Lately, it feels like we’re surrounded by systems and industries that aren’t working the way they should. There’s an oil shortage, and a baby formula shortage, and a used car shortage, and a microchip shortage.
Now, here comes the airline industry shortage. This past weekend, thousands of flights were canceled because airlines didn’t have enough pilots, grounds crew, or planes. People were stranded in airports for eight hours or longer. JetBlue, American, and Delta collectively canceled about 9-10 percent of their flights—between five and 10 times higher than their historical average. And some experts say that if you’re planning to fly at all this summer, things will only get worse. How did this happen? When will it end? Today’s guest is Scott Keyes. He is the founder of Scott’s Cheap Flights, a newsletter and business with more than 2 million members. We talk about the origins of the crisis, the economics of the airline industry, and why the decline of business travel is a cannonball in a lake whose ripple effects are wreaking all sorts of havoc.
In this excerpt, Scott explains how the approach that airlines took in the early part of the pandemic, in 2020, set the stage for the current summer of hell in air travel.
Derek Thompson: Scott, there are so many moving pieces here, and we’re going to get into every single moving piece, but I want to kick us off with a clear thesis statement. So, imagine you’re having dinner with an old friend, you order drinks, and he’s telling you about all these stories he’s reading, about this summer turning into a season of hell in air travel. Thousands of canceled flights over the weekend, friends stranded for hours in airports in the U.S. and Canada and Europe. And he says, “Scott, you’re an expert here, big, big picture, what the hell is going on?” What is your 60-second answer to that question?
Scott Keyes: My 60-second answer is that the amount of turmoil in the airline industry, in the overall travel industry, over the past two years, is unlike anything we’ve ever seen in modern travel. Even the 9/11 attacks—it was airplane-based, caused so much turmoil across the world and across the globe—caused a 5 percent, 7 percent drop in overall travel, whereas when you look at 2020, travel figures are down 70 percent, and have still had ramifications since then. And so, when you rewind to where airlines were—looking down the barrel in March of 2020—they weren’t worried that this was going to turn a profitable year to an unprofitable year. They were worried about surviving into 2021. They were worried, “Are we going to be around?”
And so many of the decisions that they were making in March and April of 2020 were in that mindset of, “How can we batten down the hatches to make sure that we come out of this thing alive as a company, rather than one that is being sold off for parts?” And so, laying off folks where necessary, doing these sorts of employee buyouts, offering early retirement, shedding pilots, selling airplanes, retiring aircraft, all sorts of decisions to try to make sure that they come out the other end.
But now, with the benefit of hindsight and seeing the rapid travel rebound, we are now paying the price for those sorts of decisions. They wrote the check back then, thinking that they would really be facing a dire situation, but when it turned out to be not as bad from a travel-industry perspective, we’re now struggling to try to rebound and fill that capacity as the demand really spiked.
Thompson: This is the story of the pandemic. I mean, in industry after industry, it’s so fascinating that the pandemic hits, everyone thinks the world is going to implode—and, in fact, much of the world does implode. People cut back massively, whether it’s retailers or the oil industry or, here, the airline industry. And then for a variety of reasons, when demand surges a year later, a year and a half, two years later, the supply-demand imbalance is so janky that there’s all sorts of problems with the service.
Oil prices skyrocket, there’s an inventory crisis in retail, and there’s a travel snafu just all over the place in air travel. It sounds like what we have to do now is go back to 2020. I want you to tell me how the airlines responded to the economic crisis, the pandemic, in terms of pilots, ground crew, and planes. What did they do in those three categories that has essentially made the bed that we’re sleeping in today?
Keyes: That’s right. So, across the board—Delta shedding 30 percent of their employees, almost 30,000 people from their staff; American, laying off 30 percent of their staff, whether it’s through buyouts, earlier retirements, or otherwise—airlines were really trying to cut and become as lean as possible, to reduce those operating expenses with the anticipation that they were not going to be making much money over the next however many years. They took it in terms of aircraft, retiring many of the older, gas-guzzling planes, using this as an opportunity to try to reduce their fleets, in many cases either to stop having to pay upkeep and operating expenses on them, or to be able to sell them elsewhere and get some kind of petty cash for those older planes.
And those types of things certainly helped improve the balance sheet throughout 2020, but with the benefit of hindsight, would they have made the same decision if they had known how quickly travel demand would rebound, if they had known how quickly folks would want to get back out and start traveling again? Almost certainly not. Almost certainly not, because they assumed that this was going to be a four-, five-, six-year recovery period, not the 12-to-18-month recovery period that ended up coming to pass. And so, when travel demand started rebounding much quicker than they anticipated, the airlines were caught flat-footed and trying to then play catch-up.
This excerpt was lightly edited for clarity.
Host: Derek Thompson
Guest: Scott Keyes
Producer: Devon Manze