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Brian Sumers of The Airline Observer

• Jeff Borman and Matt Brown

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The airline industry. Brian Sumers lives it, he breathes, he speaks truth about it unlike anybody else. He is the founder and editor of The Airline Observer, a newsletter covering the global airline business. He's also co-host of The Air Show in which he discusses the business of the sky.

Brian talks with Jeff and Matt about shenanigans at Southwest Airlines, whether inbound flight traffic from China is ever coming back, saving Boeing, Jetblue's pivot, and the future of loyalty programs.

Matt Brown:

Hi everybody. It's no Show. I'm Matt Brown, joined as always by Jeff Borman. The airline industry Brian Summers lives it, he breathes it, he speaks truth about it, unlike anybody else. He is the founder and editor of the Airline Observer, a newsletter covering the global airline business. He's also co-host of the Air Show, in which he discusses the business of the sky. If you follow airlines, you've seen him everywhere. He's done aviation coverage at Skift and shown up in Continental Traveler, the Wall Street Journal, the LA Times, cnn, cbs News, bbc World, npr. One week this guy is in Dubai, the next week he's in Singapore. But wherever this international man of mystery is, he's diving deep into how and why airlines work the way they do. He's based in LA but grew up in Chicago and has spent an ungodly amount of time, I'm sure, at Chicago, o'hare Father of two, married to another writer. So you know he'll never be without an editor and king of the skies. Brian, welcome to no Show.

Brian Sumers:

Thank you for having me. That is the best introduction I have ever gotten.

Matt Brown:

You are welcome. Let's get right into it. Southwest Airlines is in the news a lot this summer and there's a lot of talk of takeovers and poison pills and an entity called Elliott Investment Management which seems hellbent on taking over the airline. What is happening to Southwest and, more importantly, why is it happening?

Brian Sumers:

Yeah, not so long ago an activist investor Elliott as you say took about an 11% stake in Southwest. They want to turn Southwest around and a lot of people don't understand what has happened at Southwest Airlines. The magic sauce, the secret sauce that they had been using since the 1970s kind of has worn off, especially since the pandemic. A lot of the things that the airline did to make all that money for all those years is not working as well. People don't like not knowing where they're going to sit on the airplane. People have a little bit more money now. They want the opportunity of at least having an extra legroom seat, maybe having a first class seat. A lot of folks, you know they want to travel internationally. They don't just want to fly in North America, and the two most profitable airlines right now in the United States are Delta and United because they can service all of that demand.

Brian Sumers:

Meanwhile, southwest Airlines I wouldn't say it's the same airline that Herb Heller created in, say, the 1970s, but it still looks a lot like the Southwest Airlines that people used to fly 20 years ago. All one class of service doesn't go to that many places. It's kind of a drab and dreary airline that isn't built for the moment of the times, these things are changeable. You can change an airline, but the problem is, the people at Southwest Airlines for so long have basically said well, this worked for us in 1978 and it worked for us in 1998 and all these other years, so how dare you tell us to change what we do? This group, elliot, is saying guys, you've had enough time. You screwed this up. Your stock is undervalued and you need to do something to change it.

Jeff Borman:

My background, Brian, is mostly all on the hotel side, but a good chunk of it in distribution and the hotel world looked at Southwest so enviously because they were able to keep themselves off of OTAs and still survive. Is distribution a part of this?

Brian Sumers:

Distribution might be a part of it. I don't think that it's the only part. I think that the big problem is that the product doesn't match the times. But Southwest, in the last couple of years, has had a problem with load factor. You know how, like you'll hear in the popular media, airplanes have never been more full. You can't find an empty seat on an airplane just get on a Southwest flight. They have quite a few empty seats. I think their load factors are in the low 80s, which seems high, but it really should be higher. And so one of the things that they've done very recently, like in the last month, to deal with the load factor problem is I know this sounds revolutionary load factor problem is. I know this sounds revolutionary, guys, but if you go to Google Flights, you can pick out a Southwest flight and not only see the flight, but you can see how much it costs.

Brian Sumers:

That's essentially still direct distribution right, because all of Google Flights is going to do is send you to southwestcom. But for decades Southwest said no, we can't ban Google Flights. People can't comparison shop us between us and the other airlines, because they're just going to come to Southwestcom because our customers love us. It turns out the customers stopped coming and so they said we're going to go on Google Flights. It is a temporary trial. I interviewed the COO of Southwest last week. He said it's something that they're evaluating. I think there is some work involved to be on Google Flights, but I tend to think they're going to stay there.

Matt Brown:

One of your favorite airlines to write about over the years is JetBlue, and recently you observed that there's a relatively new era of straight talk at the company and that they are quote unquote playing to win. They are flying less from LA and Europe, flying more from Boston and San Juan. They are renewing a focus on premium leisure. Do you think airlines, maybe more than other industries, try to do everything everywhere all the time? Do you think that they all think they can chase every market segment, versus just focusing on a few things that they can do really well?

Brian Sumers:

Yeah, it's a good question. I should clarify I have two types of favorite airlines. They're the airlines that I love to fly, which tend to be the most well-run airlines, so that's Delta and United, where things are going to go right most of the time, and then they're my favorite airlines to cover, and the more dysfunctional an airline is, the more fun it is to cover, because people at the airlines are very upset, they leak to you a lot and there's a lot to write. For a long time, jetblue was in that second camp. As you say, the airline, even though it was undersized, tried to be all things to all people. So I don't know where the listeners are from. I live in Los Angeles. Nobody thinks about this airline, jetblue in Los Angeles.

Brian Sumers:

This is a New York, boston, san Juan and Florida airline, but the last CEO, robin Hayes, decided that the big problem that JetBlue had was that it was undersized. It was so much smaller than the big four and the only thing that JetBlue could do to get itself out of that rut would be to grow and be a nationwide airline. The industry we call it an order book, right, the number of airplanes you have on order. It wasn't like they tripled or quadrupled the size of the airline by airplanes. They just tried to do more with less, so they became this really small nationwide airline. They tried to build a focus city in Los Angeles. It went terribly. They tried to expand to Europe and then the CEO, robert Hayes, who did all of this, he retired. I say that he retired in air quotes because, even though he cited health problems, he was one of these guys that a couple months later, lo and behold, oh, he gets a new CEO job as CEO of Airbus North America. So his health must have been okay, I'm going to presume. You know we can't put words in people's mouth, but it was time for him to go.

Brian Sumers:

And right now JetBlue is in shrinking mode, not a lot, but a little bit. There's new management there and they've said they're going to try to do what they should have been doing all along, which is win in a few places win in Boston, win in New York, win in San Juan and win in Florida. You know, these things are kind of common in the airline industry. An airline decides that it wants to be all things to all people and then realizes it can't be If you look back about what American Airlines said after its merger with U, with US Airways about 10 years ago.

Brian Sumers:

It was the largest airline in the world and you couldn't do an interview without them telling you that and it was going to fly to everywhere in the world that its customers wanted to go. So from here in LA, where I am, they launched these new flights to Sao Paulo, shanghai, beijing. They launched these new flights to Sao Paulo, shanghai, beijing, hong Kong, just anywhere people in LA would need to go. But those flights they lost a lot of money and if you look at American, at roughly the same size now, talks about they just say we want to be the number one airline for the US Sunbelt. So, as you say, the thinking of being all things to all people in the airline industry has mostly gone away, although United and Delta are still doing it.

Jeff Borman:

You must love Ryanair, then that's got to be in the top of quote machine airlines right.

Brian Sumers:

Well, you know it's in the top of quote machine airlines. But more importantly than that, well, you know it's in the top of quote machine airlines. But more importantly than that, the thing that people in the industry are most impressed by and somebody at another airline, very senior, told me this recently. He said the great part about Ryanair is they know what they are and they know what they ain't. So the model hasn't really changed in the last 30 years. Model hasn't really changed in the last 30 years. One of the mistakes we see this with hindsight, but one of the mistakes that Southwest probably made was even though the problem is today that they don't have the premium seats, they kind of got away with their obsessive focus on costs. So in the very beginning Ryanair and Southwest were kind of inseparable. They both had the same model. But I think, if people look carefully, southwest kind of inched slowly, year by year, up market and tried to be all things to all people and Ryanair never did. And that was kind of the genius of Ryanair.

Jeff Borman:

The four big US carriers and the 20 billion they do every year from loyalty programs is immense, and it's a big moat that I think the smaller carriers just probably can't touch. One of the big problems, though, is that Gen Z flyers aren't getting in programs. They aren't collecting points, you aren't using cards that fuel them the way that the industry has designed these programs. What's the loyalty landscape going to look like 10 years from now when, all of a sudden, that big base of traveler are in their 30s and 40s isn't loyal?

Brian Sumers:

Oh, that's a complicated question and your data is probably more up to date than mine, but I don't hear a whole lot of concern from airline people. What I do understand is that there are two versions of loyalty and I'm sure people coming back to your airline year after year because they can't imagine flying anyone else and they want that frequent flyer status and we're seeing more travelers become free agents now at any age group, but certainly Generation Z, so they want the best deal or they want to fly nonstop. They want to fly the airline where it's going. But more recently, any airline. When they talk about loyalty they will use this term. Interchangeably. They will talk about the card program.

Brian Sumers:

Program at these companies is not really about keeping people loyal to your airline anymore. There's a piece of that. It's important, but it's all about the credit card. Mostly it's about the co-brand credit card, how to make that more enticing for travelers. But it's also about that Capital One Rewards program or the Amex Platinum card or the Chase card which I have, where you can transfer points, and what I haven't seen is a lessening of interest in credit cards. That will give people points and, yes, you get points from the credit card company but ultimately that money gets transferred to the airlines and the hotel companies, and so I still hear a ton of bullishness about these card programs.

Jeff Borman:

The loyalty program at the top tier is very different. Right Delta rewards its highest level. It's a much more valuable reward than American, let's say. Are the top tier ranks growing or thinning as all these customers become top tier through credit card spend instead of actually flying? What's going on there?

Brian Sumers:

Well, look, the people that participate in the card program are more profitable for the airlines in the card program are more profitable for the airlines. Airlines love co-brand customers, and so it makes sense when you're going out to reward your best customers, not to reward them based on the old metric, which we called butts in the seat, but actually people who make you money, and so it makes sense to reward your most profitable customers. You talk to these airline loyalty people. They have very sophisticated systems that will predict how many people in every tier they're going to have at the end of the following year, and they tell you that they basically get it right. So if you're United and you want to have a certain number of 1Ks, you're going to get that at the end of the year.

Brian Sumers:

You know airlines treat this stuff as top secret. My understanding is maybe there's been some thinning of the herds over time. A Delta executive used to say this if everybody is an elite, no one is an elite. But I do think that for people and I don't chase status anymore, but for people chasing status it can end up being disappointing because you spend a whole year trying to get to a certain level of status and then, once you get there you realize that everybody else has that status as well.

Brian Sumers:

There's some interesting discussion in loyalty programs about what the first tier of loyalty is. At the big airlines there's a lowest tier and you might be able to get some of the benefits of the lowest tier by using the airline's credit card. Airlines will tell me that they almost see that as a subscription product. So they could come out to the market and say if you spend this much money per year, you'll get a free check bag, you'll get priority boarding. But it turns out it's more profitable to do it and say the thing that we want to call a subscription is actually a co-brand credit card and you'll get all those goodies if you sign up for the credit card.

Jeff Borman:

There's a hotel version of that as well, where the bottom middle like so-called gold level right, it's not your entry level, but it's your next one up uh is both worthless and the most profitable. The people never travel, but you get the subscription dollars and their credit card spend.

Matt Brown:

Brian uh Boeing called. They love your work and they trust you completely. They'd like you to come in and be the czar of the company for a five-year contract. You'd have to move back to Chicago. Maybe you could do like a split city kind of thing. What would be your first task in charge?

Brian Sumers:

I'm going to let you guys in on a little bit of a secret. The airline industry is broken up into two parts, and there's the people who understand the airline business and there are the people who understand airplanes. There is aerospace and there are airlines, and every airline is split into two between operations and what they call commercial, which is selling the tickets and loyalty and things like that. And not only, gentlemen, am I not an expert in what Boeing should do?

Brian Sumers:

Half the people who work at airlines, including people with extremely high-ranking jobs, have no idea what happens at the Boeing factory, and that is why airlines got into so much trouble here, because people with brains like mine who work at airlines with jobs like chief commercial officer just assumed that the airplanes were going to come and the engines were going to work, because that has always been what has happened in the airline industry. So these people, when I talk to them at airlines, they don't know what's going on at Boeing, they don't know when they're going to get their airplanes and, frankly, guys, neither do I. All that said, boeing needs to clean house and they need to make reliable airplanes again.

Jeff Borman:

How do you see seat capacity and O&D pairings changing over the coming decade? When COVID stopped flights, a measure that we were seeing is how many asses could be transported from place to place on any given day, and from most of the metrics that I only loosely keep up with, it seems like it's about 5% above capacity from pre-COVID. Where does that go? It doesn't seem like there's a lot of incentive to add capacity. It seems, at least to the casual flight buyer me, that they'd rather just keep raising prices and keep load factor high.

Brian Sumers:

Airlines would prefer to grow capacity in line with GDP. So that is the rule of thumb for the airline industry, not airline by airline, but in the aggregate. So we're talking 3% or less per year. They think that that's kind of steady state. There are a few airlines that think they're doing very, very well and they want to add more capacity.

Brian Sumers:

The problem is there are not enough new airplanes from Boeing and Airbus to add more capacity. The problem is there are not enough new airplanes from Boeing and Airbus to make that happen. Also, engines are not as reliable as they used to be, so we have all these airplanes on the ground because the engines don't work, and so we're actually in a situation now where capacity is artificially depressed. So even if a lot of airlines wanted to fly more, they couldn't. Now the people in the airline industry that work on the commercial side of course know that this is actually really good for business.

Brian Sumers:

This is another secret right now of the airline industry, Because if Boeing can't deliver an airplane, the airline is going to get some sort of contractual payment because its supplier couldn't deliver the airplane on time. Then the airline doesn't have to fly the airplane, and so there are artificially fewer seats in the market and an airline's pricing power goes up. So the answer to your question is no, we're not going to see a lot of new excess capacity in the coming years. Airlines will tell you they want to grow. They just can't because Boeing and Airbus can't deliver the airplanes. But it turns out this is actually a pretty good thing for the industry.

Matt Brown:

Is there a service offering that airlines are ignoring or leaving on the table that you think would be worth them revisiting?

Brian Sumers:

There is something that they're already revisiting, and I have high expectations when it comes to air travel, and I really like international first class, and about 10 years ago, airlines decided that no airline anywhere in the world could make international first class work. Jeff Smyzik, who was the CEO of United until about 10 years ago, called it a big money loser. It turns out, though, that there is a decent market for a better than business class product in a lot of places, for a better than business class product in a lot of places, so one trend that we're seeing right now is kind of a business class plus offering. So you still have the airlines like Air France and Lufthansa and Singapore Airlines that have a true first class, but you also have airlines and this includes JetBlue, for example, and even Condor, which is supposed to be a low-cost airline in Germany that has a front row with more space and often better service. I think that's kind of a neat trend.

Brian Sumers:

That's the one that I can think of right now, because we talked about earlier how airlines try to be all things to all people, and part of that is where they fly, but it's also do you have a product on the airplane that can service any possible price point that people want to pay, and can you do that in a cost-effective way? Because maybe the international first class of years gone by where you have to have the extra flight attendants and cater, the special champagne and the caviar and all that stuff, maybe that's a money loser. But in every class of service some people want to pay for a little bit more room and some people will pay less for less room. So you can really see a situation where there aren't just three or four types of product on board, but even within every cabin airlines slice and dice the offerings. Are you guys familiar with the new Lufthansa Group business class seating?

Jeff Borman:

No.

Brian Sumers:

Okay, so on one airplane, Lufthansa has something like nine types of business class seats and they expect people to understand that and pay more. And for an airline expert like me it's actually kind of a novel concept, right, because some seats have an extra few centimeters of legroom. So if you're a very tall person, you'll want to get that business class seat. If you want a quiet, you'll pay for something else. I don't know, there's a lot of skepticism in the industry that the customer just isn't going to be able to understand that, but it is a neat idea.

Jeff Borman:

When would you predict US inbound from Asia, China specifically, to get back to 19 levels?

Brian Sumers:

Nobody thinks China's coming back. Ever and ever is a long time, so I don't actually mean ever, but you alluded to this before. I did an airline CEO conference last month in Dubai. China for the foreseeable future is over. China is closed. If we're talking from the United States, we're talking a few routes from the West Coast, mainly into Shanghai. There is no expectation that China is coming back. People are very excited about every country in Asia Pacific Well, most countries in Asia Pacific except for China. But there's no interest in China.

Jeff Borman:

There were 5,000 flights almost between the US and the UK this month. Every nine and a half minutes is what I saw on Skift. Is the UK basically a 51st state at this point?

Brian Sumers:

Well, not all of those routes make money. We need to be honest about that. London is a very popular market among Americans, but the thing that makes London unique is that Heathrow, the airport where most of those flights go, is one. It's slot controlled, which means you can't fly into Heathrow unless you own the rights to fly into Heathrow. And those slots are sellable and they can be very valuable, especially when times are good. So what you have in Heathrow is that if you're a US airline or UK airline and you own slots at Heathrow, you got to use them or lose them. And sometimes it makes a lot more sense to fly a marginal route into Heathrow. That maybe even loses money, because if you give that route away, that authority away, and in 10 years Heathrow is hot again, you are not going to be a very happy manager because you traded away Heathrow slots.

Brian Sumers:

London is not as good of a market right now as it was before the pandemic. A lot of airline people say because you know the business, traffic is just not where it used to be. It's improving, but not where it was. But you know people think london is going to come back and so it's just a market that you want to protect. London in january is, like probably the worst market in the world, because nobody wants to go to London in January unless they're closing some sort of a deal. But all those flights have to fly because you got to use your slot. So if you want to basically free vacation, go to London in the winter.

Matt Brown:

It's time for the mystery question. For the mystery question, brian, if you could snap your fingers and change one thing about the airline passenger experience for domestic US flights, what would it be?

Brian Sumers:

I think that the biggest pain points for flying is not the passenger experience, right, everybody wants a better experience for themselves, more legroom that they don't want to pay for. But the thing that makes people really upset is when the flight is not on time or there's friction in travel. If security line takes a little bit longer than you expected, something doesn't go quite right if the line to check your bag is too long. So in my perfect world and I optimize my life based on this, so in my perfect world, and I optimize my life based on this there can be absolutely no friction in my travel experience. Everything is going to go perfectly in that perfect world for me. Now, I know life doesn't work like that. So when it doesn't work like that, I need to know exactly what's going on, and this is something that United has done a great job with. If your flight's going to be delayed, they tell you why it's being delayed and they tell you what to expect.

Brian Sumers:

This idea of what people will call information asymmetry has been a real problem for airlines over the years. People think that airline employees are lying to them A lot of the times. The frontline employees don't know what's going on either. People including me. We just want to know exactly what's going on. But yeah, in that perfect world there could be none of that, because everything would work seamlessly every time.

Matt Brown:

So if you snapped your fingers, you would change physics and you would alter time and space so that there would be no friction. Yeah, exactly, it's a big one. I like that. That's great Aim. High baby Brian Summers, king of the skies. Thank you so much for being a guest on no Show. It's been wonderful.

Brian Sumers:

Thanks for having me on. This was great.