What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing the airline industry was one of the hardest hit sectors during the pandemic. Over the past couple years, with people forced to stay home, airports around the world found themselves nearly empty. Throughout 2020.. In 2021, air travel made a slow rebound with us passengers per day, increasing to almost match 2019 levels, but continued travel restrictions have made international air travel.

Much slower to rebound the consulting firm bain expects transatlantic travel between europe and north america to not even catch up to pre-pandemic levels by 2023. In fact, these estimates will probably have to be revised down in light of the new omicron variant with the highly profitable international routes being decimated. Many airlines have been struggling to get by with dozens of them filing for bankruptcy since a pandemic began with air national air travel still under so much stress, you might think the airlines will be canceling flights and laying off their staff in a desperate attempt to conserve Cash, but in many parts of the world the opposite has happened. Airlines have been continuing to fly tens of thousands of international flights, even when those planes have less than 10 capacity.

The german airline lufthansa said they may fly 18 000 nearly empty flights over the next few months. This is great news for passengers, as you will likely get an entire road to yourself and all the excess capacity pushes down ticket prices, but at the same time it's a disaster for the airlines. In normal times. Airlines do everything they can to pack as many people as possible into each plane and even then they make paper thin profit margins, but with the planes empty, they are losing tens of thousands of dollars on every single flight.

So why in the world, are they doing this and will this insane practice of flying empty planes drive even more airlines to bankruptcy in this video we'll dive under the hood to uncover what exactly is going on? The topic of empty flights came to my attention. Just the other day when i was reading a newsletter from morningbrew who was also kind enough to sponsor this video, there's always so much going on with the world from new covenant variants, economics and technology to try and keep up to date, i used to spend hours A day watching cable news and scrolling through twitter, what i realized i was just wasting time as 90 of information in the mainstream media is useless. Noise. That's why to start my day and keep me up to date.

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Brew also keeps me up to date on business news such as tesla's delivery numbers. Seeing as morning brew is completely free, there's really no reason not to subscribe. It only takes 15 seconds if you're interested click, the link in the description below and now back to the video to understand. What's going on, we have to look back to the beginning of the pandemic.

In the matter of just a couple weeks, the entire world economy was effectively shut down, and the airlines didn't have time to adjust. Flights that were already booked ended up flying, even if they had as few as one single passenger on board, even for a narrow body. Jet, the operating cost can be upwards of four thousand dollars per hour when accounting for fuel paying the crew, insurance and other expenses. Obviously, when you only have one or two passengers in the plane, you'll be losing a lot of money for each flight.

Airline stocks were tanking, and many investors fear that we could see the major u.s carriers go bankrupt. These companies need to do something quickly if they wanted to survive. The most obvious thing to do is cancel the vast majority of your flights. If demand for air travel is down 90 instead of running all of your flights at 10 capacity, it makes a lot more sense to only run 10 of your flights and have them at 100 capacity.

Each you'll have to sell, or otherwise temporarily shut down. The vast majority of your planes for the few flights that remain you'll be profitable on a per-flight basis. However, at the beginning of the pandemic, this was not possible if an airline wants to operate in a major airport such as chicago o'hare or london's heathrow, they need their own airport slots. A slot gives the airline authorization to operate a flight between that airport and a specific destination.

A lot of transatlantic flights, for example, new york to london, are extremely lucrative during normal times. Owning the rights of these slots could be worth hundreds of millions of dollars to the airlines. It's also important to know how the airports make money every time an airplane lands at an airport. They typically have to pay the airport a landing fee which can cost up to ten thousand dollars.

The airports rely on this for a substantial portion of their revenue. Airports are mostly fixed cost businesses. They need a minimum number of landing airplanes per day to cover their overhead costs. To achieve this, they typically require the airlines to use their slots for at least 80 capacity.

For example, let's say delta owns a slot from jfk airport in new york to heathrow in london. If this slot has a capacity of 100 round trips per year, they have to fly at least 80 round trips every single year. If they don't, they get the slot. Taken away from them and these slots can be extremely valuable in 2016, oman air paid 75 million dollars to get their hands on two landing slots in heathrow airport.

If you're an airline ceo, you have a very difficult decision to make. You can either waste tens of thousands of dollars per flight flying empty airplanes or you can reduce your flights and give up your slots. This would save you money in the short term, but you will also end up seeding all of your valuable slots to your competitors. This would put you in a far worse position after the pandemic ends in the u.s, the federal aviation authority temporarily waived the minimum slot utilization requirements as they knew he would drive many airlines into bankruptcy.

This waiver is expected to be extended through march of 2022. The european commission did pretty much the same thing. They also waived the slot utilization requirements in the early days of the pandemic. During the summer of 2021, the european commission reimposed the requirements at a reduced rate of 50 utilization.

Their rationale was that, because the vaccine rolled out a lot of countries were reducing their international travel restrictions, this increased demand for travel during the summer, such that airlines should be able to utilize their slots. Various organizations, including airlines in the international air transport association, criticized the move. While there might have been enough demand during the summer, the european commission ignored the possibility that new variants could emerge and disrupt air travel and with the omicron coveted variant. This is exactly what happened.

Pretty much all the european nations, as well as the us, implemented new restrictions on international travel, including testing and vaccination requirements these, along with general fear of catching the virus cause air travel demand to plummet. Despite this new development, the european commission has maintained their 50 slot utilization requirement, lufflanza, which is germany's flagship airline recently said, the slot requirement will force him to fly 18 000 nearly empty flights during this winter season alone, and it's not just lufonza in aggregate these requirements Could require up to 100 000 so-called ghost flights with few or no passengers on board. So why would the european union continue imposing these draconian rules when they are so obviously inefficient? One possible reason is economic, while they have rebounded significantly since the pandemic lows, unemployment is still slightly above pre-pandemic levels if they relax the rules. The airlines would probably furlough large portions of their staff for at least the duration of the winter season, as they are simply not needed.

Also loosening the requirements would be a massive hit to the airport companies and possibly even cause them to go bankrupt. At this point, the slot utilization scheme is basically just a massive welfare program to benefit the airports and keep airline employment at artificially high levels. Of course, this system is massively inefficient. The airport might charge an airline ten thousand dollars to land a plane.

If the plane is empty, the airline could lose fifty thousand dollars on the flight. If the airline could just pay the airport ten thousand dollars to not make the flight, the airport would be no worse off and the airline would be 40 thousand dollars better off. Another issue is employment. The airline industry employs hundreds of thousands of pilots, flight attendants and other workers.

You could see tens of thousands of layoffs as the slot utilization requirements are lifted, but if the crew is working on a plane with three passengers on it, they're not really doing anyone any good. You could just as well pay them to dig holes and then fill them back up again. In fact, everyone would be better off if the airlines just paid their staff to not come to work. At least this way they don't have to pay for jet fuel or wear and tear on the airplanes, and the airline staff could spend that time at home with their families and search for different employment opportunities.

The fact that the airlines would be better off paying their employees to not come to work just goes to show how absurd the situation has become. Inflation is already near record highs in the euro zone. Paying people to perform essentially non-productive work will only make this issue even worse, and the negative effects of this policy aren't only economic airplanes, burn tremendous amounts of jet fuel and put millions of tons of carbon into the atmosphere at the recent cop26 climate change summit. Many european leaders made bold pledges to reduce their country's use of fossil fuels.

Climate action is often framed as making hard choices. Consumers will have to make some economic sacrifices to reduce their carbon footprint, but in the case of slot utilization, the european commission isn't even willing to reduce carbon emissions when it would cost society nothing. One possible explanation for this is that setting up a new welfare system for the airports and employees would take a long time and would have to be approved by various political bodies, but the slot utilization regulations are already on the books. The bureaucrats are free to enforce these regulations with no votes or inputs from society.

This is how something which on its face, is so absurd can still happen while covet exposed inefficiencies in a slot based system in an obvious manner. It also causes major problems, even during normal times. For example, in 2019, the indian airline jet airways was going through financial distress and had to cancel its international flights. Their parent company, etihad airways, didn't want to give up their valuable slots at heathrow they needed to buy.

Some time to figure out what to do with them. In the meantime, they paid air serbia to fly ghost flights with no passengers on board just to maintain the utilization. This wasted tens of millions of dollars. Remember that all this happened in 2019 before the pandemic began.

Having some sort of a slot system is necessary for large airports to organize the hundreds of flights that they operate on a daily basis and it is important to have a utilization requirement, so airlines don't hog spots without reusing them. A sensible solution would be to make the airlines pay the landing fees, regardless of whether or not they actually use the planes. This way they have a real monetary incentive to use a slot as much as possible, but at the same time they could just opt to pay the fee without landing an airplane. When there is little or no passenger demand, this could save billions of dollars and millions of tons of co2 by eliminating wasteful flights.

It's probably the single lowest hanging fruit for climate change, as it will reduce carbon emissions while at the same time, saving money. The fact that the european union isn't even willing to do this makes into a question their purported seriousness about addressing climate change, alright, guys that wraps it up for this video. What do you think about the european ghost flights? Do you think they should still be required to meet their utilization requirements when the flights are empty? Let us know in the comments section below, as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.