316 - Host Scott McCartney attends Doug Parker's "School of Airline Pricing"

[MUSIC] Airlines Confidential with Scott McCartney is made possible with support from Pratt and Whitney committed to working smarter, cleaner and greener today for a more sustainable tomorrow. PrattWitney.com Infinity Flight, the leader in cadet academy flight training programs. InfinityFlight.com Ontario International Airport in Southern California. SoCal, so easy. And by Serium, the world's most trusted source of aviation analytics, Serium.com. We also welcome your businesses support. Contact us at airlinesconfidential.com. [MUSIC] Welcome to Airlines Confidential. I'm Scott McCartney and I'm excited to be back in school this week. We're going to go to school. This is going to be a different show. I think of a very exciting show and I think a very important show. I'm here with Doug Parker and Doug is going to lead us, lead me through a really interesting lesson, tutorial on airline revenue and pricing. There has been such a transformation in the industry and Doug can explain this better than anyone. So I think we're going to have some fun with this. We don't really know, in all honesty, where this is going. We don't. But we're going to give it a try. So welcome back Doug. Thanks Scott. I appreciate it and I'm hoping you haven't oversold this already. But I'm thinking, I agree with what you said. I think there's been an, and I find, you know, as you and I have conversations, or as I listen to some of your other guests, or that, you know, a lot of what we talk about, I try to explain as well, that's, that's, you know, this transformation that has been pricing. But, you know, it's hard. Anyway, I feel like sometimes I can even talk in a different language because, because if you don't walk through some of this history and live through, you know, what someone, you know, who's lived this like you have, or like I have, it's kind of hard. So anyway, what I thought, you know, and what we talked about is let's go through and try to put together, you know, for lack of a better term of class on this. Right. And, yeah, and it's fascinating too. I mean, it really is. You know, this gets into human psychology, it gets into all kinds of business strategy. And it gets into why the airline is what it is today, and why some airlines are doing well, and some airlines are struggling. So I think it's going to be really great. Okay. Pricing school is now open. Let me turn it over to you and take us through the how airlines price tickets, but also how this has all changed, how the sciences changed, and what that's done, not only for the industry financially, but also for how we travel. All right. Well, thanks God. I appreciate it. Look, the genesis of this in my mind, it was, you know, when the last time I was on the podcast with you, you had me and Richard Anderson on it. I talked to each other and at one point you asked us both what the most transformative event in the airline business had been since deregulation or something like that. And both of us gave you the same answer, consolidation, which is probably no surprise to you or most of your listeners. I think that's the right answer. But if you ask me what second is on that list, I think it might be surprising. I think the second most transformative event in the airline business since deregulation is a development of basic economy pricing and the sell-up pricing that came with it. Yeah. That's that big of the up. I think virtually all the major changes that are taking place in our industry over the past decade have that basic economy pricing structure as their foundation. That includes the struggles of the LCCs, the focus on product at the larger airlines, the increase in labor costs, changes in the free-complier programs, all those things. I think have their basis and the establishment of basic economy pricing structure. It's that big of deal. That's interesting in itself, such an important point because I think we think of basic economy just as a pricing strategy, pricing gimmick to address low cost carriers or just to find a way to match prices. Exactly. I agree. And again, I think in order for us to understand, in the Premier York's wings that are we going through some of that history to do it. So I think that's why we need to do some of this. Yeah. I also think it's a fundamental long-term shift. That hadn't just had ramifications for the last 10 years. It's going to have ramifications for the future. Now to cut to the chase, I think those ramifications are positive. For the long-term health and stability of our business and better for consumers, there's nothing to worry about here. But again, as we talk about trying to, you know, as much as what you do on this show, you know, working with listeners and help understand what's going on in the business we all love and what might happen in the future, I think understanding this is really important to answer a lot of those questions. So I thought it might be fun for you and I to work through this together. And if we do it right, I think we'll be able to provide some insight into all sorts of questions that your listeners hopefully will find in interest. Questions like, how come more Roman coach was a strategic failure? The products like premium economy and main cabin extra are now being deemed rousing successes. Yeah. Yeah. We will come back to these. But I just want to throw them out here at the start as things that hopefully we can go back to if we do this right, we can answer. Second, why are the same executives who once argued against product enhancements in the airline business suddenly product advocates? Yeah. Have they changed? Yeah. Or it's something else changed. What's happened to the spill carrier model? What's the future of the ULCC model? What benefit should frequent flyers expect going forward? How are the product models of the big three compared to each other in the future? I think we can answer all this, or at least to my satisfaction, by understanding what's happened with pricing. So anyway, that's the goal. Now when you and I first exchanged notes about this, I know I told you that I wanted to act as though I was teaching a class. And for the purpose of this podcast, you'd be my student. I started laying out, always happy to be used. Yeah, yeah, I appreciate it. I started laying out some notes and I quickly realized how stupid that was. No. No, no, it really is. So first, I've never prepared a lesson for a class in my life and your professor is here. Second, for this to work as I think it should, I need to do a pretty basic building blocks, airline revenue management, one-on-one kind of course. And you're at least a graduate PhD assistant in airline revenue management. So you can't be my student because you already knew all the answers. No. So anyway, so let's try this instead. I'm going to pretend to be an aspiring professor working on a one-on-one level course, and you're going to help me by being the seasoned professor, pointing out things that may not make sense to an entry level student. So basically, you're going to play dumb and help people in the class, sorry. But we also need you to be your normal and positive challenging self at any point, which I know you will be. That'll be the best feedback. All right. And also know that I'm going to steal all of this for my class at the University of Colorado in the aviation MBA program. Okay. You're probably going to do it much better than I'm going to. Nonetheless, fair enough. Steal away. And actually, before we get started, I probably should think, I need to thank two people who I do help me a little bit with some of this history. My Aleemman, who you know well because one of your other guests, I was going to be in Don Casey, who ran pricing in your management in American when I was there as a great guy and who helped me with some of the history. So yeah. Anyway, two points though before I get started, the disclaimers that I need to make first. While I love Aleem revenue management concepts, and I think I understand them better than most, I never worked in revenue managers directly. And I am not an expert in detail. So that's why I had to call my and Don, for example. So I imagine I'll in accurately represent some history or some specifics here. And many of your listeners are going to know more specifics than I do. But the point of this lesson is not detailed. It's not the detailed history in specifics. It's about the evolution of revenue management at a high conceptual level. And how that evolution has changed airline business models. But if you have to get some feedback later about how I've misstated the precise history or left something important now, I apologize in advance. I will stipulate. They're likely right. And I'm likely mistaken. But I'll also suggest it probably doesn't matter in regard to the conclusions that you and I are going to talk about. Second, some of what I'm going to say is going to be susceptible to being pulled in snippets to make it sound as though airlines are greedy price gougers. It's really hard to talk about maximizing revenue without sounding somewhat unfriendly toward consumers. That's why airlines executives don't generally like to talk about it in detail like we're going to talk about it. You know, that's a really interesting point. It always fascinates me because overall airline prices have continued to decline. Inflation adjusted, right? So as good as they are at maximizing pricing, prices keep going down. And so for consumers, it's travel is really a better and better bargain if they were I always say if they were price gouging, they're pretty poor at it. Exactly. So thanks. I mean, you're always good about that. But again, others sometimes aren't. No. I just, I just, I just go ahead. No, and I think the other part of that is this has always been a low margin business. And airlines have always struggled to make money. Even when it was a regulated industry, they struggled to meet the prescribed profit level. And so I think it's important to, you know, I would get in fights with people at the Wall Street Journal. And in the years when airlines were going bankrupt and losing money and all, and saying, they have to make money. It's to the travelers benefit that they make money because then you can buy new airplanes. You can, you know, provide good service. And so in a low margin business, I just think consumers need to remember that and travelers and I think, you know, road warriors understand this. Airlines need to make money. That's not a bad thing. Thanks. You said it all perfectly. That's good again. But I'm just modestly concerned again. Some of what I'm saying, we pulled out the snippets. Sure. And I look, you know, Parker just said the quiet part out loud. Yeah. And that's anyway, you know, what the context I'm going to keep trying to bring it back to and you've already done it is, you know, this isn't about price gouging. This is about trying to maximize revenues on a really low margin business. Yeah. And I think that's the way I'm going to do that. It's important. People are, you know, that's their jobs to go figure out and do that. And in all my years in the business, I never witnessed anything resembling price gouging for God's sake. And as you said, if we're doing it, we're really bad at it. Yeah. But anyway, if all that's insufficient, know that what I'm saying here is entirely my perspective. Individual airlines might disagree with my perspective on this or certainly wouldn't say it the way I might be saying it here. And again, they might be right. But look, with those two, those two disclaimers, let's go. I'm a professor. So look, we need to start by describing what revenue management is. And I'll fall into calling it our end of time, revenue management in short is pricing and yield management. We'll talk a little more about those two functions. But the essence of what those functions are trying to do is maximize the total revenue collected on each and every flight, flown out each and every day. That's their job. And the people that are good at it are worth their weight and gold. And it's kind of an analytical group. It's almost like the Quant Joc set up that an investment bank. You know, it's throwing some food and letting them do their puzzles and work on this stuff. And the ones that are really good at it, like I say, just can make a huge difference. People like Benton, Balda and stuff, were really good. Scott Kurt, fantastic at it. Glenn Hollenstein, fantastic at it. People, most people won't know and I don't know him all. But people like Don Casey, who I talked about, and it's a channel in American. And they're just, you know, it's a different kind of function. And it's about, and people that really enjoy doing it and maximizing the revenue on each and every single flight and free and how to do that, is a really valuable part of their own business. So that's what we're going to be talking about. That's what we're talking about a good bit. They just know that's what those individuals and those functions are trying to do. And the importance of this function is impossible to overstate. The reason those individuals and those groups are so important is because it's so important to an airline. So think about a little bit about what you just talked about in really good years. Airlines make 10% pre-tax profit margins. 10% of revenues follow the bottom line. But what that means is that a $50 billion airline, like American Delta United, can just get its existing customers. It only needs to be a share. Just get your existing customers to pay 1% more. You know, instead of paying 500 bucks, pay me $505. Just 1% more. That falls to the bottom line. Sure, existing customers, you're not going to be, you don't need to figure out a way to get them to be paying 1% higher. That's 1% profit margin. You can't find that stuff. And where 10% is the best year you're going to have, getting 1.1 margin is just enormous in our business. So, these types of revenue management in groups can do those things. Alternatively, try to go find $500 million a cost savings at an airline without reducing capacity which is going to reduce your revenues. You can't do it. airline costs are largely capacity driven. Their salaries or benefits, their price, their maintenance costs, their aircraft, rents. I'm not suggesting cost control at airlines isn't. Cost control isn't important. Particularly because someone who came up through finance, I know it's important. But it just has far less leverage than even tweaks in revenue management. Which is why this is so important. Interesting. The other point is to make right now is go ahead. Do you have a question? No, I just think that's a really important point because we sometimes think of, oh, they're just being cheap or whatever. There may be certainly examples of that. The point is revenue is so much more important or as a lever you can pull. It's where all the leverages. The other thing I mentioned at this point is scheduling, which is also an incredibly important airline profitability and works closely with revenue management. But we're not going to get into scheduling as well. We're going to assume the scheduling department's top notch. They've optimized the schedule to maximize the profit generating capability of our airline. Right. And now it's up to revenue management to take that schedule and go maximize the revenue generated on those scheduled points. Right. Okay. So with all that, that is building buck number one. What you just said, revenue management, maximizing the revenue on each and every flight is crucial to airline profitability and very small improvements for mistakes. Can have enormous implications on profitability. Building buck two is airlines have very large disparities amongst other customers as to what they're willing to pay. Very large. I'm not going to spend a ton of time on this because I think everyone gets it. But some airline customers are very price sensitive or what we call price elastic. They just want to give them point A to point B as cheaply as possible with little regard for anything else. And some customers are priced in elastic. They care much more about scheduling price. They're willing to pay large sums just to get there more efficiently than some of the routing. Yeah. And I don't know of any other business where this disparity is so large. So going back to building buck number one where small changes can make big differences, small shifts in either direction along this spectrum. A price elasticity can have really large impacts on profitability. So I think sometimes when customers are looking at what are they trying to do here and it just seems like they're amazing petty or so confusing. Why they're doing it. It's all about really trying to move as you know, it doesn't take much. And if we can figure out a way not necessarily to get that in my example the $500 customer to pay $505. But to get one more $600 customer on the plane in lieu of $400 customer, those types of things can have the exact same effect. And that's what is going on all the time here because it's just so important. There's so much disparity in what people are willing to pay. Getting those who are willing to pay more onto your airplane is really, really valuable. And it's not just the question of income of the particular customer because that customer who's willing one day to pay $600 for the ticket, another trip may only be one to pay $300. Precisely. The exact same person. The exact same person, right? Depending on maybe on who's paying. In the first example, they're telling you what you've been in, some example might be themselves. Well, in my experience depending on totally who's paying. Well, it might be some type you really have to get somewhere even when you're paying. Yeah, no, that's it. That's very true. In general, yes. In general, in general. Yes. Okay. So, all right. And now the third building block and then we'll start with building blocks is the airline's schedule drives something we call natural share. Natural share is a term. Airlines use a lot internally. It's not, you know, kind of scientifically developed. But I shouldn't really say it that way. It's just not particularly precise. But it is, it represents how much share an airline should expect to generate on any given route, given the customer demand and the competitive options. So is this, I got 70% of the seats. I should get 70% of the share, kind of thing. Kind of stuff. Exactly. But it's much more detailed than that. I mean, they had this, if we were doing schedule and spend a lot of time on this, we're going to not do a schedule. But it's really important to think about versus revenue management because, yeah, when, what I can tell you is, if any airline, if they add a new round, they, they're not going to know pretty well how many customers are going to show on that routing, you know, as soon as it goes into the schedule. Because they know on that routing, how many customers are traveling per day each way, not just on that route, but on all the connecting routes that now makes better. And we're, and, you know, it's not, it's rarely about generating more customers. It's kind of, it's going to shift share from others just because now it's a better routing. That type of thing is, you know, again, that's kind of your natural share. If I go out of flight based upon where we are and, you know, there are things like S curve and you're 70% example, you should get more than 70%. Right. Because you have, you have such scale. But nonetheless, you know, but yes, thank you. That's what it is. And that's what we talk about as a natural share. Again, not precise based on tons of data. But it's important in this conversation because that's what revenue management, you know, [BLANK_AUDIO] I remember the manager can't do much about that. That's what scheduling goes and builds. And you build your natural share. Revenue management is looking at this, okay, this is my natural share. What can I do to maximize the revenue on the airplane given that I know that's what I should be getting in terms of revenue share? - Right, and let me just have some of that natural share. You know how many people in a market are members of your frequent fire program or that kind of thing. How many people have your credit card and that would be part of a natural share? - Absolutely. - Calculation. - Yeah, adding a flight from Dallas to El Paso is gonna have dramatically different kind of natural share for American Airlines in El Paso to Atlanta. But anyway, that gets done and that's coming what you're trying to compare yourself against as revenue management. So at this point, I'm gonna pause and give you a query that, you know, to students in this class that I might pose for this class we're creating. - Yes. - You're in that world and you as a revenue manager, manager, knowing what you're doing, you have three things you now know. What you're doing is really important. So you need to do it well too. There's a major disparity in what your groups of customers are willing to pay. And three, you're being measured by how you perform, how you perform versus what is believed to be the natural share of revenue you should collect on this market you're working on. How would you best go about maximizing the revenue on every flight in the schedule or the things you might do? Now, okay. (laughing) - The class is one of the ones. - You know, it's a fun time. I lived next door to an American Airlines pilot all they need to do is just raise fairs. Just raise fairs, they can pay us. And you know, we all know just raising fairs isn't gonna do it, right? - Okay, but you know what I want to do? You absolutely would say that. - Yeah. - And they-- - And address it. - Yeah. - Because then you're gonna lose customers, right? - And part of that, you know, getting $5 out of the $5 more at the same time, if I get one or two more people on the airplane, you know, then I'm gonna maybe turn that flight profitable, right? - So let me answer the professor. Professor, kindly answer your question. That student's idea, which is, that's a great idea. However, doesn't tend to work in our business. - Yeah. - Because 20 to 25% is a number, maybe everybody around, but when I was at American and prior airlines, the number I was always told by our team was, if we don't match the lowest there in the market, 20 to 25% of our revenues are going to go away. - Right. - These price sensitive customers matter no matter who you are. - Right. - And if you, if we just raise our fairs and they don't match, you, the revenue managers just cost me 25%, not 1%, 25% on our revenue. You just can't do it. You have to have a price in the market that matches for that reason. So any good idea of it, yeah, that's hard to do. - Right, so if I'm doing it, I don't wanna manage for the cheap ticket. I wanna manage for the expensive ticket, right? - There you go. - So, and that's kind of inside out or have asked backwards, right? So I've got to save some seats. - I could sell every seat on the airplane for $50, right? And have 100% load factor. - We're not gonna get your natural share. - And I'm not gonna get my natural share. But I could also screw up by, you know, saying, hey, everybody pays $2,000, and then the airplane goes out empty. So I gotta find a way to charge my price insensitive customers and appropriate price. And the old airline thing was the bakery, right? For the first loaf of bread is cheap. The last loaf of bread you got, you know, somebody's gonna pay you a lot of money for that because it's the last loaf of bread. And that was the theory with the seat, right? I wanna hold back empty seats for that walk up fare. And if I've got good data on historically, how many people show up or whatever, that's what I wanna manage for. So I'm gonna sell a few seats, I'm gonna match a few prices, right? But I'm only gonna do that on a limited basis because I wanna hold back seats for higher fares. - Yeah, you're a beyond a 101 student. (laughing) Thank you, that's of course that's right. The other thing I think students would say is, well, if I want some of those higher paying customers, I should give them a product. I should improve the product that's on the airplane. In the rules of this year, allow to, would you ever imagine, if you think putting caviar in coach is gonna get you more of those height, you're perfectly okay to say that's my idea. But you gotta, all you gotta do is just say, I'm gonna cover that with the cost of the caviar. - Yeah, when her giveaway liquor bottle, to everybody, yeah, no, but the old airline adage was, it's a different product because you're buying it a day before rather than 30 days before. I don't think anybody really believe that. - Right, then we'll get into something. - But yeah. - Yeah, so again, you're too good a student. But I think if we were doing this with the 101 class, we'd end up with a list of items and they come out in two broad ways. One, you can shift share from your competitors. Figure out a way to get those customers that are willing to pay more to fly your airline to be on you and more of your competitors. - And so-- - Shure, share, share. - Better-- - Right, frequent fire, mile bonus. What are you talking about? - More Roman coach. - More, okay. - Those kinds of things. - Okay. - You gotta put a better product on my plan that's gonna get those kind of customers who tend to be business customers on my airplane versus us. - Right, that was the whole more Roman coach theory. We give them more leg room. We will take customers away from other airlines. - So that's one way, shifting share. The other way, I think if we worked through all this is where you were going, which is to optimize the revenue of your airline's natural share. That is, figure out a way to get everyone on your airplane to pay something close to what they're willing to pay. And now to get into that, we'll get into that. But first, on a share shift, you've already gotten there. But in general, and I stress general, 'cause I know some of our listeners will disagree with this. Sustainable share shift in the airline business is really difficult in our business. To get some, to shift what is your natural share because of your schedule, off of your airline onto another airline based on their schedule. In a sustainable way, it's really, really hard to do. - So that's really an interesting point, 'cause I always think of people as creatures of habit. Right, once they get locked into, hey, I like flying this airline or whatever. It's hard to get them to change. On the other hand, what you always hear in the airline business is people will fly somebody else for $5 or $3. - Okay, I'm sorry, share shift on price, really easy. - Okay. - The biggest way, again, you don't wanna do this a regular management person. You don't wanna lower your fares to try and shift share 'cause all's gonna have the other airlines gonna lower their fares 'cause they can allow it either. And all that happens is a race to the bottom. But you're right, absolutely. The biggest way to shift share is price. That's the biggest share, is the lowest fare, will indeed move price. We'll get into that later, that's what happens later on. But anyway, in general, shipping share, other than price is really, really hard. Primarily 'cause it's so expensive to lose premium customers. So if you do this caviar and coach idea, and it works, everyone's gonna put caviar and coach. 'Cause they have to. - Right. - Because they can't afford to lose those premium customers. So the result of that is, we now all have caviar and coach, we raise our cost structure, we're back to our natural share. And that has happened, and again, back when Wi-Fi was put on, I know Scott Kirby, the time worked with us, and he got some griggy, still gets some grief of it. I see a time to know, oh, he said, Wi-Fi was something we should put in the airplanes, and all it's gonna do is raise our cost. And it was something like that. And in fairness to Scott, I should've been trying to remember exactly what he said. But it was something like that. And he was right about that product. It sounds so customer and friendly to say, "Oh, we shouldn't go put this probably any on it, "get out and know we said we shouldn't." But the point was, we're all gonna put this on our airplane. Because if it moves share, it's important, customers care about it. If an airline doesn't have Wi-Fi, they're not gonna find. So we have to have it. But it costs more than we earn from it. And we're all gonna need to have it on, and we're all gonna go back to our natural share and hear, and this is back in 2009 or something when we're all struggling. So that comment, I think was accurate at the time, sounds strange now. But that's the world of trying, the point was his point. And it got on my set of progressive. Whoever said it, the point was, it's really hard to move shares, really hard to move share in our business. Certainly at that time, with enhancements to the product. Because if you do, it's so expensive to the airline who lost a share, they're gonna manage the product. Fair enough? Okay, fair enough. Yeah, that's share-showed. And there's no magic answer to that. No, there's no magic in front of it. You know what I'm saying? Rather than just, oh, it's really hard. So if you're a student, you know, that's your idea, I'm just gonna tell ya. Right. Be prepared, it's gonna be, it's been tried. It's really, really difficult to move for your natural share. Yeah. Kavi had here, you could lose it. Right. American Airlines has proven that over the last couple years. You can make mistakes. Yeah. that allow you to lose your natural share and getting it back to the heart and then we can talk more about that. Yeah. But, you know, that's a self-inflicted wound. You know, actually, thinking our way to steal someone else's share is, like, it's really, really hard to do. Yeah. So, that gets us to the second part, the second idea we had on how to do that and that's to optimize the revenue of your natural share. So, to help us understand that. And let me just throw in, because we talked about it before, Richard Anderson proved dependability can shift share, right? Reliability? I mean, I think Delta by reducing cancellations running on time, they did get more business travelers gravitating to them in competitive markets like New York. I'm not going to argue that point, I think, is probably accurate. I don't know how much it did. Anyway, but yes. But again, that's got to be a sustainable, okay, that's really hard. That takes a lot of work to come up with a product enhancement that can't be matched quickly. Yeah. Right? So, that's the difference there. Okay. If you get there, it's like, you know, that the other reliance can immediately, can immediately replicate that. Right. But what's happening is they're working on it now. Yeah. And they said that has moved share, look how much is being invested in the other reliance and improving their operations. Right. For the same reason. Right. But you're right. Good answer. Okay. Now, to help us understand the second means by which everyone can maximize the revenues on any given flight. I want to pose you a question I got when I was a freshman in micro-economy, I want to want it out of the encounter. Okay. And I still remember it had an impact. I'll be back then. I still think that. So, anyway, and now this was all, what was it? 1981. So, this example is dated, but the theory is what matters. So, the problem like this, the story, the problem is like this. A hardware store advertises new lawn mowers at $150 each. But they'll give a discount of $25 to anyone that brings in a huge lawn mower for trade-in. The lawn mowers that are traded in are promptly pushed out the back door and thrown away. Yeah. Why does the hardware store offer this discount for something they throw away? And what is that price in model called? I'm not sure what is called, but you're essentially trying to make the consumer feel good about the purchase, right? You're giving them a discount as a way to get them in the door. I don't know. To me, it's not unlike, you know, Walmart got in trouble in different places for selling milk at $3 cents a gallon or something. And they were willing to take the milk was the lost leader to get them in the door. The lawn mower, I don't know, is it? You're willing to give up that bit of profit margin to make the sale. Of course. What the A answer to this is, is it's discriminatory pricing. The individual that owns a lawn mower. You respect what you're saying. Unless likely to go by your 100-foot-y hour lawn mower than someone who doesn't own a lawn mower and isn't a lawn mower market. Oh, okay. So that individual who doesn't have a lawn mower at all, there's flaws in this, of course. You might be selling, you might be saying, the guy who has a total piece of junk and has to have a new lawn mower. But in general. Right. And you have to be general here. The individual who owns a lawn mower isn't, you know, says, "Oh, my lawn mower's work, it's fine. I wish I had a new one." Right. Do they see the ads that they're going to be $25 for this thing? Yeah. A deal. But yeah. So that's how the hardware store maximizes their revenues. They can either charge everyone $125. But probably still would work. And it may not get the attention of the guy who owns a lawn mower. But the 150 is a fair price. And one that, you know, that that person is willing to pay. But some others may not. So that's the answer to the question. It's. It's. It's. It's. It's. It's. Scrimmatory pricing. Yeah. And it's. It's discriminating based upon whether you own a long corridor. Yeah. So. As we as a replacement, it's discriminatory pricing. The airlines. Because of this enormous leverage and the huge price disparity among our customers. Have been working on refining and perfecting price discrimination, ever since deregulation. It's the primary means for revenue management to maximize airline revenue. It is, as I mentioned before, white airline pricing seems so convoluted to consumers. It's not about shifting share. Nearly as much it is about getting your natural share of customers to pay what they're willing to pay. Okay. With me. Yeah. This is really important. So in some cases, offering a sale will motivate somebody to buy an airline ticket, who might not otherwise buy an airline ticket. That's that's the lawnmower. For some of your customers, they got to go. Right. So it doesn't really the discount or the discriminatory pricing doesn't really matter to them, right? Well, no, again, let's not get too cut up on a lawnmower analogy, but in the lawnmower analogy, in the lawnmower story, the person with the lawnmower is the is not prices. Is the prices of customers are that's the leisure customer? It seems like it seems like it seems like it should be the person. But anyway, the person is is in our world the leisure customer. They don't have to get a lawnmower for God's sake. They don't need to go around the store today. Right. You're trying to compel them to do so. I don't have to go to Cancun. Yeah. I can be in a size of it. I guess so anyway. So anyway, that's but that's such what's happening that's in this and again in the airlines, it's so much bigger than just the $25 and it's your entire pool of customers. So it's really, really important. And the airline business is this concept of discriminatory pricing. And when airlines aren't able to get their customers to pay close to what they're willing to pay, or in this this this I keep saying what customers are willing to pay, economists call it your reservation price. What you as a consumer, into the consumers are willing to pay is your reservation price. That's where you'll stop. When you can't get customers to do that, that's what revenue management execs called delusion. And that probably primarily happens because you have these fences that are porous, you know, that business customers can buy into the leisure fairs or competitive forces. You're trying to match some low cost carry. You're going to just keep selling the low fair even though you're deluding yourself. But anyway, delusion is a really important concept. It's probably the most proper reducing costs at an airline, but it never showed up on the P&L. That's because it's an it's an opportunity cost. It's just the cost of what might have been if you possibly could have collected it's the difference we want was possible to collect versus what you actually what you actually collected, which is in this case consumer surplus and revenue management leaders hate delusion and they work really hard to minimize it. So I keep coming back from the same concept. Yours working really hard to figure out how to maximize, get people as close as you can to the reservation price. And not have them pay less than they're willing to. I remember vividly sitting, you know, and we're at American and a group of investment bankers comes in and they tell us you're got to be as paid $149 meter from the courtium. You know that we'd have paid a lot more than that. And it just makes your part sick, you know, as revenue management, I look over at the time again with Scott. Kirby and he's like, yeah, spirits in the market and we got to work. We're sitting on, you know, this is back when we were matching all the spirit fairs. But enormous delusion. And again, as revenue management is a revenue management ounce that you now are, you would just hate hearing things like that. What you want to hear is, God, you guys, yeah, that price right. I felt like I felt it was a fair price, but it was what I was going to pay. So now, so let's talk a little more about this. And again, this is going to be a little wonky, but I think it's important to me to explain all this. So now I'll try and do it quickly. But when you go to, you know, the economic theory on this, the economy theory on this, there are three degrees of discriminatory pricing. First degree, perfect. That is, you chart each customer the absolute maximum they're willing to pay for a product, you eliminate the consumer surplus. Think of a skilled car salesman who negotiates different prices. Yeah. From individuals based on that, based on that salesman or saleswoman's ability to discern each customer's individual reservation price. They're just good at. And they know what you want to pay and they figure it out and they get they get you to pay what you want to pay. Because this, by the way, is why my dad dressed like a bomb and take off and watch any time he went to buy a car. Well, you know, the the great Bill Cosby show and not that we should cite Bill Cosby or whatever, but he was a doctor. And he would do that and put on radial jeans and a torn up flannel short and all. And with his kid and walking to the car dealership and, you know, struggling to buy a car or whatever. And then one of his patients would walk up and say, hey, doctor, Huxable. Yeah. And it would ruin the whole thing. There's the salesman who say, doctor. Oh, okay. Exactly. Okay. Well, that's first degree price is a good measure. Yeah. It's virtually impossible at scale. You got to know every day too much about your individual customers. But I, but I will note, you know, the expansion of AI has some people worried about that. And, you know, that's, you know, that's kind of what's come up with this Delta statement about AI. We can talk more about that if you'd like. Because not really what I'd be talking about this class, but for what it's worth, I don't think that's what they're trying to do at all. But none of the last that's what that's perfect price. Yeah no the car salesman saying oh I'm to see what zip code you live in or so I'm gonna charge you more yeah. Okay so that's perfect everyone's not gonna get there I don't think he was trying to get there but we've been young we thought we were trying. Second degree discrimination price discrimination. This is when companies charge different prices based on the quantity or version of a product so this allows the customer to self-select and do separate tiers so you can think of volume discounts you know you know corporations and better airlines get discounts you know commissions otherwise but they're still paying really high fairs but trying to get more than your share and then you'll get them at certain corporations a discount for example. That happens in other businesses as well where you can think of product tiers like Netflix basic versus Netflix standard you want to watch commercials or not you know we're premium and that happens in all sorts of businesses and by the way that's what's happening with Bayesia economy right which is what is all headed and then the third degree of discrimination and the lesser of the three is companies price products differently based on the unique demographics or subsets of their customer base so think senior discounts or student discounts an entire group of people that you believe you have you know are more price sensitive like seniors or students right give them all a discount because they're less likely to pay if you don't do that for them because they're price sensitive yeah or the long story yeah now it's the least effective of the three degrees largely because the groups are imperfect I mean Warren Buffett's a senior he doesn't need a discount right but he's gonna take it if you give it to him right so anyway so with that understanding that now let's go back with that theory to the reality of airlines at this point I've even compelled to start distinguishing before basic economy and after basic economy because that big a deal so I may say you know B.D. before basic and A.B. after basic okay as how big a deal it is but just no that's because it's truly transformative so some what I'm gonna talk about is gonna see really strange to those that run around you know before basic uh-huh but it's important to understand the evolution so well before basic as you know back in the 1980s as the airlines came out of a regulated pricing environment they invested heavily in price discrimination tools and policies in an effort to maximize their revenues and the primary area discrimination we already talked about was between business customers and leader customers so a clear a clear example of this discrimination airlines led by American in the 80s developed these intricate pricing rules things like 14 day advanced purchases requiring certain stays change fees all sorts of things to identify to to separate oh you're a business customer for zero leisure company yes and also yield management systems to do whatever they could to continue attracting leisure customers because you have to their 20-25% of your over-evernance with low fares but fencing business customers out right not just these fair rules yeah now yield management which we'll talk about in a second but we did that we like to products first-hand coach that was all was there so you're trying to fence people off but you're selling them the only once you sell the first class which is outrageously priced yeah it was not priced to sell I mean that would yeah it was really only one product I agree but at least there were two you know there was enough on a wide right anyway and at this point again because a 101 class we should do a brief explanation of yield management because it's I think transparent to the average consumer but it's important to this the evolution story in short yield management is the practice of having inventory buckets of increasing prices inside a grand distribution system it's different than pricing their prices but they're in the prices set but they're in there are different buckets and large there's 14 prices for the same flight exactly and what happened what happened is large airlines would match the lowest fairs of summer airlines but only a total point that they felt as they were going to be able to sell enough higher price seats in the future that they no longer chose to sell those little fairs yeah now in airline speak they weren't raising the fair they were rather they were closing the little inventory buckets they hear and talk about that but they consider it does make any difference all the consumer's thesis suddenly Americans fair is higher than the low cost care and those those other carriers would get Americans spill what we call spill right and those are basically customers that American in this example has chosen not to carry because they knew that higher yielding higher yielding customers are coming or they believe that leaving those fair buckets open would allow those that were coming to be able to pay the much lower fair than the reservation price so they shut those those buckets off my point on this the reason that's important because this also was extremely complicated and data driven they spent a fortune on it it was the way to do this in the in the existing computer reservations and GDS systems and it was another tool and price discrimination the way to get to maximize the revenue on the airplane and they were good at it so by the end of the 1990s average business type fairs were almost seven times higher than later first yeah seven times yeah the same product yeah okay let's take a quick break to thank infinity flight academy the leader in cadet academy training programs for helping us bring the podcast to you 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systems I mean I remember when it you start with hey the flight and then there was the realization that wait a minute we're pricing that flight with 50 different connections so we need to you know how do we yield manage it we're gonna we're gonna have priority for the Dallas New York customer because we can also take an El Paso Dallas customer and that's two fairs okay how are we gonna price El Paso New York and and build that into the into the whole yield management equation yeah it was again it was brilliant work it was a very complicated and really complicated ton of effort really smart people yeah intricate systems all this stuff yeah and I think that's important as we go for it is like I'll get to that yeah but look you know the result of that was stories and not just stories these miss happen all this happen every day very unfortunate results in account such as business customers paying a $1,500 for and sitting in a middle-season coach and on the aisle and on the window yeah where people who would pay $200 right and they'd have these conversations with each other on the airplane and the 50 hundred dollar person not only do they have this they don't have the same but I think a worse one right and they've paid you know seven eight times I know this sounds crazy now probably to people that are your my age but it was a business model for decades yeah and then better and the better the airlines got at it the wire that his berries became so the reason I want to trust why you know how hard this was to develop and create is because as I've been I've been thinking about this I think it's worth that worth asking a question that I keep asking myself as I've been put this together how can the people that were smart enough to build and develop these complex discrimination tools didn't ever decide to add at least a few simple and logical pricing add-ons like an additional fee for a window seat and coach or for a seat closer to the front of the airplane okay is that a question you want to answer that I mean think of that's fascinating think about all the effort times going into this why in the world and they know what they're doing this is pure pure and simple price discrimination yeah why wouldn't they is it a limitation of the reservation system thank you I think that's the answer again after talking to a couple of my friends only is so much I mean there were and and I think that that happens broadly I mean I in your example with the $1,500 thing one of the remedies was upgrades for for people right but for decades upgrades were not based on price you paid but based on your your loyalty level right how much you flew or you know how many miles you had accumulated and and I always wanted so the $1,500 guy may well not get the upgrade even though he or she may be the most deserving yeah of that and that was it was Was that just a blind spot or was that also a technology shortcoming? Good question. And that's, and again, that's why what I keep asking myself is I'm going to be like, "Was this kind of just legacy thinking you couldn't break out of it?" Yeah. Or was it just impossible? And again, talking to, it's a couple of friends of mine. I've come to believe, and it makes more sense. No, they had discussions about this. I mean, Maya talks about, you know, Nanook conversation with, you know, having a challenge from Mike Gunn a long time ago. In American, half of our listeners we're never talking about, but he ran Americans marketing back in the 80s and 90s. We're, you know, Gunn challenged the team with go figure out ways that we can get more from business customers. And of course, and how hard is it to come up with, okay, she's like, yeah, we said we talked about, you know, pay more for the window seat. But the problem is they couldn't do it with technology. They were working off old mainframe systems that many of them controlled by people outside their firm at the GDSs, who, you know, even if they wanted, you know, if they could, you know, figure out a program that quickly that wasn't in their business model. So anyway, I think that's the most of your tickets were sold by agents. Yeah. Somebody else in other systems. And, and that's still an issue of, you know, what, yeah. So we have a quick spin on how to talk about this. And I know this is where listeners are probably schooling right now. I'll tell you what it was. And I don't know exactly. I'm just going to hand wave it as, it's primarily technology. I think that's, I think that hand wave is largely accurate. And maybe there was more. I'm not suggesting there wasn't somebody back in that time who had better ideas. But I think if you, if they did, they would have been told it was just unemployment of due to technology. So, you know, one road sign on that, one, one, I think a lot of that pricing creativity originated with discount carriers who weren't beholden to the main friend systems, basically. And so, so Ben Baldanza at Spirit was able to do it. He couldn't do it at US Air, but he probably could at Spirit. Again, my student is well ahead of me. Oh, sorry. You're absolutely right. I mean, what happens is technology changes. Right. The internet comes. Yeah, websites are developed. You can put your own product, people are buying, directly from the airlines, instead of the GDS, that stuff coming back then. When these people were doing these things, I don't think they had the ability to do much more in that sort of thing. Within the constraints they had, they built this arcane system. Did it really, really well and it worked. The problem is it wasn't sustainable. Yeah. So, in the early, you can't have a model, or somebody's paying $1,500, the firm middle seat, and they had to be more than $200. It's not going to work forever any way. Right. So, what happened? In the early 2000s, it became clear that model wasn't the product that people were looking for. And when it events like 9/11, the dot com, the dot com bubble, rising fuel prices, increased LCC competition. All those things, like a serial legacy airline bankruptcy. And open the door to a lot more LCC run, which eventually the traditional fences were just gone. So, this world that the legacy runs that created wasn't just transformed. It was gone. Yeah. The yield management still there. There's still efforts underway to charge different videos. Saturday's days are gone. 14 day events were gone. The real tools that were used to separate are gone. And this disparity went away. There's still a disparity, of course. But it's two or three times, not seven or eight times. I think it's worth saying, too, with all of those crazy rules and penalties and fences that were in place, there were a whole lot of travelers who gained the system. And it was, you know, you would buy back-to-back tickets because you could get around the Saturday night stay for multiple trips to New York or whatever. You would, you know, there's still a little bit of, you know, this whole skip-ladding thing, which is a new name for an old technique of, hey, if it's cheaper, go to El Paso, I'm just going to buy a ticket to El Paso, but I'll get off the plane in Dallas because that's where I really want to go. So, and that all, it just angered customers. Absolutely. It made buying an airline ticket an unpleasant thing, a difficult thing. Absolutely. It didn't feel fair. Yeah. And because it didn't feel fair, everyone felt perfectly fine with going and figuring out ways to break through the rules. Sure. So, it goes away. And then we move into this period. Beyond that, that's really not very pleasant period, you know, through the great recession and the growth of the ULCCs of debondling. You'll remember all that. Again, not going to spend a ton of time on it, but the important point about the debondling thing is that the ULCCs took it to a new level. Yeah. The ULCCs, and you mentioned Ben, they were doing things that, you know, at the early on, maybe none of us thought was possible, but they were, they were, all things that the large airlines included in their base fairs, like carrying on bags, assigned seats, drinks, they were all extras to the base fair at spirit. Right. So, the large airlines, for a long time, tried to post fairs that looked like they matched, that, that max spirits kind of what they called getting on the plane fair. So, the fair would have a fair of $49, but you got to pay for, you know, a bag, you got to pay for a carry on for God's sake. So, someone else would post a fair that adds $49, and the cost of whatever the charging for the bag, et cetera. And they, they post a fair that felt like, at least to them, like, I guess, what you're really paying is consumer, or matching their fairs. But the GDS systems would only, would only show the base fair. So, as a consumer, what you would see is, you know, in 20 to 25% of the customers again, would see the lowest fair is on spirit. Right. Huge problem. Yeah. For the large airlines. Yeah. Not only do they have to match the spare that spirit isn't really charging, because they're charging add-ons to that, and the other, other airlines don't have. Yeah. But if you, and if you, if you, so if you don't, but if you try and match what their true fair is, you lose 20 to 25% of your revenues. Because you're going to be way down on the good play. Because you mean so far down the spot. Yeah. And maybe it's not 20 to 25% because spirit is not that big yet, but it just fuels their growth. Yeah. Because they have this best share shift thing in the world. Yeah. A fair advantage. And airlines can't allow that. So, you know, things again, I'll skip kind of this for you and I might find fun talking about, you know, American actually try to match the base fair. Yeah. And it did. And I think it was effective against spirit, but it was not effective. You know, Wall Street didn't like it, other airlines didn't like it. So, but as that's going on, delta is working on base of the economy. And I believe this spirit, you know, fair advantage is what led delta to begin developing basic economy fairs. They were doing it back in 2012. And I got to say, I believe, because I wasn't there. And I can't speak for certain as to what they're thinking about. Maybe we should bring Glenn on, Glenn Howenstein onto the show. And he asked Kim to tell us about the story of this transformational event. But absolutely. Yeah. And maybe he's going to tell us, oh no, we realize all that this is a transformational product. And, you know, if we, it wouldn't just restore price discrimination to the airline industry, but it would improve price discrimination from an unfair and unsustainable third degree model to a much more efficient customer friendly and sustainable second degree model. But I don't think that's what he's saying. Yeah. Because we know at least that internally delta referred to basic back then early on as a spirit match strategy. Yeah. That's what they call it internally. And they initially only placed it in the spirit markets. I just think this is really interesting. Yeah. Because, you know, what I've talked about is this transformational event. I don't think even they realize at the time how transformational it was. Right. But only when they saw it in place, do they see what happened. So they have it only in spirit markets. By early 2015, you know, three or two or three years later. They only had basic account against 75 rounds and all those had LCC competition. Yeah. But by 2016, just one year later, they expanded basic economy across your entire domestic network. Right. So it only sees logical that as they rolled out what was a defensive tool, they came to realize it was an enormous offensive tool. It was actually the basis for a much more profitable airline pricing structure and a transformation one. So United American had a basic economy in early 2017. By that time, you know, I was an American and it was pitched to us as both a great defensive tool for ULC. So he's primarily this, that was the pitch. Yeah. But also as a potentially transformational tool for maximizing revenues because of the tiers above a basic account. So it sort of, it becomes the discount for the lawnmower. It becomes the, yeah, it becomes the base of which you can add things onto it. And really, I think what it comes is, it's basic Netflix. It's commercial. You know, you want to sit, you don't care about your time, you're willing to just, all you want to do is see the show. We're going to give you this. And again, huge difference basic Netflix. Right. That doesn't have the prices for it. We do. But yeah, that's what it is. Basic economy is here's the bare bones spirit product. We'll get to the clue. Yeah. And we should, again, for our 101 students, we should make sure we're always clear about this. You know, the back then basic economy is the bare bone products that you see on the airplane. But depending on your line offers very little else, no seed assignment until check in. Last ones to board limited if any frequent fire miles of cruel baggage limitations. Yeah. No change. changeability, etc. All just a pair of bonds, as you say, get you to quit. Right. No. I remember thinking at the time, it was a strategy of saying, "Okay, here's the bottom fair, but we don't want you to buy it. We are going to make this so distasteful that we want you to spend more and buy up." Now, for some people, the opportunity to buy that cheapest price, that's exactly what they want. And for others, and I think we've seen this in so many other consumer areas. I mean, you mentioned Netflix and everywhere else, right? Consumers actually like the opportunity to buy up to their comfort level. Exactly. I would just reach out a little bit while you said and say, "It's not that they didn't want you to buy it." They wanted, we wanted 20 to 25% of our customers to buy it because we knew that's what they care about. But if that's all you care about, here it is. You didn't want to buy it, it was the other 75 to 80% of your customers who were willing to pay more. And that was the classic problem Aaron has had, and here was a solution to that. And this willing to pay more on the sudden, I think it's Delta in particular saw what was happening. They realized, "Oh my goodness, we have people willing to pay premiums that we were never offering the ability to pay a premium." And when we offer that ability, what do you know? They're out there number one and two, "Oh my God, we need to get more of this product out of the airplane." They're willing to pay for, very, our willing to pay for more legroom. They're willing to pay for basic economy. I don't have for premium economy. So I need more premium economy seats. Because that's what they see it happening as in the real world as they have the product being priced. And therefore they, which I think is a key point of all this, and you're leading me there, which is much of the narrative is airlines like Delta went and bet on the product. They went and put a big product out there hoping that they would trample, they would steal, share from other airlines and get business customers to fly them versus other airlines. Maybe some of that happened. Certainly if you're the first one that'll happen. But what I believe the real story on this is what they understand is, even if we lose the share ship, this is the right way to price, the screaming rate. This is the right way to maximize the revenue on the airplane because I'm giving, I'm allowing the customer to choose a product at a premium that they're choosing to pay. They're happy because they're paying it, we're happy because what they're paying is cost, you know, gives us more than it costs us to provide that service. And this is a win win. And that's what's happened. Yeah. And it's, I mean, it's fascinating because we've seen Delta brag on earnings calls about the growth of basic economy. Right? And hey, we're, you know, 25% more basic economy tickets or whatever. And that's, and part of it, and in a, I think this is, you know, not to get ahead, but it's not just the product on the airplane. The basic economy, if you believe it brings in new customers or customers who aren't in your loyalty program becomes an opportunity to get them into the loyalty program. And then if you get them in the loyalty program, maybe they'll get your credit card and maybe, you know, so you can make money off of a customer in other ways, other than just getting them to buy an extra leg room seat. Yep. Now you're there. I'm there. I mean, look, it's brilliant and it's transforming. I mean, it takes away the price advantage and therefore much of the spill from the ULCCs. And in most cases, the large airlines don't need to close down the basic economy price bucket and give the ULCC the price advantage anymore. Yeah. That basic economy product is unacceptable to their less pricing and their customers. So I'm not, I'm not saying there aren't times of the point that they might close down or raise the basic economy fair above where the spirit might be. But in general, they're well-involved. They're matching spirit fairs or frontier fairs in this case. Because that, that, that is not a product that's going to dilute them. Right. Because people like you and others aren't going to pay in certainly business people. They're their business man. The other thing we found right away is, by the way, most corporate clients said, please, fair, don't wait to not show me that fair. Right. I don't want my clients screwing up and buying that. Because they're going to be really upset. It was happening. They were buying it and getting really upset about the product that their company had put them on. Right. You know, so they suppress it. They mean to show it. Yeah. Corporations. Uh, many corporations. So anyway, it's, it's really in that regard. Yeah. And not just matching the fair, but also matching the product. Yeah. Right. Which is a better product for God's sake. You're on. Well, you're on a seat. But, but if you're going to, you know, the, if you're going to pay for, I don't know, what? Uh, pay for a seat assignment. Right. That's, that's how you match spirit's lack of, or spirits seat assignment fee. Right. Yeah. Yeah. Um, so anyway, and then like we said, as you do that, a funny thing happens, you find customers are, you're willing to pay more for the product. Yeah. Who knew? Yeah. I mean, it seems illogical now. I know. But again, when you go, that's why I think this history is important. We couldn't do it. But before we go through the last turmoil, you know, this unbundled debondling, which actually kind of takes away from the customer. So you've got to pay more for what you used to pay for, be up. You want these, these small things. Um, but it turns into something that says, no, okay, here's, here's the bare bones. And now here are things that add on. And the add-ons people are willing to pay for it. And they're willing to pay a good bit for it. When they do that, you realize you need more. Um, so look, I don't think, um, that Delta is necessarily attracted more premium customers by betting that premium customers would come to the enhanced product on share shift. Again, they may have gotten share shift because they were first mover. Um, but I think they fully understand that, you know, this like, like other product enhancements, if it works, the other ones are going to follow. And that's what's happening. Right. Um, but they've learned their customers are more than willing to pay a premium for the enhanced product, that more than coverage costs a product. So they keep putting more. Um, so on essence, I don't think the issue is a necessarily attracting more premium customers than it used to. Right. I think the industry is here to have to offer those exact same customers an opportunity to pay premiums. Yeah. Never existed before 2017. They never existed before basic. Yeah. Uh, yeah. And some airlines are ahead of others in that process. And, but they're all headed there because the best way to eliminate costly revenue, revenue delusion. And so that's way to maximize revenues on each and every flight. It's revenue management. Yeah. Uh, pure and simple. So anyway, we're coming, I'm coming kind of the end of this. So if I'm a student or even a customer, I might say, well, who cares? What do you resist make? If these airlines improve their products and that led to higher pricing, or if they change their pricing model, then that's, well, you know, better product. We end up in the same place as a customer. You know, it's, we have, we have better product in place. And I get to choose to pay. What? Check here too. Check it in an egg. Yeah. Exactly. To which I'd say, no, it doesn't matter. The shifts important because it's real and sustainable. This is a model that makes sense. Airlines work so hard for 20 years to come up with this, you know, high-scrimination model, this third level, this third degree model, which worked. It absolutely worked. It was just unsustainable because the, because the gap was so big that you invited low cost competition in. Um, so it works on the natural share. They don't need to steal share for it to work. Of course, you're going to try to keep stealing share. That's what airlines do. We, yeah, it's even better if you can steal share. But to the extent they still share that's additional profits, but it's also means the other end of the day trying to steal it back. Um, so and it's good for the concern because I get to choose which products they want to pay for much unlike the prior model. So I'm not suggesting, you know, that there won't be tough times for airlines in the future. And that there won't be tough revenue environments. But I don't think this pricing structure will change. I just need the prices for each of these products will be lower in that case. I think this is a real and sustainable because it's so logical and so perfect for what airlines need to do. The discriminatory amongst some very, very large disparities between their customers and what they're willing to pay. Um, at the same, on the same airplane, um, and it gives them the ability to do that while matching the ULCC. So I think it's here for the launcher. And I think that has real implications for the industry in terms of things like ULCC competition, relative price offerings, pre-good buyer programs, customer satisfaction. I think that's why I'm saying it's the second most transformative thing. Yeah. Let's pause a moment because we also want to thank Ontario International Airport for its support. Ontario International Airport is celebrating a decade of local control. 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Promotional support provided by the Ultimate AvGeek website, the AirCive.net, a vast collection of airline memorabilia. Timetables, root maps, rare cabin and airport photos, special flights, and more all at the AirCive.net, the hub of Air Transport History. Okay, Professor, continue. Do you think that this industry has had continual evolution? Do you think that some other model or answer or response is out there to be evolved? I say that because it seems to me that ULCCs are at a point now where it's your serve. You've got to come up with something new to respond to basic economy. Yeah, let's go. The answer is, of course, it can be evolution. Let's go through the-- let's go through the answer. Let's go through these questions, okay? Okay, let's start with the answer. Sure, yeah. Let's see if we can answer those questions that we posed that we'd be able to answer at the end of this. Okay. That will address if it doesn't come back to your question. Okay. All right. So, first question was, how come more rooming coach was a strategic failure, but products like premium economy and main cabin extra ever-roundings success? Because more roomed throughout coach, you gave away for free. It didn't-- you know, extra leg room seating becomes something you can charge extra for. And more roomed throughout coach. And, you know, to me, that was at a different time too. That was when an airline seat was much more of a commodity. And it was hard to move share, right, as you've told us. The theory was Americans said, hey, we're going to give everybody extra leg room. So they won't fly united. They'll fly us. And people said no, especially if the price is cheaper somewhere else, I don't care. All right. Okay. I mean, that's it. Yeah. They were looking to shift share at a time that they couldn't monetize. They couldn't. And they tried to monetize, but it didn't work. They still had-- because of the pricing system as employees, they still had to map-- they couldn't afford to lose 20 to 25% of their customers. So they still had to match the lowest earn the market. So those people were paying the lowest earn the market and also just getting more space. But by the way, if anyone doesn't know what more roomed coaches, Americans talked about like two of those seats back in the early 2000s. Two or three. Yeah. Six foot five Don Cardys. Yeah. So they said that their seats in CoSLA are really removed in an effort to get more business customers or more people to pay more in like 2000. So that product-- I mean, obviously, a huge product in it. Did not work. They still-- because all that is happening now is their prices are large in the same because they've put it in force. They had to match the low fare. So those 20, 20% of people that just paid the lowest fare now just happened to have, you know, four more inches of leg room and they're happy. And the business customers who are paying these enormous prices back then, they're not going to pay even more enormous price to be an American. Right. That actually what they're counting on is what you said. They're counting on the people that pay really high fare as a united to now choose to fly Americans dead. And there might have been some of that, but they're sure what enough. Right. Because it's really hard to do. Like I said, it's really hard to get people to ship because what those people care about the most is, you know, what's who's going to get me there the fastest. And that's the natural share. Yeah. And then they move someone off their natural share into your product. Again, more, more room and coach absolutely had to do some of that. There's no doubt there's huge product names and they advertise that a lot of it. So I know it had to do some of that, but it clearly wasn't enough because it was gone within two years and, you know, well, there was a downturn. Yeah. But I wouldn't have worked in pricing environment at my point. And indeed, unfortunately, probably for customers that was like what airlines look to for another decade is, well, that's why we don't do these things. Yeah. Get more room and coach. Look at what American try. And it obviously didn't work. And caveat and coach isn't going to work either. It's either an increase across and not move share or it's not going to move share. It's just we shouldn't do those things. And that's what we get to all of it. It was also, by the way, I think, and I think this is relevant, was at a time when standard seat pitch was not as cramped as it is now. Oh, absolutely. Yeah. So, right. So, if you had already squeezed down to 29, 28, 30-inch seat pitch, more room throughout coach might have been a whole lot more attractive than if, hey, wait a minute, I'm getting 32, 33. Do I really care if it's 34 or 35? I mean, yeah. Anyway, at the end of the day, I think it was an effort to move share, which is really hard. And it wasn't, you know, an ability. They didn't monetize. They weren't able to monetize, but it was a price instruction. Yeah. So, what was the next one here? Why are some executives who once argued against product enhancement in the airline business suddenly product advocates? Have they changed? Okay. No, they haven't changed. You know, those individuals in the down, just unfair to like me. If I was still in the business, I'd be one of these people who would look as though I've changed. Right. But this was a question we had recently with Scott Kirby. And I've been probably just gone out of it. But good. He's not fair to him. Yeah. This is true. I think of anyone who was in the industry in 2009 and was talking about, you know, you know, hey, we can't put more product in the airplane because I can't get paid for it. And who now is in the business and is saying, I'm going to pull out our product in the airplane. And people are saying, kind of what happened with that individual. So yeah, the US got, well, anyways, currently, Scott out of it. But it would be true of anyone. He's one of the very few people who was, you know, had a high enough position in 2009 that he was being quoted on this. And now he has a high enough position in 2025. He's still being quoted on this. Yeah. But the answer, I think, is individuals, you know, like, you know, someone like me, if I was still working, we're Scott in this example. They haven't changed. I mean, again, on this point, they haven't changed the way they think about the business. What's changed is the way to maximize profit. In 2009, the way to maximize profit was not to put a bunch more product on the airplane because you couldn't get it monetized. But now, with the open and recent economy, it is. So that's what I think. Yeah. Yeah. I do think, and this part, I've always thought the airline industry was the place where new pricing strategies would get developed. Price where new pricing strategies went to die. I mean, where they succeeded. But the challenges in this business are so much more that you get a lot of innovation out of this, right? A lot of other industries now do yield management, right? But it started with airlines. And so this idea, I mean, I do think the consumer has changed in terms of willingness to pay more for add-ons and all. And there's a bit of a chicken egg thing. That start, because airline started baggage fees, right? And now that has migrated, that concept has migrated to other industries. But I also think there's, and this is what's going on at Southwest right now, maybe, where there is much more consumer acceptance of, yeah, they're going to charge a fee to for me to check my bag or a fee for this or a fee for that or whatever. Yeah, no, I agree. And again, I think the reason airlines are so innovative as you say on this is because it's just so much more important to us because of this disparity within our customers, which isn't going to go away. I mean, again, this is, we always get over time this. Why do you even match these fairs? Again, I told you it's 20, 25%. Another point is, well, why don't we just have an airline that will leave for business customers? Lord knows that's as well as been driving a million times. Right. Never worked. So anyway, I think this disparity that airlines have in their customers is what drives all that innovation. And always the great question of who subsidizing who, right? Is the leisure passenger subsidizing lower business fairs or is the business customer allowing leisure people to fly on cheap fairs? Yeah. Whatever the case is, they're not paying enough for the airlines to be wildly proud of right. And they allow me to work very, very hard to maximize that revenue. Okay, let's combine the next two because they're similar. What happened to the spill carrier model? You kind of ask me this. So I'll try and answer it there. You know, just the ULCC's innovate. Look, my view is the spill carrier model seriously on by the basic economy product that is not necessarily diluted as we already talked about. So it's much less likely to close that. So it's much less likely that those airlines that a consumer is going to go online and find those airplanes have a fair advantage versus the other airlines. And that's what spill is. You know, and so I think that model, if you're living off that model, which those airlines were, you got to figure out something else. That's interesting. Do you think the internet is what really changed that? Or I mean, the internet gives you perfect pricing information, right? The perfect pricing information all through the 2010s and it worked just fine. I think basically how many change it? Back then, airlines, we've matched. the fare for a while then we turn it off. Then you get spilled. Or you not want to match spirits, low as spare because it didn't include all their add-ons and you would look to the customer like the lowest fare without spirit and they get sp- that's not spill, that's price advantage. But because- but for those same reason that's what happened before, those those things aren't happening anymore because of basic economy and that's a huge deal to these carriers. So when you ask can there be more innovative, can they figure out things? I don't think you can figure out way- I don't know how they can figure out a way to just all of a sudden have a price advantage but they don't think the owners are getting a price advantage anymore. They have to go back, they have to figure out a way to have a cross-manage. A way to live off the revenues, their natural share of revenues, not more than their natural share because of the spill, their natural share of revenues at those price levels has to be profitable. And the way to do that is have a cross-picture that manages that. They've unfortunately gotten themselves, I think, in trouble on both fronts. So look, they're challenged. I don't know if we're not going to predict that they're going out of business or anything but their business model is- you can see it in their financials, you can see it in their growth prospects. It's much harder to have a price advantage. You've got to have lower costs now than the- and you know Richard Anderson mentioned this on our call is like wow, you know the big neurons are open at the door to possible cost advantages with things like new labor contracts, at least in his view. You know, and we've seen that in the past. So maybe that kind of happens, but I don't think it's with the existing LCCs or LCCs because they've kind of gotten their cost up to there. So maybe there's- I think what more like will see is new hindrance come in who have really, truly, truly low costs again and they grow fast so you might see more and more of that kind of repeat itself. But I don't know if you're at a LCC, you've got to figure out a way to get your costs into a range that allows you to be profitable at your natural survival. And I'm just curious because I think it's a mistake for them to be matching sort of a a big airline model, right? Put in first class seats, put in and take an out seats for extra legroom rows and stuff. Those things are going to raise your costs, your unit costs. And I just can't see consumers saying, oh yeah, I'm going to, you know, frontier first class. That's for me. I don't know. I don't know either. I really don't. I mean, the camera, you know, that's what happened at the Legacy Carers. You know, they didn't have, they didn't have, you know, premium economy. And then once through basic economy fairs, they figured out, oh, I can sell these seats for a lot more than they cost me to take out a row of seats. They didn't work. So maybe it, maybe it's still an optimal model for them. I don't think it's not going to be as good as what the larger ones have with the same model. There's no doubt about that because they don't have the scale. That model is contingent upon having a schedule that gives you a natural share that is sustainable. And I don't know if they have that. But it's, it may be better than what they're doing now. It's hard for me to argue. I don't know, but I'm with you. I'm the question. Yeah. Okay. Next question out here was what benefit should frequent flyers expect going forward? Now we have any mentioned frequent flyers yet. We could spend a whole other class on that and what might happen there. Yeah. This one, I think, is really interesting because, and you've mentioned it a little bit. What's happening now is airlines are, as they recognize the value of monetizing these seeds. They've stopped giving away as many free things to their frequent flyers. Right. A frequent flyers, I imagine. So I can remember when I was back back when I was in American, you know, in Delta was touting what their paid first class load factor was and it was higher than ours. I'm asking our GM asking our team, how come they can do this when we can't. And the answer I got back was, well, they're calling it paid first class, but these people aren't paying full fare first. They're not paid full off. They're, you know, taking bypassing years and selling upgrades to them. And, you know, so they're only getting an extra $200 to which to point out, well, who cares better than that? It's an extra $200. In this work, well, $200 makes a huge difference. Yeah, no. And you can, people are making a work out of it. That was the point. It was like some sort of revolutionary thing. And quickly, what we said was, well, we got to be really careful about this though, because we're going to alienate our free suppliers who are used to getting that as a free upgrade. And those, that they're really important, of course, because our credit cards, you know, generate billions of dollars of revenues for people wanting to bought, wanting to use their frequent fire miles or points. So we'll get to be very careful about it. Well, fast forward to where, I don't know, just a couple of earnings calls. I just saw a quote from Glenn Allen's time again, where he's bragging about the fact that they have, I think, I don't want to miss quote, but what I think I read was, bragging on the fact that they have virtually no free upgrades anymore. Right. That they're almost 100% paid first, if you will. Again, not paying full fair first, but they have, and they're not, they don't seem to be losing any sort of frequent fire share from their AMX card. It seems to be doing really, really well. And I'm just going up. So they have to get out of way to do this in a way that I'm sure their frequent fires aren't particularly happy about. But nonetheless, they're okay. You know, I think the new rule is, look, we love our frequent fires. You know, if you want to upgrade, go buy the basic, not basic economy, go buy the fair just above basic economy. And you get a free upgrade into premium economy or main cabin extra. Right. That's your upgrade. Right. That by the way, maybe if this is the trend we should talk about, I think over time, you may see that begin to try and be monetized or work a long way away from that. But that's what it looks like. But these airlines are realizing is we can get a lot of money from monetizing and we love our frequent fires. Of course, we value the fact that you don't have that. But if you want to move from the cabin you're in into another cabin, just give us more miles. Yeah. Use the point you've earned to pay for those. And that's, anyway, that's what I have the trend is. And I don't want to get frequent fires kind of open to our zone. My god, what's going to happen? I think it's a, if it happens to be a graduate ship, but it's clearly what's happened with the first class cabin. So I think it's logical to assume that airlines will keep figuring out ways to do this and that things that once were free. And again, people take such and that is not free. The people earned it by earning your miles. But once things that were once given then to those who had who were elite customers may require you to pay for more miles. And so the question is, can you replace the benefits? I mean, what's happened with frequent fire with elite levels of programs is, I think, the benefit to benefit to Ben Repoist. You mentioned one, the upgrade to extra legroom instead of first class. But I get that universally. I'm actually okay with that. I infrequently get a first class upgrade. I'm fine if I get extra legroom. Boarding has become such a, such a mess that I want my status in the frequent fire program just so I get an early boarding group. I mean, that's the, you know, or the benefit is reaccommodation in disruption or a special phone number to call or there are things, I think the incentives for people achieving high levels of elite recognition in the program. That's changed. And airlines have really kind of done a brilliant job at convincing people that high levels of status are still worth something. Yeah, they almost feel like they're worth more. Yeah. It's just, it's like, it's status. So anyway, being able to board first, I'm with you as a huge event. I'm suggesting, I'm suggesting, a larm anybody, but those things can be monetized over time. Right now, they've chosen to monetize the upgraded first class. And not only have they chosen to do it, they're doing it and bragging about it. Again, it's just that's just so to me, so telling what's happening. That never would have happened when I was working. I would say, I'm going to go on the call and tell our frequent buyers, or not give it any more free upgrades. You know, our marketing people, we're going crazy. Yeah, I mean, we wouldn't have done it for that reason. But now it's, it's okay. So that's great. That's, again, that one, if anybody says great, it's goodness for the airlines. It's goodness for the customer's own understanding. It doesn't mean you can't get into first class of the free environment. It just means if you want to be into first, if that's really important to you, you know, not always. Yeah. There's an interesting thing going on right now at Southwest where a list preferred people are apparently very happy with the changes that are coming. But a list people are unhappy. And and one of the one of the issues is when do they get to reserve an extra leg room seat? And they're they're low in the process, right? So, you know, it's 48 hours. It's not at the time of booking. And so all the, you know, it's possible that all the seats will already be taken. Or if you change flights, you're not guaranteed an extra leg room seat. So in a sense, their benefits are being diluted. And and they're not happy about it. It's going to be interesting to see if Southwest can get away with that in in a sense. Or if they need to sweeten the pot. Yeah. Thanks. But again, that's exactly the kind of stuff I'm talking about. But again, I just, as an observer now, I'm not, that nothing to do with it is, if it happens or not. But observing this, it feels like those types of things are exactly which we're going to see. Yeah. The bigger ones you're going to see. Okay. What what used to be an automatic, you know, a time of purchase upgrade for you based on your status? Well, now it's going to be 48 hours in advance. And by the time you get to 40 hours in advance, you may not be able to do this. Yeah, I want to get it now and give us some more money. No, and the pressure is if I really want that, I'm just going to go ahead and buy it, even though I could get it 48 hours in advance. Okay, and again, I know I can just tell them, this is not another, this is going to be a lermist if I made you sound. To my knowledge, I don't know, you've been working on this. Yeah, I don't know, this is going to happen soon. I just think this is a gradual and rational result of where we end up, but it's going to be tempered very much by the fact that the credit card programs are still valuable, that you can't keep asking people to give you two cents a mile for something that isn't worth two cents a mile. So they're going to figure out, they'll balance that. But it's, anyway, I think you will see a moment where trying to monetize more of those types of issues. Okay, look at our last one here, what, how will the product models of the big three compare to each other in the future? My answer to that is they're going to be really similar because that model is the way to maximize the revenue and natural share. And because any allowing any loss in natural share to the product is a lot more expensive than matching that product enhancements. So, you know, I think this is, this is the new model, it's the right model for legacy airlines. And I think what you're going to see them all move to this product. And I think you're seeing it happen today, not just this product, but these product enhancements that allow the customer to choose between, you know, whether they want to pay more for a better product or not. That's going to result in, you know, a better product than all the airlines. Yeah. So that, that makes a question a little bit of two big premium airlines or three big premium airlines because Scott Kirby's been saying they're only going to be two. Okay, Scott. Yeah, like I, I, as I always do, I'll listen to your show and I listen to Scott, that he did great job as always. Yeah, that one now. So I'm happy to comment. You know, and what I think is, you know, what I'll always say before I comment about anything Scott says, look, I think Scott's great. He was part of our team for 20 years. It's a big part all we accomplished together. He's one of the best airline executives I ever worked with. But because I know him so well, I also knows BS. And this, there will only be two global premium carriers is complete and total BS. And I think he knows, you know, there are three such airlines and always will be certainly for the foreseeable future. And look, they're still struggling to regain share they give over a year ago through a flood distribution strategy. Self-inflicted and they've talked about it. They talked about their doing about it. That's what, you know, I guess self-inflicted their working through that. But that doesn't change who they are. Americans a global US network carrier with one of the most valuable networks in the world. And then as we, as we've now discussed over a long time, the way to maximize profits of an airline like that is to monetize the enormous demand that exists for premium products. And that's what Americans were going to do. You know, I flew because of my, because of my, because of my quantus board membership, I flew flagship first on American from DFW Brisbane recently. It's as nice as anything in the sky. Certainly in first and business, you know, pods, door closes, your, it's fantastic product. They have a 321 XLRs being delivered with 155 seats. 155 seats on an a 321. And instead of 220. Or we don't have to find out exactly because it's all, it's just hugely skewed to premium. Now, those are decisions that they made in the last few months in response, or even since their debacle in response to people telling them why you got to improve your product. They, those are, you had to make those decisions years ago. Yeah. And they did because they were already seeing as Delta and United are now seeing is now saying significant and sustainable premiums that those products can generate for their shareholders for global premium airlines. So anyway, I just think, you know, as a check on this, suppose Robert is in sit by bus. And the American board asked Scott to return as it's the, that's not going to happen. Of course, I, neither of those things are going to happen, but stick with it. Did you think Scott's message to his team and his customers and his new airline American is going to be, or too late, there's only over two global US premium airlines. Those spots are taken. So we're going to be this distant third carrier picking up their spill. Of course not. Yeah. It's laughable. And of course he wouldn't. But it's not who he is. It's also not the right answer. And he knows that. He'd say, you know, he's there to get American share of global premium traffic and more back to AA through restoring faith for the business travel community. And by putting out a product that's good or better than Delta United's, he'd say exactly what Robert is saying, because that's the right answer. And that is where they're at it. So look, I think, you know, I don't know, maybe he maybe he just finds it a provocative statement. And I guess it is because it got me to, got me to, got me to say this. But in a world where people can just say whatever they want without basis in fact, and just hope that in doing so it might come true, which is an unfortunate world we've gotten to. Maybe he thinks of the good thing to say to his team and his shareholders, because it helps, you know, people maybe believe that to be true, but it's ridiculous. And he knows it. And he's smarter and he has better strategic perspective than that statement indicates. Yeah, well, he's being provocative. He's provoking. I think he has an interest in dissing his former employer. And it is interesting, but it does. I can't wait to see what it is. I try to go back to this. I think Scott's great. Yeah, I'm not upset about this. I just think, again, like I say, I know well enough to know when it's what it's just BS. And that's what this is. And like I said, I can know it in any way. Right, but it is out of defense that they probably don't need of my old friends. When I heard that part, I thought, come on. So, anyway, thanks. No, it's just, I just think it's fascinating. I mean, there is a motivating the workforce element to it, right? And there is a, you know, in competitive markets, in Chicago, you know, trying to say to customers, more than one, not them. I think American, to me, American needs a stronger public response. But that's a whole another. I don't have a view on that. I'm not there. Yeah. Anyway, what I know is that comment is without basis. Yeah. So look, okay, class is here's my summary of the class. Yes, yes, professor. It's your county pricing and the sell-up pricing that came with it is the second most transformative event in the airline industry since deregulation. Yeah, finally created a tool for larger airlines to match the fair to the LCC and the ULCCs without seriously deluding their revenues. And it gave them a mechanism to monetize their product attributes. And they're finding enormous demand from customers who are willing to pay a premium of those attributes. It's information, and it's with a suspect and it's a really good thing. And with us to say even through the next big recession. Yeah, I think it's not, again, I'm not suggesting that there won't be bad times, but I think the structure stays in place because it's so logical. And it can certainly be enhancements in your vision to it. But the structure of here's your bare bones fair and here your premiums on top that you could pay for products you may or may not choose to pay for. That structure is in place to stay. I think that's going to result in a better product. It's going to result in a ability for large airlines to compete better with smaller low-cost airlines. And it's here to stay. It may be at lower fair levels, maybe at higher fair levels. But it's a huge difference from what we had from the time I joined the business in 1986. Up until I left in 2022. And it's transformation. Well, Professor, you're hired. Alright. This has really been incredible. Really wonderful, really appreciate all the preparation, all the thought, everything that went into this. I do think it will help everybody in the industry understand the business more, but also understand how to transform it of the changes that we've seen in the last couple of years. So, deep, deep, deep appreciation for all you've put into this. And thank you. Alright, thank you. Alright, so that's all for this week. We will be back next week with more on airlines confidential. Thanks for listening, everyone. Take care. This podcast is produced by Mass Media, [email protected].