The Vertical Space

#74 Rob Britton: "Commercial Aviation and AAM: Prudent Optimism"

• Luka T • Episode 74

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In this episode, we sit down with Dr. Rob Britton, Principal of AirLearn, who brings five decades of experience in commercial aviation. This fascinating conversation covers the history and future of the airline business, the significance of the hub-and-spoke model, the realities of aviation sustainability, and the challenges and opportunities for advanced and regional air mobility. Throughout the discussion, we explore the enduring value of aviation, the power of market forces, and the critical need for innovation, all wrapped in a spirit of prudent optimism. Whether you're in the industry or just passionate about flight, this episode is one you won't want to miss.

Rob:

And so it has been a remarkable achievement. A democratizing a mode of transport that was only available to the wealthy. And I'll tell you guys to put a sort of a fine personal point on it. I think that reality for me spending my career in the airline industry, that's been to me the most satisfying aspect working for 50 years in and near airlines is that we have made it possible for everyone to fly. We're cheaper than the Greyhound, we're cheaper than Amtrak, and now people can fly. And isn't that a great thing

Jim:

Hey, welcome back to The Vertical Space and a conversation with Dr. Rob Britton, principal of AirLearn. Rob has five decades of experience in commercial aviation, and I guarantee regardless of who you are or who you work with, you'll love this discussion. So how to describe this talk? It's a blend of the history and promise of aviation and commercial aviation, the role of hubs and why they started and continue, a reality check on aviation and sustainability, the challenge and opportunities for advanced air mobility with the necessary dash of prudence, and a thorough discussion of regional air mobility. It sounds like a lot, but there's a constant theme, the value and promise of aviation, the power of market forces, the need for innovation and not just in technology with prudent optimism laced through the entire conversation. I had lunch with a few friends last week who loved the podcast. Thanks to you both. And they encourage us to keep the introduction short so our guests can get to the meat of the podcast. So for at least this podcast, we listened. So many thanks to Rob for this uplifting and serious conversation and to our many and growing number of guests, we hope you enjoy our talk with Rob Britton as you innovate profitably in The Vertical Space. Dr. Rob Britton is the principal of AirLearn, a consultancy that helps suppliers, partners, newcomers, and students understand the complexities of the airline industry and provides marketing and leadership advice to a range of organizations. In 2006, he retired as Managing Director, Advertising and Marketing Planning at American Airlines, where he was responsible for worldwide media advertising, brand stewardship, direct marketing, promotion, and customer research. He was part of the team that helped rebuild American brand after the 9 11 attacks. Rob has spent more than 50 years in and near the airline and tourism industries in a wide variety of roles. Rob earned his PhD in geography from the University of Minnesota and completed a postdoctoral program at the Wharton School, the University of Pennsylvania. He has held staff and field positions with Republic Airlines and Northwest Airlines. Rob joined American in 1987 and worked across the enterprise in marketing, international affairs, corporate communications, and operations. He has published more than 125 articles in major newspapers and magazines, in travel trade publications, and in academic journals, most recently the MIT Sloan Management Review. Rob has enjoyed a hybrid career with a long service to academia. Originally a geography professor, he is now an adjunct professor at Georgetown University's McDonough School of Business, a visiting professor at Imperial College London, and an annual guest lecturer at 25 other business schools worldwide, including Yale, the University of Zurich, and the London School of Economics. Rob is a senior advisor at the ENO Center for Transportation in Washington, and serves on advisory boards at the Umeå School of Business and Economics, Sweden and the South American Business Forum, Buenos Aires. Rob is married to Linda, an attorney, and has two adult children and three grandchildren that live in Alexandria, Virginia. Rob, welcome to The Vertical Space. Great having you with us.

Rob:

Happy to be here. Thank you for inviting me.

Jim:

First question. Is there anything that very few in the industry agree with you on?

Rob:

No, I think that I, because I've been around for so many years, most of my perspectives are fairly well aligned with the industry. I think the one place that sort of jumps to mind, and I'm not sure that it's a disagreement necessarily. I think the industry, is, with respect to, sustainability, climate change, emissions, all that stuff. I think the industry, fails to, in their zeal to talk about how, what they're doing with SAF and what they're doing with, fuel cells and all this other stuff. I think that they really fail to tell what I think of as the balanced story and the way that I would explain what I think of as a balanced story, I is this way when I'm in the business school classroom and I, that's where I spend a lot of my life and I give a lecture, particularly when I'm in Europe, and inevitably in Europe, somebody's going to ask me about climate change and airlines, and they may even be quite pointed about it. and I always like to say it this way. I start out and I say, look, commercial aviation is responsible for two to three percent of climate change and gas emissions. It's not 20 percent. It's not 10 percent. It's two to three. Now that's a small percent, but it's a big number, and nobody's in denial. But what, I like to say is I like to think of it in cost benefit terms. Okay, if we own up To 2 3 percent responsibility for climate change gas. What do we get? And the answer is we get an enormous amount of good. Both in terms of all the great things that commercial aviation enables, whether it's adding value to other economic sectors, allowing businesses to grow, providing a foundation for tourism. All of these, all these things. And I think if you frame it in those terms, it's a good way to frame it and I think that the industry seldom kind of puts it in that direction, I think largely because they're trying to put a happy face on it. And I would rather put an honest face on it to say, okay, yes, we own that, we're trying to make it better, but at the same time, we're adding enormous amounts of good and people want to fly.

Luka:

Rob, what is it about the narrative that you're hearing from airlines that is particularly maybe frustrating is a heavy word, I agree with your point we've poked around this topic in our previous episodes, talking about, whether the allocation of capital towards that goal is really going at the right places and will have the desired outcome when you consider the 2 to 3 percent overall, but also when you double click on it and see, what segments of the market are responsible for most of the emissions. And then you end up with a, 15 percent of a 2. 5% Type of problem on and on. So, so that's one side of the conversation, but the airlines are entities that have been around for a long time. They're smart people. They know the business yet sometimes feel the narrative is out of touch with reality. How do you explain

Rob:

Well, it's a great point and a great question, Luka, and I think you're right. It does seem to be a little bit, out of touch. and I think what my basic complaint about the way they frame it up is that, it's all this sort of, fluffy good news, and nobody's really willing to, put some caveats around it. I'm a, I'm a believer in honesty and I think somebody should You know, I think the airline industry needs to say, yeah, we're, we believe in SAF, but let's be honest. It's not scalable at this point. Right. And even if it were scalable, it's going to be expensive. And so, I think a more forthright discussion, at least in some circles, I mean, they don't have to do it, Scott Kirby doesn't have to talk about that when he's making a presentation to the Sierra Club, right? But at some point, there's got to be, I think, a greater amount of honesty, in the debate. whether we're talking about alternative, whatever it is we're talking about, alternative fuels or, whatever else is going on. And, I mean, at the end of the day I think where I, when I really get pushed into the corner, as I would be, for example, if I'm in front of a bunch of students in Sweden, right, home of Greta Thunberg, if I'm really pushed against it, You know, I start to rail about this idea that it's okay for them to fly, right, if they live in Stockholm, and in December and January it's cold and dark and wet. It's okay for them to go to the Dominican Republic to go on the beach, but somehow it's not okay for, a family in India that has just become middle class to take a journey. And so, I'm wavering a little bit, but I get really cranky about this because I think at the end of the day there's a lot of hypocrisy that surrounds all of what we're talking about here. So all I'm saying is let's get rid of the hypocrisy. Let's get rid of the fluff and let's have honest discussion about what we need to do. Now, having said all that, I mean, the arc of things, as an optimist, and I've been an optimist all my life, the arc of things is moving in the right direction. I mean, people are doing the right things. And Luka, you rightly point out, when it comes to capital allocation, that sort of thing. I mean, it's not a perfect world, but we're sort of, maybe it's not correct to say we're moving in the right direction, but we seem to be lurching in the right direction.

Luka:

Another thing that we brought up in the past in the podcast is that it feels like the airlines are under pressure to innovate where in fact they are the users and the operators of the technology. Do you see that as well from your perspective, right? People are pointing fingers at airlines and say, well, what about this new, more efficient, aircraft or propulsion system Where in fact, they should be turning to the Prats and the, Rolls of the world. Right. And the same, well, what do you have that I can use so that, we can address some of

Rob:

No, I agree with that completely. Yeah, I mean, I think, I agree with you. I think that's a, I think that's a solid point, Luka, but I, in, in the end, it's one of those things where if an airline were to do that, they would end up just getting dragged through the mud. I, so I think that, it's the sort of sense that, we're all in it together, I think is where we need to be. And that, again, that's, one of the points that I always make. to my students, and that is that everyone in the commercial aviation ecosystem understands what needs to be done. No one is in denial. there's nobody that says, this is not an issue. This is not a problem. And so, we all collectively own the problem, but you're exactly right. The people who are distinctly in a position to fix the problem are the people that manufacture engines, and to a lesser extent, are the people that make airframes. and, I mean, and I want to be sympathetic to them because I think, they're working on all these things. But in the background of all this is what I keep saying, and that is people want to fly. And, if you look at, sometimes I see these sorts of, these sorts of interesting collision courses, if we take, the global scale, I look at, the, I look at the, the order announcements At Farnborough last month, for example, and Indigo, in India, I don't know, it's, I lose track of how many hundreds of airplanes they have on order, but that's the reality, right? India is emerging. People are become more and more Indian people are becoming middle class. Their business sector is sort of growing in spite of itself. and people want to fly. And so what we're going to say to them, no, you can't. yeah. I said, anyway, beaten that horse to death, but it is, it's something that I feel really passionate about in that. And so, come back to answering your first question. I think that's what I would say. I think I have a slightly different, maybe not slightly, maybe a fairly significantly different take on the discussion around sustainability and, and climate change.

Peter:

Yeah. and Rob, I would say that this is also, we talked about, oh, it's a propulsion problem. It's an airframe problem. That's where the work needs to be done. I would say it may well boil down to being a petrochemical problem because the most effective path to actually achieving this goal, if that's what people want to do, is to be able to preserve all the existing training, all the existing airframes and create a fuel in a new way that works directly in those systems starting tomorrow. And in that case, then, it's a petrochemical problem and it's, it's those people that we need at the table doing this. And then, oh, by the way, if we solve that, if we find a way to create a sustainable, renewable liquid hydrocarbon fuel, especially if we do it without bio based feedstocks. We're doing it from electricity and water and a carbon source. Well, and that's way bigger than just SAF. That is a new energy storage medium and an extremely powerful one, and one that's so differentiated from batteries that we have anchored ourselves to with the entire renewable energy matrix. That would be literally a massive step forward for civilization if we could do that cost effectively and

Rob:

It would. And I've, and again, in keeping with my, my, my realism, but sunny optimism, I think that, we are, everything that I read, and I'm not a, I'm not a physicist, but everything that I read is that, the research is very close on, for example, to being able to sustain a controllable fusion reaction and be able to then take that and scale it up. And if that's, I don't know, I'd love to see it in my lifetime. I'm 72. if it happens in my lifetime, I'll be dancing in the streets. but, if we have a time frame that says it's 20 years off or 30 years off, I think absolutely those kinds of breakthroughs are doable in that sense, whether it's a fusion reactor that generates enormous, virtually unlimited amounts of hydrogen, or it's a breakthrough with other kinds of energy sources that will not, add enormous amounts of CO2 to the atmosphere. Let's bring it on. and, there's, it's clear to me that lots and lots of people, way smarter than us are working on this. And the more that we do, the better and the closer we'll be. So I think, we'll get there.

Jim:

Your answer to the opening question is, let's have some realism with some sunny optimism, and let's understand the value that aviation is providing. Let's start the answer to sustainability of, let's first of all remember that these are the things we do for society. That you all take advantage of and they play a very important role while understanding that sustainability is something we, we're only two to 3%, but we're focused on it, but it's not something that's gonna happen tomorrow, but you want a balanced, realistic approach while answering the question. That's frankly a little refreshing. So is there anything else you want to talk about on this topic before we move to the next

Rob:

No, I, I think now, I think the only last thing that I would say is the other thing that makes me absolutely crazy, is when we're singled out, right? When we're thought to be, the only evil polluters that exist in the world. I teach a lot in, I teach a lot in Switzerland, and as they have an enormous dairy industry, right? And as you also know, the world's cattle, have about a 5x impact it's somewhere around 10 percent of climate changing gas, largely from methane that the cows burp. But nobody's going after, the dairy farmer, right? I mean, they are to a, to be fair, there, there are some, green extremists in the Netherlands, which also, they also have a large, dairy industry that are going at this. But I don't want to be singled out. I don't want to be held to be the only evil people around. And particularly in, in the US marketplace where, people still seem to be more than happy to buy enormous pickup trucks, right? And just so you know, we've got a Ford Escape Hybrid that gets 46 miles to the gallon. I ride that bicycle to the grocery store. So, we can't be singled out, and we've got to get back to what you so eloquently say, Jim, and that is this idea of all of this good, and I think to maybe wind this up, that's the part of the story that we're not telling. All of this good.

Jim:

We should have an episode on those bastard cows, coming out.

Rob:

And what I always say, what I always say to people is, I love milk. I'm from Minnesota, so I grew up drinking milk and eating cheese. I love all that stuff, right? But I'm not going to say, let's get rid of the world's cows. Let's figure out a way to, to redo their biology so they don't burp methane. And we can probably do that in 10 or 20 years, right? Anyway.

Jim:

I can already tell this is going to be a great discussion, just for the, your answer to the first question. But Rob, give us a perspective, in order to predict what we should be doing in the future we want to understand the past a little bit more. Give us a history of the airline industry, just from a historical overview and lessons that you think may apply

Rob:

That's great, and I'm looking forward to this little history lesson, if you will. So, I mean, and the thing that's interesting about the airline business, and in fact I was teaching this morning, at Georgetown, where I work part time, and I had to explain that it was a group of MBA students, and I had to explain to them that the airline industry, for the first 50 or 60 years of its existence here in the United States and other parts, will look very different from what it looks like today. So here in America, as you guys know, at the dawn of commercial aviation, in order to stimulate the growth of this new technology, the federal government handed out contracts to carry mail by air and then that slowly worked towards carrying people. And somewhere in the late 1920s was the first effort to create a, essentially, a regulated utility model for the airline industry. They were not going to allow the market to do that to make decisions. So what emerged from the Civil Aeronautics Act in whatever it was 1927 or 28 modified through the 1930s was a regulatory regime that was not just operational regulation but economic regulation. And so for 50 years until 1978, a group of lawyers in Washington made all of the commercial decisions for the airline industry. Most fundamentally, could you start an airline? And the answer was almost always no. So they regulated the most fundamental aspect of the business, and that was market entry. Once you were lucky enough to be licensed to be an airline then the federal government, through these lawyers in the Civil Aeronautics Board, which was the name of the entity, told you where you could fly. And so they doled out, essentially, you could think of them as route licenses, right? And those licenses were doled out to two different types of airlines. There were the so called trunk airlines the remaining survivors are American, Delta, and United, but back in the old days there were brands like Eastern, and National, and Continental, and Northwest, and a whole bunch of them. There were the trunk airlines that carried people longer distances, so from Chicago to San Francisco, or from New York to Boston, just from New York to Miami. And then there was a whole network. Fascinating, vast network of what were called local service airlines. And these were brands like I grew up with in Minnesota, North Central Airlines, or it could be West Coast out on the Pacific Northwest, or it could be Allegheny. Or it could be Piedmont, or it could be Ozark, these kind of funky regional names. And these were companies with smaller aircraft serving smaller markets, generally with a nice subsidy from the federal government. So this Civil Aeronautics Board controlled licensing. Once you were licensed, they controlled routes. Sometimes in the case of local routes, and we're probably going to talk about regional mobility sometime in the podcast. So there was a handsome subsidy that, for example, North Central Airlines collected from the federal government to operate a route from Minneapolis St. Paul to Brainerd, Minnesota, to Bemidji, Minnesota, to International Falls. Small communities, 8, 000 people, 9, 000 people. And this network of these local service airlines really, you can, there's a fascinating map that I actually have on my computer, which I could, if you remind me, I'll share with you. That showed you this vast network. So they doled out market entry, they doled out the routes, they doled out the frequency, so they control supply. If you were given what was called, it wasn't really a license, it was called a route award. If you won the route award for new service from say Minneapolis, St. Paul to Denver, which North Central Airlines got that route award in around 1969, the government told you how many flights, not the marketplace says, there's demand for six flights and we're going to meet the marketplace demand. But the government said, we think it's three. And that's what North Central got. They got three flights a day from Minneapolis, St. Paul to Denver. And they were, of course, happy to have the route, because the, the previous incumbent Western Airlines, now part of Delta, had no competition. So they were, they nibbled a little bit toward the end in the period, sort of roughly 1965 to 1978, with a little bit of gentle competition. But the last thing that they controlled, the fourth thing that they controlled, was price. And they set price in a very interesting and comfortable way if you were a producer. They basically set price at whatever the average cost of production would be, plus a guaranteed profit. So for years, the mantra at the Civil Aeronautics Board was I believe that they were going to set fair levels at a point that would produce a 12 percent return on assets, right? it was just bizarre. And so what, so if, and the, and All of that fair setting was done against average cost of production. So if you figured out, if you were a bright guy and you figured out how could I produce this product, Below the average cost of production, you made your investors very happy. And in fact, interestingly enough, cause I come from Minneapolis, St. Paul, that's exactly the model that Northwest Airlines for years pursued. Now they were very clever about that because the long time CEO, this is maybe more detailed than your listeners want, you can just edit it out, but the long time, here's the fun thing, the long time CEO of Northwest Airlines was a guy named Donald W. Nyrup. I actually knew his son quite well. Don Nyrup's previous job, before he became head of Northwest Airlines, was he was a member of the Civil Aeronautics Board. So he, this is classic revolving door, right? He knew exactly how all this worked. And he said, if if I can produce the product cheaper than anybody else, my investors are going to be really happy. And that was exactly the model that they pursued for a long time. So even, with that idea of average cost of production and a nice, built in cushion, companies still found themselves in financial trouble. They couldn't manage the business. And so, for example, in the, I believe, late 1960s, the CAB, went out and engineered, by leaning on Delta, engineered Delta's acquisition of an airline called Northeast. Northeast was on the verge of running out of cash and they said they need help. And, Delta takes over. And there were a couple of other episodes that were like that, in that. So, so this whole thing is micromanaged by a bunch of lawyers on Connecticut Avenue in Washington, D. C. And there was this enormous, I mean it was a big, they took up the whole building. And there was, they had economists and they had all kinds of other people, and obviously an army of lawyers and they, this, all of this, all this whole thing set up to make the decisions that would normally be made in the marketplace.

Jim:

And who were some of the more successful airlines

Rob:

Well, I've already mentioned, I've already mentioned Northwest. Northwest was a good one, a Continental. did very well through most of their, through most of their years. Delta was always very astutely managed. and had, they really had a, very, the government basically gave them a very nice route network. So those are sort of three that, three that, that come to mind. So what happens over 50 or 60 years of intrusive government economic regulation? Well, Costs just keep going up and up because there's no competition. There's no Southwest or JetBlue or Spirit placing downward pressure. And all of the older companies, more or less have the same cost structure.

Peter:

Rob, it's remarkable that this economic regulation of air travel got put in place so early in the infancy of the industry. And my question is, what was the motivation for that? Who was advocating for this economic regulation? Was this coming from the airlines themselves? Was this to protect their profits? Or was this coming from the government? Or was this just an outgrowth of how society thought about regulation at that point in the 20th century?

Rob:

The principal issue at hand was in the 1920s and even into the 30s, the planes were falling out of the sky and it was not the safe industry that we, the astonishingly safe industry that we have today. And so the impetus for regulation originally was all driven around safety. And the logic that was able to be sold to politicians in Washington, to the media, to the person in the street, the man or woman in the street, was if we allow the market to decide, if we allow competition in this industry, some company is going to get into financial trouble and they're going to cut corners on maintenance. They're going to cut corners on pilot training and the plane is going to crash and everyone's going to die. That was the kind of logic of the 1920s. Then what happens in October 1929, the stock market crashes and there's this massive meltdown and there's this massive, through the early 1930s, loss of confidence in the genius of the market economy, right, and the, suddenly the market economy is no longer able, the skepticism, both, driven from FDR or whoever else it is, even from, for that matter, moderate Republicans are saying, they can't, we, the marketplace is a good place to be, but it's not perfect. And so certain industries are going to need to be controlled. And so that actually added a layer of legitimacy to this whole regulatory, impetus and it just carried on. And so what's happening? So costs are going up, prices are going up, costs are going up, prices are going up. And essentially the, the reality was, as I said, all of the older airlines, whether they were in the, local service category, Piedmont and Ozark and North Central. Or they were in the trunk category, National and TWA and Western, whoever they were. All of them more or less have, in a range, the same cost structure. Their costs are all going up sort of in lockstep. And so when their costs go up, for example, when the pilots union, and as you know, unions have been a reality in, in, in the transport sector in general, and in, in aviation in particular for decades, the pilots union at United, let's say as an example, in the, 1950s, say, we need a new contract we want to raise. United's management just gave it to them because they knew that they knew two things. First of all they had to do was go to Washington and say our costs just went up. You need to raise fare levels. That was reason one. Reason two was they knew about pattern bargaining. The same reality that exists in automobile manufacturers. When the UAW gets a contract at GM, they take it to Ford. Ford. They take it to Stellantis, and off they go. So the United Pilots knew that the Airline Pilots Association, once they got a deal at United, they were going to shop it to every other airline management group, and all, it goes up and up and up. Then what happens? Boom! Mid 1970s, a nice boom, actually. Mid 1970s, a group of influential economists, led by Professor Alfred Kahn from Cornell University, travel down to Washington, and they say, they meet with the Civil Aeronautics Board, don't get much response. They go up to Capitol Hill, and they say, this is nuts. The technology has been perfected, flying has become safe, planes are basically not crashing anymore, and this mode of transportation, which has essentially been perfected, is available only to the rich. Guys, I've been in this business for 55 years. I started in 1969. as a travel agent to pay for college. My parents were broke and I had to pay for it myself. I was a traveler. When I went out to Minneapolis St. Paul International Airport, the only people I saw at the airport were the well to do. So Alfred Kahn says to the Congress, to whoever will listen, if you deregulate the airline industry and you allow competition to come in, prices will come down and more people will be able to travel. So the impetus was entirely pro consumer. And that's exactly what happened. That's exactly what happened. And so the Airline Deregulation Act is passed on October 24th, 1978, all of this intrusive government regulation starts getting phased out. There's open entry into the industry, provided that of course, you satisfy the basic operational requirements. You get a license to operate. And new airlines are starting up. Routes are opened up. Prices are opened up. Prices and fares immediately come down.

Peter:

So, do you think that early period of economic regulation of air travel was unnecessary? Was it a mistake? Could they have started with regulating safety but not routes and ticket prices?

Rob:

Yes, I fervent looking back basically on what I know. They could have created a operational regulatory regime that said, here's what you need to do and then put some teeth into it. That if you fail to do this If you fail to do this and you have an accident that turns out to be traceable back to your negligence, you lose your license. Easy as that, right? So, we can't, you wish that you would have had that kind of mentality. And by the way, guys, as this was not just in the United States. This was global. In fact, it was even, in a very real sense, it was even more intrusive than most of the rest of the world, because the model of the rest of the world was state ownership of the carriers. Now, there is a bad idea, right? Let's put government in charge of Air France or The predecessor of British Airways or just about any airline in the world. But, so it's a great, I mean, I love the musing about, what would have happened and how we would have had far less pain than we have today. Because what has essentially happened since 1978 has been an enormous amount of pain, variably defined, visited upon the older airlines. Because they have, in order to survive have had to figure out a way to lever their costs down in order to get, into a situation that sort of approaches equilibrium with the new players that are coming into the industry. And as you guys know, that lever has mainly been Chapter 11 bankruptcy protection, which is a very blunt instrument, painful for the workers, painful for retirees, but it has allowed the older airlines, the three remaining older airlines to survive and, to get on with their business. But the fruits of this were evident from the beginning. I mean, you could go back, to the early, late 1970s, early 1980s, and you could see, and I was around back then, and you could, I, you'd see a full page advertisement, in the New York Times for People Express, one of very bold start up carrier saying, we're going to fly you for 59 peak and 39 off peak and people are going, wow, this is really great. And so it has been a remarkable achievement. A democratizing a mode of transport that was only available to the wealthy. And I'll tell you guys to put a sort of a fine personal point on it. I think that reality for me spending my career in the airline industry, that's been to me the most satisfying aspect working for 50 years in and near airlines is that we have made it possible for everyone to fly. We're cheaper than the Greyhound, we're cheaper than Amtrak, and now people can fly. And isn't that a great thing?

Luka:

I'd like to ask you a question about deregulation, but before, I'd like to rewind a little bit and ask whether there were any milestones in the pre deregulation days that you think is worthwhile to call out, whether this is the emergence of the jet age or the point at which air travel became a mass market, perhaps when the contours of today's hub and spoke model

Rob:

Yeah, I think that, well, there's no question that the advent of a jet powered aircraft, with turbine engines that are far more reliable than, than piston engines, was an enormous breakthrough. And so that dating to, 1958 and being perfected then on and through the early to mid to late sixties with not just, new bigger airplanes like DC 8s and 707s flying, but, the emergence of, smaller jet aircraft that could serve smaller communities. That was, that was a huge breakthrough, from a technological standpoint. and there were probably, there were, not probably, there were certainly, smaller, more subtle, things that changed along the way. I mean, I, one of the, one of the things that we sort of, we take for granted today, is, is the emergence of much better weather forecasting, and just, think about that weather forecasting that was really the methodologies and to a certain extent, the technologies that, that were developed during World War II, particularly in, in the European theater of operations, to allow, good weather forecast to enable the B 25s and B 29s to, to bomb strategic targets in, in Germany. So all of that stuff, right, that found its way into the civilian sector. In fact, one of the great early adopters of that technology, that wartime technology was actually, my hometown airline, Northwest. They had a meteorology department, in the late 1940s, that was the envy of the airline industry. They were like, we're on top of this and, we're going to figure this out. So there were those

Jim:

And that was the envy of the industry until they merged with Delta. They always had a premier weather forecasting capability. With meteorologists,

Rob:

Absolutely. Brilliant. Yeah. And, so there were those kinds of things. Now, over on the economic side, I mean, I think it's worth calling out so that I don't sound like I'm, dumping, just enormous amounts of, of bad stuff on the Civil Aeronautics Board. There were people that were around back then that saw what was going on. People like Will Rist, for example, America's former Government Affairs Senior VP. There, there were people at the CAB. as early as the 1960s, mid 1960s, late 1960s, through the early and mid 1970s, they could kind of see that this was a little bit silly. And they could kind of see that maybe we should allow, maybe we should tinker around a little bit with some experimentation. But It was really just nibbling around. So, you had the emergence, I mean, this is going to sound incredibly quaint to us in, in, in 2024, but, we, you had the emergence of family fares, right? Where, husband and wife, and of course it was a traditional nuclear family, husband and wife, and the kids could go along and the wife got, a one third discount and the kids flew for half fare and, off they went to Disneyland or, go see the Empire State Building. Again, to make this personal and a little bit fun, I first got smitten with the airline industry when I was a teenager, and around the same time that I was smitten by the industry, the Civil Aeronautics Board allowed airlines to offer what were called Youth Standby Fares. So, I could join, and I did, United Airlines, they called it the 12 to 21 club. You were minimum age 12, maximum age 21. If you were in that age window, you could fly for half fare, standby. You couldn't make a booking, but you could fly standby. Oh, and I flew to a lot of places, for half fare. Flying standby, and we know we got stuck once in a while trying to get home or whatever, but for the most part it worked out. So there was a little bit of nibbling along the way, but, nothing, like the, the, what needed to really be.

Luka:

At what point do you consider the airline industry became a mass industry and when did the hub and spoke

Rob:

Yeah, well, it's so, it was so, I mean, I'm being, I'm being a little bit, a little hyperbolic when I say that, in the, 1960s and 70s, the only people that could afford to fly with the wealthy. I mean, middle class people were flying and, travel was increasing, travel as a, as a component of discretionary spending was some, was there, in the, in the, in, in the post war boom, as the economy expanded rapidly, what, what did middle class people do? They, they bought a bigger house, they bought the wife a car, and then, once that was all sort of fixed up, they started to travel, so people were traveling and, and it was becoming, it was on its way, to, to becoming, a mass business. Now, around that time, a number of very forward thinking, not a large number, a small number actually of forward thinking companies started saying maybe within this constraint of the federal government of the Civil Aeronautics Board handing out routes, maybe we could organize a route network in a way that enabled the evolution of the hub. Right. And of course, the pioneer in this was Delta Airlines. I mean, you go down to Atlanta, Hartsfield Jackson Airport today, and you see this massive hub, the biggest one, essentially the biggest one in the world. But that hub, it really existed even in the 1960s, right? And as early as the 1960s, people in the South said, when you die You might go to heaven, or you might go to hell, but you're probably going to get through Atlanta. So they had that idea down, and that's what they had. Now, interestingly, and to be fair, United did a little bit of that hubbing at Chicago and Northwest did a little bit of that hubbing at Minneapolis St. Paul, and Continental did a little bit. Nobody had anything quite as well developed as Delta. Now, fast forward to, October 1978 and the deregulation of routes and the idea that now an airline could configure their routes in a way that made business sense. And the hub and spoke model then emerged very quickly as the way to move people around a geographically vast country. People say to me, why do we have these things? And people oftentimes ask that question living in a place like Chicago or Washington or New York where they can fly non stop to anywhere in the world. But if you live in Medford, Oregon, or Tuscaloosa, Alabama, or Traverse City, Michigan, you don't have a non stop to even to Boston or to San Francisco. And so, the hub and spoke concept became, an enormously sensible way to move people across a geographically vast nation like the lower 48 of the United States. And from across, a place where population was pretty broadly distributed. It was, of course, an urban population, but not everyone lived in big metropolitan centers. You might live in Birmingham, Alabama, or in Portland, Oregon. And if you lived in Birmingham or Portland and you were on your way to Sarasota, Florida, there was probably not an airline that could operate that route, even without the constraints to operate that route, go in and make money. I always like to explain it. I was going to actually bring them up today. I was, because I oftentimes bring props to class and I talk about how hub and spoke airline model is really like two funnels where the narrow end of the funnel faces each other and the hub is in the middle of the funnel. So they're collecting traffic from all over, flights coming in. Say Delta, flights are coming in from the west. And they're landing at Atlanta and they're going off to the east or coming in from the south and going to the north. And these hubs are, for the most part, directional. because that's, logically the way that you would organize. So these things end up working really well,

Luka:

Is it a fair observation that once the government control was removed over routes and fares, with the deregulation act in 1978, the major carriers focused on the most profitable routes, which ended up being these trunk routes. And with easier access to the market, you had this emergence of regional airlines that started with code chairing with major airlines and started connecting smaller communities to these larger hubs. And so, is that a point where we really start to see, the concept of a regional airline emerge, and can you talk about how that segment evolved and how they then later ran into

Rob:

That's Absolutely right. and so to use an example close to home, before deregulation, so in the old regulated environment, an airline called North Central Airlines based in Minneapolis, St. Paul, operated a route, with subsidy, up to northern Minnesota, up to the smaller communities in northern Minnesota. The subsidies, for the most part, went away with deregulation. There was this thing called the Essential Air Services Provision, which was put in. but for the most part, the, airlines needed to find a new model for collecting people from smaller communities. in the old days when there was, when there were aircraft suited to this and there was in some cases subsidy, in some cases a cost structure that allowed airlines to serve these smaller, that was what happened. Very quickly, a company like Northcentral, which now had the freedom to grow, ended up actually merging with a couple of smaller airlines and became an entity, a brand called Republic. They could no longer, and I was around, this is when I got in the business in 1984 they could no longer serve these points economically, these small communities economically. And so they then began, they then turned to these regional airlines that operated on a franchise model, right? Paint your airplanes to look like ours, sign a contract to conform to service standards. We'll take care of of setting the prices, we'll take care of running the commercial side. You get involved with the operational side. And as in the regional airline ecosystem, there's a bunch of different models for how those companies get paid. But for the most part, nowadays, it's what's called fee per departure where the company, whether it's SkyWest or whomever, Air Wisconsin, they get paid. For every flight they, every flight they run and the airline takes care of collecting all the revenue and managing it. And that model got built out. That model really starts to be built not long after deregulation and in, and in fact, some forward thinking, larger airlines like American with their American Eagle brand, and United, with, I think they called it United Express from the get go, starting to franchise with these independent operators, to provide service to these smaller communities, and the whole thing takes off and, 40 years later, we now have this network, that, has evolved, works pretty well, but, as you guys, as you just suggested, has some problems related to the economics of small jet aircraft related to, the salary structures for these smaller companies, so on and so forth. I, again, my sunny optimism says that, a lot of these issues that were being talked about with a lot of vigor five or eight or 10 years ago, about pilot shortages in the regional sector, are for the most part being sorted out and the way it gets sorted out is by raising their salaries. And these companies are able to do that and continue to provide, the kind of service that people want. So the, in the regional environment, I mean, if you think about, if you think about small cities, small communities, small and medium sized communities in the United States, my sense is that the system works pretty well. It's not perfect, but it works pretty well. And there are just for all I've, while I've got this, there have been a number of different models. that have been tried. I mentioned, the so called essential air services model that the federal government administers, which basically is, for the most part, a failure. To me, when we're talking about regional air service, the most successful model in my view is something called the minimum revenue guarantee. And this concept was actually pioneered in resort towns in the Mountain West that were seeking to have a greater sense of reliable air service. And so I believe that the first resort towns that pursued this is winter resort towns, were Steamboat Springs, Colorado, and Jackson Hole, Wyoming, and Vail, Colorado. And this goes back to the late eighties or early nineties, and they contracted with American and American came up with this minimum revenue guarantee concept. They said, well, how much service do you want from where? And they said, well, you know what we want one flight from Dallas, one from Chicago, blah, blah, blah, blah. So American came up with it with a number that they needed, which was basically their costs probably with, and with some baked in profit. And they gave them the number and they said to the resort and it was usually done through a chamber of commerce or a local economic development authority or some either private or public private partnership. They said, look, here's the number. we'll market the flights. We'll sell the flights. And at the end of the year, we'll just do the numbers. And if you meet the revenue threshold, you're golden and if you don't, you write us a check to make us whole. The interesting thing about those, the way those structures are is that, as I recall, the airline didn't give anything back if they wildly exceeded the guarantee. So, and they started, so they started out doing this for tourism destinations, and then they widened it out and, for example, one of the more recent just ordinary communities was a place called Roswell, New Mexico, town of, I don't know, 20,000 people in eastern New Mexico. This goes back about a dozen years, and at that point, rather than American doing it with their mainline, because their, those planes would have been too big, they did it through their Eagle Regional Airline, and it was the same concept they said to the city of Roswell or whoever it was out there that was doing this. Look, here's what we need. And off they went, and it has worked spectacularly well. It's worked so well, in fact, that the initial service pattern was from Roswell East to the big hub in Dallas, Fort Worth. And I believe, and you could check the schedules, but I believe that they've since built it out to it, to have at least one or two flights from Los Angeles of all places. So, here's this little town and the dusty high plains of New Mexico with pretty nice connectivity. That model has been very successful and has in fact been used by a number of other airlines. And just to finish that concept off, you guys may be aware there's actually a number of consulting firms that work with local communities to try to build air service. And this minimum revenue guarantee. concept is just one of the many things that are in their arsenal. And these are both for sort of tourism dependent communities, as well as, as well as just sort of ordinary places. So that's an interesting concept. What I like about it is it's a market based concept. It's not something, where the government's going to come in, where there's going to be a lot of political shenanigans and pork belly, pork barrel stuff. And so it's a nice solution and it has been very successful for the communities that have pursued it.

Peter:

How prevalent is the use of that mechanism today?

Rob:

Well, it's still, and so the other, so carrying that forward, one of the interesting things is that in a number of these, resort communities they started off with the minimum revenue guarantee and they were just able to be weaned off of it because, you know, the market, the route got built up, the service got built up, so on and so forth. In addition to American, I, quite honestly guys, I don't know who else is pursuing it besides, yeah, I'm pretty sure that Alaska Airlines has, I don't know if they're still doing it in the winter from, I believe, Seattle into some of the interior ski destinations in British Columbia, a place called Kamloops, which has a couple of, smaller, but growing ski resorts. And then the other people that are using it, I believe in Canada, in Eastern Canada is Porter. You may know about them, Porter Airlines. they, they're, historically a Q400 operator, but now they've just recently taken delivery of E195s and are building out their service pattern. But Porter was running, I believe, a minimum revenue guarantee into a number of ski resorts in Quebec and in Eastern Canada.

Luka:

So we talked about regional air travel, how they came to exist, and the kinds of pressures that they have started to feel over the last maybe two decades or so. What's your assessment of the current state of regional air travel, and are you seeing opportunity in new technology, whether this is electric propulsion or increasing autonomy to remove some of the economic pressure that caused the contraction of this segment?

Rob:

My sense is that if we think about conventional small jet technology, I think the service patterns that, companies like SkyWest or Air Wisconsin or the owned subsidiaries like Delta's, company Endeavor. That whole thing seems to be fairly stable. And again, I'm, I confess I'm a little bit removed from some of the to and fro on that, but I'm not seeing, for example, in the airline, trade publications, the industry publications like Aviation Week or Aviation Day. I'm not really seeing, people squawking about pilot shortage and so on and so forth. And as I suggested earlier on in the conversation, I think that, a lot of the pilot shortage of 5, 6, 10 years ago was really related to money. Once they've given these guys a raise and a signing bonus, they don't seem to be having much trouble attracting young pilots into the system. And I know for a fact that all of the regionals recruit very heavily in those universities that have ab initio pilot training programs, like the University of North Dakota or the University of Nebraska, Omaha, and. there's a handful of schools that, four year universities that do that. So I think that's, so full stop, let's shift now and, look at the new technology on the horizon. And, even though some of it seems, a bit further out, it's pretty clear that, companies like Heart, Aerospace in Sweden, building out these 30 passenger hybrid, aircraft. I think this is very exciting because my sense and I haven't seen any data, but my sense just maybe in a very simplistic sense as an owner of a hybrid automobile my sense is that the economics of a hybrid aircraft with a, 30 passenger and, I'm sure once they're successful with that, they'll build it up to, 50 is very exciting. And so you've got that as just sort of hybrid propulsion, the, and again, my knowledge of the players is small, but there's, I know that there's a handful of people that are building out, a pure battery solution, in a, in a smaller package. And that stuff, I mean, that's all very exciting because I think that, that will at least start to attack the, fuel related part of operating into small communities with, with RJs. The interesting thing, if we take this sort of long view of regional service, long being say 40 years, if we go back and look at the operating economics of a, of an airplane, like the Saab 340, that was a very economical airplane to operate in terms of fuel burn, 30 passengers, as I recall, something like that, and then, the, the pure jet aircraft that Bombardier was delivering started to come on and Embraer and, you know, all of a sudden those became very popular. But you know, What happens when oil spikes up? A lot of those aircrafts start to get a little bit marginal, especially in the 50 seat range. So, so the new technology, whether hybrid or pure battery, I think will at least address, some of the energy related issues. And if that's addressed and the labor issues are sort of sorted out, then I think, the prospect looks pretty bright. And indeed, depending on, where things go with, with autonomous, operation, you could start to see something looking very attractive in terms of being able to serve smaller communities. I mean, to me, it's not entirely impossible to foresee a regional airline map that looked more like what it did in the regulated period when all that service was so massively subsidized. So that let's say a city of 10 or 15, 000 people in the Great Plains could expect to have connectivity to a major hub.

Jim:

Rob, do you think that the hybrid or electric capability why should they better serve those communities in the future? If they're profitable routes, today they could be served from a gas turbine engine. Why do they have to be electric or hybrid?

Rob:

no, yeah, I'm not, yeah, I'm not sure I was clear enough. No, what I think I was saying is that for example, a hybrid airplane might be able to provide, supplemental service to, a city that has jet service, so imagine, I don't know, I'm going to take an example. Let's take, let's take Bismarck, North Dakota, the capital of North Dakota. They probably enjoy, I haven't, I'm looking at a schedule, but Delta Connection flies to Bismarck, probably four times a day, five times a day from Minneapolis, St. Paul, from their big hub there. Maybe with a hybrid aircraft, they could serve, they could add some trips in the middle of the day. Alternately, there might be the possibility that the attractive, energy economics of these newer, of this new technology might allow a service to places that don't have it today that would very much like to have it. And you could conceive of a combination of what we spoke about a moment ago, a minimum revenue guarantee. So now let's go down to a, a very small city of say 15, 000 people, and maybe it's just an ordinary place. Maybe it's a resort place or a tourism dependent place. Now they could contract with SkyWest or Air Wisconsin or whomever to bring in a 30 passenger hybrid airplane into a very small place. So you might actually see more dots on the map. And again, hard to know where we would be, but at least what I know about the, the potential economics of these things, that would be, that's not infeasible. So I hope, does that help a little bit?

Jim:

does, thanks.

Peter:

Yeah, has Heart announced what their efficiency gain or operating cost will be for that 30 person aircraft? I mean, I'm curious as what is it relative to like a narrow body jet, like a 737 or an A320, and what is it relative to another 30 person aircraft?

Rob:

Yeah, I don't know what that is, but I would encourage you to look. I just, I remember about four or five months ago, I was actually, I was teaching over in Europe and somebody mentioned, they said, there's this Swedish company that's working. So I dug it out and I looked very briefly at their website. So I'd encourage you to, they're called Heart Aerospace and they're in Gothenburg, Sweden. and I bet they've got some, I mean, there's probably some promises there, and as you guys know, it's always once the aircraft is in service that where you really see whether it's actually performing to the promised economics, and I could tell you a lot of funny stories about that, in conventional aircraft, but, I suspect it's going to be a pretty significant, efficiency gain and especially vis a vis, anything in that category. And, the problem guys is that basically that 30 passenger, aircraft size has basically gone away. There's nobody, there's almost nobody flying something like that anymore. I mean, there's a couple of small operators that are keeping, Beach 1900s in the air that are about, 20 passengers. So, they might find a niche is

Jim:

Is it because the market doesn't exist? I

Rob:

Well, that's because, right, I think you're right. I mean, I think that, you could look at the small end of a regional aircraft and there's really nothing there anymore. And so I, I think that they're onto something. With a, with a 30 seat airplane. And I have to believe that they'd, once they prove that they'd build it out to a larger capacity. And if they do that, I think they're going to have economics. it's a turboprop as I understand it. and if it's a speedy turboprop, the block times into a, you know, on a 200 or 300 mile service are going to be pretty comparable to a pure jet.

Peter:

CHAT GPT says it's a 30 percent reduction in operating cost compared to traditional regional jets.

Rob:

Well, there you have

Luka:

true, then it must be

Rob:

Yeah, that's exactly right. You read it on the internet.

Luka:

Hey Rob, let's run a thought experiment real quick. Assuming that new technology comes online and now we have electrified aircraft that, lower the cost per flight or a per mile, whatever is more relevant for regional air travel. And, and this value generated for airline, how does the airline get to keep that value? Do we end up in a situation where the business model changes, where OEMs become the operators, and now they have this privileged access to this cornered resource, and they get to keep the added profits. Or will it be, everybody has access to these aircraft, so now we're back to the usual, low profitability airline models. How do you think that this will change the structure of the network and the overall profit distribution along the value chain?

Rob:

Well, that's a super interesting question, guys. and, the, I was smiling when you, and when you introduced it, because, one of the things that I tell my business school students is that if we look at the commercial aviation value chain, once you get to the people that actually operate the stuff, there's not much left over. It's all the other guys that are taking, their generous slices of the pie. but you throw out a really intriguing idea, that, I mean, you'd have to go back to, almost to the dawn of commercial aviation when there were in fact OEMs that were the operators. That model does not exist, has not existed, and it's an intriguing idea. I suspect at the end of the day, and again, who knows, I've never been very good at prediction, but at the end of the day, even though the concept might be there, the notion that the manufacturer would actually then become the operator, I don't know, it's a little tricky. Just because I think, the OEMs, they could conceivably go in and say, okay, we're gonna, we're going to operate, let's take, let's just muse for a moment, since this is a thought experiment, let's just muse for a moment and say that these guys Heart they're building airplanes in Sweden. And Sweden is a geographically large, but empty country central places, there are small cities of 10 or 20, 000 people throughout the country that want to get to Stockholm to go shopping or see a show or whatever, do business in the capital. So you could conceive that Heart would say, we're going to make the airplane and we're going to operate the airplane in Sweden, right? And so, they get an operating license from, the Swedish government and they start flying. It's conceivable they could make that work, but at the same time, they're going to want to sell that airplane globally. And I can't foresee that, a relatively small company is going to want to ramp up. There's nothing that would keep them from doing that, but would want to ramp up and become, if you will, a global operator, all over with, with operating licenses and, 20, 30, 40 countries, but it's not out of the question. I mean, but it's a interesting possibility. If we look at the history of commercial aviation, though, I think we see a situation where, the, what was that, the wonderful phrase that one of the, business savants of the early 80s, always talked about, maybe it was Jack Welch or somebody like that, always talked about stick to the knitting. In other words, let's focus on doing the things that we know how to do best. And so, the OEMs make the airplanes and the commercial airlines operate them and there's not much in between. But again, nothing to keep them from trying that out as a model.

Luka:

What do you think, needs to happen either with technology or the market side that would enable and accelerate the point to point network topology as opposed to the hub and spoke?

Rob:

Yeah, well, I think that I think you're already seeing some successful business models here in the United States, airline business models, where the point to point, is the nature of the route structure. and it's, it's basically David Neeleman with Breeze and, and the guys at Avelo both of those companies, which, I always like to point out to my students, my Either in a moment of incredible bravery or stupidity, both of those airlines took wing during the pandemic and they're growing like crazy, right? And, they have picked out opportunistic places like New Haven, Connecticut and Burbank, California, Hollywood, Burbank Airport for Avelo. Neeleman is getting as big as he can in, in Westchester County, but as that airport is constrained, but he's finding these places where, you've got a pool of, a pool of, middle class, upper middle class, well to do people that want to travel and that they don't want to drive to and get stuck in traffic, making their way to LAX or JFK or whatever. So, so you're seeing some of this going on. Now, the reality is that, as the hub and spoke behemoths, Delta, United and American, every time they get a new regional jet or, either it's one of their owned companies or a franchise, every time one of those new aircraft are delivered, the economics of a hub say, put it into the hub and add another spoke. But these point to point guys are out there in the thing about, and where Breeze and Avelo are different is Avelo is, strictly single aircraft type 737 800. but Neeleman has found the sweet spot with the astonishing economics of the A220. and that plane has just astonishingly low seat mile costs. My friend, Ben Baldanza, who is on the JetBlue board we were having coffee a couple of years ago and we were talking about the A220 because JetBlue is now putting it into service, replacing their E190s. And their, the seat mile cost of the A220 is like 50 percent of what the E190 was. So with economics like that you're probably going to end with the capability of that airplane it's not just low seat mount cost. It's the fact that airplane has the range capability to go coast to coast. Neeleman is flying Breeze airplanes from Westchester to San Francisco and and Los Angeles. And so you can conceive of people looking at, at flows, traffic flows in the United States and finding, and this is what, I mean, Neeleman is doing this right now with the A220, finding, what's the next opportunity? And I think you could probably foresee some other people wanting to jump into that business with that particular airplane, because it is so capable and so economic and, we're, we're, we could conceivably see some additional sort of conventional, if you will, jet, turbine powered jet aircraft like that. But, we're starting, as you guys know, we're starting to approach, the laws of thermodynamics in terms of how much more efficiency can we extract from a gas turbine engine but, it's conceivable that somebody might get in and, build an airplane that's maybe even smaller than an A220, maybe it's a hybrid airplane, the, people are, people are clever and they're finding new things to do.

Luka:

Rob, I'd like to get your thoughts on the viability of the on demand airline model. There have been many attempts in the past, none really successful, yet entrepreneurs continue to try. Do you think the assets can be utilized enough to make these on-demand routes possible? Are new, cheaper aircraft the solution, or is it a structural problem that's tough to fix?

Rob:

Yeah, I think it's a, I think it's tough to fix. I think you could see a way to have a limited success in, a small array of markets. And the problem with that is that, you then need to find demand that only needs to go in those limited numbers of markets, so people traveling up and down between Los Angeles and the Bay Area, I don't even know if that on demand outfit is still flying out on the way out in those markets in California. I mean, it could exist. It's limited. And you get other kinds of, you get other kinds of on demand models. I mean, if we're talking about, for example, Wheels Up, that Delta has just sunk a bunch more money into, you just wonder about whether they can, whether they can actually make that work vis a vis, the other kinds of, models that, that exist in, if you will, business aviation, the NetJets and the rest of those kinds of things. I mean, Wheels Up, if you look at their, if you look at their concept, if you look at their website, you look at thinking, well, there's got to be a market for that. And yet, they've struggled. I think to be honest with you guys, just not to, I know a little bit about them because I was working for a couple of years with a marketing professor at Wharton that I know very well. And we had, he was wanting to write a, Harvard case study about Wheels Up. And so we had a bunch of conversations with their chief marketing officer. It was pretty clear that even though they might have had a pretty good concept, they didn't really have an idea of how to go in and tap the market. So I, I think that, I think what ends up happening, and I think maybe to your question, Luka, about sort of structural issues. I mean, I, I'm a, most of my career in the airline business has been on the marketing and planning side. And I just, I think to myself, there's just, there's something about these on demand services that it just somehow, it's not a question of awareness because the people who are very affluent, that can afford to, travel this way, know about these things, but they've never been able to really get traction. So, I don't know, but having said that, if you put that, if you put the on demand concept together with, the array of new technology that's coming at us at a fairly rapid clip, you may possibly see in the future, some of these companies beginning to get traction, depending on how they do it.

Jim:

So given that you're talking about regional immobility, you're talking about on demand, how do you see the next 10 years playing out? What's a high probability occurrence as it relates to the commercial airlines, the introduction of electric hybrid, potentially eVTOL, STOL. And, what do you think is likely to occur

Rob:

Well, yeah, step one is that all of this stuff that's being developed, has to be built, and it has to be certified. And you guys know that, certification is not an easy task, these guys will get there. And so once the stuff is built and certified, I, I think you're going to find buyers. I mean, there are, as the big players have made token investments in a lot of this new technology, and so, they're, people are ready for this stuff. If we take it down to the scale of the regional network, I think it's, it's, it's my sense is that it's sort of field of dreams if you build it, they will come if somebody is out there and I'll just come back to Heart for a minute because I'm much taken with this idea of a hybrid. if they start delivering this airplane and it's, it's fulfilling the economics that, that they're doing. I think you're going to see some interesting stuff, but, I don't know, guys, I, maybe it's the function of fact that I'm 72 years old, but, 10 years, it strikes me that things in commercial aviation tend to move fairly slowly. So, I could foresee that by 2034 we're not going to see revolutionary changes, and especially, if we start to look at, you know, UAM and stuff like that, where there's just so many institutional barriers, so many political barriers, the, as you guys know, the pilot union is already spending a lot of money in Washington saying, we're never going to, you guys can never allow a commercial aircraft, no matter how big or small, to be operated without people piloting it, right? So there's just, you just, I tend to be, and maybe it's a function of the fact that I live 10 miles from the capital of the Republic and all the regulatory and political apparatus, but I'm a little bit skeptical about some of that stuff. So, I don't know. I think we're gonna, I think if I crystal ball 2034, I'm going to see some interesting changes on the margin, but I'm not seeing anything really revolutionary.

Luka:

Rob, decarbonization aside, what are some of the most important challenges that the airline industry is facing and grappling with today that, we'll need to find a solution to in the coming years?

Rob:

Well, I think that, for older companies, whether we're talking about the three legacies in the United States, and certainly all of the older companies in Europe, the labor cost issue, has been, for 50 years or longer and continues to be, a big deal. Right. And, you've got powerful trade unions, that, that have a lock, and institutionalized and guaranteed through law lock on contracts with legacy carriers here and in Europe and, they all want more money. And so you've got, that, that is, to me, again, as a long time observer for older companies, that's absolutely where it is, it's the cost pressures continue to be there. What else has gone on? I mean, we've, we simply have to, and I don't want to minimize this because it's huge. We simply have to find a way in the United States to split off, as they have done in most other industrial countries, the air traffic control function. the whole ATC system is held together with duct tape and bailing wire. And it's just, it's just got to be modernized and it will never be modernized under the current regime of being operated by the FAA. Now, you got Yeah,

Jim:

separate podcast.

Rob:

it is a problem. Yeah, absolutely. And I'd be happy to come back and yak with you about that. But that's a, that's a huge one as well. and then, what else is going on? I mean, you've got infrastructure challenges in, all of the big airports, there's not enough runway capacity, there's not enough terminal capacity, and so, the, Pete Buttigieg's solution to that is, well, let's, let's constrain the legacy carriers from continuing to grow at O'Hare or Kennedy or whatever, rather than the obvious solution is let's build more aviation infrastructure. But of course, politically, they can't do that because, there's, all these people whining about carbon emissions and all the rest of that. So, it's just, to sort of conclude, it continues to be a fascinating industry because there is just so many moving parts, not the least of which is the continued intrusiveness of national governments and the operation of the industry.

Jim:

You've been given a hundred million dollars and you have to invest it in the industry. The return has to come within 10 years. What's going to get the bulk of the investment? What's not going to get any investment?

Rob:

Wow. I, I get it. I think it depends, I think that's a really hard question to, to answer because it depends on who's holding the wallet with the hundred million dollars in it, right? I mean, if it's a, if it's a legacy carrier, they're gonna buy, they're gonna buy increasingly fuel efficient and capable new aircraft at the, at the larger size of the spectrum. So, the A350 or whatever, they're gonna buy A321s in the middle size. They're probably gonna start to build out more of these A220 smaller aircraft. if you're a, if you're a startup, and you're holding the 100 million wallet, you're gonna, you're gonna be buying, A220s, and you're going to be buying, these, these new, these newer propulsion technologies, hybrids or pure battery to the extent that they're able to be demonstrated to be effective and safe and stuff. And so, I wish I could be more, I wish I could be more articulate there, but as you guys know, I'm not a finance guy.

Jim:

Yeah, but you're a lot. Listen, there are a lot of people listening, Rob, who may not know you, who are thinking, this guy's unbelievable. And they're, they think this podcast is a great discussion. Talk, tell a little bit about what you're doing today.

Rob:

Well, I still do, a little bit of consulting in the sector. And I think that the companies that come to me, are people that want a holistic understanding of how the airline business works somebody with some gravitas and gray hair, and I have a gray hair, not very much of it. But I, I'm, I'm a person that when I approach a, a challenge when I'm given a business problem by a big company like Delta or a smaller manufacturer or a startup software company, I try to look at the problem holistically and I try to bring together, marshal together all of the experience that I have, in understanding how the airline business works. So, if somebody comes to me with this, what they believe to be an absolutely sterling idea about to, bewilderingly new technology. I have to give them a cautionary tale about certification and how long it takes to get stuff done by the government. So, so that's the sort of put over on that side. The other thing that I really do apart from, what takes up a lot of my time and that's being a invited guest lecturer in business school classrooms because I derive an enormous amount of joy from that. But the other thing that I do on the consulting side is, people hire me to explain how the business works to newcomers. And so just as an example of that, one of the big legacies, brought me in a year ago because they had just brought some new VPs on board that had come from outside of, the airline business and they needed to get up to speed very quickly. And that's what I do. I can explain how, airlines work. And so I sort of can deliver an Airlines 101 to an airline company, to a supplier, to an airport. I'm doing, that's, yeah, so that's kind of what I do.

Jim:

do it, you would do it very effectively, just based on our talk, Rob.

Rob:

thank you. so much.

Jim:

You've been doing this for a while, as you've reminded us. Who are some people that have knocked you over in the last 50 years who you think are the top couple in the industry? And then who are some people today that you pay a lot of attention to?

Rob:

Well, I think, look, I don't know either. I don't know the Avelo guys at all. I, the guy that's the CEO is the former chief financial officer of United. I don't, but he, those people are obviously very brave people. They're knocking me over right now frankly, the whole decision to build out New Haven Airport is just, to me, is just a total stroke of genius. Neeleman with Breeze. I mean, here's a guy that started off in Utah with a little company called Morris Air, sold it to Southwest, started JetBlue, built Jet blew up, left JetBlue, started Azul in Brazil. I mean, this guy's a, he's a, he's a complete, clever guy. And, and there's a lot of other people that are like that, that, that are there that, some of the, the older guys that have been around for a long time, all the, the senior guys at Indigo, have an amazing track record. if I, to be honest, and maybe this is a good place to end, without getting myself in trouble with them place where I used to work at American. I look at Ed Bastian at Delta, is, and his leadership team, are absolutely building, a remarkable company. And, the, yeah, they had a, they had a huge, set back with the whole, the whole cybersecurity blow up with CrowdStrike a month ago. But that's a, and that was painful and it was a ding on their brand, but by and large, their trajectory has been forward and they are producing, probably the world's most consistent airline product. So those are guys that, that I look at. And again, those are all people on the operating side, because that's kind of where I spend most of my time.

Jim:

What have we not asked that you would like to answer?

Rob:

I think you've covered, we've covered a lot. and I've really, I've really enjoyed it. and it's been, it's been a great conversation. If I can help out in the future, you know where to find me.

Luka:

I do have one quick question, there's a lot of entrepreneurs in the audience. Where would you advise them to go and innovate in the aviation value chain?

Rob:

Well, I would advise them to go and innovate in places that are realistic. I mean, you guys know that, billions and billions, have been and continue to be invested in, in these new technologies and not all these guys are succeeding. And so we're starting to see shaking out in, in eVTOL and a lot of this other stuff that's there. So if you've got entrepreneurs that are looking to invest, my, my guidance is just be very careful about this and don't believe, the pitch deck, and when you talk to the people and listen to the pitch deck, ask some really hard questions based on the fact that, we're already seeing, a lot of the companies that have attracted billions in venture capital, going belly up. So I, I'm a, I'm a believer in prudence. And I think prudence is a good thing when you've got money to invest.

Jim:

Maybe that's the headline. Rob, you've been a real gentleman. You've been a great guest, and we really appreciate your time.

Rob:

Super to talk to you all and stay in touch.