359 - Scott McCartney with Guest Co-Host Christina Cassotis

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1:00Welcome to Airlines Confidential. I'm Scott McCartney, and as many nerds know, today is Back to the Future Day, celebrated because October 21, 2015 was the future date that Marty McFly, well-named, I'd say, for an airline podcast, Marty McFly and Doc Brown traveled to in the movie Back to the Future Part 2. And today truly seems like we are back to the future, because airline stocks last week were telling us clearly that the future is back to the past, the past of high cost, savaging earnings and weak companies struggling to survive. I've seen this train wreck before, as many of you have. And Christina Kasotis, I know you've seen it too.

1:48Welcome back, Christina. I bet there are plenty of times when you are glad to run an airport rather than an airline and the turbulence we're seeing for airlines right now is probably another reminder. Well, thank you, Scott. It's always good to be here. I can tell you that when airlines get a cough, airports get the flu. So I'm not sure that I'm not sure that I'm happier. I mean, listen, it's a tough industry wherever you are in it. And it has been a rough week for airline stocks, no question. And it shows, I think, mostly that the fear that investors have for airline earnings because oil prices are so high and because they There are growing concerns that consumers are getting tapped out and may start pulling back on discretionary things like travel.

2:36So that's going to be the real test. That said, parts of the market are strong. I mean, we know that, right? The premiumization is still strong. But we've got plenty to talk about. You were, I heard, at Southwest's Media Day, and I even heard you caused a bit of a ruckus when you accused the good leaders of Southwest of being, well, boring, which used to be a capital offense at Southwest, but I guess not any longer. So that's going to be an interesting story I look forward to. And we have news from TSA, America, and the FAA, Lufthansa, and a lot more to talk about. Yeah, yeah. Well, let's start with the airline stock retreat of last week, because this is really significant and I think overlooked in airline media coverage so far.

3:24It's starting to look more like a typical airline downturn caused by an oil price shock, at least in terms of stock prices. Back to the future we are. To be sure, this may have already reversed by the time you hear this, if there's good news on the oil front or good news on the earnings front. On the earnings front, United and Alaska were scheduled to report Tuesday, which is after you and I are recording this. Southwest reports the day we air, October 21, and American the following day. So lots of news is coming. JetBlue, which will be particularly important, will report next week and Frontier and Allegiant the following week.

4:05OK, what happened before all that? Well, as listeners know, Delta reported on October 9, but the news really seemed like it was a big red flag for other airlines that don't have Delta's premium clientele, its massive credit card revenue or even its own oil refinery. To make matters worse, oil prices went up another 11 percent or so last week. Well, that sent Wall Street analysts into the cut the estimates mode, anticipating not only weaker earnings for the just completed third quarter, but more importantly, even weaker earnings or bigger losses for the fourth quarter and likely beyond, because this shows no sign so far of letting up.

4:50It's looking more and more like airlines will have a harder and harder time recovering most of the higher fuel prices through ticket price increases. They're certainly trying. They're even a move for further price hikes last week. And this is the real test of whether airline demand has permanently changed, as I think it has, but then there is also the reality of the economy that we're in. So the numbers. First, For context, the S &P 500 was down 2 % last week. It was a bad week in many sectors, particularly technology. But when the S &P 500 broad market measure loses 2%, it's a bad week. But airlines were far worse.

5:40Southwest wins the prize for the smallest decline in its stock price among big airlines, a drop of 5 % that would be quite bad any other week, but pretty good. American was down nearly 7%. Those were the better performers. Downright rosy, I'd say. Delta was down more than 8%. Alaska and United in the 10 % decline range in one week, and Allegiant down more than 12%. And ugly as that is, it gets much worse. Frontier lost nearly 20 % of its value last week and JetBlue nearly 24%, almost one quarter of the company's market capitalization. I'm not sure why people aren't paying more attention to this.

6:31Anyway. It's crazy. Yeah. Yeah. Lose 24 % of your value in one week. That hurts. It really does. Obviously, the market thinks airlines with weaker market position are going to have a harder time passing on higher fuel costs. Those are the airlines that were losing money before all this started, before jet fuel prices more than doubled. I noted concern about JetBlue and rising short seller interest in JetBlue shares and JetBlue debt last week. So I guess that was kind of early warning of what happened this week. JetBlue common stock dropped below$3 a share. It closed Friday at$2.93 a share. A wives' tale that I have found useful in my career from my Wall Street Journal days, based on nothing in particular, but I think it's a good measure, is that$2 a share is the level where the market thinks there is a high probability of a bankruptcy.

7:33This isn't any kind of hard and fast rule. And share price alone is not a good predictor because there are many, many other factors. But a stock dropping quickly to$2 is historically a sign of trouble, in my estimation at least. JetBlue was a$6 stock in August. It has lost half its value in two months. The market has really turned on that airline. Please note, again, a low share price alone is not a reliable predictor of bankruptcy. And JetBlue isn't below$2 a share yet. It's$3. But$2 a share was a predictor for Spirit Airlines, and it has been for many other companies in many industries. In fact, 72 % of companies that do seek bankruptcy court protection have hit$2 by the time they get to court.

8:25Spirit first dropped below$2 a share 45 days before its 2024 bankruptcy filing, with the second bankruptcy. Spirit dropped to$2 a share about 17 days before the filing. JetBlue is in a much different situation. Important to note, a much different situation. Stronger markets in New York, Boston, and Fort Lauderdale, more premium offerings, a solid turnaround plan underway that is showing stronger margins and strong revenue growth, but really has been hit upside the head by this fuel price doubling. JetBlue also has about$2 billion in cash on hand. That's good, but it's losing money. and that's going to erode if it can't start making money.

9:13JetBlue also has, somewhat similar to Spirit, very large debt payment looming on borrowing against its loyalty program. It's most likely not in need of court-supervised debt restructuring this year, but maybe next year if oil prices stay high. Right now, close to 30 % of JetBlue shares are sold short, meaning that a very large portion of investors are betting that shares are going lower. Short selling is you borrow the shares and hope that you can buy them back, repay them, as it were, later at a lower price. So you're betting that they're going to be cheaper in the future. The average short interest of S &P companies is usually around 3%.

10:03Delta short interest is about 4 % right now. Southwest United, 5%. American, 14%. JetBlue, 30%. So, Christina, that's my deep dive of the week. It just looks like at least investors are getting spooked by all this. And I've always learned something when I'm on this podcast with you. This is a cold splash of water in the face for those of us in the industry, right? Because schedules get impacted. So, you know, what I watch, stock prices are not the first thing that I watch, but what I do watch is what lands on my desk and the desk of staff members, which is schedules. So when fuel goes up like this, we see it in frequency trimmed here, smaller airplane there, a seasonal route that doesn't come back.

10:55And we have, you know, that much more pressure to keep our costs disciplined, which, by the way, we spend a lot of time doing anyway. And we have to lean into, you know, the relationship of being a partner, not necessarily a landlord, because our job is to protect the roots that our community depends on. And I will say this about consolidation, running an airport in the Midwest that lost its hub. You know, history says that tough times sometimes mean fewer names. And for communities, fewer names mean fewer choices and higher fares. So as an airport, you know, I'm rooting for every single one of these airlines to come through healthy.

11:37We want more airlines doing better, not fewer. And we are hoping, I hate when hope is a strategy, But right now, we're hoping, right, that we see this not last as long as into next year. There are good management teams at airlines that are working with a pretty tough, I mean, they've been dealt a pretty tough hand. And this is, it's tough to manage in this environment. Yeah, yeah. You know, but absent oil prices, boy, things would be blowing and going, right? Right, yeah. Yeah, well, that's exactly what everybody thought was going to happen, which is, I don't know, it's I think the takeaway from all of this is going to be a hard winter for a lot of airlines in the US and around the world for the industry, right?

12:23For everybody who participates in this industry or candidly relies on it and definitely harder for those that are weaker. So it could drive consolidation across the industry. Certainly, that's the history of financial crises for airlines is we end up with fewer names. but the story is not yet written all the way, so fingers crossed. Speaking of consolidation, let's note that Lufthansa was the winning bidder for a 44 % stake in tap Air Portugal. Lufthansa outbid Air France KLM. This was a big competition between the large airline groups in Europe for market share. The Portuguese government was the seller.

13:03Portugal took over its flag carrier in 2020 when the airline was collapsing in the COVID pandemic. In exchange for the European Union approving a massive 3.2 billion euro public bailout to save the airline, the Portuguese government committed to a strict restructuring plan that required eventually privatizing the airline and returning it to commercial hands. So here we are. The government still retains a 50.1 ownership stake, but has committed to a second equity sale by 2028. Lufthansa gets a Lisbon hub and highly coveted takeoff and landing slots, which is good. TAP has about 100 airplanes. So here we go with consolidation, right?

13:46Lufthansa's airlines now include Swiss, Austrian, Brussels, Eurowings, and Italy's ETA Airways. Air France, KLM, includes those two carriers, along with SAS Scandinavian and Transavia. IAG, the third big European conglomerate, includes British Airways, Iberia, Aer Lingus, Voiling, and Level. But the European market is actually still pretty fragmented. The big three have about 30 to 32 percent of seats within to and from Europe. I know, it's smaller than I would have expected. That's about half of what the U.S. big three have in terms of within to and from system-wide market share. Lufthansa is the biggest of the European groups at about 12%.

14:29IAG comes in second at about 10 % and Air France KLM at about 9%. And yeah, it is actually, and especially so that tap purchase or that tap bidding was clearly very important. One thing I think we've talked about in the past, so TSA letting pre-check cleared travelers into secure areas without a boarding pass to meet and greet. This is something that TSA has been testing at 13 airports with plans to roll out to 300 airports. Now the agency says it has indefinitely suspended the rollout, though it will continue to allow it at the 13 airports that have it now. And talk about back to the future. This is something we rolled out in, I think, 2017.

15:22It was called My Pit Pass. Oh, right, right. Because you went to shopping mall. Yeah. Well, it's actually, it wasn't about the shop, but people in Pittsburgh really love going to the airport. Lots of stories about how it was the place to be in the 80s and 90s with the airports and pre-9-11, people, actually a lot of grandparents and grandkids watching planes take off. That's what we saw. It wasn't a really big, yeah, it wasn't really, it wasn't really about the revenue. It was really about the fact that people just really liked being at the airport and seeing what was going on. So we launched that program in 2017.

16:01We were the first airport in the country since 9-11 to let non-flyers back to the gates. People registered. They had to get screened by TSA like everyone else. And the other thing is they could walk someone to the gate or go pick somebody up at the gate. They could watch planes take off, lots of little kids. People loved it. We actually paused it during COVID and then COVID went right into our construction. But it definitely showed how much people loved being able to just get past security and not have that be a barrier. But I can tell you that Thursday, my team and I had some meetings with senior executives at TSA.

16:43And I once again came away really impressed with what that agency has on its plate every day. So in my mind, if they want to pause this to get it right, let them. I'd rather they get it right than get it fast. That's how I feel about that one. So with all that news having been said, I'm dying to know what happened. Okay. So you went to Southwest Media Day. You weren't wowed. You heard you called them out in front of a bunch of reporters, which of course you used to be. So what happened? What gives? What was that all about? Well, it wasn't all that big a deal, But it was interesting. I have to say my disappointment is rooted more in style than in the substance.

17:32The substance of the media day was really interesting. Southwest is redoing its loyalty program, moving to three elite tiers and reworking qualifying for that. the significance of the qualifying, I think, is now you can get everything they have to offer in terms of elite perks with credit card spend. And other airlines have done this. You don't have to fly. You can get all through credit card spend. And some of that existed before you could get the highly coveted companion pass at Southwest, completely with credit card spend before. And that continues, but everything else. So that was one announcement.

18:17A second, which in many ways is probably even more impactful, is that Southwest will be installing Starlink Wi-Fi across its fleet. Not only is the Wi-Fi super fast, but the installation will be super fast as well. And that to me was a significant thing. Southwest says it'll have its entire fleet equipped with Starlink a year from now. In fact, most of the fleet will offer Starlink halfway through next year or so. They've got about 40 planes today. I think the end of the year, they're hoping to have 200 airplanes. Compare that to American, which won't even begin installation until next year. And as said, you know, you had to get that in.

18:58Yeah, I had to get that in. And American hasn't said how long it will take. By the way, Southwest will have 100 percent of its fleet equipped with in-seat power outlets a year from now as well. Southwest chief customer and brand officer and executive vice president. Tony Roach says Starlink on the airplanes that they already have it, those planes are delivering net promoter scores that are five to six points higher than other airplanes. This really does make the journey different for people. Starlink is a big deal to lots of customers and Southwest thinks it will be the only airline next fall that can say it has it on every flight, though United has said it will have Starlink on every flight, including regional partners by the end of 2027.

19:46So a bit of a race there, right? And we know Delta has famously said it's not going to do Starlink. We'll see what happens with that. In fact, Ed Bastian talked about that when he was on the podcast this past summer. So to me, the takeaway is, wow, once again, Southwest is moving really fast because this does help bring customers to the airline and American really needs to step it up. Okay. Third thing, Southwest unveiled a name and some color and design schemes for its lounges. It's going to be called the Southwest Icon Lounge in honor of its iconic founder, Herb Kelleher. Okay, this is where my blood starts boiling.

20:35You know, maybe this is the wild turkey talking. I don't know. But this is just boring. And boring is very unherb. If you want to honor herb, call it Herb's Hangout or Herb's House or something fun and different, something clever. I thought, and I've said this before, that it should be the Love Shack, L-U-V. Southwest used to call itself the Love Airline. Its home is at Love Field. Its stock symbol is L-U-V. They've got hearts painted on the belly of the airplanes. But no Love Shack. CEO Bob Jordan told me Love Shack didn't test well. So Icon Lounge tested better. Was the test done? in an antique store.

21:25I mean, it just seems too predictable or whatever. Now, there's a lot to that. These lounges are going to be done in conjunction with Chase. And so you got to have something that will appeal to make sense to Chase customers. I don't know. Icon Lounge. Okay. But that's not even the worst of the corporate focus group boredom here. Southwest Loyalty tiers, which today are A-list and A-list preferred, will become. Are you sitting down, Christina? I am. Go ahead. All right. Southwest, the airline that Bob Jordan still says does it the Southwest way that still is, quote, Bob's quote, unmistakably Southwest, that still the airline that still sets itself apart from other airlines by making things fun, that quirky, zany, fun-loving, creative, joking, cooler than everything else airline, is naming its loyalty tiers silver, gold, and platinum.

22:30Because nothing says unique like using the same tiers as every other airline or just about every hotel and even some casinos. Sony PlayStation star levels apparently are silver, gold, and platinum. As I was looking this up, I found waste management uses silver, silver, gold, and platinum for customer paid levels of private garbage pickup. Seriously, garbage collection uses silver, gold, and platinum. Bob Jordan even said, quote, our identity is the same as it was in 1971 when Herb founded this airline. So yes, I suggested in front of the horde at Media Day that this was all un-Southwest boring.

23:14For loyalty tiers, I half-jokingly suggested they should be Herb, Gary, and Colleen. Better names for Southwest. Hey, we would all aspire to be a Herb, right? That's what you want in your loyalty tiers, some motivation, right? But the bottom line was it seemed so far removed from Herb Kelleher's creativity and salesmanship and genius that it just wasn't Southwest-like at all. Now, Tony Roach, who I respect tremendously and who knows a lot more about this than I do, Tony said Southwest really had to simplify a lot of its wording for a broader group of customers these days. And I get this. Customers wanted silver, gold, and platinum because they understand it.

24:02Many don't understand A-list and A-list preferred. Southwest doesn't even use boarding groups A, B, and C anymore. Southwest has a rapid rewards priority credit card with Chase, but it doesn't really get you any priority in boarding, security, or check-in. So there's a lot of confusion here for customers and for frontline Southwest employees. And they're trying to clean that up. But the focus group says customers wanted silver, gold, and platinum. So Tony and others pointed out to me, a whole lot of Southwest customer base doesn't have a clue who Herb Kelleher was or what Southwest's history was.

24:42Southwest isn't the quirky startup trying to revolutionize travel anymore. It's an established, mature airline that wants to take customers away from Delta United and American. In the not too distant future, it's most likely going to have two by two first class seating. It's most likely going to have 15 or so wide-bodied jets. Bob Jordan said both are still under study. Southwest is adding international partners, and they have their own silver, gold, and platinum-type loyalty tiers, and that's all got to sink. And Bob and Tony say this is all still Southwest because Southwest has always been about giving people what they want.

25:22Okay. Convinced? I'm not. But I see why they are. Honestly, I think companies overdo the focus groups. Asking customers what they want for a loyalty program, tier names, just yields what customers already know, silver, gold, and platinum, right? It's what it's supposed to be. But airline loyalty is one area where people who engage pay very close attention. And a lot of frequent flyers really love the quirks and love the differences. Name it whatever you want. They'll play the game. Starbucks didn't have to go small, medium, and large. Tall, grande, venti. Nobody knew what venti was or tall was.

26:07But that became part of the culture, part of the identity of Starbucks. Even part of the allure, part of the fun. Why not have some fun with this? Is anyone going to fly another airline because Southwest doesn't have silver, gold, and platinum? Oh, well, back to the future, this was not. Well, you know, it's funny that you said people hadn't heard of hurt. I don't know how many people, you know, how many people under 30 have danced at some place late into the evening to Love Shack. I mean, you know, it's interesting. You said it didn't test, right? I just, you know, and I will say this one thing, and I can't believe I'm going to do this, but I am.

26:49I have to defend focus groups just a little bit because I've sat in those rooms. And you know what happens. Even if you get the focus group to say, yes, let's go with Love Shack, then it goes to legal and you got to get the B-52s to sign off. I mean, when we, I can tell you that when we opened Presley's Place, which was the suite of sensory rooms we opened in 2018, this was the result of one of our heavy equipment operators, a snowplow driver named Jason, whose son had been diagnosed with autism. and he said, you know, these sensory rooms really help my son with preschool. We should build one.

27:26And I thought, cool. Then we realized we were missing a whole segment of the market. People who couldn't fly wouldn't fly because of family members who couldn't handle the chaos of the airport. Anyway, he said, is there any way we could name this after Presley? And I thought, what a great idea. So I went to my comms and legal teams. And do you know we had to clear that with Elvis Presley's estate? Oh, really? Yes, for real. So I'm just saying, I mean, you know, it takes time anyway. Well, I have to say on Love Shack, one thing, one of the very senior executives at Southwest said to me afterwards, you know, people, we talked about Love Shack and people said, you know, that song is about sex.

28:14And to which I said, the whole airline was about sex. Exactly. The hot pants. Right. But times have changed, right, Scott? Times have changed. And, you know, one of the things that actually I kept thinking about as you were talking is that especially if they're going to be looking at international partners, one of the things that people want in an alliance when you're going from one airline to the next is they want some clarity and some consistency. So I just don't know how much, you know, I just don't know how much that played into it. But they are a mature airline. They're a huge airline. And they have very engaged customers.

28:54That said, I agree, loyalty is different. I mean, Starbucks did teach the whole country to say venti with a straight face, by the way, or just, you know, order a tall instead of a small, like we've all done that. But I don't know, I feel like as long as they're still treating people the same way on the planes, I don't know. I'm not sure it matters. We'll see. My naming credentials, my late wife wrote a book about Starbucks and I gave her the title, which was Grande Expectations. Well done. Well done. Silver, gold and platinum. Yeah. Yeah. All right. Time now to thank our silver, gold, and platinum sponsors.

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31:07With classes located at Denver International Airport and week-long residencies in Washington, D.C. and at airports around the world, students experience a hybrid flexible course structure that balances in-person and online classes without career interruption. Go to business.ucdenver.edu to learn more. And that program, the first cohort of students, they were in Munich this week. Munich. Yeah. Very cool. They're coming to Pittsburgh in the spring. Yes. Very exciting. Yeah. I'm very excited. Okay. All right. I saw a Politico story about the FAA that caused a bit of heartburn for me. Politico reported that the FAA is working to acquire an ownership stake in the Boston startup Airspace Intelligence, which is creating the new command center tool system using lots of technology, including artificial intelligence, that will give the FAA better visibility on what's happening out there and what will happen each day, each hour, and how air traffic control can make better use of the airspace and reduce delays and cancellations.

32:21I saw a demo of this system in Washington with FAA Administrator Brian Bedford back in May. I think I know some of the people who are working on this with airspace intelligence. They're the right people, smart, experienced, practical, all good. Okay. And airspace intelligence now has a 12-year contract from the FAA worth$875 million. It's been awarded. Okay, so why does the government need to become an owner rather than a customer? Sure, this has been a thing in the Trump administration, taking an ownership stake in Intel, for example, and some rare earth mineral companies. But this just seems like a distraction that could upset this project.

33:06And the last thing we need is upset in this project, especially when several senators are already questioning whether we should trust artificial intelligence to help with airspace management. Do you really want to give your enemies of the project more ammunition to derail it? And I don't know, what if airspace intelligence turns out to struggle with the project? Does an ownership stake make the FAA more likely to stick with a loser or have more incentive to throw more money at it so that the investment will be worth more? Why is this not a clear conflict of interest? Be the customer, don't be the owner.

33:45To me, FAA needs to focus on two things, equipment monetization and controller staffing. Get those done before we worry about the government profiting off of government contracts. Yeah, well, that's, I think this is a fascinating, you bring up some really interesting points. And, you know, I would imagine that there are a lot of people, this isn't done yet, right? That people are talking about it? Yeah, yeah, exactly. Right. So I'm sure it's being discussed and ownership questions. I mean, that's a policy issue, really, right? Should they have an ownership stake in contractor companies, to your point, especially startups?

34:26My guess is I would imagine it has something to do with wanting some sort of revenue return if it is deployed somewhere else, but I have no idea. So more to come on that. No, I mean, the president likes to be a dealmaker, right? And I don't know. The government's not in the profit business. The government's in the running the airspace business. Public utility business. Yeah. Okay, so you had American Airlines news last week, and there was more this week. First, yes, first, American's chief commercial officer, Nat Peeper, told Brett Snyder of the Cranky Flyer that American was going to rebuild Los Angeles as its gateway to Asia, which is a big change.

35:14Because American had cut lots of its trans-Pacific flying out of Los Angeles due to so much competition there, and American was losing money on many of the flights. American relied on selling seats on partner airlines, but it's not just the same as having your own metal in the market, as we all know. Pieper says that if American wants to be the premier global airline based in the U.S., and that's the stated goal now, it needs to have a lot more flights in Los Angeles. But that will have to wait until after construction gets finished on Terminal 4 at LAX before the 2028 Olympics. And the other American news was that Brian Zontins is out as chief network planning executive.

35:55He had joined American in 2020, coming from WestJet and United, and he was one of the principal architects of the American strategy to focus on domestic markets, particularly the Sun Belt. Nick Anderson, American's vice president of commercial planning and performance, will be the new senior vice president of network planning on November 1st. So you've always got something to say about American. What do you think? Yeah. Well, I think first of all - We're all watching. We're all watching. Yeah. No, absolutely. Absolutely. And I think we will have Robert Isom on the podcast coming up this fall. Oh, great.

36:33So I'm excited about that. And yes, and I think it's high time, good time, and it should be a fascinating discussion. look on that. I think this is exactly what America needs to be doing. Kudos to Nat Pieper, who's really become the driving force behind so many of these moves. This is all interconnected, right? It all goes together. Ending involuntary bumping, we talked about last week. Great move. Years late, but great move. Building back Los Angeles, I think that's important. Years late, But you got to at least give it a try. It's going to be really difficult. Moving out Brian Zontan, who is really a good guy, but my impression is pretty conservative.

37:20I think that makes sense because they need to change the focus. They need to change the narrative, the story. He's just probably not what American needs right now. We've harped on this many times. Losing market share in Los Angeles, New York and Chicago was not a recipe for success, Certainly not a recipe for being the premier global airline based in the U.S. Relying on Phoenix, Dallas, Charlotte, that's an airline that looks a whole lot more like U.S. Airways than it does today's Delta or United. And you're just certainly not going to be the premier global airline out of Phoenix, Dallas, Charlotte, even Philadelphia.

38:03Americans got to figure out whether it's going to be New York or Philly, but that's another story. In Brian's defense, Brian Zontan's defense, I would note that he played the fleet that American gave him, right? American is really short on wide bodies compared to rivals. And Brian didn't have the aircraft to really capitalize on the international travel boom that we're seeing right now post-pandemic, that international boom that's been so impactful for Delta and United. My one big complaint, I've said this before, my one big complaint is that American is still moving too slowly. And that's costing it revenue and costing it customers.

38:45It's making the right moves now. But they're the right moves for today, not the right moves for 2028 and 2030. They got to find a way to make things happen, even if it's going to be more expensive. And, you know, that's usually the answer. You can make it south. I think Southwest would say you can make all this stuff happen faster. It's just going to cost money. Right. And and Southwest is willing to spend it. You know, but I think America's got to change that mindset, change that culture, which has been so focused for so many years on cutting costs and pinching pennies. The airline business from 1978 to 2015 or so was all about having the lowest cost possible.

39:30That's how you earn more, right? Everybody thought it was a commodity business. You just had to get from point A to point B. People didn't really care. Well, it's a different business today. It's not a commodity business. Over the past 10 years, except for the pandemic, it's been a revenue-driven business. And in that, you got to spend money to make money, unlike at any other time in deregulated airline history. This so all plays into the commercial online history course I teach at the University of Colorado, Denver. This is the, it's not the last chapter, it's the most recent chapter that we're experiencing now.

40:09This is a different business. And I think, I think Delta understood that first, you know, 2014, 2015, Glenn Hauenstein, Richard Anderson, Ed Bastian, they, they got it. United understands that now and has really made rapid changes. Southwest understands that now, pushed into it by Elliott Management, but they get it. I don't think American, you know, they got to really start showing that they understand that. Anyway, the changes Nat people are making for American and its customers, great. Keep them coming. Pick up the pace. Yeah, you can't cut your way to profitability. We all know that, It does take investment, and it takes a culture to follow along because once people get it from the front office to the front line, it goes at pace.

41:02One of the things you did mention, however, that I thought was interesting, just because I'm always going to put an airport perspective on everything, is they're waiting on construction at T4, Terminal 4 in LAX. And this is one of the things that I think is really interesting that's also happening at the same time, which is infrastructure is setting the pace of airline strategy more than people realize sometimes. Yeah. No, great point. Right? Right? Yeah. And I think that's why it's so important that, you know, that there's a partnership model because, you know, something like that is critical for American and their strategy.

41:42LAX is a very important market. And I think having their own metal will make a difference. I mean, it will. Yeah. You know, it's a great point because one of the things that I think people don't appreciate is how much of this battle Delta won on the ground, not in the air. What Ed Bastian did during the pandemic to accelerate construction at LaGuardia, JFK, and LAX. So they're sitting there at LAX and they've got their reconfigured, rebuilt, consolidated terminal. Great facility there. Great facility at LaGuardia. Great facility at JFK. And Americans still mucking around with the construction.

42:25Look, it's not all American. There's a lot of LAX involved and everything else, right? But, you know, Delta has a definite advantage because they found ways to make it happen faster. All good points. Okay, I also want to make sure we take another moment to thank our other sponsors for making the podcast possible. Thanks to RTX. At RTX, a century of aerospace and defense innovation shapes a unique perspective. It takes more than technology alone to rapidly advance the future of flight and strengthen global security. It takes the vision to see what's next, adapting expertise and scaling manufacturing capability to deliver where and when it matters most.

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43:48Infinity Flight Academy, where future airline pilots take off. Back with the mailbag in a moment. Promotional support provided by the ultimate avgeek website, theairchive.net, a vast collection of airline memorabilia, timetables, route maps, rare cabin and airport photos, special flights, and more all at the archive.net, the hub of air transport history. Okay, Christina, in the mailbag, Tom from San Diego has a question for you. Oh, it's fun. I've heard, speaking of LAX, I've heard that the relationship between Los Angeles World airports and their contractor has been a complete disaster for LAX.

44:30Maybe an episode with Christina Kasotis could tackle this subject and get your take on what's going on there. I think it would be another great show of yours. I do know, Christina, just for background, that the main contractor on the People Mover Project, LINCS, filed a huge lawsuit in July against the city and LAWA. LINCS stands for LAX Integrated Express Solutions, and it's a consortium of big engineering and construction companies, including Valfour, Beattie, and Alstom, the parent company of Bombardier Transportation. There's a lot of finger pointing in both directions. The contractor blames the city and LAWA for a 141-day work stoppage because of a 2025 power outage.

45:17The Contractor claims Lawa is forcing it to absorb cost overruns that it shouldn't have to absorb. Lawa blames the contractor for all kinds of problems in return. There have been fire problems and damage along the power rails and underlying electronics, for example, on this people mover. People mover is said to be 99 percent complete, but won't open now until next year. Oh, and the cost of it has ballooned from about$2 billion to more than$3.3 billion. There's an immediate crisis right now because an early October completion deadline was missed. The contractor said in its suit that missing the deadline without an extension from the city could allow lenders to demand immediate payment from the contractor and force the contractor into bankruptcy.

46:05Lawa could dump the contractor entirely and force a$900 million termination payout, but neither side wants a total collapse. So there has been a technical deadline extension to December 8th. Christina, you just completed the big terminal redevelopment in Pittsburgh. Maybe go back to Tom's original question and talk about the relationship between an airport and a contractor and what can make it challenging. Yeah, I really appreciate the question and the perspective. And obviously, I'm not going to comment on anyone's litigation because I will tell you that I have empathy for both sides here. For anybody who has worked on a big mega project where you have to keep the airport running while you're building, it is enormously complicated.

46:59But I am happy to talk about the relationship in general of, you know, what we set up. And by the way, did we get it all right perfectly? Absolutely not. But I would say that it's one of the things that a lot of airport leaders are faced with because of how much capital is going on in this country. At the end of the day, the owner and the contractor actually want the same thing with the ribbon cutting. They want it to work. They want people to feel good about it. They want people to feel like we all did a good job making this happen. But in between, we don't always have incentives that are perfectly aligned.

47:33That's the bottom line, right? Contractors are managing risk. They're managing margin. We're managing schedule, keeping the airport operating at the same time, managing expectations, the public's money, and operating while building is a big challenge. So what we learned and what we did from the beginning is we were, you know, really, and I'm not saying LAX did or didn't do any of these things. So this has nothing to do with their situation. I actually don't know much about it. But we were constantly prepared for the unexpected. Just what could go wrong, right? What's the worst thing that could go wrong here?

48:14Which is why we spent so much time having contractors in front of us reporting to our senior leadership team. We hired an owner's rep who was overseeing the contractors and the project managers to make sure schedules were aligning. I mean, the work that you do on managing dependencies and conflicts is no joke. And there's always something that's going to come up that nobody expected. because 30 years ago, when we were building airports like they were in Pittsburgh and other places, we have drawings that do not reflect the as-built. We were finding, seriously, you dig into the ground and you realize, oh, there's a tunnel there that wasn't marked, okay?

48:59Or there's something behind a wall that nobody expected. So everything is taking longer when you're rehabbing old infrastructure. And there were a couple of things that we were really rigid about, which is bad news early. If something goes wrong, you think it's going to go wrong, tell us so that we can manage and we can manage the expectations and the communication and the relationship. You know, everybody wants to lock a scope in early and stick to it. The problem is that these changes happen and then change orders come in. And that's when prices go up. and how you make sure that those change orders are the right thing to do is not something usually that airport staff alone can do.

49:44So you're bringing in either forensic accountants from the beginning to help with that, or you are hiring a specialized team who has done this elsewhere. I can tell you that we didn't always get it right. And I personally had a few conversations with contractors directly with the CEOs of firms and said, this has to get done. And, you know, workforce challenges aside, this has to get done. I will say that, you know, it's interesting that this is the result of a power outage. The power outage in LAX back in, what, 17, I think was followed by the one in Atlanta in 18. That's why we built our microgrid, so that we would never have, you know what I mean?

50:29I mean, it's really interesting that it's sort of come back to cause other problems for them. I think this is one of the things that, you know, at some point airports should be looking at is how to make sure that resiliency and redundancy are at the top of the list for operating from an energy perspective because something like this is really unfortunate. it. But, you know, we've had to hold the line at times, and there were certainly change orders that we rejected. But we had to understand everything about that project every step of the way, because there's so much on the line. And when things go wrong, you just know it's going to be contested.

51:12So I just, I wish them a lot of luck on both sides, because it's not good for anybody if this shuts down. Not good for anybody. And we had Bombardier. They were the folks who ran the people mover in between the two terminals at Pittsburgh for 30 plus years. And we had a great relationship with them. So I don't think anybody is out there to have anything go wrong on purpose. But yeah, you got to get people in the room and figure out a path forward that everybody can live with. Yeah, no. And all those firms mentioned, they've done this a lot, right? This is not their first radio. No, it's not. Yeah.

51:50Yeah. That's all really helpful. Thanks for that. I think it really helps to understand the relationships more. So appreciate that. All right. One more for you. Patrick from Dallas has this. Patrick says, I work in the finance org of an airline. I thought you and Christina had a very robust and thoughtful discussion around PFCs, passenger or facility charges, and the fact that customers are paying for it one way or another. It's either through PFCs or higher rates and charges at airports that then go into ticket prices. Either way, it goes into ticket prices, right? Yep. Patrick goes on to say, I'm trying to make the case internally to my finance leaders that we should be pro-raising the PFCs versus having the costs of new infrastructure sit in rates and charges.

52:43PFCs don't go into cost per available seat mile, but higher rents and landing fees do. And we all know that chasm is one of the most important metrics that investors look at and that airlines obsess over controlling. I'm not really winning that fight, though I thought it would be an interesting point to make on your show. As I know, finance leaders at airlines listen to it. Anyway, just wanted to share one additional wrinkle for your ongoing advocacy to airlines to budge on this issue. Keep up the great work on your show. Excellent question, Patrick. I always thought airlines were really short-sighted on this.

53:27Passenger facility charges. Should airlines embrace them within limit, Christina, rather than fight off any increase as they historically have done? Oh, gee, golly, I can't imagine I'd have an opinion on this. First of all, Patrick, wow, I want to frame your email. And this is, thank you. Because I think Patrick made the case that airports have been making for 25, 26 years. But Patrick put it in airline CFO language because it's true. And yes, I think limits and oversight is absolutely appropriate. I also think that there's a bigger question on sort of what airlines are taxed on and where that money goes.

54:15So I can imagine that there's a bigger conversation to be had, But for the finance leaders listening, the infrastructure has to get paid either way. This has to get paid for by somebody. The question is how. The PFC, the passenger facility charge, as we all know, is a passenger fee. It passes straight through the ticket and it doesn't hit the cost base of an airline. Rents and landing fees, right, as Patrick said, do go into the chasm. and that's something that airlines are fighting to keep down. So to me, it makes sense to choose the option that doesn't show up on the income statement because this one does by saying we don't want it to raise.

55:01And let's remember, talk about back to the future. What a theme. The PFC is, I think, one of the only things in aviation still priced like it's 2000. The cap was set at$4.50 26 years ago. And, you know, look at anything else in aviation that hasn't moved. I mean, you know what we were worried about back then was Y2K. I mean, that's how – I bet there are people who don't even know what that means. I mean, you know, you can't – I can't mean anything else. And they want silver, gold, and platinum for Southwest tiers. But that's enough. But, you know, if you take a look at what has gone up in the aviation world, and this affects all of this, obviously oil, steel, concrete, labor, sandwich, anything in the terminal that you're buying does not cost what it costs in the year 2000.

55:52And$4.50 today buys about half of what it did back then. And in the meantime, we need airports to build better, to build more, and to have resilient systems, better security. We have challenges we didn't have back then. And I also want to be fair to all of my airline friends because I know that there's a real concern. If you are selling a lower cost or lower fare ticket, every dollar on the fare matters. And I completely understand that. But I think that's why we're not suggesting that there's an unlimited PFC ceiling. I think that a modernized cap indexed is probably a really good idea, so we don't have to have this argument again.

56:41And I think that small, predictable adjustments along the way would have helped instead of facing this, what I would consider to be this huge 25, 26-year cliff. I mean, it's local money. It's people who are spending at the airport where the passengers are flying on projects that the FAA has to approve and that the airlines should weigh in on. No question. No question that there should be some accountability and that it shouldn't be for just anything. And I think that's sometimes the misunderstanding. But the passenger facility charges sit in an account and we can't use them unless we submit projects that the FAA approves can be used for the PFC.

57:27So inherently, you know, you have airline weigh in, but if you need to make it more explicit, say it. I just think that, you know, Patrick, I don't think you're losing the fight. fight, I think you're articulating why we should not be fighting and why we should be working together to figure out how to fix some of the funding issues that are not going to go away, given the infrastructure needs and the modernization required in this country. Right. Yeah. Yeah. No. And as everybody operating at LAX is going to find soon, And cost of operating there is going up. Yep. All right. Well said. Thank you.

58:10Thank you for that, Patrick. Thank you for that, Christina. Just a really important issue and love to hear you explain it. Thank you. Well, thank you for the question, Patrick and Scott, for giving me a chance to explain it again. And thank you, everybody, for listening. That is all for this week. Awesome. I will be back next week with more. I think we'll know a lot more about the health of the industry after we hear from United Southwestern American. So looking forward to that. Thanks again, Christina. Thanks to all of you for listening. This podcast is produced by Mass Media. Info at MassMedia.net.