[Music] Airline's confidential with Scott McCartney is made possible with support from RTX, Collins Aerospace, Pratt & Whitney & Rathion, connecting and protecting our world, RTX.com. Infinity Flight, the leader in cadet academy flight training program, infinityflight.com. Ontario International Airport in Southern California. SoCalSoEasyFlyUntario.com. The executive MBA in aviation at the University of Colorado, Denver, business.ucdenver.edu. And by Syria, the world's most trusted source of aviation analytics, Syriom.com. We also welcome your businesses support contact us at airlinesconfidential.com. Welcome to Airline's confidential. I'm Scott McCartney and we are not coming to you this week from O'Hare International Airport. O'Hare is getting so crowded with flight scheduled by United and American that the FAA has told us there is no room for podcasts from O'Hare. So like Southwest Airlines and Spirit Airlines we're pulling out just kidding. About the podcast departure part. Southwest really is leaving O'Hare more on that in a bit. But first welcome back Professor Doug Parker. The school bell is about to ring again. Class is back in session and this time we're going to learn about airline route and hub profitability. A listener request this class. I'm looking forward to it. Just as much as I'm looking forward to the NCAA March madness basketball tournament coming up. Doug we're gonna call this class market madness. Oh, excellent. Thanks. Thanks God. Thanks for having me back. Yeah look I heard your listeners request for about how hub profitability is calculated. I said to myself I wasn't gonna do it in the least these classes but anyway as we'll talk about this. This is kind of near and dear to my heart giving my pass. So I thought it'd be fun. So and it's also you know I think an interesting and an important topic for people that follow airlines. So more on that but the class does seem timely given the focus that you mentioned is going on right now at Chicago. Oh, here. There was more news on this this week. The FAA is meeting with the airlines. The city of Chicago which runs the airport push back on the FAA suggestion that flights be capped lower than the airport's full capacity. So look it's unclear what the FAA is planning to do it over here other than try to get American United each pair back a bit of their summer schedules. They don't have slot controls the way Washington Reagan and the New York airports do. They used to and the FAA certainly could reimpose lots. I'm I'm not sure what's gonna happen here. What I what I feel pretty certain about is neither American or United is going to unilaterally agree to pull back. Yeah and given where they both are there's there's not nearly enough capacity to hear for what they both want to do. Yeah. If something's got to be done and we shall see. Yeah no it's really interesting. Nobody's gonna say just kidding. Right? No they seem to go up there by as much as the other one goes up. Yeah yeah each time. Yeah but but Southwest has made it a tiny bit easier I suppose for the FAA. An unrelated or not Southwest did announce that it was leaving Oh here in June. Southwest started flying Oh here in 2021 and served 15 destinations from Oh here starting June 4th Southwest will serve Chicago only through Midway Airport. Curiously there I think they're the official airline of the Chicago Cubs north side but now flying only from the Southside Airport much closer physically to the White Sox but the Cubs in marketing and spirit. So all of the 15 Oh here destinations will be served from Midway Southwest. Interesting also said it was pulling out of Washington Dulles effective June 4th. It has only three departures there. I don't think this about operations and delays and congestion I think it's about profits and losses so your lesson is perfectly timed for us as a small player at airports dominated by bigger airlines Southwest no doubt found it harder to make money and so better to focus all of its flying in Chicago and Washington on airports where it is strong Midway in Chicago Baltimore and Washington Reagan in Washington. Yeah as well as guess it's really hard to compete against all airlines in their hubs. Yeah, I have to weigh in on more and more flights. Precisely. Half the airplanes are full with connecting traffic and the airlines don't have that absolutely cannot compete Southwest is a different animal of course they're obviously national and can do more but yeah I'm sure you're right that over time Southwest just realized this wasn't the best use of their assets and they decided to concentrate them where they can do better. In other news we saw that the Homeland Security's restarting global entry made no sense they dispat that they they they they talked about not doing it but they apparently had the good sense to restart it. Just as lines are getting longer at airports for government screening because of the funding shutdown. Several cities have started to report long TSA lines because it's spring break and there are lots of travelers of course and because most more TSA screeners aren't reporting for work because they're not getting paid right now they're gonna get paid eventually but a lot of people can't live that way and need to go off and find other things to do so they so they don't have as many screeners as they once had just as just as loads are ramping up so anyway that's that's developing situation that doesn't seem to have a ready solution but I sure we get to once soon. Yeah yeah I hope so it really needs to get to resolve quickly and for the sake of the economy the military conflict and the person golf needs to get resolved quickly too. Jet fuel prices have gone from about two dollars and 40 cents a gallon before the US and Israel attacked Iran to close to four dollars a gallon at the end of last week according to the Argus Daily sample of prices in Chicago Houston, Los Angeles and New York. That's almost a 65% increase so huge for any airline. Curiously it seems airlines have been able to raise ticket prices at least for now. A Deutsche Bank fair survey I think this has done weekly showed some sharp jumps in ticket prices especially for transatlantic travel and transcontinental trips, long haul flights consume more fuel of course and I think the you know the lack of lift through the Persian Gulf takes I don't know 10 20% of a long haul international capacity out and so European airlines and others are probably picking up traffic and maybe able to raise prices because of that. The Deutsche Bank survey are posted prices for sale not sold tickets so we really don't know yet if people are really paying higher prices fairs and I'm sure we'll get back into this aren't set based on costs they're based on demand and so as long as demand is strong perhaps airlines can cover some of the increased fuel bills they're facing so let's hope demand stays strong. And the other bit of news last week was filing from spirit airlines in the bankruptcy court. Spirit announced it's it's restructuring support agreement and a plan of reorganization and it is basically the outline of the plan it seemed to me as I look through it all lacking in numbers lacking in specifics but they did outline a $300 million exit term loan facility which would be five years five years on the term on that at fairly high interest rates and it looked like there were a couple choices in that but it looked like interest rates above 10% spirit requested a confirmation for the confirmation hearing for the restructuring plan for May 27th so that gives you an idea of the timeline on this the airline said it was the plane restructures 1.1 billion dollars of outstanding debt and it says it also said that the spirit which went into bankruptcy reorganization with 214 planes currently down to 125 there's a sale of I think 20 of those coming up soon but spirit also said in court that it expects to be down to 76 to 80 airplanes by the third quarter of this year so more shrinking to come what was not filed was a document of financial projections spirits primary lawyer apparently told the court that those projections are taking longer to put together than they anticipated because of the volatility in jet fuel prices there was also there's supposed to be a comparison of what creditors would get if spirit liquidated and that wasn't included this is all in preparation of creditors voting on this reorganization plan so they get to see what what the alternative would be
The Spirits lawyer said that creditors were raising questions about projected liquidity because of the higher fuel prices and about cash flows in spirits reorganization plan. So I just think if fuel prices stay high, it just makes it all that much harder for spirit and it's plenty hard to begin with. Yeah, I don't have anything to add to your spirit work. But I do want to talk a little bit about the fuel price situation. I mean, certainly it's a near term issue and that's in spirits living on near term. So a real issue for them, but it feels to me like the market and analysts over index on this fuel increase and what it means for the industry. What I know is fuel price spikes are really hard to adjust to. It's hard to quickly do what you need to do as airlines to adjust to oil prices that go from $65 to $100 overnight or within a week. That can't be offset. But over time, airlines have proven they can be profitable at $100 a barrel, which I think some of us forget. It feels like we still live as though we're in the old days where in the 90s, where I went to $100 a barrel, everybody's following bankruptcy. Well in 2013 and 2014, fuel price average for those two years was $104 a barrel. And the airline industry made in those two years about $15 billion pre-tax, which is about what they're making, which is certainly on an inflation adjusted basis what they're making now. So it takes time to adjust. But if this is the new normal, airlines will get to where they adjusted this. What you'll see is slower growth from airlines and they plan, you'll see some airlines maybe, the lesser airlines maybe fall into the way side, but not, you know, not any airline of real size. And the other thing I note is the airlines are preparing themselves for this. Given the past, certainly given the recent past with COVID, they all have enormous cash balances, enormous amounts of unsecured collateral that could be borrowed against. This is not an issue anything close to what we've seen before. And I think over time, you'll see airlines adjust to it with higher fares and less capacity. So interesting. I remember 2008 when baggage fees came in, it was because oil went to $140 a barrel. Right. Right. And got through that. Yeah. Sort of. Yeah, exactly. And again, it's kind of my point. I mean, I think it really kind of crossed over like in 2011, 2012 to, but once that was the new normal, we all adjusted to it. Yeah. And we're profitable. And I think if, I'm not saying that it is a new normal, hopefully it's not. But if it is, we're all going to be paying higher fares. And the airlines, the airlines will figure out, it's an entirely different industry than it was, you know, in the 1990s and early 2000s. Yeah, it probably does cut into earnings for the year. Of course. Neertr, near term without a doubt. Yeah. Huge impact. Yeah. Yeah. I think it's a near term impact, not a long term impact. Right. Good. Good. Thanks for that. All right. Time down to thank our sponsors who provide the jet fuel for this podcast, if you will. We want to thank Syrian. Syrian offers the most accurate and precise data and analytics to enable airlines to optimize planning operations and passenger services. The right intelligence drives operational efficiencies, enables you to predict market shifts and helps airlines respond quickly to maximize revenue, manage costs and seize commercial opportunity. Visit syrium.com for more. And thanks to Ontario International Airport, which is celebrating a decade of local control. Thanks to public support, the local community reclaimed O&T, revived it as a vital gateway in Southern California and ensured the airport is ready to soar even higher in years to come. Visit flyuntario.com/1010 to learn the story and find out how you can join the year long celebration of how a decade of local control has turned O&T into one of California's fastest growing and most economical airports. And thanks as well to our newest sponsor of airlines confidential, the executive MBA program and aviation at the University of Colorado Denver. The executive MBA and aviation at CU Denver is the first degree of its kind in the world, taught by industry experts and designed for ambitious leaders from across the aviation ecosystem. With classes located at Denver International Airport and weeklong residencies in Washington, DC and airports around the world, students experience a hybrid, flexible course structure that balances in person and online classes without career interruption. Go to business.ucdember.edu to learn more. Doug, I have to say, I just had my last class yesterday and had two incredibly great guest speakers. What you know very well, at least ever wine. Yes, we had fabulous conversation. And I think you also know Jeff Shane, who the father of open skies who came to talk about open skies and regulation and everything else on Zoom from Switzerland. It was a fantastic session. Since last night I was on Richard Anderson and I did one of your classes. Which I enjoyed. I know Richard enjoyed. It's a great, great group you had there. Smart people with great questions. He's great. So, anyway. I enjoyed doing it. I know what you're doing too. And that was a fabulous opportunity. We talked about consolidation and you guys were the architects of it. So, it was fabulous. Good. All right. Speaking of class, Professor Parter, the class is now yours. Okay. Here we go again. As I said in the outside, I was not planning on doing a class every, I'm not doing a class every time I co-host. I promise. Primarily because I don't think is I'm interested in those listeners. And also it requires me to work for me and I've been done working for a while now. People keep referring back to the first class. Okay. I think it was pretty valuable. We'll see what they think about this one. But anyway, the fact is, while I decided I wasn't going to do it, I did hear on another episode a listener asking you, you know, writing in about how airlines could possibly measure the true profitability of the route system, given all the moving parts. And I got to tell you that was like music to my ears. Because I started my career long ago working on airline profitability systems. So this is one area where I actually can geek out. Yeah. And I'm not usually the airline geeks. I'll try not to geek out too much on this. But like I say, this, this, I like the topic. I'm, I find it interesting myself. Hopefully our listeners will find it interesting as well. The fact is, route profitability is one of the most important pieces of information required to run an airline. If you don't know how your routes are performing financially, your loss is a leadership team. So we airlines spend an incredible amount of time and effort ensuring the information is right and analyzing the results every month. And what also find interesting about these reports is that in an industry where there's so much financial and operating data that's made public, much more than other businesses, by the way. Sure. Yeah. No one outside of the airline ever gets to see these critically important route profitability reports. They just, they don't, they don't get out. And that's because they're closely held secrets. This is important information and important enough that none of us ever wants anyone else, any of our competitors to see it. And indeed, you know, the market's themselves. So our listeners are going to be happy to know that this class is going to be much shorter than the price. The client price is close. Well, because we don't have to go back and review the history here. I learned most of what I'm going to talk about in the late 1980s, but it hadn't changed a whole lot since then. So I should make that caveat up front though. While I know the top pretty well, my knowledge is dated and my memory is foggy and some specifics. So some of our listeners who do this stuff for a living may be able to correct me on some of the details, but I feel really confident that I'm still good on the concepts. Okay. So here we go. Someone rules the last time. I'm going to do a poor job of pretending as long as I'm in, some pretending as long teaching a class in airline route profitability 101. You're going to do your best to pretend as though you're a student in this class. That means you have to pretend you're not as smart as you really are. Oh, no, no, no, no. This is being done on this subject. It comes naturally to me. I know this is really complicated. And I know I have no idea. Okay. All right. We'll do your best not to at least pretend as though you're in 101. All right. All right. Well, those rules. Let's call the class to order. So here we go. So by talking about how most businesses go about reporting and analyzing segment financial results, and then we can, we can contrast that to the airline business. Because I think that's important. Yeah. So we want to spend a ton of time on this hopefully. But let's, let's do a little role playing here. Let's suppose you're the owner of a retail chain called Scott sneaks. Okay. You, you Scott. So high end tennis shoes for men. And my slogan is good for the soul. See, see you're a natural. So okay. Yes. And by the way, you're killing it. So you now have quickly expanded to 10 stores here in the Metroplex. So you, you want to assess how each individual store is doing as opposed to just knowing total what was going on. So how would you go about allocating your company's total revenues and total cost amongst each of the 10 stores so that you can measure how profitable each one is an individual. Well, I should know the sales per store for each store. And I know what the costs are to operate each store. That doesn't matter.
and take into account headquarters and all that. But I can look at each store, or I guess, I don't know, when I look at it as revenue per transaction, revenue per sale and like-- - No, I just don't know. You just want to get a, you want to take your profits and divide it up amongst these stores. - Yeah. - You have the answer. It's as simple as that. - Right. - It really is, which is more than a contrast. And I think that's what most people are used to when they talk about profitability. And wire listeners was thinking, how would I do that in an airline? Because in general, in that situation, in that retail environment, you know exactly what the expenses are related to that store. Certainly the direct expenses, the employees, the employee cost, the employee benefits all of the time. So like, and you know exactly what revenues were collected in that store. So you've tracked the expenses from revenues, you have this one issue, which you describe, which is the overhead cost. So you, the CEO of this business, that you're going to allocate some of that to each of the stores. - Right. And you know, the limo you're taking to work, 'cause you're now a big shot. - Oh yeah, yeah. Things like that. But you know, a warehouse, if you have to have one, they're rent on that warehouse. Those things, they're not gonna go away if that store goes away. So. - Yeah, the marketing costs, I sign Luca Domcic to be the, the Alistair rep and he's gone. - Fair enough. So anyway, so that, so I, my guess is, you would have two measures. You'd say the fully allocated measure, but that measure has a problem in it in that some of the costs, the fixed costs aren't gonna go away. So you'd also look at a variable cost measure, very profitability. And let's just say for the sake of argument, that you're a pretty efficient operator. So that's, you know, 5% of your cost are overhead. So you're gonna get really close to these stores and you're gonna be able to do it pretty fast with just your accounting guys giving you off the general electric. - Yeah. - Fair enough. That's how that works. That's how it works in almost all businesses around, around the world. Now let's think about how you do the same thing you run a narrow one. So before we do that first, just for definitional purposes, I'm gonna be talking about a route, route profitability throughout this. A route, as I'm talking about right now, is a non-stop city pair. So if I'm talking about the profitability of DFW to Panama City, Florida, for example, what I mean is the contribution of the three round trip flights per day that American flies between DFW and Panama City, I'll say ECP sometimes, that's the city code for Panama City. So airline schedules, airline schedulers will obviously also look at this data by individual flight. But if we're talking about an individual store in our business and how it's doing, we're generally gonna talk about how all the flights between those two cities are doing as a whole, okay? - Okay. - All right. So let's start with costs and then we'll go back to talk about how we allocate revenues. So as you might imagine, this is gonna be a lot more complicated than Scott Sneaks. Our store has different employees flying in and out of it every day. So there's no ledger that says, here's what the ECP pilot's made. And even the grounding employees that work in ECP work flights to different markets like Charlotte. - Right. - So we can't charge all the wages and benefits of that airport to the ECP DFW. Frankly, there isn't really a single expense. You can just pull off the general ledger and attribute to this store, to this ECP DFW store. So you've got to go through the expenses, line by line, and each line gets allocated differently based on a lot of thought and analysis and data. And I'm not gonna totally geek out on you and go through everyone, although I wouldn't mind doing it. 'Cause they're actually as fast as me. They're all different. And different all, it's the driver of the expense we had about allocating. We always talk about cost per ASM, almost no cost during my ASM. The only thing I think we actually allocate on the ASM is management costs. The real drivers of cost are things, depending on what it is, either departures or passers-borded, depending on what the cost is. But anyway, we're not gonna go through all those. Well, let's pick one. And the one that's easy to pick is pilots. So if DFW, ECP is your store, how would you go about allocating the cost of all the pilots that flew this route over the course of one month? - I'd add up the hours, 'cause they get paid by the hour, right? - Whatever. Pilot, flown hours? - That's funny. - Yeah. - Pilot block hours. - It's always, for each flight, they get paid either what they retire of scheduled or actual. - Right. - Yeah. - But that's those block hours. - Yeah. - I agree. Fair enough. So we're gonna take, but which pilots are gonna do that with? - On ECP. - 'Cause some pilots make more than others. - You're gonna take the aircraft type. - If we cost. - Right. - Well, no, you're, you have buy aircraft. Again, this is, so if it's a 737, yes. - Oh, yeah. - This is for a 737. - It's a 737. - Exactly, it's a 737. - Take the 737 fleet cost for the month. - Okay. - Fieded by block hours, that gives you a number, multiplied by the number of block hours flown that month DFW, ECP. - Right. - You got it. Good job. All right. Now every line of expense is gonna go through a similar process. With some of them being a lot more difficult than that. But with every time with a goal of accurately assigning all the costs incurred at the airline in that month, across each of the 200,000 flights that were flown in that month. - Really? - Yeah. - Exactly. In the case of American Airlines. And then interesting though, I'll also note, the cost that we end up allocating are never gonna equal the cost reported in the company P&L for the quarter of the month. And that's because accounting rules sometimes result in reported expenses that are different than the real economic cost. And what we're trying to do here is, it's slight profitability, it's a management tool, it's not an accounting exercise. So we wanna allocate the economic cost, not the generally accepted accounting principles cost. The most notable of these investments in the biggest one is aircraft ownership. - Sure. - And in the airline P&L, aircraft ownership is spread across aircraft. It's an appreciation and amortization, some of its interest expense, depending on how you finance the airplane. - Wow. - Okay. And depending on how you finance the aircraft, how the aircraft are financed, two similar airplanes could have a very different expense to be on the P&L. So. - Right, different, same airplane, different age. - Right. - Could have completely different costs. - You could have the exact same airplanes that were manufactured one month after the other. And if one of them is on an operating lease and one of them is owned, they're gonna have a really different cost on the P&L. So you don't wanna use the actual P&L cost. What you wanna do is what? What should you do instead? How would you go about getting a economic cost into our flight profitability system for those airplanes? - Boy, I think, you said 200,000 flights per month. I think I'd take the aircraft costs and divide it by the flight. You need the airplane for that flight or do you wanna get finer than that? - Yeah, we wanna do about hours again. - Yeah, well, we gotta get the right number. Like we just started about the P&L doesn't have the right number in it. So. - Yeah. - So we make up a number. - Okay. - But we make up the right number. - Yeah. - So what we do instead is we say, what's the market rate for that aircraft, if I wanna lease one for them, if I wanna, what's the, what's the lease rate cost of that airplane? And we're just gonna put them all on operating leases basically and say if every one of my airplanes, 'cause that's the economic cost, if I wanna get one more, it's the odds. Again, that's what's, that's a good proxy, much better than the P&L for the economic cost. So we're gonna take all the 737 maxes, go ask our team, if we wanna go get 737 maxes on a 20 year lease right now, what's the monthly lease rate? That's what our team plugs in. As a cost of a 737 airplane for a month, and then you gotta take that airplane course and how many blockers is it producing a month and put those onto this DFW, ECP run? - So this would mean that you could end up with a different profitability conclusion month to month depending on what leasing, what the leasing market is. - Yeah, they generally don't change that much, but sure. Yeah, I mean, you get there in profitability month to month because of fuel prices. So anyways, again, just trying to point out that this is not some kind of oldest, what is when, people put a lot of thought into try to figure out exactly how to do it, they don't tie it to the P&L, they're looking to show economic costs and get a real profitability of every route. It's not perfect of course, because we don't have the right exact information by flight, but it's really, really well done. - Okay, so we do that for every line, now we've allocated the cost. Now let's start by revenues. How should we allocate the revenue per flight and I'll start with giving you some information? So let's just start with a single flight, not a route, not even, not just one flight. So let's assume as a flight today from DFW to Panama City, it's got 140 passengers on it and on average, those customers paid $500 for their round trip by Tinterie, okay, with me. So the people on board that airplane have now paid $70,000 to total for their travel. - Yeah. - How much revenue should we allocate to that flight? - So each of those tickets has a breakdown of, if they're a connecting passenger, what they paid for the ECP leg and what they paid for the prior leg, right? - Well, let's start with it fair enough. You're, you're, I'm just thinking. - I don't know, all I know is a ticket breakdown. - Yeah, okay, well there's one big issue, it's just round trip and we only wanted to go one way. - Right. - Okay, so we're gonna take $70,000 to buy it in half. - Okay, okay. - Everyone paid $500 for a round trip flight. - Yeah. - This is just one leg of a round trip flight. So we're already on to $35,000, okay? - Right. - Now, you're on to a more subtle but really important point, which is a lot of those people paid $500, not just to fight for the flight.
from DFW to Panama City, they paid to buy from Kansas City or Sacramento or Tucson. Sure. And so therefore they didn't pay $500 for just that, like they paid $500 for two likes. Right. And we got to take care of that. And we're going to look at the profitability of Tucson as well. So they got to get their fair share. Yeah. So anyway, so you're right. So we got to take care of that problem. Okay. We'll try and make the math simple here as we can. So let's assume half the pass a pretty good proxy by the way for a US hub about half the customers are connecting on, on, on, on, on, on, on, on, on many flights. So let's just assume half those people connected. Right. And now what you'd really do is what, what the airlines do is they'll go look at, okay, let's use Kansas City as an example. Someone's trying Kansas City DFW, DFW, ECP, they'll look at the average fair MCI DFW, the average fair DFW ECP over the month. And they'll pro rate that $500 based upon which what those two pairs were. So if it was if, okay, all right, we're not going to do that. We're just going to say that they were the same, okay. Right. So we'll split it in half. But Kansas City, they can't see much twice as much. They'll get twice as much of the 500 as ECP. Okay. As, yes. So half of the passengers, you get the full $250 for that leg. Half of them, we're only going to get. 25. Yeah. All right. Well done, student. So when you fight through that, that 35,000, now we're now we've just taken out round it in the years thousand, 9,000, all right. Okay. We've got a fourth of it. So now we're bound 9,000. Now then there's another big piece of revenue that's not in passing your revenues. You talk about a lot on your show. Your pundits like to talk a lot about how airlines are living off of this revenue. What might that be? Well, there are many buckets. Okay. Well, baggage fees, etc. As soon we took care of that in my 500, but you're right. We need to allocate those. Okay. There's a real large one. A frequent fire revenue? Credit card revenue. Credit card revenue. Right. Exactly. So that was big enough that we need to talk about, at least even in this example. But you're right. But always is a big number two. That's going to be totally insulated. We're going to get allocated actually based upon some real data. But anyway, but the big one that I find that we should at least talk about more things is really interesting is the credit card revenues. Now the fact of the matter is it's not in passing your revenues, but it should be. That's what it is. This is just a distribution system for seats. What's happening is the bank is paying American Airlines to give seats to the bank's customers. Right. It's just a distribution system. So are you talking about allocating the passenger who's on a award ticket? Or are you talking about in general the credit card dollars from Citibank because I bought my groceries there. Absolutely. I'm talking about the $6 billion that comes to do American Airlines right here from Citibank. A direct payment from Citibank to American Airlines because buying points so they can distribute into their customers so their customers can then use them to buy fairs. That's what's happening. Pure and simple. It's a distribution system that doesn't end up in passenger revenues and it should. So we got to put that in in this example because it's big enough we should talk about it. The way you do it is where I think you're getting. The way the airlines will do this is they'll go look at which routes get the most redemption of miles. So we're going to allocate that $6 billion. We're going to allocate it based upon which routes people use their miles on because that's where they're taking up the seats. If we didn't give that money they'd be unfairly penalized. So routes like Hawaii would look much worse than they really are because we're getting paid to put those people in flights to Hawaii and we've got to give that money to Hawaii not to Des Moines. So anyway so that's what so it again for our example we're just going to assume Panama City's a leisure market. They probably have some reason for the redemption of people wanting to go there. So we're going to assume it's kind of the average. The average is a little more than 10% of revenues if America. If I'm right about America being at $6 billion there are $50 billion airline. A little more than 10%. We're going to have 10% in our example. Okay. So we'll add 10% of 35,000. That's 3500 more. Now rounding all this again we're now at we took out 9,000 and now we're adding back 4,000 we're at $30,000 upon board revenue. You with me? Okay. Yeah. So that's what we end up with. And we end up with on that flight that $30,000. I don't know what those fully allocated costs are going to end up to but I think they're going to be really close to that. Just based on what I think about a route like this. And at $100 bear oil it's definitely going to be higher. Yeah. I think so. It's going to be higher. That's a definition of a low margin business. Exactly. So this individual flight is going to show up on a report as break even, slightly negative on a fully allocated basis. We're referring to that as FACC fully allocated contribution. That's a term that anyway, I'm used to using all the airlines use different acronyms now but that's what I remember calling it. So that's the FACC profitability. Now we've fought through all that. To get to this point we got a fully allocated profit just like we had for Scott Sneaks. Yeah. And what I'm going to tell you is here's the rub. The fully allocated profit number for an individual flight or for a route is almost meaningless. We I would never look at that. But we weren't part of it. I know. It's going to be your base point. But I would never look at that number for any decision about increasing or decreasing service on a route. And why do you think that would be? What's wrong with looking at an individual route on a back basis? Because it's a big network. It's just one little piece of the network. Fair enough. That's right. And how that manifests itself is you're not giving that route the the benefit of the contribution is given to the whole network. That's beyond revenues. When we took those beyond revenues out. Right. We we took out the network effect of that route being a place. If if somebody wasn't able to fly if we didn't fly to ECP we wouldn't have gotten that. Sacramento to Kansas to to to to to to to ECP person because we don't have that route. So yeah, although but that's tricky because then that that flight to Kansas City might have gotten somebody from somewhere else. Right. You're right. You're right. You're right. You're coming. No, you're right. This is good. Yeah. You get exactly that's the real that's that's all go through. So but but nonetheless you're what you said is exactly right. The problem with looking at an individual right on a fact basis are two problems. One of which we already discussed with Scott sneaks. There are a lot of fixed costs. Yeah. In that number. So we know that we have that problem. Yeah. And we have another problem which is the network impact. So we got we got it we got to correct for both of those. On the revenue front. We just add back all this beyond revenue that we deducted. If you remember that was $9,000 we took out a beyond revenue. We just add all that back. Okay. But that's too much. You know what that is? Well now you're counting more revenue than you actually pocketed. No, forget the double counting point. We'll get to that. Okay. But it's just it's too much even double counting. If I add back that 9,000 I've given too much credit to this row. Oh, because I'm taking up a seat. For some where out. Thank you because they're there's displacement or spill. So that ECP to DFW beyond revenue is taking displacing some other revenue we could have sold. So if one of those $500 round trip pathitors is flying Sacramento DFW ECB by selling that ticket to them. We lose a seat on Sacramento DFW that we perhaps perhaps maybe maybe not exactly this is this here comes the analysis. The perhaps could have sold another customer we call that spill which is revenue that we could not collect because we were fall or nearly fall on the flight already. In this spill or displacement is calculated through some really sophisticated analytical means people would just wing this. In my day we had these things called spill tables that would tell the model how much to deduct based on the probability of displacement given the average load factors in that market in that Sacramento DFW market and the incremental fair levels because that's what you're going to sell the next the lowest ticket still to sell. The incremental fair levels of every single route for the month. Now I imagine since my time there's something even more precise in the coding but the concept is the same. You have to account for the revenue or connecting passengers displaced on the portion of the itinerary that wasn't in the DFW ECB like. All right so I don't know how much the model is going to tell us to take out for spill but I think $2,000 is probably a reasonable guess and it keeps them at easier so we'll just use that. So we're not going to add back 9,000 we're going to add back 7,000 now we're at 37,000 we're at 37,000 we had in the fully allocated calculation. It's a big difference. We just added over 20% to the revenues of this flight, to the contribution of this flight. We call this revenue metric is called onboard revenue plus beyond netta spill. Okay. You with me? All right. Now that I want to get to where you started because I have had board members and some airline management people get quite troubled about the use of this measure. And I'm guessing some of our listeners may be already because if you're pure bread accountant this is really disturbing. What they object to is that we double count it a lot of the revenues.
Just like you said, we most definitely have the $500 paid by that customer flying Sacramento DFW of Panama City is now going to get credit, Nettis Bell is going to get credit to both the Sacramento DFW and the DFW of Panama City Route. Look, this is what you said about Gap Academy. Exactly, but look, that's the true network impact. And it's the right way to analyze the contribution of that ECP DFW route to the airline. Because if we cancel Dallas, Panama City, we're going to lose all of that $500 of the customer's money, not just the per rated amount of $250. And if we ignore that fact in a hub and spoke airline, we can make some really bad decisions. Some routes live off the Beyond Revenue they create and they should get credit for that creation. I mean, just this is not a real example, but it probably can be certainly at times. Think of a market like Midland Odessa, which short haul route to DFW, South West is in the market. The local fairs are going to be low. But Midland Odessa also has a lot of oil business and there may be a lot of international travel going in and all of that or much of that is going to flow over Dallas, on American. And if all you gave Midland Odessa credit for was their onboard revenue, someone would look at this route, this route's terrible. We get rid of it. What's wrong? Right. And in reality, it's contributing enormous amount to the airline. In this example, I don't want to pick on Midland Odessa. Right, no, but roughly this exists certainly for a tiny time. And you have to look at the full impact on the network before you start messing with routes, particularly in a hub and spoke. And in that example, you can see how Midland Odessa not to get credit for some of the business class fair to London that that banker got. Exactly. Exactly. And that's what this does. And yeah, now London Delta DFW is going to get credit for it too. So we have this double county problem, no doubt about it. But if you don't do that, you're going to make some really bad decisions. So I was thinking this really gets more and more hypothetical, but it really doesn't, right? I think it's more real. Yeah. I really do. It takes a lot of your head around this, but once you do, it's more real. So and again, we'll talk about it. You know, people, they will, they will talk about what that means. You can't just go look at the real profitability as the test anymore. It's going to be something higher in that. Okay. So on the cost front, we have the same issue. We have with Scott Shops. Some expenses are almost entirely affixed. So we can't assume they're going to go away when any individual route goes away for an airline. This includes things like corporate overhead, of course, IT development costs, which are getting bigger and bigger all the time, non-aircraft interest expense. These things can add up to nearly 10% of expenses, particularly since IT development costs are growing in every airline. So when we take that out, we call it just if we did Scott Shops, we call it the variable contribution, the variable cost contribution. And it results in a better, more accurate picture of what our individual store here is contributing. But unlike Scott Shops, we got another one, another more significant, it's not a significant adjustment to consider to make sure we are really only counting variable costs. Guarante guesses what that adjustment we still need to make is. Have we, have we added in the aircraft cost? Yeah, the aircraft cost are in this number. So yeah. We've got it. That's right. Aircraft costs are in this example. They're not overhead. They're not anything like that. They're real costs. So in a real, in a normal world, you'd like to say, "Oh yeah, if we get rid of a route, we're getting rid of an airplane." And it's variable. By the way, I mean, I can see you thinking already, things like pilot costs, you can say are fixed, but they're not. If it over time, it's an off-shore period of time. You can get pilot costs down, pilot's retirement, we would slow hiring, you can give leaves to people that paid leave people to take. You can manage all the employee costs in a variable basis if you choose to downsize. But airline, assuming you're going to get out of airplanes, is aggressive to say the least. Because aircraft ownership is almost never really very, airlines like to talk about how they built flexibility in their fleet planning by having a lot of aircraft come off at least each year. Or how they have a bunch of own airplanes, they can sell in a downturn. But if you've noticed, that never happens. And it doesn't happen because one, it's really difficult to return a least aircraft without planning for that return several months to a year in advance. Well, look at Spirit. They had to go to back from six months to do it. Yeah, precisely. And two, it's really hard to sell used aircraft in a downturn. So you can have a lot of used aircraft, but you're not going to be selling them in a downturn. Here we find. So when airlines do reduce capacity or slow capacity growth in a downturn, it's almost always through lower aircraft utilization, not through reduction in airplanes. But that raises your cost. No, that's what we've seen lately at frontier. The down to eight hours a day or the aircraft, the cost go up. It raises your cost per ASL. Very ASL, right. It doesn't raise your. My point is those costs are fixed. Yeah. And because they're fixed, you may use the aircraft less because demand is down, but you're not going to reach. The aircraft on the ground. So. And that's because fleet pans are pretty static for two to three years out. So assuming the ownership expense is going to go away, just because we have an aircraft of unprofitable flying, is really aggressive. And it's a material number. Aircraft and ownership cost are about 15% total cost. So we were already taking out 10% of overhead. Now we have 15%. Now we've reduced our cost by 25%. So this final metric, the one that assumes aircraft ownership to be fixed, is what I always look at and analyze in the variable to wrap. Because I think aircraft ownership cost are almost entirely fixed. Now every airline has different acronyms for these measures. And American, I know it's changed theirs from what I grew up with, but I still remember that metric from my past as VABZO. Which I'm just going to tell you because I'll end up saying VABZO is a variable allocated cost. So we take out all the fixed costs. Plus beyond revenues, that's the B. Net a spill, that's the S. But then net a ownership cost to, we add back ownership costs. And there, you'll see VAC for variable, see VAB for add to beyond. Anyway, but VABZO is the number that we've now gotten to. I've added back the beyond revenue. I've spilled it. I've taken out the fixed cost, but I've also taken out ownership costs. So now if you think about what we've done versus when we had the fact number, which was break even to a small loss, we've added 20% of the revenues by including beyond contribution. And we've reduced our expenses by somewhere around 25% by eliminating all the fixed costs including aircraft ownership. All right, he's doing better. Precisely. Any route flying into hub is going to be nicely profitable as a measure. So now I'm sure a lot of listeners are thinking, well, what's the point of measuring individual route profitability? If every route shows up with a nice, proper contribution, well, don't you want to compare cities? Exactly. And that's my answer. First and foremost, it's the right analysis. VABZO does reflect the contribution that each individual route is making to the system. And that's why you never see an airline significantly reduce capacity in an economic downturn. Putting the aircraft on the ground would dramatically reduce their earnings and their cash flow, not improvement. Obviously situations like COVID, where there is no revenue. That's a different story. But I'm talking about, you know, great recession. You see by grounding airplanes. I'm talking about economic downturns. You just won't see this. Because of this reason, this is why. Because it would actually reduce the airline's cash flow and earnings. And I'll tell you, I've had to explain this. We aren't going to cut capacity or response to an economic downturn or fuel spark, spike argument to a lot of really smart, successful and skeptical board members over the years. Because they're all used to manufacturing or consumer products or retail businesses. By the way, I want to go back to selling sneakers. Exactly. Exactly. But they're used to, okay, if we had a down, and they're also not used to the kind of downturns we see in a single business. So they're just kind of stunned when we say, oh gosh, our revenues are suddenly going to be down 5%. So we can't get 5% or we can't begin to get 5% across that. And what are we going to do? We're going to do anything we can. But we're probably going to lose 5% of our earnings because I mean, 5% of our revenues and keep our costs the same because we can't do much. And that's frustrating to people in other businesses because they're used to, in these kind of downturns, they quickly respond. They shut down a plan, slow production rates, close some stores like we would in Scott Sneaks to improve cash flow. So it takes them a while to understand that that's not the right answer to our business. It's not just the relatively high fixed costs. They get that. It's the network, the huge network impact on revenues, particularly for hub and spoke carriers. Yeah. That is really hard to understand. But anyway, they understand it eventually. We get through it. But anyway, I'm just pointing out that this is, if people listening or thinking, this sounds nuts. They're not alone. People in other businesses think the same thing. But I will tell you, this is the right way to analyze these routes and this is why you see the behavior you see. So, and here's why, because focusing on VABSO, focusing on, tells our scheduling and revenue management teams what we want to tell them. And that is, given this fleet of airplanes that you have at your disposal, go maximize the contribution they can produce as a system. And that's what they go do. That's their job. And not to try and worry about getting out of airplanes because they can. Not to try and worry about overhead. Go maximize variable plus beyond that is bill less ownership. So is there a VABSO equivalent for a new city? Sure. You've got to make assumptions about when we start.
cities? Yeah, okay Panama city's not doing so well maybe we should start Jacksonville or or whatever. Absolutely, indeed that's where things like these spilled. We have their group Van Ausell and they're looking at new routes all the time. Sure, primarily international because it's where you really use a lot of assets. Dimessically our team knows pretty well what's going to happen exactly as they add certain routes. But nonetheless, yes, that's it. We look at the same exact numbers as we start routes. So anyway, but just because every route happens to have a positive margin doesn't mean we're maximizing the value by any means. And I can't remember the exact Babzo margin we would consider adequate because it kind of moves around as economic conditions move. But in general, I recall it being in the 30 to 35 percent range. You need to have a 33 percent Babzo margin to feel good about those routes. And when individual routes fall below those levels are team knew we had better alternatives for our existing fleet that hadn't been tapped. So we'd reallocate flying accordingly. And another thing that happens when you focus on the right metric, it makes it easier to see trends and the things that really matter to the network. So as you've kind of already noted, we'd focus much on relative performance or on year over year changes or month to month changes in route profitability as we would on the absolute level. Sure. It's really I always struck me for example, how much change in a competing service? Could have on a routes Babzo performance that is Delta has one flight in the market that we were in, you know, you can just you can just see it the change in that month. Yeah. Quickly interesting. And so I got a lot of my best real understanding of what other airlines were doing with their schedules and how we should be thinking about the future by looking at monthly changes in our own individual Babzo routes. And some of that stuff gets hidden if you start using back or if you're not paying attention. And then one last point out to make is that airlines do and this will give people some comfort. We do indeed look at back for for two levels of the route network. First of course, for the entirety of the airline. In fact fully allocated. I'm sorry fully allocation of confusion just the revenues and in all the expenses. And for the entire of the airline, if all those Babzo contributions don't result in an airline that's fully allocated profitable, it obviously isn't working until then you got an issue. Airlines also look at fact for each hub. Because at the hub level, you obviously don't have any beyond revenue to add because all the connecting activity is contained within that hub. And the thought is if you did something as big as closing an entire hub, you really could get a lot of the otherwise fixed cost down. Now the reality is there's no way that's true. And on the fixed cost piece and doing something as enormous as closing a hub would be almost certainly cash negative and in PV negative. Both because of the fixed cost problem and the impact it would have on revenues throughout the whole system. But we always strive to have each hub be fact positive on standalone basis. We would look at fact as the measure of the hub's profitability in every month. So we certainly do use it, but it's not the right it's not the right measure for the for the stores. It's only the right measure at a very high level hub before the airline. Would you manage it by saying hey we we need to run more people over I don't know Salt Lake City and or you know you could. Again the team's doing that through other tools that they see but yeah yeah you could get there. But yeah for the most part it's not oh the customer's going to go where the customer wants to go where the where the where the most efficient routing is. And if we start trying to mess around and say oh it's that's kind of suppress Dallas on on you know Panama say just to Sacramento and that's trying to force them over Chicago where's gonna lose them to somebody who's got an efficient route. So yeah very little it's hard to do anything like that. But anyway so that's it. So to our to our listen to our listener question on how airlines analyze probably by route or hub my short answer is it's complicated. But it's really important management information. So airline team spend a enormous amount of time ensuring they're both organizing the data properly and analyzing it intelligently and it's one of the many things that make our industry unique and therefore it's fun for people like me to talk about. Yeah no and well I think it's one of the over time one of the changes in the industry right. I mean I remember Gordon Bethune talking about when he when he got into continental and say you know why are we flying that where it was a money and somebody would say well we got it we got it to Kansas City because it's strategic. And he said it's our strategy to lose money. We're not gonna do it for it was a money precisely and we still do see a lot of it would come development routes. Yeah yeah and and I know and on this back on the street of Pluripon I remember vividly early American talking about oh if we fight Hawaii even not lose his money because that's where people redeem their advantage miles. Yeah to which I would think well why are we doing that. They're going to redeem them somewhere or or or if you really want to do it that way it's going to come from some other route. This is a zero sum game if they're if they're redeeming their miles there somebody else is getting revenue they shouldn't have gotten where they earn their miles and we should give their that revenue to why but shouldn't be nothing. Now it's much easier because because the banks are paid and you used to allocate that to where the redemption is. So yeah so we've learned a lot through all this and but yeah if if if we're out server losing money they get cut these days it's a whole different world. Yeah so so is this something that AI is going to change? AI could probably do it maybe faster but I don't again this is the everything I described is not done manually by the way this is all now done. No but there are there are there's a lot of thinking that goes into. Yeah yeah yeah. It's not interesting. I don't know. Yeah my guess is yes and what could what could really help is is doing I think probably some competitive analysis which is hard to do because you don't have there's a lot of competitive information available but not all the stuff you need to do this really well. So Professor thank you that was that was most enlightening. Okay really was very interesting. All right thanks Doug. Before we get to the mail bag I want to thank RTX for its long time sponsorship of Airlines Confidential. RTX rallies more than 180,000 innovators around a powerful vision to create a safer more connected world with industry leading tools and technology the RTX global team works across market leading businesses, Collins Aerospace, Pratt and Whitney and Raytheon to drive progress for generations to come. 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Okay hang on everybody because in the mailbag we got one that I think is going to really set our leader Scott off. So here we go Adam from Texas writes hello Scott so it starts nice. I listen to your show every week and have commented to you in the past about various topics with positivity however this time won't be that. Uh oh yeah you've said multiple times on your show general and corporate aviation doesn't pay its fair share as an airline corporate and general aviation pilot I highly all caps highly disagree with this in it. Jet fuel for non-commercial use is taxed at 20 to 1.9 cents a gallon airlines pay 4.4 cents a gallon that's almost five times more with general aviation using less infrastructure besides ATC that requires less money from the ticket taxes airlines pay I'd say that is a fair share. Someone could write a thesis for a doctor with the topic of fair share in aviation and I bet it would come out to surprise you it is fair. Please do some research on this before using this platform to make a statement as bold as what is fair and not fair. I love listening and we'll continue to do so keep up the good work. Uh okay the steam is coming out of my ears. Thanks for that. It is a nice note. Yes it's his view. It's strongly held you. No I'm really and I'm really glad to ask good because I think this this is an important topic you know import for the country we got we got some issues we got a settle and this is a really crucial issue so yes I did some research at Adam's suggestion. I've done this before but did it again for this and I'm afraid Adam it's going to make my statements even bold. Okay first let's separate general aviation from corporate aviation. I've been specific about business jets right this is not CERAS SR-22s or SES-172s because it's the business jet lobby that has effectively scuttled every attempt to separate air traffic control into a more independent and energy.
And because visits jets very much use the same or close to a amount of air traffic control services as larger jets do. Airports get funding in many ways. Yes, landing fees levied by weight usually, but also passenger facility charges, concession revenue, parking. Airlines generally pay for the terminals they use. Based on fuel taxes and landing fees and fixed-based operator FBO use rather than terminals corporate aviation may well pay its fair share for airport use. That's not where the argument is. The argument is about air traffic control because that's what we're talking about in terms of modernization and most importantly funding that modernization. And there a corporate jet uses much the same service even if it's not talking to a big city control tower. The business jet files a flight plan just like an airline flight. It talks to departure control and uses en route airspace at the same altitudes and spacing as airline flights. It gets sequenced with airline flights and congested airspace most often talking to a tray con just like an airline flight. So in terms of air traffic control the issue at hand, a corporate jet uses close to the same services as an airline flight. So what do they pay? I've got two scenarios where I think are representative scenarios. I looked it up the most commonly used business jet in the US is the cessacitation Excel and it burns about 250 gallons of jet fuel per hour. Let's compare a two hour trip on the airline side which uses 737-800 with 150 people on board not quite a full load but close to it. As Adam said, the non-commercial business jet flight pays a federal fuel tax of 21.9 cents a gallon and that's a total of about $110 for the two hour flight in terms of fuel tax. The airline pays only $4.4 cents, federal fuel tax, 737-800 burns about 850 gallons an hour, so only about $75 in federal fuel tax. With me? But the airline flight also pays federal ticket tax into the trust fund. That's 7.5% of each passenger's fare plus a segment fee of $5.30 per passenger. So let's say the fare is $100 for the two hour flight. We're only comparing one way but let's make it cheap so we are not skewing the comparison. That means the passengers on the flight paid $190.20 in federal excise tax for the trust fund. Together the airline flight contributed just under $2,000. 1995 the corporate flight only $110. Does that sound like fair share? Let's look at a longer flight, five hours. We'll compare a G5, a Gulf Stream 5 which burns about 450 gallons an hour with a 737 max 8 which burns about 750 gallons an hour. 100 gallons an hour or less than the 800 by the way, so is the benefit of the max. You've got a corporate aircraft that needs more fuel and an airline that burns actually less fuel than the predecessor model that we were comparing before. Okay, fuel tax for the G5 is about $493 and for the max 8 only $165. But you got those 150 passengers on the max 8 and since it's basically a transcon flight, five hours, let's say the fare for that leg is $150. Cheap but we're going to keep it cheap for the comparison. Total $2,648 for the airline flight $493 for the business flight. Again, five times as much for the airline flight. So Adam when you note that non-commercial corporate flight pays five times the fuel tax, you're not given the fair share of the tax story. In the first scenario, the airline flight paid 18 times as much as the business jet. In the second, it's the airline flight that pays five times as much. Not to get too far into the tax weeds, but I think it's worth noting that there is a federal excise tax that could be applied to private jet flights. But NBA, the National Business Aircraft Association, successfully lobbied to exempt aircraft management companies and aircraft owners, including trusts, which many corporate aircraft are owned by trust, to exempt all that from the federal excise tax. NBA, a brags about this on its website, aircraft owners qualify for the tax exemption regardless of whether they conduct flights under Part 91, private aviation rules, or Part 135 charter rules. And you know they qualify for the exemption because they pay the higher non-commercial fuel tax. They gladly pay it because it's much, much lower than paying the excise tax as the rest of us do. And by the way, you don't really need to do this research to know the answer to the fair share question. If private jets were paying their fair share, NBA wouldn't lobby so hard to keep the current system in place. Heck, if they were paying their fair share, private jet owners and their passengers would be demanding better air traffic control service, along with the rest of us. The current system gives them virtually a free ride in terms of air traffic control, and that's just wrong. So not to go all Bernie Sanders on you, Doug, but the NBA has tremendous cloud in Washington because the people who ride business jets are big donors to politicians and can history shows kill initiatives on this issue because they're afraid that if they had to pay for the airspace they use, they'd pay more. They can afford it as the numbers show fair share would mean another couple thousand dollars per flight at most, but the history has been that air travel in this country has suffered because they aren't willing to pay their fair share. Bravo, Bravo. Well done. Look, I don't have, I have nothing to add to that other than to tell you that I was heavily involved in our efforts back in 2016 to get the ATC system to be under a much better governance system and it failed, even with the Republican Congress and administration. Yeah, and we thought we got pretty close. We got pretty close. Yeah, I know. And anyway, and yeah, and this was a big part of the issue. It wasn't all the issue. And the other thing I'd say is as much as the equity issue is troubling, there's so much value in the ATC being reformed that we the airlines were willing to say, okay, forget it. You guys just stay where you are. It was hard to do. It's impossible to do actually, but we were going to try and figure out a way what everyone was paying about the same. Certainly for general aviation, we made a commitment. So whatever your total payment is, we're going to figure out why you keep your total payments the same way. It's much harder for the people you're talking about here. And I agree they rightly should pay, but as you know, that's not the biggest issue. So we need to figure our way around this. People shouldn't be fighting it for goodness' sake. It's a national issue. And I appreciate your efforts. Can you fight for this? Yeah, no, and I would love to see the issue come. I mean, I think there are Michael Horto last week raised a lot of issues with commercial space flights. And what are we going to do about electric vehicles which don't pay a fuel tax? How are they going to pay for their air traffic control services? I would love to see a comprehensive new system of payment into the trust fund. And more importantly, I'd love to see that money actually get used for air traffic control modernization rather than sit there. No one running a business would do it this way. That's for certain. And you'd adapt as things like space becomes an issue, you would change the formula. Yeah. And with their inequities, you'd work to fix them at least over time. No one in the right mind would set up a business this way. And the fact is air traffic control is a business is really important to business. We're not talking about the safety portion here. No one's talking about taking FAA and making privatizing it. We're talking about the air traffic control system and just making it run like a business because that's what it is. And it's really important to corners in the United States. So anyway, that's the way I always think about it. It's like, no one in the right mind was a CEO of a company would set up what would tolerate destruction. Yeah, absolutely. Great point. All right. Well, that's all for another edition of Airlines Confidential. I'll be back next week with Charles Duncan in a chat with Robin Hayes, the CEO of Airbus in the US. Doug, thank you so much. This has been really grand. And I as a student certainly learned a lot. I hope listeners did as well. I enjoyed it. Scott, hope you're real. Thanks for your time. So long. Bye. 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