Hey there, it's Stephen Dunner. Before we get to the final episode in our series about airline travel, I want to ask for your help on another series we are working on. It's about something we all experience, but we don't like to discuss. It's a series on failure.
Failure is embarrassing, it's painful, it can be life-bred in it, but we need to talk about it because there is a lot to be learned from failure. And when failures are hidden away, as they usually are, that learning can't happen. This is where you come in. We are looking for fascinating stories of failure.
Maybe it's something you were involved in firsthand, maybe it's something you read about and just stuck with you. It could be a failure in politics or war or business, it could be a failed relationship or some other personal failure. Maybe it's a failure in sports or the arts, a failure of invention or exploration. If you have something, anything that could help, we would love to hear about it.
Send an email to radio at Freakonomics.com, the subject line, Failure. With your help, maybe our series on failure will succeed. So, thanks. I'm very excited about traveling.
I have always loved planes and airports and waking up at 3 a.m. to take a cab when everyone else is sleeping. I frequently volunteer to drive my friends to airports just because being near an airport makes me really excited. Maria Diplutis is one of the Freakonomics Radio listeners who sent in an audio diary for the series we've been doing on airline travel.
She has been excited about flying for a long time. I remember as a kid loving everything about air travel. And even now, I'm pretty hard-pressed to think of anything that I don't like about it. She does have her preferences.
I really, really try to avoid being stuck in a middle seat because I have a pretty big butt. So, it gets a little awkward if I'm stuffed between two people. Diplutis lives in San Francisco. And I will be flying to the Greek island Chios to see my uncle who lives on that island.
He has cancer and things aren't going so well with his health. I will also be seeing other families. It's been about 15 years since I've been back, so there's a lot of catching up to do. And there's going to be a lot of me having to answer the question of why I'm almost 40 and still single.
I will be flying alone. In general, I prefer to travel alone because I can be a pretty whimsical person, so I like the freedom to be able to do whatever I feel like doing in the moment. I try to fly as cheaply as possible because I studied theater and social work, so I'm poor, but I did it to myself. I basically got on Expedia and tried to find the cheapest airfare.
I got a one-way ticket, which is something that I can do because I have dual citizenship between Greece and the U.S., and the ticket costs a little over $700, which I think is a pretty good deal. How good of a deal is it? Think of all the other things you could buy with $700. On the other hand, what would it cost you to get to Greece without a plane ticket?
How would you even do that? Today on Freakonomics Radio, the third and final episode in our series on airline travel. In part one, we discussed the headaches and benefits of flying. In part two, we heard about the remarkable safety record of modern aviation.
And today, we are talking about the price of air travel. Obvious things like ticket prices, but also environmental costs. The only solutions are either you don't fly or you use sustainable aviation fuel. Also, would you rather own an airline or an airport?
An airport. Because why? Because they're a monopoly. And what is Maria de Plutis seeing on her journey?
I think every airport has to have a sign of one. I think there's some sort of international law. This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dupner. If you've already heard the first two episodes in the series, you know we spent some time in Atlanta at the headquarters of Delta Airlines, which is one of the world's largest airlines by revenue.
We did some safety training. We wrangled baggage. We watched the intricate choreography that goes into getting a plane ready for takeoff. And we spent a little time with Delta's CEO, Ed Bastion.
Good to see you. Welcome. Great to be here. Thanks for having me.
This is our founder's office. That's where a lot of the magic of Delta gets decided. You have amazing mementos. We've got Olympic torches in here.
We've got Yankee Stadium memorabilia. This is probably my favorite, the Delta thank you plane. Thank you to our people and our customers. What do I have to do to get one?
I have to fly a million miles now? No, you just have to know me. We can get you one. After reporting out the first two episodes in the series, I had come to understand, oh, I did not get a thank you plane, just so you know, but by now I come to understand that a commercial airline is an extraordinarily complex business to run, and I asked Ed Bastion to name the most difficult part.
I'd say the most difficult part is dealing with our political leaders. We're a divided country, as you know, and we're in a business where we want everyone to love us. And it's a real challenge at times to be able to navigate and make certain that you're putting your people in your company first when others want you to run in a different direction. And what's the relationship between a big firm like yourselves and the federal government?
Can you give me an example of what kind of change they might want? Well, I think they're always looking for advocacy on their issues, whether societal issues, sustainability, environmental, corporate governance issues, and you want to always stay above the frame of that. I read, Ed, that you were 25 before you boarded your first airplane. Is that true?
That's true. And you're how old now? I'm 65, 40 years ago. So for someone who's 25 today and has flown dozens, maybe hundreds of times, can you explain the difference between access to airline travel now versus then?
Well, back then, air travel was very much seen as a luxury, as a service that only the rich could afford. Did not have a lot of routes, so pricing was controlled by the government. The number of travelers as a result were quite few and planes were generally only about 50% full. And around that time, in the late 70s, early 80s, the Deregulation Act occurred in our industry that allowed airlines to take a lot more control over pricing, which created a lot more competition, a lot more growth, brought fares way, way down.
The Airline Deregulation Act was signed into law in 1978 by President Jimmy Carter. Until then, there was a federal agency that determined how much you would pay for a plane ticket. I worked at the Civil Aeronautics Board in 1978 during airline deregulation. That is Severin Borenstein.
Today, he's an economist at the University of California, Berkeley. The Civil Aeronautics Board designated certain airlines to fly on certain routes, and then they would set a price that was intended to be high enough for the airline to recover their costs. After decades of regulating prices, we were going to open all that up. When Maria Diplutis was telling us about her trip to Greece, you may remember she said she basically got on Expedia to find the cheapest ticket.
It turns out that's pretty typical. 83% of U.S. air travelers say that price is among their top priorities. Back when the industry was regulated by the Civil Aeronautics Board, or CAB, airlines were not allowed to lower prices to win customers, so they had to find other ways to compete.
They would compete against each other by adding more flights on the route. Since you couldn't cut the price, what you would do is say, we have the most flights, and that really mattered to business travelers who wanted to be able to, if their meeting ended early, to go to the airport and quickly catch a flight home. So they were competing on frequency and in other ways in service quality by offering piano lounges on 747s, and they were gradually driving down the share of seats that were filled by adding more and more flights, and they would eventually get back to the point that they weren't earning a great rate of return on their investment. So they'd go back to the CAB and they'd say, we need higher fares, and the CAB would say, yeah, okay, we'll give you higher fares.
Eventually, in the mid-1970s, people at the CAB figured out that this was just an endless loop where we were raising fares with very high prices. This system was okay for the airlines who were essentially guaranteed a profit by the regulators, and it was okay for travelers who cared more about flexibility than price, like business travelers, but for everyone else, it wasn't so good. Deregulation changed that. The airlines figured out that most people would rather have a fuller flight even if it was a little less comfortable in order to have much lower fares.
The fares did get much lower. The average price today for a domestic round-trip ticket is less than half of what it used to be once you adjust for inflation. But if there's one thing we've learned from economics, it's that life is all about the trade-offs. A cheap flight is not going to be the most comfortable few hours you've ever spent.
The seat will be narrow. There may not be good food or any food. And if your flight gets delayed or canceled and you need to get on the phone with a customer service agent, yeah, well, let's hope you don't. But the airplane will get you to where you want to go, someplace that a few decades ago you may not have even thought about going.
Multiply your one trip by a few million, a few billion, and that is where we are now. Air travel has become part of our global infrastructure. Aviation is such a powerful force in our lives, communication, experiencing other cultures, traveling to see family. There's so much power in making aviation accessible.
That is Megan Ryerson from the University of Pennsylvania. If we had airlines that just operated a few flights or if we had a system but Ryerson is not an economist. She is a transportation scholar who sees herself as more of a consumer advocate. An economist, for example, might look at this from the perspective of the airlines.
How can they maximize profits? I am totally focused on the consumer and their mobility. How can we optimize mobility? How can we optimize accessibility to air transportation and transportation broadly?
So the conventional wisdom at the moment, at least, seems to be that airline travel is chaotic and unpleasant and unpredictable and too expensive even. But you could look at all that from a different perspective and say that airline travel is a miracle of engineering and logistics and economics and that for pennies a mile, it's much cheaper than auto travel even rail travel in a lot of cases and I get from point A to point B really fast. Also, my risk of dying is much less when traveling by airplane than my car certainly over the equivalent distance. So those are the two ends of the spectrum of how we see air travel.
Where do you land on that spectrum? Oh, you want me to pick a point? I was going to say, Stephen, you're in my head. Those are the two areas where I live.
I respect how incredibly expensive and complex it is just to get an aircraft off the ground. However, I think that it's human nature. It's in our spirit to always want better. I think the aviation system is definitely a work in progress and can improve significantly.
Before deregulation, only about half of all Americans have ever been on an airplane. Today, that number is 90%. Ed Bastian again from Delta. We know it's one of the top economic drivers in our country.
Our country is so large. It's allowed families to spread out, to live in different parts of the country without feeling like they've left home for good. It brings people together. I think the impact that travel has was never more obvious when it was taken away over these last couple of years by the pandemic.
The high level of anxiety and angst and distrust that we witnessed, some of which clearly was due to the disease. But I think another big part of it was the fact that people weren't able to be together on an international scale. Considering this industry is so vital, why does it have such a thin profit margin? Well, it's highly competitive.
We have a lot of airlines in our country and in our world and we all operate on marginal economics. When that plane takes off, the last chance you have to sell that seat is 10 minutes before the door closes. So there's an automatic spoiler standard, unlike maybe many goods that you can put on a shelf and wait till you get your price. We don't have that luxury.
It's an industry that's highly technical. We have 90,000 people, but the majority of those perform responsibilities that require a significant amount of skill and training and expertise and as a result, it has high labor costs. The planes are very expensive, ranging from $50 to $200 million a piece. The principal way is high.
However, the revenue environment changes by the hour. You put that mix together, it's what keeps people like me engaged here because it's like a Rubik's Cube that you're always trying to sell for. Delta, like many other airlines, has nearly recovered from the pandemic drop in travel. Last year, they recorded a pre-tax income of $2.7 billion on operating revenue of around $45 billion.
Their single biggest cost is labor and they recently gave their pilots a big raise and an across-the-board raise for all other employees. After wages, their second biggest cost is jet fuel. And fuel costs are incredibly volatile. That's the economist Severin Borenstein.
People often quote numbers of the share of total costs that are fuel say about Delta's fuel costs. On average, fuel prices fluctuate to, say, between 15 to 30% of our cost base. Delta spent $8.5 billion on fuel in 2019, the year before COVID. Last year, they spent more than $11 billion.
We used to hedge, financially hedge fuel, trying to level out. But when you have a commodity that's as volatile as fuel and you hedge on a longer-term basis, it's very expensive. We've lost in our business a lot of money hedging fuel. The one thing that we have done differently is 10 years ago, we bought our own oil refinery, which is outside of Philadelphia because it's not just the cost of the crude, it's the cost of the crack, the refining process that you turn crude into jet fuel.
And that crack currently runs from $50 to $75 a barrel on top of the $100 a barrel that you're seeing on the crude market. By owning a refinery, we're able to save the cost of that crack and actually just pay and eliminate the middleman of the market impact and just incur the cost of the real production. So this year, that refinery will probably save us $800 to $900 million as compared to an airline that's paying for the marketplace. I remember reading about that way back when, and I thought, well, if this is successful, the other airlines will do it.
It sounds like it has been successful, and yet the other American airlines have not done that. Why? Well, it's complicated. Running a big refinery is almost as complicated as running a big airline, but you have to have another set of skills.
The second impact is that because we're in there doing it, ensuring that the supply of jet fuel stays high because the other incentive we had was particularly in New York with all the growth we've had in New York. Prices were particularly high because refineries were being closed along the East Coast. Just Delta going in and turning, because it was a closed refinery, when we turned it back on, we immediately dropped the cost of jet fuel in the New York marketplace by 50%. Wow.
So the other airlines are getting a benefit from Delta's involved, and I'm still waiting for those thank you notes. The dollar cost of jet fuel is probably the most wicked problem. that we have to solve. A wicked problem is management speak for something that seems nearly impossible to solve because of its complexity and competing interests.
The good news is that big airplanes have become much more fuel efficient. Here is the economist Volodymyr Blatkoch, author of a book called The Economics of Airlines. By some estimates, each new generation of jet engines has been about 20% more fuel efficient than the previous generation. One thing that has been happening in the field of aircraft manufacturing is that aircrafts are becoming lighter thanks to the use of composite materials as opposed to the aluminum.
Never learned how to pronounce that correctly. Indeed, new aircraft are around 85% more fuel efficient than new planes from the 1960s. The bad news is that there's a lot more flying today than there was in the 1960s. So as Greg Foran pointed out, airline travel adds up to three or 4% of global greenhouse gas emissions.
He says that hybrid and electric planes could come online relatively soon, at least for shorter routes. Here's what Ed Bastian from Delta told us. We made an investment in a company called Joby recently. Joby is an EVTOL operator.
It's an electric vehicle takeoff operator, a vertical takeoff lift. And what they are, they're small planes. They'll sit somewhere between four and six people. There'll be vertiports in different neighborhoods and geographies around large metropolitan areas.
Initially, there'll be a pilot on that plane, but over time, it could very well be autonomous and fly it to anywhere 30, 50 miles, wherever that route is going. But again, those are small, short haul flights. Here's Greg Foran. And that's going to be good, but it's really only going to deal with 12 or 15% of our global emissions because far and away, the most emissions that we create occur with our long haul flying.
On long routes, the options are more limited. Really, the only solutions there are either you don't fly or you use sustainable aviation fuel. Sustainable fuels are typically made from biomass and waste sources and they release up to 80% fewer emissions than traditional fuel. And one of the challenges with sustainable aviation fuel is that demand exceeds supply and the price is three to four times the price of fossil fuels.
So if the cost of fuel goes up by 300%, what does it do to demand for air travel? Yeah, what would that do to demand? And what would it do to ticket prices? We've all been accustomed for a long time now to cheap fossil fuels and for a few decades we've been accustomed to cheap air travel.
Coming up after the break, how exactly do airlines make their money? And when airlines merge, which they do all the time, is that good or bad for customers? I'm Stephen Dubner. This is FreakNomotrayo.
We will be right back. You're ordering desserts. You don't let me enjoy things. The bill's already too much.
You signed up for this. Maybe I should sign off then. It's time to break up with your debt. Farber Debt Solutions.
Licensed and sovereignty trustees. Get the truth about death. Let's go back to the time just before COVID stopped everything, including most airline travel. Here's Sarah Nelson, a flight attendant for United Airlines and president of the world's biggest flight attendant union.
Just a month earlier, Delta was celebrating major profits and handing out profit train checks. The American CEO was saying, we're never going to lose money again. United Airlines had just announced a huge training facility. And then a month later, they're going with hat in hand to Congress and saying, we're not going to make it because 90% of demand dropped off.
And Congress said, yes. Here is Ed Bastian, the CEO of Delta Airlines. Over a series of, I think, three launches, it was about an 18-month period, the industry received a total around $50 billion. Delta received around $10 billion.
It was allocated based on size of the airline, the payrolls of the airlines and all airlines participated in it. A lot of people might say, well, I had a really tough time too during COVID financially and in other ways and I wasn't getting bailed out. It just doesn't seem fair. How do you answer that?
There were a number of reasons why the bailouts were critical. One, the industry would not have been able to survive what happened during the pandemic. We had large-scale operations on a global basis that were by law shut down. The international skies were closed.
We were not legally allowed to fly to many of our major markets around the world, which was a government action, a responsible action, but it wasn't something that Delta did or any airline did. Secondly, the airways, however, in the U.S. needed to stay open even if customers weren't flying because we needed medical workers and supplies to get around our large country. Inter-travel is a critical part of commerce as well as society.
We could not have flown unless the government was willing to support us but also in turn for receiving the bailout money as it's been called. I don't think about it. I think it's a subsidy for COVID. We agreed to keep the airways open and to lose lots and lots of money.
Third, all that money went to our employees. It didn't go to the airlines. It went to maintain our employees so we didn't have to furlough any employees, which meant they were positioned when the market reopened. We look like, go look at Europe this summer and the difficulty of getting staff in and the long lines and the lost baggage and I'm proud of our administration for standing by and doing the responsible thing.
By the way, we have to pay back 30% of that and the government also took more in the ownership space of the airlines in return for it. So the government got a good return on its investment, including the payroll taxes and the other forms of support that our employees pay back to the government, which they wouldn't have otherwise paid had they been laid off. Delta and the other big U.S. airlines are publicly traded firms whose relationship with the government can be, let's call it, complicated.
In many other countries, there are so-called flag carriers that are owned by the government. The Gulf states are a good example. Well, U.S. airlines like Delta have complained that this puts them at an unfair disadvantage.
It's hard to compete in the international market against companies whose government buys the planes and sets ticket prices low in order to promote the country itself. Well, every airline has always complained about foreign carriers and said that they're subsidized. That, again, is the Berkeley economist Severin Borenstein. The foreign carriers could certainly point to what happened during COVID and the huge bailout that the airline industry got and say, wait a second, you're subsidizing your airlines as well.
David Nielman is the founder of Breeze Airways in the U.S. Before that, he founded JetBlue and Azul Airlines in Brazil. I asked him about the foreign subsidy complaint. Yeah, it's legitimate, you know, $20 billion from the U.S.
government. So, you know, it's just one of those facts of life. And, you know, Delta makes a lot of money international, but I'm sure they make more domestically. It's just kind of part of the big pot of soup we all have to deal with every day.
So, David, from what I can tell, the airline industry is just hard. It's complicated. It requires a big and expensive network. You also have to engage intimately with the people using that network, unlike industries like telecom or oil and gas.
So how would you say the airline industry is different from others? And what are some of the key difficulties? Yeah, difficulty is capital intensive. It's human intensive.
So you have a lot of expensive assets, billions of dollars of assets. You're subject to pandemics, to recessions. And the first thing people do is they buy food and they get sheltered. They don't think about going to Florida.
You know, that's something when you have leftover money. High fuel prices are, you have a budget, and all of a sudden, you have some kind of world shock or you have a war that breaks out and your cost just went up 75 million for the year. And you're like, okay, we need to raise our fares, but you can only recapture so much. So you can make a lot and you can lose a lot.
Warren Buffett said the best way to make a million in the airline business is start a billion. At least Warren Buffett may have said that. He is famously sour on the airline industry. It may have also been Richard Branson who said it, and he did start an airline.
In any case, there's no doubt that running an airline is complicated and expensive. The economist Severin Borenstein is on the one hand sympathetic. Airlines face incredibly volatile demand and they have huge fixed costs. So when you put those factors together, this is going to be a very boom and bust industry.
I think there's just no way around that. But, Borenstein says, the airline's relationship with the government provides a big safety net. These airlines are very pro-markets right up to the point until the markets don't give them enough revenue and then they decide they really need to be more integrated with the government. We bailed out the airlines after 9-11.
We bailed them out again during COVID. And I've argued against these bailouts because even if the airlines go bankrupt, we don't see the airline industry go away. We just see it reorganized and shareholders lose all their money, which is what's supposed to happen when airlines can't pay their bills, when any firm can't pay their bills. But I think politically, that is what happens.
Sarah Nelson from the Flight Dependents Union also remembers the 9-11 airline bailout and she didn't like where the money went. Too much to the airlines themselves, not enough to employees. I had a front row seat to that and I said, this is not going to happen again. And so when Congress started talking about a COVID bailout, we put together a plan for relief that was based on keeping the workers in their jobs.
We also had a lot of other demands, capping on executive pay, banning stock buybacks and dividends, cease on airline boards, neutrality and union organizing. We didn't agree on all of the things in the program, but the basics of this being a workers' first program, keeping people in their jobs, which would then allow us to meet the demand when demand came back. So we learned quite a bit about what it costs to run an airline, about the volatility and the complexity. So let's start hearing how airlines make their money when they do.
Here again is Ed Vastion from Delta. The majority, over 80% of our revenues come from ticket revenues and our ability to sell not just the tickets, but the upgrades to premium categories. We do have a cargo business. It does well.
It's maybe 5% of the total revenues of the airline was higher during the pandemic. And another huge source of revenue for us is our relationship with American Express and the credit card that we work together on. We are American Express's number one partner over 10% of the worldwide billings. All American Express products go on the Delta co-brand card.
I've read that you take in hundreds of millions of dollars a year from your loyalty program, SkyMiles. I don't understand that. I would assume that's a cost center, not a profit center. Well, the loyalty program is exactly what I mentioned here.
So American Express this year will pay us over $5 billion for access to the SkyMiles that they reward their customers on the card. I see, I see. Going back to cargo for a minute, I understand Delta is a big carrier for USPS mail also. We are.
We carry over $100 million a year. We have to bid the contracts. We work closely with the postal service and try to make sure that our planes are reliable on time, getting not just our passengers but the mail where they need to be on schedule. Do you make more money per pound on mail cargo or on, let's say, a coach passenger?
Oh, it's definitely on our passengers. Okay. Now, we've all read that if airlines didn't have their business travelers, that coach maybe wouldn't be possible. That basically premium or first class or business, whatever you want to call it, essentially subsidizes the price of coach tickets.
Can you break that down for me? There's no question that if you think about the real estate of an airplane, the premium cabins on the plane have an outsized amount of revenue impact as compared to the main cabin. When we think about total revenues and I'm including American Express and the loyalty plans and including cargo, et cetera, over 60% of our revenues are coming from a non-main cabin component, meaning that the main cabins only carry about 40% of the total revenue and that number continues to decrease. What does this heavy reliance on business travel mean for non-business travelers?
It means that if an airline has fewer business travelers, they may have to raise the price of coach tickets. And as of now, airlines are seeing fewer business travelers. Domestic business travel in the US is only around 67% of what it was before COVID. International business travel is only at 54%.
Here again is the economist Severin Bourne seen. If business travel doesn't recover, what we will gradually see is a smaller airline industry with less frequent service on many routes and potentially higher fares for the leisure travelers because the business travelers are not there driving the revenue. In their attempt to maximize profits, airlines practice what is called yield management. This means they are constantly adjusting prices to find the real-time sweet spot between supply and demand.
Here's Ed Bastian from Delta. It's pretty complicated. The industry releases over 1,000 prices a day. Three times a day, you input your pricing and it's an auction.
Customers on a popular route can buy up early and you always want to make sure that you're saving seats for the latter part of an itinerary. An airline also wants to save seats for last-minute business travelers who are willing to pay a premium price. Here is Severin Bourne seen. A pricing memo I got a hold of as part of an antitrust investigation from Northwest Airlines basically said to its people who operated the pricing system, you never cut prices in the last few days even if the flight is not going to be full because you're much more likely to end up cutting the price for a business traveler who would have paid full fare than bringing in any new travelers at the last minute.
And so they were definitely thinking about this trade-off. On the one hand, lower prices will fill up the plane, but on the other hand, those passengers who would have flown anyway, you want to make sure you keep a higher price for them. The antitrust investigation that Bourne seen mentioned, that happens quite a bit in the airline industry, usually tied to an airline merger. Such as the mergers between Delta and Northwest, between United and Continental, between American and U.S.
Air. These were major carriers that were merging, each arguing, well, we need to be big in order to compete with the other big airlines. And last summer, JetBlue announced plans to buy the ultra-low-cost carrier Spirit. This would create the fifth largest U.S.
carrier behind Delta, American, United, and Southwest. Executives from JetBlue and Spirit say the merger would help them compete with the bigger airlines and would therefore be good for consumers. The Justice Department disagrees and recently sued to block the merger. JetBlue and Spirit are both big in Florida.
On some routes there, a combined JetBlue and Spirit would control more than 70% of the flights. So what's the best way to think about an airline merger generally? It depends on where you're sitting. Here's Megan Ryerson, the transportation scholar at Penn who's focused on making sure consumers can get where they want to go.
Here's how I think about the impact of a merger. We have two airlines putting together their aircraft, their pilots, their crew, all of their resources. Of course, this optimization is going to result in reducing operations in areas where they both serve. They're going to cut flights and airfares could go up in that market.
But now they have some idle aircraft and idle pilots and they might be able to open up service in new locations or add frequency to a place they've always wanted to add frequency to. One possible downside to mergers is that we have fewer airlines to hold each other accountable for good service. You always see on social media people say, oh, I'm never flying this airline again. That rings kind of hollow when you only have four or five airlines to decide between.
I'm sitting here in Philadelphia, American is my hub airline. If they provide me with bad service today, I'm probably still going to book a ticket on them when I need to go to a one-day meeting and I want a nonstop flight there and back. So would you prefer to see a federally or at least nationally organized or funded airline system in the U.S.? I think we were there and the result was a very high fare, very inaccessible to most people, air transportation system.
Post-eregulation used us so many more people to be able to fly. But at the same time, I would like to see more protection of our consumers. I'd like to see more protection of competition and fares. Economists love to talk about economies of scale, the benefits and cost savings you get with a bigger operation.
But even economists acknowledge that too much consolidation in a given industry can hurt consumers. And lately, it's hard to find an industry that hasn't undergone big time consolidation. On this show alone, we've talked about consolidation in the pet care industry, in the dialysis industry and more. I asked Delta CEO Ed Bastian to imagine he was speaking at a Senate committee hearing about airline consolidation.
And I want to hear his argument in favor. I think consolidation has been a great success for consumers as well as the employees of the airline. Prior to our acquisition of Northwest, there were roughly 10 big airlines in the United States, all of pretty good size. Because our ability as an industry to invest in the quality of the service, the reliability of the product, the premiums, the international scope that airlines need to do in order to be sustainable was non-existent.
And we were jumping from bankruptcy to bankruptcy. And so if low prices are your principal focus from a consumer standpoint, you can't provide low prices, high quality of service and reliability. Those are incompatible in scale to be able to drive that. So you look at Delta and Northwest back then in 2009.
Today, we're more than twice the size of what that entity was combined just 10 years earlier. If you were looking to just profit maximize to act as a pure economic actor, would you rather own an airline or an airport? An airport. Because why?
Because they're a monopoly. We're not building new ones. We might be updating the existing ones so they control access to a market. The vast majority of them are publicly owned, meaning they're owned by the municipalities.
That could be a city. It could be a state. It could be a regional operator. And we treat them as you would a landlord.
We rent space from them. We invest in them like we have recently in New York and LAX and a few other locations. We don't own the place, but we have a long, long lease that goes out just probably 50 years. And so we treat it as if we owned it.
Our airports really suffered from lack of investment, not just by the airports, but the airlines themselves. And we've set out on a path over the last decade to improve the ground experience for our customers. And the only way we can do that is invest in the infrastructure locally. The reason they're so expensive is that the airports flying large, you have to rebuild them on the same piece of land that you're operating.
We can't close them for six months. And so that makes it a very difficult form of real estate development. But when we get it right, and that was one of the silver linings of the pandemic, is we were able to close sections of the airports and accelerate their development. You look at it, it's a beautiful thing.
We just opened LaGuardia this year. And I hear from customers when they land, sometimes they think they've landed in the wrong city. They think they've landed some big international airport. No, it's actually LaGuardia.
Even if you have never been to LaGuardia Airport in New York City, you've probably heard about it. Maybe back in 2014, when then-Vice President Joe Biden said this. If I took him blindfolded and you took to LaGuardia Airport in New York, you must think I must be in some third-world country. I'm not joking.
Coming up after the break, we visit the new LaGuardia, and we hear people say things that you never would have heard him say about the old LaGuardia. I think it's fantastic. I'm Stephen Dovner. This is Free Thomas Radio, and we are about to begin our final descent on this airline series.
Talk to you in a minute. We stopped by LaGuardia not long ago. Check out the new Terminal B. So we're going to our integrated operations center.
So these are some of those doors that when you're a passenger in an airport, you wonder what's behind them. My tour guide was an affable Canadian named Frank Screman. I'm the chief executive officer with LaGuardia Gateway Partners. LaGuardia Gateway Partners is the private firm that redeveloped and now operates Terminal B.
So we're a little bit different than running an entire airport because we're running an isolated terminal. So in our case, we collect rents from our airline partners, and we generate rents through our commercial concessionaires. We pay rent to the port authority, and that's really the basics of it. LaGuardia Gateway Partners is a consortium of four firms led by Vantage Airport Group.
They are a Vancouver developer and airport operator that's owned by a subsidiary of a New York private equity firm called Corsair Capital. You got all that? Welcome to the world of public-private airport partnerships. And how common are such partnerships and where?
Let's ask one of the authors of a research paper called All Clear for Takeoff, Evidence from Airports on the Effects of Infrastructure Privatization. I'm Sabrina Howell. I'm an associate professor of finance at NYU Stern. Okay, here's one thing that just puzzles me.
When I look at the diagram in your paper of private ownership of airports, the whole global map is just dotted with dots, dot, dot, dot, dot, representing all these privately owned airports. And then we get to the U.S., and it's like almost empty. Why? Why are we different?
So you're right. About 20% of airports are privatized, but that goes up to 36% if we exclude the U.S. and China. Now, China, you might expect, but we were initially surprised that the U.S., which we might typically think of as a bastion of free market capitalism, has no privatized airports.
So the reason is that the U.S. has strong incentives from the federal government for airports to remain publicly owned and operated that don't exist in most other countries. So if I didn't know any better, I might think when you say the federal government has strong incentives, I would say, oh, that's because our federal government cares about us and our bodily harm. They want us to arrive safely, not crash, and therefore they want to control the airport from the top to the bottom in order to have it be a safe experience.
Is that the reason or are there other reasons? Well, in practice, the reasons that U.S. airports are not privatized is, first, that they can raise tax-exempt revenue bonds, where investors in bonds issued by private companies have to pay tax on the interest they earn. So that makes it really hard for private debt to compete.
And second, the airport can receive big federal airport improvement program grants if they commit not to making a profit from airport operations. If you listen between the lines to what Howell is saying, you might find yourself thinking, oh, that's why American airports are often crowded and slow and unpleasant. They're owned by public entities that don't have much incentive to make them better. That's the trend that LaGuardia is trying to shift.
Frank Scrimmon did bring us behind some closed doors. He showed us their high-tech baggage sorting system. He showed us an operation center. And in the back office, he showed us a poster mounted on the wall.
So this is our, we just had a little bit of fun with this. This is kind of a before and after, these actual tweets and headlines and all that sort of stuff. Read that one for me. Remember when Joe Biden called LaGuardia Airport a third-world country?
And the New York Times article, February 7th, 2014, said, some see Biden's description of LaGuardia as third-world as too kind. So that was all before. I applaud your embrace of the strong negative before. But the sentiment's changed substantially.
So in one of the more shocking developments of my lifetime, the new Terminal B at LaGuardia is really damn spectacular. Do you think that even the deep haters and skeptics would be one over? I think some of them have been. I was doing a tour with an airline, and a gentleman came up to me and said, do you work here?
And he said yes, because I wasn't sure what he was going to say. He said, I got to tell you, I don't like here anymore, but I'm from New York originally. This place is unreal. I don't know how you guys did it, but it's unbelievable.
I have to tell you, a few weeks ago, I landed at LaGuardia, and I walked into Terminal B from the jet bridge. That, again, is the NYU economist Sabrina Howell. I swear, I thought to myself, oh, no, I've gone to Boston by mistake. And I stood there for a few moments totally disoriented by the change.
Wait a minute, the ceilings aren't leaking. Where am I? Exactly. Where's the prison aesthetic?
You know, I don't know. So we saw a pretty successful outcome where LaGuardia transitioned from being sort of an infrastructure hellscape to a really beautiful terminal with much more capacity and much more amenities. The art and fountains and so forth in the new LaGuardia are terrific, and I think speaks to the degree that airports play this role as civic spaces, public spaces, and I think reflect this really complex contracting that the Port Authority did with this investor group, and that's an example of a new public-private partnership for U.S. airports that the Port Authority is pioneering that's leveraging private capital, and in particular, the amount of debt that private equity sponsors can arrange in order to finance what are now very costly projects.
And what does your research suggest will be the longer-term effects of this kind of public-private redevelopment? What do you predict we will see, especially in terms of customer costs and level of service? In this case with LaGuardia, we've seen so far is a really successful capital expenditure redevelopment. Whether private equity is well-suited for ongoing operation of the terminal, and in particular being responsible for negotiating with the airlines, negotiating retail leases in a way that benefits consumers, remains to be seen in the U.S., but what we find internationally suggests that it can be pretty successful.
What we find is a consistent picture in which infrastructure funds, that is to say P.E. ownership, improves airport performance across a range of measures, like increasing overall passenger traffic, the number of flights, freight traffic, the number of routes served by the airports, increasing passengers per flight, that's an important efficiency measure. And we also show that private equity-owned airports tend to win more quality awards and reduce flight cancellations, which probably is the biggest nuisance from the perspective of us travelers. If I were to ask you, what do good airports do well and what do bad airports do poorly, what would you say?
Good airports serve more passengers and more flights and more routes. They have higher quality amenities in the terminal and offer a better passenger experience. I think a bad airport has excess capacity that it's not using well. So we see airports with gates that they're not using, with space that they're not using.
They don't aggressively try to get better stores, better restaurants that will draw passengers and draw revenues, and they don't invest in improvements. The improvements at LaGuardia's new Terminal B are dramatic. Frank Scrammon walks us through the concourse. We check out the restrooms, the shops and restaurants.
It is all brand new and shiny, of course, which helps. We'll see how it looks in a few years. But still, it is nothing like the old LaGuardia. There is a lot of natural light.
Ceilings are high and they're not leaking. There is some water coming from the ceiling, but it is a legitimate water feature. Colorful, whimsical, something you'd expect to see at a Vegas hotel on a Disney property. It is apparently the first of its kind in an airport anywhere in the world.
And it is at LaGuardia. You must think I must be in some third world country. The water feature comes alive every 15 minutes. And all the passengers we spoke with had a similar response.
I love it. It's very emotional to see the water and the music transports you to the magic place. I think it's fantastic. It just makes you happy.
Makes you feel happy. It just makes you happy. Those are not words you're used to hearing when we talk about airline travel or airports especially. Unless you're talking with Maria Diplutis.
Remember her? She was on her way to visit her family in Greece. Things can always go wrong. You might have a flight that gets delayed.
There might be a mix up with your luggage. You might end up sitting next to someone wearing too much cologne. But I think as a concept, air travel is just incredible. It's a bunch of strangers floating in the sky together in a giant metal container.
Her $700 ticket on KLM Royal Dutch Airlines brought her first from San Francisco to Amsterdam, where she made this recording. I think that there's this unity that happens in airports where it doesn't matter where you're from, it doesn't matter if you don't even speak the same language. We're all doing this incredible thing of air travel, and we are from all over the world, but just in this moment, you're in the same place and time. There's not a lot of things that have that way of bringing together.
From Amsterdam, she flew on to Athens and then to the small Greek island where her ailing uncle lives. You don't have to understand Greek to understand what happens next. If you're lucky, it's happened to you too. Thanks for traveling with us these past few episodes.
We know you have many podcasts to choose from, and we appreciate your choosing hours. Coming up next time on the show, why are there so many bad bosses? Until then, take care of yourself, and if you can, someone else too. Freakonomics Radio is produced by Stitcher and Renbub Radio.
You can find our entire archive on any podcast app or at freakonomics.com, where we also publish transcripts and show notes. This series was produced expertly, I would say, by Ryan Cowley and mixed by Greg Whippen. We had recording help at LaGuardia from Jason Pina and in Atlanta from Evan Profant. Special thanks to all our listeners who sent in their travel diaries and to Lillian Bates for helping organize them.
Our staff also includes Zach Lipinski, Morgan Levy, Patrick Moncure, Alina Kullman, Rebecca Lee Douglas, Julie Kanfer, Eleanor Osborne, Jasmine Klinger, Jeremy Johnston, Daria Klenert, Emma Terrell, Lear Baudich, and Elsa Hernandez. The executive team of the Freakonomics Radio Network is Neil Carruth, Gabriel Roth, and me, Stephen Dubner. Our theme song is Mr. Fortune by the Hitchhikers, while the other music is composed by Luis Guerra.
As always, thanks for listening. I don't want to see just the successful stuff. Can you give me at least some drug smugglers? Yeah, I don't know if we can promise that one.
That might be a bit tough. No. The Freakonomics Radio Network. The hidden side of everything.
Stitcher.