot of business-intent travel. Once the volume is back, they’re almost fully back, because they live on lower average prices anyway. But carriers that need more of higher-price business carrier, like an Emirates or something like that, it’s just going to take longer and they’ll get the plane full, before they’re going to get their rate back. That’s why I say it’s going to be a U and a second U.

{audio:0:09:07} How did you change the average ticket price, post-2008 or post-9/11?

{audio:0:09:14} What happens is, the pricing is directly related to capacity, in the airline industry. One of the crazy economics about the airline industry is that they have very high average costs. Airplanes are expensive, people are expensive, fuel is expensive, even though it’s less expensive today, but it’s still expensive. Airports are expensive. But the marginal cost is very, very low. If a flight is leaving this afternoon and there’s empty seats, the cost to put you in that seat, versus have it empty, costs me almost nothing. Literally, pennies. If anyone is taking an Economics 101, microeconomics class, you know that in a competitive market, the price drives to marginal cost. Capacity tends to drive pricing in the industry, and so the industry prices to fill its airplanes.

{audio:0:10:11} After 2008 and after 9/11, what happened is, it was the rate of capacity coming back, that determined when the airlines could, effectively, charge the rate again. In 9/11, it was easier in a sense. What happened after 9/11 was that it was such a dramatic shock to the system, that the industry reset its capacity. They got rid of airplanes, they retired airplanes that were older. They changed future order books and the industry was physically smaller, for a while. That allowed them to price reasonably, as the volume came back, because they weren’t trying to fill up all these empty seats.

{audio:0:11:00} In 2008, it took longer, because not a lot of capacity came back. The volume came back quickly, but it took longer to get the rate back. The rate wasn’t really back till, probably, about 2011/2012. It was a good year or two after the volume was back.

{audio:0:11:16} In this case, I think the reason I’m thinking it’s a U U, is because, right now, as we’re recording this, the industry’s capacity is, effectively, like your car idling in the garage, waiting to go out. All the workers are there. All the planes are there. They’re ready to launch all these planes again. Airlines have talked about that, taking on new deliveries this year, and they deferred deliveries that are coming in 2020, because why would you want to take delivery of a new airplane, when most of your fleet is on the ground, anyway? But in terms of the planes that were flying before Covid, they’re all there. There haven’t been returned airlines, there haven’t been big retirements, yet. If demand starts to return, say, by the end of this year, the industry is likely to quickly put capacity back in place, to start getting use of those employees that they’re paying or, in the US, that the government is paying for, until September, at least.

{audio:0:12:21} I think what’s going to happen is, I think the industry is going to bring back too much capacity, too quickly and that’s why the prices are going to stay low for a while. That’s great for consumers. Not necessarily great for the margins of the business. So I think the industry is going to have to buy back the traffic first, to get the volume, then spend some time letting demand catch up to the capacity, or trimming the capacity as needed, to get the rate up.

{audio:0:12:51} How did you choose which routes or what capacity to bring back to market first?

{audio:0:12:57} That’s all about demand. It’s where demand will be realized and where people really want to go. That sounds so silly and so trivial, but that’s really the case. In some cases, the constraints, in places like London or New York, where there’s slot controls and limited frequency, that traffic tends to come back at full, mostly because people don’t want to lose their positioning there. To many other places, it’s a function of how that traffic builds. I don’t know how many people buy Coca-Cola or a product like that, in vending machines anymore. But in some places, you will see three vending machines, or four or two. I used to wonder, when I was younger, why do they put four here and only one there. I realized what they did was, they put one and when it was selling out, they put a second one. When that one started selling out quickly, they put a third one. It wasn’t really rocket science; they were just watching how quickly the stuff sold. That’s what airline capacity planners do.

{audio:0:14:06} If, pre-Covid, they had eight flights a day between two cities, and maybe they’ve had one flight a day now, with this huge demand drop. As they start to bring capacity, maybe they’ll come back with a nice morning, midday, evening pattern, of three flights a day. Once that fills, then they’ll fill in the 10AM and the 2PM slots. Then when that fills, they’ll fill in other times. That’s exactly the way they think of it. They’ll build it back and add capacity as the existing capacity fills, but they’re not going to put all of the capacity back in, overnight. They’re going to start building back up.

{audio:0:14:43} They cut it all overnight, basically, in terms of when the virus hit. A lot of traffic just fell off the map, so the airlines just cut lots of traffic right off. But I think it’s going to be a slow build up back. Again, once the airplanes start being full, add another airplane, until we’re out of airplanes. Then we can start pushing the rate.

{audio:0:15:06} I think the big question then is, how do you actually make a traveler feel safe to travel?

{audio:0:15:14} That’s a question that most of the industry should be thinking about and, I think, probably are thinking about. Just this week, in the United States, for example, JetBlue announced that all passengers would have to wear facial coverings, as of 4th May. The rest of the US industry has largely matched that. Pre-Covid, I was flying fairly regularly, with Emirates, because I do some work in India and I just got an email from Emirates about what their on-board was going to be like and how you’d have to wear facial covering for the entire flight. That’s a long time to wear facial covering, for some of their flights. They’re not going to allow carriers to carry big bags on, because they say that putting the bags up and then deplaning, that’s when most of the people are pushing up against each other. They say, if nobody has to get their bags, they can stay more distanced with boarding and getting off the airplane.

{audio:0:16:23} What’s happening is, every airline is thinking about what the new normal is going to be and what is going to make customers comfortable. Clearly, you can’t social distance on an airplane the way you can in some other environments. Some people have talked about not filling middle seats, but that’s just silly. You’re still far less than six feet or two meters away from the person across the aisle or in front or behind you. So the empty middle seat might make you more comfortable, but it doesn’t do anything to protect you in the way that distancing would protect you.

{audio:0:16:58} The airlines have to come up with a way to make you comfortable, without distancing. That’s going to be a combination of facial coverings, of cleaning, of, maybe, the ability to keep the space you are in as clean as possible, with wipes and things. Maybe the airports help by having testing stations or temperature-taking stations. It’s not as if any one of those things solves the problem. But collectively, if customers can feel as if they understand this risk and, compared to everything else they do, this risk is in balance, that’s when they’re going to be comfortable.

{audio:0:17:37} I’ll tell you something I’m using, which I think makes sense is, I’m going to be comfortable being on an airplane again, when I’m comfortable going to a restaurant. The reason I say it like that is, restaurants are crowded spaces and if you and I are at different tables in a restaurant and I cough, the restaurant’s air stream, brings my cough to you, essentially, because it’s horizontal. If we’re on an airplane together and you’re two rows in front or behind me and I cough, the air stream on the airplane is vertical, so it’s pointing the air downwards. It’s not as if you can’t be affected by my cough, on an airplane, but at least the air in the plane isn’t delivering my cough to you, as it is in the restaurant. There are also many, many more surfaces that could infect you, in a restaurant. You walk in the door, you touch the utensils, you touch the chair, you touch the knife, the plate, all these kind of things. On an airplane, you board and you don’t have to touch much. You can wipe down your tray table or your arm rest, the little knobs to open the air and you’ve pretty much covered what you’re going to touch, in an airplane.

{audio:0:18:53} Maybe you need to be more careful when you go to the restroom and maybe you wear gloves for that or maybe part of the airline’s solution will be, as you walk to the restroom, they hand you a disinfectant wipe and you wipe stuff down or when you leave, they wipe it down. I think it’s a combination of all those things and it’s the balancing of this. It’s not that you’re going to get to zero risk on an airplane, just like you’re not going to get to zero risk being in a restaurant or zero risk in anything you do. But do I feel as if it’s not an undue risk anymore? That’s the key for the industry. As I like to say, the airline’s business plan, right now, is re-instill confidence.

{audio:0:19:34} Do you think the post-covid operational changes are going to have a material impact on the unit economics?

{audio:0:19:42} I think what the industry will try to do is, relatively quickly, implement the ones that don’t. For example, asking customers to wear facial covering, doesn’t really change the boarding time or things. Even if the airline buys a bunch of masks, to give to people who need them, that’s still not big dollars, so I don’t think that’s a big thing. If the airline were forced to physically distance people on the plane, that would be incredibly penalizing to the economics and it would stall the recovery of the industry, certainly, because it would be hard to make money if you can only sit people six feet apart.

{audio:0:20:30} Other things that are about, maybe, testing. The question is whether or not customers would be willing, if necessary, to get to the airport an hour earlier than they used to, in order to have the tests taken or the temperature taken or something where they can present themselves as, I’m not presenting risk to my fellow passengers. I think the industry is going to bias their responses toward things that allow them to keep the planes moving, not really significantly hurt the boarding times or the deplaning. Not to keep the plane on the ground much longer, maybe another five minutes for more cleaning or a deeper cleaning, after each flight. But the industry can handle that sort of change, within its economics. If it was an hour longer after each flight, that would hurt the industry.

{audio:0:21:28} I really think they’re going to pick on those kind of things that won’t hurt the economics that much. Customers are going to have to decide, this is enough for me to be comfortable being on board.

{audio:0:21:39} It does seem like a really tough task. This is a health crisis now and you have to persuade the traveler. Plus, you have all the potential issues with the airports changing, requirements changing on and off the airplane. Also, you probably have to discount your price, to drive demand. It’s going to be a tough time for the airlines, for the next few years.

{audio:0:22:03} It absolutely is. There’s no question about that, at all. The question is, does it start to recover by late this year or does it take even longer? It’s hard to say that we’re not in the trough now. Bookings are, literally, 95% off the prior year. The question is, how long are we in the trough and when do we start to recover from the trough? Once that recovery starts, how long does it take to build back to some sense of what a new normal demand is?

{audio:0:22:36} It was interesting, just today, Warren Buffett announced that he had sold all his position, in all airlines. He said, I’m just uncertain as to how many people are going to want to fly again. Clearly, the industry is hoping that people will want to fly again, that businesses will need to fly again and people will still want to go Spain, if you live in the UK, for vacation and that, if you live in the US, you still want to go to the Caribbean or Hawaii. People want to travel across the oceans; they want to see the world. That’s an important human thing to do and movement is important for all of us, I think. I think there’s a sense that, over time, we will be a big travelling people again and we will be big travelling societies again. It may take years, however, to get back to that point where the risk is balanced.

{audio:0:23:32} I think that if a vaccine is developed – we don’t know if it will be developed; we don’t have a vaccine for the common cold – I think that will help because, again, people will think, I can get the vaccine for this. Or if I get this, maybe I will be uncomfortable for a week, but I’m not going to die. It’s the risk of this virus, right now, that we don’t know what it will do to us and what it will do if we get it and how to treat it. It’s all that uncertainty around this virus. We live with other viruses and other risks, all the time, but because we understand them, we understand the risk.

{audio:0:24:17} When I take a real long trip, it’s not uncommon that, every once in a while, I come back and I just feel under the weather a little bit and I say, I probably picked something up. But that doesn’t mean I’m not going to fly again. I take an Advil and I go to bed, and I’m okay. I’m not saying that that’s how the coronavirus can be treated, but until it gets to a point that we understand the risk, that’s what it’s going to take.

{audio:0:24:42} How do you see the industry structure evolving, post-Covid? Maybe you can share or elaborate on how you saw the competitive landscape change, post the 2008 crisis, between the low-cost carriers, versus the flagship or hub and spoke carriers and how that evolved?

{audio:0:25:02} Every crisis that the airline industry has faced, over the last 40 years, has resulted in changes in the competitive positioning and it’s also pushed some M&A, merger and acquisition activity, in the industry. I expect that that will be true with this crisis, as well. This crisis is hurting every airline, is pressuring every airline’s cash, it’s weakening their balance sheet. Some airlines are going to fail. We saw Virgin Australia do the equivalent of a bankruptcy filing there. We saw a small carrier, in Alaska, file for bankruptcy, a company called Ravn Air. There will be others, I think, that fail as a result of this.

{audio:0:25:53} But as airlines are managing through this, some are going to do a better job than others. They’re going to do a better job in managing their cash, managing their relationship with their customers, managing the relationship with their vendors, with their aircraft suppliers. As we emerge from this, the relative positioning of who is strong and who is weak will have changed somewhat. Some airlines that might have thought of themselves as a buyer, now has to think of themselves, maybe, as a seller. Others might be vice versa. I expect that, as we emerge from this, the airlines with the strongest relative balance sheets, are going to be the stronger players. I expect that to be more of the budget carriers, because they are not as dependent on the business travel that is likely to go away, as a result of this virus. Since they carry more of the leisure demand and that, I believe, is going to recover more strongly, I think they will recover sooner. They also don’t rely, as heavily, on a real high average ticket price. If it takes longer to bring the rate back, they don’t need to wait as long for that.

{audio:0:27:09} Today, in the US, for example, there are four huge airlines: American, United, Delta, Southwest. Collectively, those four airlines carry 80% of the traffic, inside of the US. But the 20% that aren’t those four airlines, I think are going to recover faster than those four. When we look at the world, maybe two years from now, that 20% pool of airlines, might be 25% of the market and the big four might be 75% of the market. The long-haul services are going to take longer to come back, under any scenario of demand return. I think most people are going to be comfortable taking a two or three hour flight, before they’ll take a 14-hour flight. The airlines that have a lot of long-haul demand, like a Delta, like a British Airways, like an Emirates, are going to take longer to come back than the others. I think that the share of those big airlines, the global network, long-haul kind of airlines, is going to shrink some and the budget airline’s share is going to grow. The whole pie may be a little smaller, but the share of that pie is going to change a little bit too.

{audio:0:28:20} I also think we’re going to see some M&A that’s going to happen, probably in the 2023 to 2026 timeframe, that is the result of someone feeling bullish that they are relatively stronger and can make a play on another carrier now. It’s happened in every other crisis and I think it’s going to happen this time, too.

{audio:0:28:42} The other thing I found interesting is about Southwest, for example. They seem to hedge far more fuel than Delta and American and the other airlines? Do you think Southwest could be better positioned, or those that hedge fuel at these levels, anyway, would be benefiting the larger airlines?

{audio:0:29:05} Southwest isn’t a real active hedger today. They have been, historically, certainly and they have benefited from that. I think hedging, today, is problematic for airlines. Let me tell you why. Certainly, they would love to lock in the prices of today. I think we even had one day where fuel was at a negative price. But here’s the challenge with a hedge – you need a counterparty for a hedge. For a hedge, you have to have someone who believes differently from you. When you believe the price is going to go up, so you want to pay to protect that, they believe the price is going to go down, so they’re not at risk of having to pay. There’s no place for fuel to go, right now, except up. What it would cost to hedge today, is probably prohibitive for most airlines. To get someone to take the other side of the hedge, meaning I will pay you, if the prices rise too much, you’d have to believe that someone believes that they’re not going to rise that much. But there’s no place for them to go, except up.

{audio:0:30:11} I think it’s going to be problematic in that, while there might be plenty of institutions that would be willing to be the counterparty for you, when oil is $80 a barrel or £60 a barrel, but when oil prices are at real lows and it can only go up, there’s probably very few people who would be willing to take the other side of that hedge and they would charge an enormous amount, right at a time when an airline wants to preserve its liquidity. An airline doesn’t want to be spending money on anything speculative. They’re paying people, to keep them around; they’re losing money on flights they’re flying. They’ve got planes on the ground. They’re losing millions of dollars a day, big airlines, and they don’t know how long this is going to last, so they’re managing liquidity.

{audio:0:31:06} The CFO of American Airlines said, our sole focus, right now, is on liquidity. I imagine the airlines are, actually, thinking of a few other things. But maybe him, as the CFO, that should be his sole focus. You have hedging at a time when it’s going to be more expensive than it’s ever been, at a time when airlines don’t want to spend discretionary cash. That’s why I don’t see the industry being able to think long range enough, now – even a Southwest – to be able to say, let me lock in these fuel prices.

{audio:0:31:40} I know it’s very hard to calculate and these are moving variables and targets but, at what price do you start thinking yourself, as a low-cost carrier airline CEO, right, I’m going to start hedging fuel here?

{audio:0:31:58} I think they don’t think they’re going to start hedging fuel until they have a sense of what the demand recovery looks like. They will say, until then, I can’t predict my revenues and until I can predict my revenues, I can’t do anything with my cash, but hoard it. Once I can start predicting revenues, then I can start thinking about, okay, how do I use my cash most efficiently and that’s when they’ll think about hedging. Every airline would love to lock in current rates, for the next five years; they just can’t afford to do that. The issue is, they will be comfortable looking at that again, once they get comfortable that they understand what that ramp to recovery looks like.

{audio:0:32:44} On the competitive landscape again, do you think these budget airlines or that 20% and the low-cost carriers, do you think they are going to win slots away from the flag carriers, that don’t bring back capacity as quickly?

{audio:0:33:00} That’s really a policy question. What does the Heathrow Airport Authority, the New York Port Authority, these agencies who limit those slots, what do they think about their slots? British Airways, I think, has just over 50% of all the slots at Heathrow. Do they want to take slots away from British Airways or do they want to say, we’ll protect those slots, so British Airways can return to what it was, at some point? Or do they want to use this as an opportunity to split up British Airways or to bring a lot more competition into Heathrow? I think it’s much more of a policy question, than it is a Covid question.

{audio:0:33:53} When people look at the state of airline competition today, and who controls what resource – whether that’s slots at airports or gates at airports – do people want to use today’s crisis to solve what they may think was a problem before this crisis and they can use this as a reason to help make those changes. I don’t think that there’s a Covid-19 reason that there should be a real big change in slot holdings, around the world. What I think is, governments may choose to say, I will use this to bring in more competition and make sure that when there is a future crisis, I’m more diversified, in terms of the number of carriers I have at every airport.

{audio:0:34:44} Do you think the crisis will impact the demand for airlines to join alliances or JVs?

{audio:0:34:53} It may. It may also be a way for airlines to offset some of their own capital, by relying on partners. It’s possible that an alliance may recover more quickly, because everybody is sharing in the flying somewhat. Maybe I don’t have to fly my airplanes as much, because my partner is doing some. Conversely, I can do some flying for them, so maybe in total, we don’t fly as much as if we were all competing. I think the right intellectual way to think about alliances is, is there a distribution strategy? I can sell through a call center; I can sell through online travel sites. Or I can count on my partner to sell tickets on my flight, by putting their code on their flight. Airlines who look at alliances economically, as smart, look at their alliance’s distribution costs. They say, how much does it cost me to win a passenger through the Star Alliance or through the Oneworld Alliance, compared to selling a ticket on Expedia or selling a ticket through KAYAK or something like that? I think smaller carriers may decide that the cost of being in the alliance is now too great, with lower demand, so they may exit. I think the anchor players, in the big alliances, will stay anchors in big alliances.

{audio:0:36:20} What’s your view, more broadly, on the evolution of the point to point, versus hub and spoke models?

{audio:0:36:28} Customers would, certainly, rather travel point to point. I don’t know that anyone really likes connecting. But for many, many O&Ds, as the industry calls them – origin and destination, from one city to another – there are so many combinations around the world, it’s not really practical to fly every possible combination non-stop. So the hub has been proven to be a very efficient way to move a lot of people, without as much capital. But it’s not cheap to run a hub. You have to have a lot of resources at the airport, you have to have a lot of gates, so all the planes can come in at the same time. You tend to have real big peaking with the employees, so when every plane is on the ground, everyone is working really hard, unloading bags, loading bags, cleaning, boarding people, taking people off. Then everything leaves and the airport is dead for the next two hours, until everybody is back again. So you have this big peaking effect. It’s like building a church for Easter Sunday. You don’t build it for Easter Sunday. You’re just crowded on Easter Sunday.

{audio:0:37:36} Hubs require lots of resource. So they’re inefficient from a cost standpoint. But they’re really efficient, in terms of a moving people standpoint. I think newer airplanes, lighter airplanes, more efficient engines, more fuel-efficient airplanes are going to drive more and more point to point service. The service that British Airways announced and I don’t know if they’re going keep now, called Level, where they’re going to fly, non-stop, from non-UK European points, into the US, as a way to win back some traffic they lost to carriers, like Norwegian and others, that no longer connects at Heathrow.

{audio:0:38:20} I think the industry would like to move more to point to point. Airplanes like the A321 XLR is an example of a plane that promises to offer lots of non-stop routes that, otherwise, would be hub-graded. That said, hubs just make sense for lots of traffic. If you think of the mid and smaller-sized cities, on one continent and all the mid and small-sized cities on another continent, there’s no way you’re going to fly non-stop routes, in an among every pairing you could come up with there. A hub is going to be the way to do most of that.

{audio:0:38:56} But if you live in a big city, such as Paris or Frankfurt or Munich or London, or even a Manchester, I think, over time, you will have more non-stop services than you may have had before Covid.

{audio:0:39:15} Do you think that the LCCs will be tempted to move into the hub and spoke model in some way, over the next years?

{audio:0:39:25} The undisciplined ones will. The LCCs who are profitable, because they can sell tickets at a lower average price and make money on that ticket, do so because they keep their costs low. Giving into a hub and spoke network is a great way to move passengers, but it’s not cheap. You become dependent on business-intent travel. You become dependent on higher average revenues, if you adopt a hub model. It’s also not as efficient on the equipment. You buy a really expensive airplane, you can fly it more hours a day, point to point. If you put it in a hub, it has to sit on the ground for an hour, waiting for all of its peer airplanes to land and people to move around, you just don’t get as many hours out of that plane. You spend the same money for the airplane, but you can’t utilize it as much as your low-cost competitor. That’s another advantage that the low-cost carriers have.

{audio:0:40:29} That’s why I said that the undisciplined ones will move to a hub and spoke model, because they’ll do it to win more volume of traffic but in so doing, they’ll give up the one huge advantage they have, which is the unit cost advantage.

{audio:0:40:43} Let’s talk about the fleet. How would you, as an airline CEO, be looking at changing your fleet today?

{audio:0:40:51} Every airline, right now, is re-evaluating its fleet plan. They’re looking at, what do we have? What have we already committed to buy? What do we own? What do we lease? They’re thinking, what is demand going to look like, in the future? I can see a couple of things. I can see some airlines deciding to prematurely retire older equipment. Older equipment might work fine, at a lower fuel price, but it still becomes more maintenance intensive than others. So they say, look, if I’m going to be a smaller airline, I’m going to be the most efficient I can be and that would be newer airplanes. I could also see some saying, I don’t want to take on the commitment of a lot of new capital, right away. Maybe I’m comfortable a few years from now, but not in the next years. Maybe I’m going to defer all my deliveries and, to do that, I’m going to keep some of my airplanes around longer, so I can keep my capacity up.

{audio:0:41:52} I think there are two big effects on fleet that we’re going to see. I think we’re going to see older equipment retiring faster than it otherwise may have. I think we’re going to see a reduction in the order book for long-range, widebody airplanes. Again, that travel base is going to be the toughest to bring back. Probably, going to be the most long-term impacted, is the real long-range travel that requires the widebody equipment. I think that the ratio between ordered single-aisle and duel-aisle airplanes is going to move even more in favor of the single-aisle. Airlines already buy more single-aisles than duel-aisles anyway, but as a percentage, they’re going to buy even more. Those will be the two effects that we’ll have in fleet. Fewer long-haul, widebodies and older airplanes retired sooner.

{audio:0:42:57} How do you look at the decision as to whether to keep your older aircraft, run it to the ground, wear the higher maintenance costs, but you obviously benefit from cheaper fuel today, versus taking these much more efficient, but also arguably expensive, newer aircraft? How do you weigh it up? I assume the lessors, today, and the OEMs, are going to reduce the prices or the lease rates, as well?

{audio:0:43:24} They almost have to. If they have the capacity, they’d rather lease it out at a lower rate than have it just sitting unused. It’s a tough call. Lower fuel prices make it a tougher call. At higher fuel prices, this is a relatively easy decision, because when my fuel and maintenance is going against me, I can relatively quickly justify the higher capital costs of the new airplane.

{audio:0:43:49} At what prices, roughly, do you think you really question as to whether, actually, I should be taking the new NEO, for example?

{audio:0:43:57} I think, in terms of price per barrel, under $40, $50 a barrel, the NEO is not as valuable. Compared the difference in capital costs, I can fly my A320 CEO another five years and can save that expense of the NEO. Yes, I’m burning a little more fuel, but when fuel is not that expensive, it’s not as big a deal. The real issue comes down to maintenance. Older airplanes become maintenance intensive. Their utilization also becomes more limited. You have to keep them on the ground longer and you can’t push them as hard. When you can’t utilize the plane as many hours per day or hours per month, as you were before, and the maintenance expenses you are paying are really high, that, in and of itself, at any fuel price, can start to justify the new airplane. But it’s going to take longer to justify that new airplane.

{audio:0:45:07} The other thing that’s going to take longer, to justify the new airplane is just, I don’t know how much capacity any airline is going to need. They may find that, for the next three to four years, the capacity that’s sitting on the ground right now, is plenty enough to carry anyone who’s going to travel. So why would they take the risk of that really expensive new airplane buy. You’re going to see lots of airplane deferrals.

{audio:0:45:34} This is the huge question, back to demand and consumer behavior. The lessors are in a very tricky position now too?

{audio:0:45:44} They absolutely are, as are the OEMs, the manufacturers. They are in a tricky position because, for the lessors, they probably have a number of airlines that aren’t paying them right now, yet they don’t want to bring all these airplanes back, either, because they’ve got no place to put them out. They’re having conversations with all their customers, but they’re seeing a big revenue drop, I’m sure. They are also committed to big order books and they’re doing the same thing, with their OEMs, trying to defer deliveries and say, let’s not make my problem worse, by bringing in more airplanes I can’t lease out. Yes, they are in trouble right now and that’s an industry in trouble.

{audio:0:46:28} For the manufacturers, I think that they’re going to end up seeing this as a two-year pause in production. Let’s say you’re Boeing and I have 100 airplanes on order from you and I’m supposed to take some this year, next year and all the way through 2025. I don’t want to take any airplanes this year, next year. I may make a deal with you, to still take 100 airplanes, but the ones that I was going to take this year and next year, I’m going to take in 2026 and 2027. That means that they don’t have to build airplanes for 2026 and 2027, for everybody who does that. I think it’s, effectively, like a two-year pause in production, for the OEMs and all the suppliers. It’s a huge, huge hit.

{audio:0:47:09} How do you think about the maintenance cost and how it changes with the life of the aircraft? You mentioned, obviously, as it gets older, it’s more expensive, it takes a lot more to maintain and it gets harder to utilize. Is that a step change at year 10, year 15? How do you look at that?

{audio:0:47:26} It’s different for different airplanes, but it tends to be a big step change after about 10 or 12 years. That’s when the heavier work has to be done, when lots of work on the airplanes have to be done. If you look at an airline like Ryanair, they are a very successful company, but they’re really two companies. They’re a company that flies people on airplanes but they’re also a company that buys and sells airplanes. They never hit that maintenance cycle, because they fly an airplane for six years and then they sell it. They buy whatever planes are cheap, when nobody is buying. I would expect, for example, a pretty big order from Ryanair, sometime in the next year, because nobody is buying airplanes and this is the time when they buy. Then they sell them and they never do that. That requires a big balance sheet to do that. Not a lot of airlines can do that. It’s really the second 10 years of life that become especially expensive for an airplane.

{audio:0:48:32} Would you even take delivery of a MAX, as an airline CEO, today?

{audio:0:48:39} If I were a CEO of an airline that flew the MAX, the good news is that I don’t even have to make that decision until the regulators have told me that they’re going to certify the plane to be safe to fly. Certainly, I’m not just going to accept that. I’m going to ask my flight operations team, my safety team, to evaluate whether they believe my airline can fly it safely. Once all that’s in place, then I would think about the MAX, just like I think about any other plane in my fleet. It’s cost us this much to bring in, it costs this much to operate. How do I want to compare that against the airplanes I have, what I believe demand is going to be and that’s it?

{audio:0:49:17} There will be airlines taking the MAX again, at some point. But I think, right now, the reduction in flying has probably slowed the return of that airplane, for sure.

{audio:0:49:31} Let’s say it gets certified and it’s ready to fly. They don’t change the hardware and this is another software update and it gets certified. Would you feel any pressure, psychologically, emotionally, or otherwise, around actually taking this plane, after everything that has happened? Or would you just take this as a clean slate, it’s ready and not take that kind of tail risk, in that sense?

{audio:0:49:59} That’s an interesting question. That airplane was a strong seller, before the two crashes and there’s a reason it was a strong seller. It was a good airplane, on paper, and it promised good economics and good range and such. Clearly, the crashes have changed what that means now. When the plane returns, what’s going to be the training protocol for pilots and so on? Again, there has to be a sense that, not only that the regulators have said it’s safe to fly, but that each airline can ensure, to themselves, that their pilots will be safe flying that airplane.

{audio:0:50:38} Once that’s the case, I don’t think there will be an additional burden or cloud over that airplane. The reality of things is that most people, when they fly, don’t even know whether they’re getting on an Airbus or a Boeing, let alone, it’s this particular model, of this airplane. If the plane is clean, if the seat is comfortable, if the flight is on time, a lot of people aren’t going to even realize they’re on a MAX, once the MAX is flying again. I think airlines will treat it like any other plane, once it’s proven that it’s welcome back into the club again. It’s been kicked off the island for now, but it’s going to come back.

{audio:0:51:22} You’d want a discount, though, on the A320?

{audio:0:51:32} Just a quick question around the lessors. What’s your view on their role, long-term, in the industry and how it’s evolved?

{audio:0:51:45} I think lessors play a really important role in the airline industry. It’s a role that people outside the industry don’t necessarily understand or don’t even think about. But lessors do a number of things. Because they’re willing to take risk on airplane models, in placing big orders, usually relatively early, it puts them in the position to do a couple of things. First of all, they might be able to create availability for your airline, earlier than you could on your own. Maybe you want the A320 NEO and Airbus can deliver you one in 2024; a lessor can get you one in 2022. They ordered earlier than you and they have them coming.

{audio:0:52:31} Because they buy in bulk, they may get a better price than you, and even after you pay them a margin, the rate you pay them for the plane may be less than the price you would pay for the plane and have to finance it. It may be financially efficient for many airlines to buy from a lessor, because they get a better overall cost than they would on their own, because they’re getting the benefit of the big-buy discount, without buying as many airplanes.

{audio:0:52:59} The third thing is, in most countries, there are tax benefits to buying equipment, in terms of the depreciation schedule. Lessors can take full advantage of that tax impact, because they tend to be profitable companies, pre-Covid. Not all airlines can get full benefit of that, if they’re breaking even or not making a lot of money. The lessors can translate that profitability, back into a better rate for the customer, as well. There are many airlines in the world that wouldn’t exist, but for lessors. It’s cheaper capital than, certainly, private equity is. It’s cheaper capital than many airlines have the ability to generate on their own, from the capital market. So lessors have played a very important role for the industry and they will continue to play an important role, going forward. In fact, I would argue they may play an even more important role, because airlines that used to say, I don’t necessarily need lessors, because I can get as good a price as they have. I get all the advantages of the tax benefits and I have good access to capital. They may say, my access to capital isn’t as great, right now. So maybe their price looks a little better than I could get on my own. I actually see their role becoming more and more important, over time. Even though, right now, they’re under tons of pressure.

Spirit Airlines: Airline Crisis Management

How airlines can make travelers feel safe traveling on planes

A travel demand comparison with both 9/11 and 2008 shocks

How airlines could approach managing the fleet and fuel costs

Potential changes in the airline industry structure between LCC and flag carriers

Spirit Airlines: Airline Crisis Management

Former CEO at Spirit Airlines

inpractise.com/articles/managing-an-airline-covid

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Executive Bio

Ben Baldanza

Former CEO at Spirit Airlines

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Spirit Airlines: Airline Crisis Management(May 4, 2020)

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