Airline Legends Interview with Bob Crandall

Transcript

Peter Harbison:

Bob Crandall. Welcome to CAPALive. Bob Crandall, of course, long standing leader of American Airlines still, I think, a very active commentator on what's going on. I'm sure you keep your finger on the pulse, Bob. Welcome.

Bob Crandall:

Thank you, Peter, nice to be here. Not as close to the pulse that I'd like to be. It's hard to know what's going on without actually seeing the data.

Peter Harbison:

Well, I imagine Doug Parker is on the phone to you every day asking for advice, isn't he? What are they telling him? Well, what do you think? I mean, overall, what do you think of where we're at at the moment when we last talked, obviously things looked a lot grimmer and lots of vaccinations in the U S now that the market's picking up, traffic's coming back and the airlines are starting to see, I guess, what things are going to look like once we come out of this sort of big process of getting over our debt. [crosstalk 00:01:59]

Bob Crandall:

Right. I think that's right. When we last talked, of course, it was much earlier in the day. Nobody knew then what was going to happen. I certainly didn't. And in fact, what has happened that I think has been unusual by any standard. I don't think anybody would have forecast earlier in the year what has happened. We've had an extraordinary amount of government intervention into the economy. You've had some, I think, extraordinary reactions from the public. People refusing to take a vaccine, which is scientifically unassailable in part because they don't trust the government and in part purely for purely politics. I mean, because I'm a Republican, I'm not going to take a vaccine... in effect... the Republicans, the individuals, not the Republicans, have adopted the notion that my freedom includes the right to kill you by not taking them vaccine.

And then you've got, additionally, you've had the reluctance of people to go back to work for over variety of reasons. Among them the fact that they have to stay home to take care of the kids because they don't yet believe things are safe. And at least in part, I think. Because the amount of support being provided by the government is unusually large. So I mean, all of these things, and nobody could make a sensible forecast. The airlines are very asset intensive businesses that they have to make forecasts, they have to do something.

They have to hire people they have to schedule the planes. And the consequences... I think the industry's done pretty well at at dealing with an enormous amount of uncertainty. And what you're seeing is that the public is back flying to a much greater extent on short haul trips within the United States, to a much greater extent that for leisure than for business and to a much greater extent domestically than internationally. So there we are. Certainly a frustrating time I think for everybody in the world and certainly a frustrating time for those in the airline business.

Speaker 2:

Well, the good news of course, is that traffic has bounced... leisure traffic has bounced back so quickly in the States. And obviously there's been some criticism of the airlines for not getting aircraft back in the air with public not really understanding what's involved in doing that, but there hasn't been a bad mix. But that said while traffic has come back, while passengers are flying again, there's still, perhaps not back to the looking at load factors, for example, they're still not back perhaps to the extent that they could be. And also of course, yields are still something like 15% down, even looking into Q4 for this year. So there's something there that's sort of not quite right still.

Bob Crandall:

Well, I think those things, are a reflection of the uncertainties that I talked about here, what we just talked about a few minutes ago. You can't get the load back and the [inaudible 00:05:27] up, unless you create a circumstance where demand is well in excess of supply and you can't do that, and if you can't make a sensible plan, they have no real notion of how many people are going to fly. And as you pointed out, putting flights back into a schedule is not a matter of saying, "oh, by the way, now two weeks from now, that's another 25 flights". "Sorry, chief, we don't have the aeroplanes , we don't have the pilots trained, we don't have the flight attendants, we don't have, we don't have, we don't have, we don't have. So the answer is the airlines have been doing the best. Obviously they want to use the assets. And so they're scheduling as much as they can believe they can reasonably schedule without wasting liquidity.

And then what they ended up with is a circumstance where there's a little bit more capacity, and certainly in some places, considerably more capacity than they liked to have. But they made a rational, and I believe, they made a reasonably rational set of decisions. But they are not going to come out right. And it's probably not going to come out right for some time to come. Because the extent to which people are willing to trust the health of fellow passengers, the extent to which a larger percentage of people are prepared to accept the vaccine, it's going to shape what the economy looks like.

Time magazine had a cover, Peter. They said, "We're never going to be the same again". And we aren't. Five years from now we may have recovered from all of the uncertainties that bedevil us now, but we won't be the same as we were. We may be different and the circumstance then may be more reliably forecastable and therefore the relationship between demand and supply in the airline business may be more logical than it is today. But it won't be the same.

Speaker 2:

It's a good point. It's a perfect environment, isn't it Bob, for a bit of experimentation. I think there are a lot more point-to-point routes coming in now. I think aircraft, the larger aircraft, are being taken out because they're just not suitable for the market. Let's talk about fleets too, because obviously United have come up with...

Bob Crandall:

I'm sorry, I missed it.

Speaker 2:

Talking about fleets, the United have created a bit of noise just recently with their very large narrow body order. They've also of course, got into the boom market, the supersonic, as well as some short order electrics as well. But looking at the big end of the market, with the experimentation, this is probably a good time, and I'd be interested to know what you would have done in this case. I mean, they're buying... that they're going to increase... United is going to increase their fleet by something like 50% over the next four years. Is that the the full runner of a big capacity battle?

Bob Crandall:

I would think so, Peter. I would think that United's going to find itself, but contesting with a large number of people who are not prepared to yield market share. After all, you can't very well let the other guy take major pieces of market share and expect to prosper yourself. So I think you're goint to find... In the first place, there are some new entrants. The low cost carriers are more vigorous than they have been in years past. And the other majors are hardly going to look at United's rapid growth with the equanimity. So I think I have, [inaudible 00:09:42] so that United are prepared for very, very vigorous competition, which would imply, it's going to be every bit as hard to make money in the airline business as it has been for many years. Just before the recent upheaval the airlines had a period of time during which they were quite prosperous. I think they're going to be hard pressed to find their way back to that envelope of prosperity.

Speaker 2:

Well, tell us why market share is so important in this domestic market.

Bob Crandall:

Market share is important because you're going to fly between point A and point B. You need to offer a reasonable amount of frequency that's something that... That you used to have to in order to appeal to some segment of business travellers and there will be some business travel frequency. Therefore, frequency isn't going to become completely unimportant, maybe less important than it used to be. But if you're going to be a competitor in a given market, you find that market, you will, you can't, you can't rely on price, right? To say, well, I've got, I've got 2% of the capacity, but in order to fill the aeroplane, I've got to have 5% of the business. It's not going to work that way. And the consequence market share is important. You can't... To be a participant in the market. You've got to have a representative pretend age of capacity and, correspondingly, a representative share of the business. Alternatively, you're going to find yourself in very difficult times.

Speaker 2:

And, of course, Southwest, to use the word "pivoted" a little towards the business market, now making it very clear using GDSs, and making it very clear that they want to go for that market... If it is going to be smaller, and it is going to be smaller, we don't know by how much, that too is going to become very price sensitive, presumably because you've got to much capacity chasing it.

Bob Crandall:

The business market has always been price sensitive, within itself. The airline business has been bitterly competitive for many, many years. The consequence is that yes, business travel is not as price sensitive as leisure travel, but when you are trying to sell business travel to the companies that they work for, it's a very competitive business. So, certainly, business traveller is price sensitive. It's just price sensitive in a different way. Not in the absolute sense that the leisure business is very price sensitive in any case. So you're quite right. Southwest, years ago began to be a lot more sensitive to business traveller. And of course the business travel has always been of many types. And people who operate small businesses, as opposed to those who travel for very large businesses. Small business representatives have always been more like leisure travellers than business travellers. So when you say business travel you're really talking about people that travel for the giant companies in the world. But the small business person and the representative of the small business travel has always been very much more like a leisure traveller in terms of price sensitivity.

Speaker 2:

You mentioned before the low cost carriers the US sees coming into the market, and obviously if you're doing it in business and most people in the airline business, really aren't very smart for being in there. But the profit comes in the gap between yield and cost. And if the yield is going to come down, the average yield is going to come down, the costs have got to come down. Do you see the big four or the three big full service carriers... Do you see them being able to reduce their costs efficiently in this new yield environment.

Bob Crandall:

It's going to be very difficult, Peter. But it's always been difficult. This whole business of trying to get costs down to a competitive level has always been difficult and it will be increasingly difficult, I think, as the market changes in the way that we've discussed. I think labour cost, particularly, which has always been the sticky wicket in the major carriers, and the people who run the major carriers, and the people who work for the major carriers are going to have to be realistic. On the other hand, I think the ability of low cost carriers to maintain major cost [inaudible 00:14:43] is going to shrink over time. As a society, we are becoming more sensitive, I think, to the inequalities that have found their way into our society. And that inequality is increasing and I think is going to be politically and economically unacceptable.

And therefore, I think that the low cost carriers costs will come up as the legacy carriers, or the higher cost carriers, squeeze their cost down. And therefore the difference won't be as extreme as it has been in the past. And everyone will be looking for ways to distribute around that cost difference and to add value in ways that are low cost carrier may not be able to offer that. So it promises to be an extraordinary, interesting time and the airline has always been interesting.

Speaker 2:

It is. As you're saying quoting Time Magazine now, it's never going to be the same again. This really does seem to be a watershed. We've had ups and downs and lots of big downs, but this really does seem to be a watershed for the industry. Doesn't it?

Bob Crandall:

Well, I think the watershed for our society, Peter. You can say it is the watershed for the automobile business, it has certainly been up to this point the watershed for the cruise business. A lot is going on in the world. Look, around the world you've got places like Venice and Rome saying, wait a minute, maybe we go one every traveller on the world to come here. Maybe we can't have a society that is as intensely based on travel and tourism as it has been in the past. Travel and tourism used to be regarded as sort of an unmitigated, good. That's not an unmitigated good anymore. That's a watershed for the whole travel and tourism industry. So I think what you've got is yes, watershed it for the airline industry, but it's a broad based watershed for our societies around the world.

Speaker 2:

That's, that's a really interesting point. It is very much part of society, is very much affected by the economy, by private citizens voices. One of the interesting things on that, Bob, with the likely decline of business class airlines have been looking very much towards how they can focus much more on the premium traveller, the premium leisure traveller. And so we're seeing, for example, with that United deal, that there's going to be a heavy focus on putting product in the aircraft that is above the sort of...

Bob Crandall:

Yeah, I think that's right, too. We'll have to see how people do at it. I think one of the things, one of the watershed events, is going to be a question of "To what extent do companies that used to be airlines want to be in air transportation companies"? [inaudible 00:18:03] You know, Delta has experimented with private aviation to a greater extent than either United or American, at least so far as I know. I think if you look to the future, I think a larger percentage of the population... and has been true in the past... is going to fly private or something that resembles private. One of the things I'd been looking at if I was still in the airline business is, how it look more like private aviation. Maybe not becoming private aviation, but looking more like it and offering more of the virtues of private aviation.

Speaker 2:

You're really catering for the high-end leisure traveller. Then there's another aspect of that, Bob, which is leveraging the brand and going outside pure carrying passengers and freight. And obviously there's been a lot of moves in that direction with loyalty programmes and generating very large amounts of money from that. In fact, that the loyalty programmes are worth far more than the airlines are, themselves. But we're seeing some examples in Asia, for example, where the dot.com approach to actually marketing a whole range of different products just leveraging off the brand is becoming very important. And Delta has been very good at that. I think, do you see that, that sort of the side of the non [crosstalk 00:19:33] then...

Bob Crandall:

A very good question. You would add value. That is what they are trying to do, associated particular value with the brand, whether it's the extent to which you can separate the core product from the brand or establish something other than incompetence in the core product with the brand, I think remains to be seen. It's an approach that people are trying. It's hard for me to see how that's going to work, but who knows what's going to work?

Speaker 2:

Who knows? Yeah, that's right. A lot of experimentation, Bob, the big, big dark cloud ahead of us, of course. And I started talking to Henry [phonetics Colalei 00:20:20] earlier, the head of transport in the EU. He was saying that over the last... or over the period of COVID, the sensitivity to environmental issues has really just exploded. It's become far, far more important than it was beforehand. Which is bad news for the airlines... [crosstalk 00:20:46] O

Bob Crandall:

It has to be done, Peter, it has to be done. The reality... look, the science... I don't think the science can be challenged. We've had, in round numbers, we've had 10,000 years during which we've established civilization. During those 10,000 years, we've had essentially climate stability in the hundreds of millions of years before that, there were vast ups and downs and things, and now you've got 10,000 year... or relativity... to the... and we've broken out of that 10,000 years. And, in fact, I can't recite the names for you anymore, but the anthroponym and so forth... The scientific community have said we've entered a new era.

I saw a number the other day, that if we lost only the Northern ice cap, it would add 20 feet to the world's oceans. I don't know what... If we lost both ice caps, I don't know what the increase in the worlds oceans would be. But Peter, I don't think we've really started to get serious about environmental issues yet. I think certainly in the last 10 years of my life, which lie ahead, I think you could see the world get way more serious about environmental issues then it had been in the past. We are heating the climate, we're acidifying the ocean, we are cutting down trees that we simply must stop cutting down with them. A lot of these things have to change. What are the implications of that for travel and tourism? I think the implications of that are pretty profound.

I think as people being to say, wait a minute, we're going to have to get serious about this. We're going after start... Everybody can't have a car [inaudible 00:22:52] are going to have one car or vehicle. I don't care how it's powered, gasoline or electric. and I don't care about the fact that we need to cut down the Amazon in order to let more people grow sweet potatoes. That's not going to happen. We can't let it happen. And a whole series of questions like that, including no, maybe average citizen can only take one trip by aeroplane because that's all the CO2 we can allow transport to burn. Now I add, it's way out of... This is imaginary stuff. But this is going to happen. We got this, we've got this control. We've got to control the climate. We've got to control the rate at which we are using and destroying the world's resources. And that has vast implications for our society and therefore vast implications for this particular business.

I don't know. I do know that I think you're... I think you have a correct observation about the growing intensity of public attention is absolutely on the mark. And I don't think that's really gotten anywhere near as serious as it's going to be 10 years from now.

Speaker 2:

Yeah. I totally agree with you Bob. And I'm certainly under a lot of pressure from my grandchildren to recognise it. And I think the thing in Europe, particularly, I think it's going to come, I guess, in the States a lot more now. But in Europe, particularly the sort of things you're talking about. Actually limiting how many times you've been flying or putting a social responsibility on you to do that is going to become a lot stronger. But of course, one of the things that argued by the industry is we're not making the case very well because we're only 3% of total emissions and cars are 15, 20%. And the popular feeling is that our airlines are 20% or 15%. They're not that much.

Bob Crandall:

No, they're not there. But the reality is whatever share they are, the absolute is going to have to shrink big time.

Speaker 2:

Totally agreed. But it's going to cost, isn't it? The further you compress that envelope within which you have to make change and accommodate it, it means cost to the airlines, whether it's alternative fuels or whether it's, just..

Bob Crandall:

You're absolutely right. Whether we limit travel because it's going to become more expensive or whether we limit it because we ration it or whether we do it in some other way, I don't know. But I... It just seems to me that the notion of the rate of growth that we've become accustomed to, even the rate of growth that certainly the average person would like to see, because people do want to travel, it's the greatest, it's the most desired product in most people's mind... they don't have that they'd like to have more of... Even so it seems to me that you're right, there's this conflict between what we have to do to safeguard the environment and what we would like to do in a whole variety of areas, including travel.

Speaker 2:

Adding that into the mix and going right back to what we were saying at the beginning about how passengers are a bit reluctant to fly, how the airlines need them to fly. What about you?

Bob Crandall:

I haven't stopped flying Peter. I mean, my put my life is so dramatically different than it was when I was working. The fact the matter is that I will be 86 this year, I'm 85 right now, my wife is very seriously ill. I still feel good, but I don't have any need or desire to travel as much as I used to be now because I was very fortunate. I went and saw all the great places in the world when I was much younger than I am today. So today I pretty much immobile but when I need to go somewhere, I get on a plane and go. But the amount of travel could be... Again, that's characteristic of my age and occupation. But if you talk to my grandchildren, I have seven, I have three children and seven grandchildren. They, the grandkids are well, they are all prosperous and working on, but they're spending time at the end of the computer, not in a physical location and they don't have to go from point A to point B often. And when they do go, they generally go by train or bus to get from New York up here to Gloucester, Massachusetts, or from Boston to Gloucester, Massachusetts. So we're all much less mobile than we used to be. You multiply that by a lot of people around the world, it seems to me that the resumption of rapid growth that we grew used to for so many years just isn't going to happen. It's too many constraints.

Speaker 2:

It was partly a question too, about the profile of a lot of the... We're talking about premium travellers are older, over 65, retired, probably reasonably well off, these are the premium leisure travellers, presumably.

Bob Crandall:

Well, they are in the premium group. But of course that cohort [inaudible 00:29:00]... It's complicated [inaudible 00:29:00]... because a lot of those people would like to be flying off to an international destination and COVID, and the various restrictions surrounding COVID are making it right now, pretty hard to sell international airline tickets because you can't be sure where you can go and when the rules will change and how you can buy a fully refundable ticket for a low price, because you might not be able to go either because you are sick or because the destination country won't let you in. So all of, all of those complications, and then you add to that, the world's growing concern about how many people can we afford to let in how many people do you want to let in at the centre of Rome or at the centre London or in Venice at any particular point in time. We are going to see limitations of that kind. And we are going to see more people and more people worrying about the environment.

[inaudible 00:30:03] having a constraint, constraint, constraint, constraint. You have a very effective product. Something people want to do and therefore they will do it. But there not going to do as much more of it as they have been able to do in years past. And it's certainly going to come, to some extent, become disengaged from the world's growing prosperity. You're just not going to be able to expend as much of your resources on travel as has had been true in the past.

Speaker 2:

Yeah. None of that terribly cheery when we come to talking about beyond business.

Bob Crandall:

Exactly. Of course, I was never known as the cheery guy.

Speaker 2:

Underneath that, Bob, underneath that tough exterior there's lots of it. Bob, thanks very much for joining us again. It's always great fun talking to you. Look forward to the next one and then best wishes to your wife. Hope she's [crosstalk 00:31:02]

Bob Crandall:

Thank you very much.

Speaker 2:

Thank you.

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