Central Air - Major Podcast Incoming

Episode Date: May 6, 2026

On this week's show: Gary Leff, author of the View From the Wing blog on the airline industry, joins us to discuss who killed Spirit Airlines — the airline made strategic errors, but it could have been profitably acquired by JetBlue years ago if not for a series of Biden-era anti-trust policy failures. The Trump administration tried to commit its own policy error — it wanted to buy the airline, making Spirit’s troubles into taxpayers’ problem — but fortunately, Spirit’s existing creditors refused to be crammed down, and there was no deal to be had.We have a wide-ranging conversation for you with Gary on the relationship between the government and the airlines — whether United could really be allowed to buy American, what’s going to become of the financially-troubled JetBlue, why Europe has a more robustly competitive low-cost airline industry than the U.S. does, and much more.Also this week: We discuss hopeful federal news on housing policy and a grim housing policy outlook in our nation’s capital.Sign up for updates from Central Air at www.centralairpodcast.com. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.centralairpodcast.com/subscribe

Welcome to Central Air, the show where the temperature is always just right. This is Josh Barrow. I'm here with Ben Dreyfus, who writes the Substack newsletter, Calm Down, and Megan McArdle, columnist for the Washington Post. Megan, did you see that we're a major podcast? I did. I mean, look, in my heart, we've always been a major podcast. But now New York Magazine has acknowledged my internal reality, which is always incredibly satisfying. Yes, New York Magazine, the current cover story is about that Democratic Congressional primary in Manhattan. in New York's 12th district. And it noted that Alex Boris, one of the four leading candidates in that race,

has appeared on major podcasts, including Ezra Klein's and this one. And so, you know, that was a fun thing to read in the pages of New York magazine. It's also this hilarious cover image of the four candidates all in the back of a taxi, which, Ben, I'm amazed that they got them all to cram in like that. I didn't realize they still had taxis. Yeah, it's nobody uses them. But you see them occasionally in Manhattan. They're good from the airport.

Are they? I feel like it is much more efficient to get a taxi from the airport than to get an Uber, and that is now my preferred mode of transit coming into D.C. It certainly used to be true that it was very chaotic to find the Uber lines of things. But I feel like that's a very, you know, 2015 problem. No, it just takes less time. The taxis are right there. There's always taxis available because everyone's Ubering.

I exploit the arbitrage. It always felt like you had to wait in line half an hour to get a taxi, but I guess that's back when people took taxis. I haven't even thought about taking a taxi from the airport. No, it's great. Taxis are now the secret airport hack. It's actually fortunate timing. We have an expert here that we can talk with about many issues related to travel, including this question of whether you should take a taxi from the airport. We have Gary left with us this week. Gary's an airline industry analyst who writes the indispensable view from the wing blog and with Spirit Airlines. going under this week after a failed last-ditch effort by the Trump administration to rescue it. We thought it was the perfect week to have Gary come here and join us. So, Gary, thank you for coming on Central Air. Thanks, Chuck. And I'll actually offer a little bit of a tip with taxis and

Uber's at JFK. If you're coming into, well, the airport keeps changing where the pickup is with construction for Uber, ride share. Terminal 4 often loses it on site and you have to go offsite to pick it up, Terminal 5 as well. The trick is coming into Terminal 5. is to walk across to the TWA Hotel. So take the bridge over, and you can call an Uber there. So when they tell you that you can't get an Uber at the terminal, that's true, right? But you can get one just across the bridge. And the TWA Hotel is beautiful.

So you also get to see a piece of architecture history. It is. It just should be so much of a better hotel than it is, though. It's such a weird thing. It's like, my understanding is that JetBlue actually owns a big stake in the hotel. And it's sort of, it's this hotel operated by people. who are not really in the hotel business. I mean, they have a hotel business.

They just, they are, everything is nickel and diming. And it just makes you, they can, they charge high rates, but not as high rates as they should be able to get. And they unbundle everything. They think they're an airline, right? So they charge, they actually charge extra for guests to use the pool in season because they think the pool is so, and it is awesome to look over the, you know, the airport operations from the pool.

But it just, it makes you feel like you're anything but a guest when you're there, which is a shame. So this week, Spirit Airlines, no more. And honestly, I never flew Spirit. I'm, like, too snobby to get on a Spirit plane. But, like, there's been this sort of sense in the coverage that, like, Spirit sucked. But maybe it was a good thing for the country that Spirit was around that, you know, forced people to compete on price. Why did Spirit fail?

Why did we have, you know, some decades of, you know, the shittiest airline possible? And then suddenly that business model doesn't work anymore. Yeah. So it actually, at first, it really did work for quite a long time. Before the pandemic, you know, Spirit and Frontier, the other Oetal Cost Carrier, I mean, these were the highest margin airlines in the industry. They had the lowest costs and, you know, they were able to fill planes and make quite a bit of money. The problem really is threefold, and it was accelerated by the pandemic. But number one, spirits costs just are a lot higher than they were before the pandemic. Spirits costs went up 43 percent compared to 2019. So a lot of that is labor costs. and pilots in particular. And there was a pilot shortage during the pandemic when airlines had been paying pilots to retire early to get them off of their books. They were not feeding the pipeline of pilot training. And it is very time-consuming and expensive to become a pilot, in part because

of government regulations that actually don't have a lot to do with what goes into being a commercial pilot, but that have been lobbied for by the airline pilots association. But it's But it drive up the wages of pilots. It was Harding Spirit. It was also airport costs. It's been a lot of airport construction, major airports, that drive up the cost per employment for airlines at airports. And so these costs going up affected spirit. And they also lost a lot of their cost discipline. You know, they had just opened in 2024 and new corporate campus, 11 acres near the Fort Lauderdale Airport. This is not something that the old Spirit Airlines would have done. In contrast, Frontier Airlines that still quite does have local. costs, but is losing money as well, just not as much. They do their flight attendant training at a truck stop off the freeway in Wyoming because it's cheaper than being in downtown Denver near their headquarters. Costs are, you know, their fundamental idea. So cost was one thing.

Another issue was that the preferences of passengers have changed quite a bit. And Delta says that they noticed that starting around 2015, that people became willing to spend incrementally more. for a better experience, and it wasn't just about low prices anymore. And so Spirit really didn't have the product that a lot of customers were looking for. They only had the really low-end product. And the major airlines became much better at competing against Spirit. So it used to be Spirit would set a low price. And the airlines faced, you know, United Delta American faced a fundamental challenge of, do we match that price? If we don't, we're going to lose about 30% of our passengers.

But if we do, all the people that are going to pay a lot more are going to get that same seat for a lot less. And the airlines used to have always been since deregulation among the best at price discrimination. You get on an airplane and different people are paying different prices for the same exact product. And the way airlines used to do it was Saturday night's days, 14-day, 21-day advance purchases. They're segmenting out that, you know, they have your business travelers that are willing to pay a lot more

for convenience versus leisure travelers who are much more discretionary and, you know, those folks you want to offer the discounts to, but not the business travelers. But the spirits, frontiers, years ago, Airtran, other discount carriers, they did not impose those same restrictions. And so the ability for the largest airlines

to really segment their customers went away, that got replaced by basic economy, these cheapest fares that are more restrictive, allow the major airlines to offer the same price as Spirit and Frontier without cannibalizing the more expensive fare passengers. This is the stuff where it's like we're not going to give you a seat assignment. You have to board last. You have to wear a stupid hat when you get on the plane. Just like intentionally degrading stuff. The sturdises may randomly punch you. Right, exactly. So it's somebody who's going to be willing to fly spirit might buy one of these spares and get a slightly better experience, an extra inch or two of legroom at the same price. Maybe there's a seatback TV. There's a better app if you're flying United, these kinds of things. And so you're getting a little bit more for your money, but they're not cannibalizing the rest of the business. So the airlines became much better at competing. And of course, if you're flying United, these kinds of things. And so you're getting a little bit more for your money, but they're not cannibalizing the rest of the business. So the airlines became much better at competing. And, And of course, if United also has, it's high your yield, premium stuff that they can sell, and so does Delta. And so they have the high margin stuff and that cheap stuff to offer.

And Spirit mostly had the cheap stuff. So they just weren't as viable a business model as they had been. As the competitors got better, as their costs rose, they faced increasing challenges, and they hadn't really figured that out. So there's been a lot of discussion sort of about who killed Spirit. And when people ask that question, they're looking for a political actor here. And the government interfaces with the airline industry in all sorts of ways. And there's a couple of key things that have happened here. One of course is oil prices have gone up a lot because of the war. And so I assume that part of the reason that Spirit shut down this week instead of three months from now is the war, even if it was inevitable. But then also there were these antitrust decisions in the Biden administration. I mean, JetBlue wanted to buy. Spirit. They blocked the, the Biden administration blocked that JetBlue Spirit merger. Presumably, you know, the spirit shareholders would have been a lot better off if that had been allowed. Would we have had a more functional airline industry if, you know, if there had been a more favorable attitude toward mergers under Biden?

I mean, so, so first of all, Spirit did not fail overall because of fuel, right? They were expected, widely expected to liquidate by the industry back in December before the price of fuel went up. Spirit failed because of Spirit, a number of decisions that Spirit made, including, by the way, after the deal for JetBlue to acquire them was killed in the courts. So, for instance, Frontier offered more than once after that to buy them, and Spirit's board was not interested in the deal that was on the table. According to Bo Frankie, who's the chairman of Frontier, it was basically, you know, Spirit felt that they were not offering enough money, right? So they thought that they could be, you know, could work things out better on their own. It was, you know, rather than taking the deal, ultimately it would have been a better deal to sell. It was a misjudgment.

So Spirit made bad decisions. But in terms of what the world would have looked like otherwise, if all that had happened during the Biden administration was killing the JetBlue acquisition, that wouldn't have really made things better, as you say, other than for shareholders. because JetBlue itself hasn't made money in six years. JetBlue is trying to shrink to profitability now. They simply would have had a bigger shrinking to do with less capital having spent a couple billion dollars trying to buy Spirit, right? So they would have been in worse shape today, and they would have spent a lot of money in the process converting Spirit Airlines planes into their interiors. so they would not have been better off. In fact, JetBlue is probably stronger now, not having done that deal.

And with Spirit exiting the market, JetBlue is already coming in with 15 new routes out of Fort Lauderdale, right? Breeze Airways, by the way, is coming in with several routes that Spirit had been flying because it's actually not that hard to move around planes

when there are available gates at an airport, planes by definition are movable. So you can move them, you go into another airport, the barriers to entry except at really crowded major airports, except in congested northeast airports in particular, but not only, the barriers to entry are not particularly great, which is one of the reasons why this is such a hard industry. They're incredibly capital intensive, heavily unionized, very few, you know, there's no remotes in the industry for the most part. And so flying passengers

is historically very low margin. It's, you know, the ancillary fees that can make more money, credit card deals make more money. But it's worth noting that the opposition to the JetBlue acquisition of Spirit is not the only antitrust decision in the airline industry that happened during the Biden administration. And something that I've pointed out is that the Biden administration also sued to break up the partnership between JetBlue and American Airlines. And much of the strategic rationale for JetBlue acquiring Spirit in the first place was to have the spirit planes and pilots so that they could grow in places like Boston and Fort Lauderdale, even as they were finding themselves growing in New York with the American deal. So they were operating American slots

out of JFK, and they were coordinating schedules and sharing revenue in these Northeast airports. And so to do that, they had to move planes there. And because they moved planes in New York, they were having to draw down in places like Boston that gave Delta the opportunity to come in and become the number one airline in Boston displacing JetBlue. So JetBlue wanted to maintain and grow. And so now we're going to buy Spirit as our best way to do it at a time when you couldn't get planes, you couldn't get pilots because so many had been taken out of service during the pandemic. So by killing that deal, the rationale for the Spirit deal went away, but JetBlue's management was still committed to it.

In fact, the CEO of JetBlue, who doubled down on the merger. and then lost that one too. I mean, he's not there anymore. He left for health reasons, and then three months later had a new CEO gig at Airbus Americas. Okay. And there, you know, JetBlue is trying to do its turnaround, but JetBlue would have been much stronger then.

So basically the idea is that the American and JetBlue partnership gave them enough strength that JetBlue would have had the ability to productively absorb spirit. And then once you broke that up, then JetBlue couldn't grow profitably anymore, and they would just have been saddled with planes and debt. The counterfactuals are always hard and what would have intervened in the process and how strong they would be. But JetBlue also is part of this deal was supposed to join the One World Alliance,

which would have given them international partnerships worldwide, not just piecemeal. It would have given more, they had more relevance in the New York market, more relevance in the Boston market, more relevance in South Florida partnering with American, as well as the ability to use their miles to travel all over the world on all the one world airlines. and that makes their credit card a lot more attractive. It makes them now attractive to New York and Northeast high dollar spend. And those high margin credit card deals become much more valuable for a JetBlue, which is something that I spirit and other carriers just can't replicate.

And so, yeah, I mean, I think it's reasonable to say that JetBlue would have been much more, which better positioned, as well as heavily had the rationale for absorbing Spirit, which kind of went away. And so if the only thing that the administration did was kill the Spirit JetBlue deal, I mean, I said at the time that I thought they kind of saved JetBlue from themselves. JetBlue should have tried to walk away from that deal already. One of the ways this has been talked about for the last few days seems to be, you know, especially among conservatives, but among everyone, really,

I, as someone who's never been on Spirit Airlines, should really be upset about this, that this has been a disaster for America. And that like this is a bailout situation. Spirit was too big to fail, you know. It was a systemic risk or something like that. Whereas opposed to the fact that like sometimes businesses go out of business because they make poor management decisions. And I guess I'm wondering what you think about that. Like should I be caring about this as someone who's never gone on Spirit?

I mean, look, I think the people that work for Spirit should care about this, right? Obviously, you know, the creditors of Spirit expected to do better than they're going to do in liquidation. Spirit had published schedules that represented 1.7% of domestic capacity this summer. So it's very much marginal. There were some markets where they're more significant than others. Their biggest market was Fort Lauderdale. Fort Lauderdale is a desirable place for airlines to fly, and we're seeing more flights going in there. We're seeing flights going into Atlantic City with breeze. So there's going to be backfill. There is some effect at the margin. Look, I wouldn't say that I loved flying Spirit. I mean, Spirit had a top. I toxic brand. People hated Spirit Airlines. At the same time, you know, they were cheap. They were often cheap. And, you know, they did offer what they call it the big front seat, which is like a kind of first class seat. And they called it the big front seat because that's all you got, right? You didn't get, you know, the free check bags. Originally, they started bundling these things in the recent months. But historically, so the reason they even had this product was because when they converted their business model to be an ultra low cost carrier, they realized that it was going to cost them several million dollars to take these seats out, right? And they weren't all for low-cost care. We didn't want to spend the money to remove the big front seat. So we'll leave it there and we'll try to sell it for some extra money. And it turned out for a long time to be one of the best deals in travel. Sometimes, you know, I picked up an extra $40, Chicago to Austin flying Spirit's big front seat once.

And still, even with the big front seat, it was cheaper than United, cheaper than American with similar schedules that day. I flew them back in November with my family, Austin to Newark, because, look, I couldn't get a row of seats together and back with my wife and kids, but for less than it would have cost, I got that big front seat on spirit. So there was, like, at times when it was a value. But it was also at times a terrible, crazy experience, too. And reputationalally, I mean, you know, maybe they would have been better off. They probably would have been better off being acquired, just getting rid of the name, right?

That's the old, you know, stringer bell idea in the wire, right? You know, when your product's terrible, like, change the name. And they never, you know, they never really did that. They tried to make the product better. They tried to be more reliable. They added Wi-Fi. They were the last airlines to even work with the government on pre-check because they wouldn't spend the money on the tech, right?

So, you know, no, I don't think that the world travel or the U.S. travel materially changes because spirits gone. They were a pioneer in low-cost. They're not the only ones. and they just weren't run well in recent years. Megan, you flew in the big front seat once, right? No. No, I've been on EasyJet, which is like Britain's version of spirit.

It was the worst flying experience of my life. Although, actually, it worked out really well for me. So I should say this in advance. In 2016, at a conference in Germany, and somewhat quixotically, I assembled a, elaborate, cheap business class trip, which I told my boss about this very proudly. And he was like, that's, you know, that's very impressive. Thank you. But why? Because Bloomberg travel budgets were very generous. So anyway, I ended up in the Luton Airport and then I flew from...

That's one of the airports outside London. Yeah, it's outside of London. And it's where this business-only class-only airline called L'Company flies or flew. I don't know if they still do. But so I then flew to the former East German airport in Berlin. The cool part was Sixth rented me a BMW Series 5, which I drove on the Audubon at very, very, very high speeds before I realized I was not that good a driver and should pull over into the right lane. But then going back, I got trapped in, there was weather in London. And since EasyJet is based out of the UK, basically everything was shut down. So we're all trapped in this airport, because EasyJet basically owns this airport. The lounges for reasons that are completely unclear to me are sealed off.

You can see them. There are waiting areas. We are not allowed to be in the waiting areas. The waiting areas are for closers. And I guess there were no closers in the airport that day. So there's like five seats and like two power outlets in the entire airport. And they're all monopolized by teenagers. And I am wandering the airport and I finally see one group of middle-aged Britons huddled around an outlet.

and I go into the duty-free, and I buy two bottles of wine, and I bring them over to the group, and I'm like, hello, guys, can I please use your power? Because my phone's about to die, and I don't speak German, and I'm stuck in the stupid airport. Anyway, long story short, that is where I figured out that Brexit was going to happen. Although I regret I did not have the courage of my convictions to just say it was going to happen. I said, like, I don't know, it seems to me.

Like, all these smart people think it's not. But, like, it seems to me, like, sure seems like it is. And also, and also I, like, Luton itself kind of figured into this column, this long, long piece I did for Bloomberg on Brexit and why I thought it might happen. So it actually turned it to be one of my better journalistic experiences. But as a traveler, this is like, what is the highest level of disrecommendation? That is what I would give to flying a budget airline. So it's like, it's like how what's his name, Friedman used to go and. taxi cabs for knowledge.

Thomas Friedman. Thomas Friedman, yeah. Your version of that was going to find hoveling British drunks. Two were like, yeah, we'll even. We're out of here. They were actually like quite nice. They were all middle class.

You know, like one was like a special ed teacher. They would have like small businesses. They weren't from London. They were from the Midlands and the north. And that's the thing is like most journalists weren't talking to people like that. And they certainly weren't talking to people like that. for the eight hours they were trapped in an airport with all of the wine the duty-free afforded. And that was like, it was a really useful reporting experience.

I love that you were forced involuntarily into the journalism that broke the story open. I'm like Jonah in the whale, Josh, my whole career. I have a question for Gary related to this, though, which is that, you know, Europe has this really robust market of these low-cost carriers. I mean, EasyJet and Ryanair being the two biggest players. I believe, but these carriers are, I have flown easy jet. It is not a fun experience, but it is cheap and it is very popular. Why does this model work better in Europe, whereas in the U.S., you see not only spirits struggling, but like the low-cost carriers here are just much smaller relative to the ones that seem to be, you know,

fairly, you know, very, very robust in Europe? There's several things that are different. I mean, originally the, you know, Ryanair's, these were actually very much much modeled on the U.S. experience with Southwest Airlines. And they'll say this. But for one thing in Europe, the low-cost carriers are actually low-cost, which is their costs of Ryanair and EasyJed are about 30 percent lower than spirits. Some of that is labor. I mean, they don't, in many cases, hire their own workers. They have these labor broker companies, you know, so they're outsourcing the employment arrangements. They're, you know,

hiring out of lower cost, Eastern European countries. They're serving airports that are themselves, often lower cost. So, you know, you talk about Luton. I mean, this is not the same as serving, you know, Heathrow or even Gatwick. If you're going to fly into,

you want to travel to Vienna, you're probably going to wind up flying literally into a different country. Many of the low-cost carriers serve Bratislava and call it Vienna, right? So, I mean, they're able to manage these costs. They are serving a lot of point to point routes that have no competition. They have these roots often to themselves, that the major

national carriers don't find it economic to serve, but that the low-cost carriers do. Whereas in the U.S., they're often serving many of the same routes, there are exceptions in the U.S. I mean, Allegiant, their bread and butter is these kinds of underserved roots that don't have anyone. And Breeze began with the same idea trying to create that model. So there may be some opportunities there to kind of import some of the learning from Europe back into the U.S. But the markets are different. The other thing, too, is that the consumer is also different. You know, there's a lot of derision, you know, when I see people referring to the

consumer is different in the U.S. than Europe because the U.S. is wealthier. But this actually does matter on average. There are certainly people who are struggling in the U.S. who want to travel and who value, you know, price over everything else. But as I mentioned earlier, the largest U.S. airlines are meeting that goal as well. But because the U.S. is more prosperous, there is more of an upsell opportunity to make money. And, you know, the ultimate high margin in the U.S. is the credit card business that leads to a lot more flights from the major airlines. You know, for Southwest Airlines, one of the major reasons they started flying to Hawaii is to have something attractive to offer to their

credit card customers. And so you get a lot of air service that might not otherwise be sustainable. In the October Delta earnings call, they described the reason why they are building up aggressively in Austin. And it wasn't that there's a dearth of flights out of Austin that they can serve if they viewed the Austin market as right for selling their American Express product. Right. And so the card in some sense, you know, cross subsidizes it. You don't have that in Europe because of capped interchange. right? And so those card products aren't profitable in the same way, leading to more flights with lower fares that airlines are willing to operate effectively at break-even in order to gain the, be relevant to customers who drive profits in other ways. We're going to take a quick break and then come back with more Central Air with Gary Left. But I also want to make an announcement for people. Ben, Megan and I, we're all going to be in Washington, D.C. in the first week of June. The Welcome Fest conference is happening on Wednesday, June 3rd. That's the organizing conference for centrist Democrats where I got protested by the climate defiance people when I was interviewing Congressman Richie Torres last year.

We're actually going to be doing a live taping of Central Air at that conference, which I'm very excited about. We are also going to be doing a live in-person meetup with you. For our listeners who are in the Washington, D.C. area or will be in the Washington, D.C. area on the evening of Tuesday, June 2nd, we will have an exact location announcement coming for you soon. but we would love to see you that evening out at a bar in Washington, D.C. And if you want to know exactly where and when that's going to be, go to centralairpodcast.com, sign up there to follow us on Substack and get our emails. And you'll get the update on where you can come see and chat with us in person. We would love to see you in Washington, D.C. on June 2.

I find this actually strange that the increasing importance of this co-brand credit card business. I mean, and the shorthand that people use that I hate is they say that, like, the airline loses money flying and then makes money on the credit card, where it's like people only want to hold the credit card because you fly. So it's not like a truly disaggregated business. But we're in this environment where the airline miles keep getting devalued. You know, like, I mean, especially on Delta, but even on United and American, just the amount of miles that you have to cash in to get a trip has become astronomical. The value of status has declined because they actually sell the first class seats. They don't have seats to give away for upgrades.

So shouldn't people be less interested in carrying the credit cards? I don't understand how that business is apparently getting more robust than ever when it seems to me like the quality of the offering has gone down. So yes, absolutely. And in fact, competitors to the airline card products have done increasingly well. So American Express and Chase and Citibank and Capital One are all in the premium card business with their own currencies in a way that, you know, that even 10 years ago, you know, you didn't have it to the same degree. banks have figured out that they can build their own products to attract much of this business, independent of the airlines, without having to pay the airlines to license their brand. And there is some limit to the devaluation, I think. I mean, Delta has the largest airline co-brand and arguably the least valuable miles,

and you wouldn't expect that. But I also point out that in 2019, when they extended their agreement with American Express by 10 years, They predicted that in 2023, they would hit $7 billion of revenue. And they didn't. From the credit card. From their American Express relationship. Now, that's mostly the credit card, but they also get paid for some other things. It's a very deep relationship.

To scope that, like, how much revenue do these airlines have in total in a year? It's something, what is it, like, $50 billion or something for one of the majors? Yeah. So I want to say that Americans 2025 was $54 billion. Okay. So this is a really large fraction of the business. And it's high margins. So, you know, the airlines don't usually reveal a lot of detail about their card business in their financial disclosures, but they revealed a lot more than they ever had in 2021 when they were borrowing heavily against the loyalty programs during COVID. So if you go back to the Great Recession, they were selling half a billion or, you know, a billion dollars of miles at a time to the banks at a discount to raise liquidity. But they came up with a different idea. during COVID, which was to borrow heavily against the future income streams of the loyalty programs. The ones that hadn't already separately incorporated them, you know, spun off the programs and made into wholly owned entities, pledged all their revenue against these bonds, but had to

reveal details of the financing as they're raising money on these bonds. And so each of the major airlines, the largest airlines, raised between $5 and $10 billion apiece on their loyalty programs. and what we saw were disclosures of margins on the programs between 39 and 53%. Now, I think in some cases, it's not that one is more profitable than the other. You know, there's some exaggeration because it has to do with internal accounting assumptions, how much the airline charges itself for a seat, these kinds of things. But it indicated that these are very high margin, whereas just the act of moving a passenger on a plane is very, very low margin. And so that, you know, we learned, a lot more about just how lucrative it was. So when you talk about $6 billion, okay, at 50% margin,

just order of magnitude back of the envelope. That's $3 billion. And you look at American Airlines says they received a little over $6 billion in cash remuneration in 2025 from Citibank. And, well, it's Citibank and Barclays. And they only made $11 million total profit. That kind of gives you a little bit of the context. One of my hobby horses, right, is Virgin America, the long-dead Virgin America, which famously, like when it launched, I think 2007-2008, had that system where you could do, you know, point of order. You could order free drinks and free stuff, and they would come, and you didn't have to sort of wait for the beverage cart. And you sort of freed you up a little bit.

And then they were sold to Alaska, Alaska. I instantly took out all of these machines. and so that they could have uniformity amongst their fleet. And they never brought it back and no one's ever brought it back. And as somebody who really loved that system, because I hate the beverage card, waiting for the beverage card. I've been obsessed with it. And going through the financial statements of Virgin America at the time,

you find that Virgin America's number of how much money they were getting per passenger in those seats for non-ticket stuff was way higher than all these other ones. I guess it's never been entirely clear to me that In the decade since then, or a little more than a decade, as all these airlines have increasingly discussed non-ticket revenue, right, as the sources of their margins, why we still have not seen anyone try this wonderful thing that gets people to waste money on overpriced cookies and Glenn Livet. Well, Alaska actually does a better job than anyone else with their buy on board food. It's actually like not bad. And so they sell it pretty well. And that goes back to in part the Virgin America acquisition because Virgin America did a really nice job with food, both in back and in front.

But also to their CEO at the time who used to hold an executive meeting on Tuesdays with top officers. And what they did, they sat down to lunch. And they always served the onboard food. And so the quality of the food was something they really understood and that mattered that they. airline, and this is something that's they kind of kept with and is attractive to people. Now, one of the reasons, by the way, why ancillary revenue is really attractive to airlines in the U.S. for domestic travel, you know, there's a 7.5% excise tax on domestic airline tickets. This does not apply to fees. So as long as something that you purchase is optional, then the tax

doesn't apply. And that becomes an incredible incentive when you're talking about, say, you know, check bag fees. All of a sudden, you move when you're talking about a scale of a billion dollars, even if all you're doing is moving a billion dollars out of the ticket price and into the fee bucket, right, you're saving $75 million in its tax arbitrage. Spirit and Frontier, they actually had fees for booking your tickets online, right? They charge you extra. The idea was that you could avoid the fee by going to the airport and buying the ticket at the counter. Right. Right, with like really limited hours as well, which, you know, then you got to pay for, you got to go to the airport, you pay for parking, or you, you know, you spend all this time,

but it's technically avoidable. And so, I mean, it didn't make the ticket more expensive. It made a portion of the ticket non-taxable, right? So it was just this tax savings. It was whether it was a technology fee or a web convenience fee at different times, it was, you know, labeled differently. So there is this tax incentive to move more things into ancillary. At the same time, Anything that you put onto the aircraft is expensive. The space is expensive. Moving it through the supply chain, moving it through security, all of these things are costly and given limited space. So for instance, most airlines struggle to make duty-free work, even though, oh, why don't we have a captive audience? Why don't we sell things to them? And not having the duty-free stocked on the plane used to be one of the really attractive things if you remember SkyMall. You'd have like the garden gnome and you'd be flipping through the cat, you know, the cat, you know, the cat, I was wanted that zombie statue that was coming out of the ground, you know, where it looks like there's a zombie pulling itself out of your lawn, I guess, for Halloween. But, you know, I could eat left it year round. Why not? But I never got up the courage. But these things have, you know, they went out of business with the rise of, you know, inflate internet and on board entertainment. And people weren't just sitting through sitting with literally nothing to do, but flip through this catalog and, you know, and buy things. But, you know, we also see now Amazon is kind of, you know, coming up with their competitor to Starlink for Wi-Fi. And it looks like they'll be able to bundle things like server space for the airlines,

but also bringing Amazon shopping into flight entertainment. And so, you know, we do this kind of idea digitally. Can we look a little bit forward at what we're going to see in the U.S. industry? I mean, first of all, fuel prices have risen massively in the last couple of months since the war with Iran began. And we're starting to see some reduction capacity. I mean, United pulled down some midweek flying and red eyes and, you know, spirit is going away and won't be entirely replaced by other airlines moving into where they're operating. But doesn't there need to be a lot more than that?

I sort of assume that there's a shoe that we're waiting for to drop where lots of flying that would have been profitable before just won't make any sense with jet fuel costing, you know, almost twice as much as it used to. Yeah. So, I mean, the bigger shoe to drop is going to be the macro condition. in the economy, right? So if the economy shows significant effects from high oil prices, that's going to have a huge effect on demand. Now, United thinks that the 5% that they're cutting now is where they ought to be relative to incremental, marginal flights that aren't covering their costs anymore. You know, in the short run, they've already got the plans, they've got the employees, They're, you know, they don't have to schedule all the employees for flights, but when they're not scheduled, they're going to be on reserve and they're guaranteeing a certain number of hours anyway. And so the biggest marginal expense is fuel. And so the load factor or the fare that they need to get to make it make sense to actually cut the flight. It's a pretty big, pretty big differential. Over in the longer run, you would expect to see a lot more opportunities for, you know, for change. And so the

question is, how long does this last? What effect does it have on demand? And I think they don't know yet what that looks like. And are we going to see more, I mean, is JetBlue going to go bankrupt? JetBlue has a lot of debt. And they, they comments by their founder, Dave Nealman, who now runs Breeze, so he's not exactly a neutral arbiter, right? But they were recorded internally for his own employees had said that he thought that they would have to file chapter 11 this year. They then were forced, Jeff Blue was forced to respond. Their CEO said, look, we have no plans to do that this year. Right.

That is less than, than Sherman asked. But look, letting Spirit fail helps them. You know, they are in a much better position in Fort Lauderdale than they were when they were battling it out with Spirit. This is why they're adding flights to Spirit. to Fort Lauderdale now. You know, they are undersized in some sense for the markets that they're in. They're no longer the biggest player in Boston.

They are, you know, they are number four in New York, which is difficult to, the number one airline is going to get an outsized amount of business in a market. The number two, you know, will do less than it's proportionally. But by the time you're number four, you're, you're really hurting. You're not relevant to the customer every time that they fly, that customer is willing to spend that much more to stick with you, to take your credit card, to spend on it, to use when they want to, two years from now, maybe do a cruise in Europe or something. And so they just haven't had the lucrative opportunities, which is why I came back to earlier, this idea that

they had plans to join the One World Alliance with their partnership with American, kind of a way of getting to scale. They were denied that opportunity. That's why they wanted to buy spirit. And now they're partnered with United. We haven't seen that come to full fruition yet. It's not partnered as deeply as they were with American, in part for avoiding the antitrust concerns that they were sued over in the American deal. But there's also been plenty of speculation of could United buy JetBlue? United doesn't want their debt. United would love to have their JFK gates and slots. They would love to have the Fort Lauderdale operation because United has a huge gap in their route network in the southeast.

But it's costly, very costly to do a merger. So, you know, certainly JetBlue has very valuable assets in a bankruptcy in a way that Spirit does not. So it's also important to remember that, you know, Spirit is just going out of business, but bankruptcy doesn't mean going out of business. The planes, the pilots, the gates, these are all still there. And JetBlue has value in a way that Spirit didn't. And then there was this news. Apparently, Scott Kirby, the CEO of United, floated to the president at the White House. the idea that United should be able to buy American Airlines, which would form by far the largest airline in the world. Is that for real?

It's for real that he apparently floated the idea, yes. Is it for real that is it conceivable in any grand universe? It's hard to imagine even in a even, you know, I think back to the Chevy Chase movie Fletch. There's this great scene where he, where Chevy Chase, how, into someone's car, they're driving down the freeway, they're being chased by the cops, and the guy who's in the car with him confesses that he stole the car. And Chevy Chase says, you know, I'm not even sure that's a crime anymore. There've been a lot of changes in the law, right? And we're in this kind of Chevy Chase world where there's been a lot of changes in the law. But even given that, I'm not sure that that works from an antitrust perspective. Because even if the federal government were to sign off on it, you still have all of the

state attorneys general who can sue for antitrust. You have all of the international markets in which these two airlines compete, where you have foreign governments that get involved in these things as well. And so the hurdles are ginormous. And so look, Scott Kirby came out and said, yes, we had this idea. We thought it would be great. It'd be great for customers, great for employees, you know, great for the world. But America, said no, and we're not in a position to do this in a hostile way. So, you know, so there you go. And then everyone, well, what was he trying to accomplish? Was he just trying to distract from Americans' PR wins from their 100th anniversary? Was he trying to soften the ground to make

some other, you know, JetBlue acquisitions seem reasonable. Like, who knows? Or maybe he really, you know, thought, well, look, I've got this great relationship with the president. I, you know, donated a million bucks to his inauguration. I did, you know, Stephen Miller's wife's podcast. You know, maybe I can sell this, right? You know, who knows? Well, I mean, isn't there also an element? I mean, because we talked earlier about, you know, JetBlue still wanted to buy spirit even when it was no longer a good idea. I mean, you know, executives fall in love with acquisitions all the time, even sometimes when they are sometimes mistakes. Scott Kirby used to be an executive at American. Is there an element of this that like he didn't, he wanted to be

CEO of American? He didn't get. that job, but now he could buy the airline? Like, it's a personal quest? There's no question that there is a, that appears to be personal glee on his face, sticking knives in American Airlines. In 2016, Scott Kirby was fired by the board of American Airlines. And basically, the board said, you know, we can, you know, we have a, we have a CEO, we have a president, we have a CEO, we're not going to be able to retain all of them. The CEO isn't ready to leave. Scott, Kirby wants to be CEO. I think we can probably keep the airline COO around a while.

He doesn't have the same great options. So these are the two. But if we keep Kirby around, you know, we're not going to be able to retain him anyway. So they fired him. And he immediately became the president at United because he had no non-compete. And with a clear path that he was going to become the CEO there. And he's done, you know, for all of my, you know, I have beefs with things that he's done. I have beefs with United Airlines.

United Airlines is certainly a better airline than it was 10 years ago. And a lot of that is to his credit. It's also to the credit for the transitional CEO Oscar Munoz. Because to think back then, it was a really interesting story where United lost their CEO, Jeff Smycic, as part of the Bridgegate scandal. Right. Because it turned out that he agreed to offer a scheduled flight to the vacation home of the chairman of the Port Authority of New York and Jersey, in exchange for, in actual quid quo, quid,

pro quo for moving agenda items at the Port Authority, right? And this came out. The chairman's flight is what they called it. Right. To South Carolina. Internally, United. And so immediately they lost the CEO. They bring in a board member who had been the president of a railroad who had no airline experience outside of the board. But what he really did is he just went out to all the line stations. He visited with employees. and sold them on a vision that United could be better than it was, because it was a pretty miserable and happy place at the time. Jeff Smycic was in this place where he had just completed a $2 billion cost-cutting exercise

that he had this Orwellian name for, he called a project quality. We're cutting $2,000 out of the product. And everyone was just beaten down at United after years and years. They had this incredibly long bankruptcy. They liquidated retirement plans and the employee stock ownership program at the airline. And Oscar Muño says this place can be better, but he doesn't have the airline experience those chops. He brings in Scott Kirby. Scott Kirby becomes a CEO and really turns United around to a large extent.

And, you know, Scott Kirby seems to have incredible glee every time he's able to stick it to Americans. So, you know, maybe how committed he really was to that, who knows? But it certainly does seem to relish the drama. we have an American Airlines fan on this podcast. Yeah, named Megan. American Airlines has a fan. It's amazing. I live in Washington, D.C. I want to fly out of D.C.A. The best way to accomplish that is to get myself into an abusive monogamous relationship with American Airlines, which is what I have done.

It's, I don't even know what, you know what I'm missing. I only fly other airlines when someone else's... is booking the travel. Look, I mean, I live again, like in Idaho where we have to have these monogamous relationships with Delta, but I just wanted to ask the expert while we have him here. Is Megan right that American is not the worst airline, a terrible airline that is noticeably worse than United in Delta? Or are Josh and I write that American is a terrible airline? So, I mean, neither one of those is wrong. And Megan's argument for why she flies American is right, right? So American is, last I looked, about 51% of the flights out of National Airport. And it's better to

have status with an airline, even if it's for the extra legroom seats, but also when operations go sideways, you're much more likely to get accommodated on another flight. If you've got status, you're going to be higher on the list. You're going to get a lot more help. You're going to get through to customer service much more easily. I usually just go to the lounge and then they do it. It's the easiest way. And the Econcourse lounge is actually quite nice. Yes, it's lovely. over there, right? And they've closed D for renovation. It's going to be nice. American is starting to put money into things in a way that they really hadn't. Americans, and the interesting thing is, what Americans' problem is, is that back a decade ago, their model of the industry was they were

trying to compete with Spirit and Frontier. Just to give everyone a little bit of background here, American Delta and United, they're all almost, they're approximately the same size as each other, but Delta made $5 billion last year. United made $3 billion in change. American, as Gary noted earlier made $100 million. They barely made any profit at all. And there's a reason for that. I mean, American bet wrong on the direction of the industry, and they got the customer wrong, and the messaging to their employees about what they're trying to accomplish.

And they have fewer extra legroom seats to even sell to customers that would want to spend more. They've been about, you know, cramming seats into planes and, you know, selling at lower cost rather than offering the premium buyups that customers have wanted. And that also not, they haven't seen themselves as having a product that could compete in big coastal markets against, you know, a lot of other airlines. And so they've retrenched from, you know, New York and L.A. and Chicago. And that has cost them in the credit card business as well. And so they are just now really turning around as of about a year and a half ago, beginning to invest in more premium experiences being willing to invest in their, you know, lounges and, you know, and their onboard. experiences to some degree. And so they have a long way to go. I don't think that Delta and United are as far ahead as Delta and United would say. I think that Delta itself is not as reliable as it once was. And Delta's premium product isn't as good as they want. So if you're in New York, you know, they fly a lot of 767s across the Atlantic that have a product that is arguably inferior to what both United and American have on

operable planes. Particularly in business class. They have the like, oh, what were state-of-the-art business class seats 20 years ago. That's true. And so, look, there's room for, you know, there's opportunities that they have in the operation. Delta was vaunted as this on-time machine. They trademarked the phrase. 20 years ago, it was American's phrase that they left the trademark lapse on. And Delta was an airline that would go months at a time without canceling a flight for reasons of their own, of their own fault. And now it's very much not the case. In fact, at the last earnings call, they acknowledged that they have issues with their pilot union contract that causes them to cancel flights when they have pilots who aren't scheduled to cover a flight, the process they have to go to to find replacements while identifying what pilot they might have skipped over to offer the premium pay to just simply takes them so long because of what they've contractually agreed to

that they wind up not filling flights. It takes them longer. than the time allotted before the flight. And when they do it, they wind up breaking other trips of other pilots. And they don't see themselves as having this solved at least until the end of summer. And that's kind of optimistic. And this, and, you know, they've recently had, you know, a situation where there were canceled hundreds of flights where other airlines just weren't. I mean, they had, you know, a small amount of weather that several days later had cascading effects that others are able to recover from. So, you know, they're like marginally better and marginally friendlier. But, you know, somebody who doesn't know one airline from another, I think what you'll, you will find is that

historically American employees have been less happy to be at work than, you know, Delta employees than Southwest employees. And that shows and it feels in the experience. But I mean, they're, they're like working on it. It's possible. I'm not sure that they have the leadership to really sell it the way that Oscar Munoz did it United 10 years ago. So whether they'll be successful, I don't know. So, I mean, one of those things with the unhappy American employees is that For some of the employee groups, my understanding is that American is sort of copied Delta in terms of the structure of the compensation. But the Delta compensation is heavily focused on profit sharing. Like Delta employees get basically an extra month of pay when they pay out the profit sharing.

And the American employees have the same profit sharing formula, but American basically doesn't have any profits. So there's no profits to share. And presumably the employees are unhappy about that. That's right. In fact, so the flight attendants of American won the Delta profit. sharing program as part of their contract. I mean, Delta, Delta's flight attendants, over 80% of Delta's employees are non-union, and they're unique in the industry in that regard. But so Delta adjusts their pay every year, whereas United Flight Attendants took five and a half years to

reach a contract that allows for a raise. And so, you know, they go along as their wages were eroded by inflation in the meantime, right? The amount of money that they're making is worth 20% less, and it's taking a really long time, and the first contract was rejected there. But American employees got the Delta profit-sharing program, and Delta earns profit. American doesn't. United earns profit in the first quarter. United earned more than Delta did. But United actually doesn't have that same profit-sharing program, and the new flat-attending

contract did not improve on profit-sharing. They bargained for other things. So it's crucial to Delta's ability to pay their employees. more is profits. And Delta would argue that their employees are crucial to their ability to make more, too. Gary, I want to thank you so much for this whole tour of the airline industry. This has been a really interesting interview. Thank you for joining us. Thank you all. We'll be right back with more central air. I saw a happy piece of news this week. We talked a while back about, you know, there's that housing production bill that's moving through Congress called the Road to Housing Act. And it's supposed to be

the one big happy bipartisan story of this Congress, Republicans and Democrats getting together to agree on things like removing regulations on mobile homes so you don't have to put a useless chassis on the bottom of them so that they can be cheaper to produce a bunch of small good ideas to make housing cheaper. And then Elizabeth Warren, as she fucking does, comes in at the last minute on the Senate bill of this and adds this provision that basically makes it illegal to build single family homes for the purpose of renting them out. If you build them, you have to liquidate them within seven years. It makes the capitalization of them impossible. And it's part of this whole like panic for no good reason about the idea that private equity is trying to buy up every house in the country. And there were private equity firms going out and buying existing homes. It turns out not to have been that good a business model. But the better model is to build new subdivisions. And, you know, most of them are built for, you know, people who are going to buy a house. But some people for whatever reason prefer to rent. Maybe they're going to move soon. Maybe they don't have the money for a down payment. And so this has been a burgeoning business, you know, something like 50,000 homes a year get built this way. And, and,

And they want to make that illegal because homes are for people, as they say. And so this got stuck in the Senate bill. Senator Brian Schatz from Hawaii comes down at the last minute. It's like, what are you doing? Why are you trying to make it harder to build housing in this? And the Senate passed it overwhelmingly. It's been bottled up in the House. And weirdly, it's this, instead of a Republican Democrat split, it's a House Senate split where the House Republicans and the House Democrats both have the correct positioning on this. Maxine Waters is the lead Democrat on this in the House. basically saying, why are we adding a provision in this pro-housing bill that makes it harder to build housing? But it was something that the Trump administration apparently wanted, that they liked this populist message about keeping Wall Street out of homes. And some of it is bound up in this idea about do we really want renters out in the suburbs? Maybe that's undesirable people. A lot of Republicans are less free market than you'd expect when it comes to housing. But so anyway, it turns out in the news this week that the president got briefed on this or thought about it or whatever and decided actually it's a

bad idea to ban new single family rental housing. And so wants the House to change this bill to take this provision that was theoretically in there to please him to take it out. So we might actually get a housing bill that is not stupid and that just largely consists of things to make housing, you know, more affordable rather than less. And maybe Elizabeth Warren won't get her way. So anyway, I haven't been in a good mood about a lot of stuff that's happened in Washington lately, but this is something that I am pleased about. Listeners, he is actually smiling. Yes.

He looks like a happy little boy who just got a plastic dump truck. I'm curious about how this happens. I mean, I know it's crazy to like imagine what's going on in the mind of Donald Trump. But it does seem like at some point someone put a piece of paper in front of him and he said, yeah, ban him. And then another point, he changed the meds or something. And he said, you know what? I don't like the piece of paper anymore. And is there someone in the White House?

Is Stephen Miller the one going, ah, damn, I got screwed again on my long-standing attempt to ban single housing renting? It was not really clear. I think partly it's that there's this sort of populist, you know, like boo private equity thing. And the president likes to say save the suburbs. There's this attachment to this idea of, you know, the single family. or occupied home, you know, in part because the, you know, there's this idea that you want to encourage, you know, people to invest in financially in their communities and have a financial

stake in it and build wealth in their home, which weirdly conflicts with the idea that housing should be affordable. And the president himself has talked about this. Like, does he want housing prices to go down? Like, that makes it cheaper for someone to buy a house. But there's a lot of people whose houses are valuable and they're planning to retire on that. And they're worse off if prices fall. So the president has equivocated on that in the past. But it was never really clear, like, why this Elizabeth Warren anti-Wall Street idea really became a key thing for him. And then, yeah, I assume that what happened is some developer got in front of him and made the pitch about why this was a bad idea. And the president has reputation for listening to the last person

who spoke to him. But sometimes the last person who spoke to him is correct and raises a good objection. And I assume that's what happened here. Someone, you know, he's, I assume he has sympathy for other real estate developers. And someone talked about, I want to do this business that you're trying to make illegal. Why are you doing that? And he, you know, sometimes, that it actually works to make a correct argument to the president. It's heartening, isn't it? I mean, you know, you've got to take your joy where you can find it. But it's nice that sometimes the good guys win.

Yeah. So, I mean, we don't want to declare victory just yet. But so this bill, it passed the Senate. It went back to the House. And what the Senate people, including John Kennedy, the Republican Senator from Louisiana, what they wanted was the House to just pick the thing up and pass it unamended so the president could sign it. And they were sort of expecting that Donald Trump would go knock heads together among the House Republican Conference and make that happen. Then, you know, Trump spent several months distracted by the government shutdown and his, you know, fight for the Save Act on voting.

There was news reporting that the president said nobody cares about housing. But so apparently now that he's been able to pay attention to this again, he's now more aligned with the House. And there's no good reason why the House can't amend this bill and have it taken up in the Senate again. It's not like they're – they don't have that much other policymaking to do this year. They've run out of ideas. And so they have the time to amend this bill and get it right. So I think that that's probably what's going to happen. But it's going to take some number of more weeks.

There's also something that made me unhappy. And it has to do actually. We talked at the beginning about how we're a major podcast. And that was to do with that interview related to my congressional district in New York 12, where Jack Slossberg, that like useless Kennedy, who's never had a real job, is running for Congress. He's on social media talking about how we should make it, you should be able to deduct your rent from your income taxes. And he's like, well, you deduct your mortgage interest. Why can't you deduct your rent? And so it's, I mean, it's two things. One is like nobody feels like they should

pay taxes on anything anymore. And everyone wants their own special tax break. But the other thing is, you know, if you subsidize rent, which is what you're doing by making it tax deductible and you don't actually cause more homes to get built, that just pushes rents up. And Jack Schlossberg, when he's not coming up with dumb tax credit ideas, is out there saying, don't redevelop. There's these giant housing projects in Chelsea on the, like, in a very expensive part of Manhattan. And the city has this plan where they're going to demolish the existing buildings, build new homes for all the existing residents of those housing projects that will be nice and new instead of decrepit and falling apart, and add thousands of additional homes

on those sites in core Manhattan. And that's, you know, that's been done in consultation with the residents of the housing projects. They've gotten a buy-in. But Jack Schlossberg is like, no, no, that's terrible. don't tear down these decrepit old buildings. So he wants to subsidize the people's rent, but at the same time prevent new homes from actually getting built. And he's a Kennedy with no real job. And so I'm still mad.

What's the argument for not knocking them down and building nicer ones? Who's the losing? So it's, I mean, it's like there's a minority of the residents of these projects who oppose it because they basically, they're afraid that if you tear the buildings down, they won't get replaced. It's basically they have like low trust in government. Now, it's, you know, there's a plan where, I mean, they, you know, they have to build new buildings first before they can tear any of them down because they have to have somewhere for people to live. There's parts of these plots of land that are, you know, open space right now where you can start building new buildings before you tear anything down. But it's basically, it's a combination of conspiracy theorizing and this idea that, you know, well, if we gentrify the neighborhood, which, again, it's Chelsea, it's already gentrified, then people will be displaced. But again, it's a housing project. It's not like you can, you know, displace the low-income housing that is the housing project that is fun. fundamentally income restricted forever. I mean, like the broad problem in the left, right? I can't remember who said this on Twitter the other day, but it was just like an extremely

sharp observation, which is that the problem on the left is they want to be like in favor of affordability and against private companies who make things or build things. And that that's a fundamentally incoherent idea unless you introduce the like, you know, the magic hat. the fantasy novel Magic Hat of social housing will fix all ills, which it will not. And I think this is just more of that, right? It is like, do things, but don't do things in any way that would cause anything to actually happen. But, I mean, it's not all of the left.

I mean, this redevelopment is a Mamdani administration. I mean, they didn't start it. It was in process under Eric Adams. But, like, Momdani's team has the right position on this. Jack Schlossberg is like an old money guy. from Manhattan, who, you know, certainly has never needed a housing project himself and is not exactly a candidate of the left. It's, you know, the, but I mean, I know down where you are, Megan, in Washington, D.C., your lefty candidate for the mayor for mayor is a lot worse on this

stuff than Zaraanis. Oh, yeah, she's great. Janice Lewis, George. She loves Vienna. Like, and honestly, it looks like she read, she read one Vox article on Vienna. And it, like, I don't know, she got one shot at by it. Vienna has a lot of social. housing. Vienna, Austria, not Vienna, Virginia. Yeah, sorry, but Vienna's social housing is probably not replicable anywhere else for a variety of reasons, but she is convinced because she read the Vox article. And so she's just going around saying she's going to build 70,000 units of affordable housing in a social housing model. Well, at the same time, like her actual history as a council member is that she is against doing anything that would cause landlords to say,

be able to collect rent from tenants. So, and this is, this has been a huge problem in D.C. Partly because of the moratorium that we had in, you know, like from COVID, the nationwide moratorium, but it got exacerbated in D.C. for a bunch of reasons, including the fact that our pre-existing tenant laws are, some people will take issue with my saying this, absurdly pro-tenant. So it's extremely difficult to evict someone. It can take years. There are cases, we just had a case recently where the woman had basically, like a disabled veteran who was being stiffed by a woman who had moved into her Airbnb had realized, unlike, had the tenant unlike her, had realized that if you went over 30 days, you would be automatically considered a tenant. And that that would invoke all manner of tenant protections.

and then is like, you know, risking bankruptcy while this woman squats in her house. And this is not the first time this has happened in D.C. The building, there's a building down the street from me. The gale. I don't think it was super well constructed, but it's got a big affordable housing component. It might be all affordable. I'm actually not sure. I believe it is all affordable.

My recollection is that it was not all affordable when it was the trilogy when it was built. It was bought and renamed. But at any rate, There's this affordable housing that is basically teetering on the verge of bankruptcy because they have such big rearages. The city council's big idea for this is now that we should just forgive their property taxes rather than, I don't know, helping them collect rent from their tenants. If you Google it, the copy says that the Gail Ekington is a modern masterpiece with historic roots featuring spacious studio one and two bedroom floor plans. That is not a modern masterpiece. So when it was in its original incarnation as the trilogy, it got very bad reviews for having very thin walls that people could hear through.

But the problem in D.C. right now is that no one wants to build anything. We dropped from, like, record high permits right before the pandemic to, you know, like a thousand or so permits pulled. And that's total units, not buildings, pulled last year. And that's a combination of our economy is doing really badly. So we actually shrank that this is annualized, this is, but at an annualized pace of over 8% in the last quarter. It's a combination of Doge and other stuff. D.C. had actually already been in a secular recession before the pandemic. Also, we built a lot of housing. So there's a whole

neighborhood near me called Union Market where their functionally was nothing there five, 10 years ago. So because of all of those things, rents of decline, no one wants to build. And so there's this making it even harder, which has been Janice Louis George's personal mission on the city council is to make it harder to collect rent from tenants, harder to evict them, harder to sell your building when it turns out that you can't make any money off of it and you need to get rid of it before you go bankrupt. And somehow she's going to build 70,000 houses with what, I guess with taxpayer money, but like, oops, we've got a $1 billion deficit.

And the most annoying thing about all of this is that all of the local Gymbi groups endorsed her on the grounds that she had the bolder plans. for housing. Her bold plan for housing is to make it even more unpleasant to be a landlord in a market that already, where landlords already do not want to build houses. And, like, nonetheless, they endorsed her for, like, kind of progressive, you know, log rolling reasons rather than any kind of rational, because Kenyon McNuffie, her opponent, who is much less ambitious. I think there's 12,000 units that he says he wants to build. But his plans are more realistic. And also, he doesn't have a lot of plans to chase landlords and businesses out of D.C., which is kind of a prerequisite

for having people moving into housing here. But so why did the YMB groups line up with her? Because, I mean, here in New York, a lot of the Ymbis have been, you know, have been quite pro-Zoron, but Zoron has actually been pretty good on housing issues and are arguably better than Andrew Cuomo was. She talks a good game. But it seems like there's... No, but I mean, Andrew, Mombani is also the same, right? I want to streamline permitting. Okay, everyone wants to.

to streamline permitting, right? Like, it's puppies and kittens and fireflies on a magic, magical June evening. This is the most uncontroversal thing in any progressive city right now is let's streamline permitting. Well, I mean, you say that, but I mean, they're currently having a big fight in Albany right now about an actual permitting streamlining initiative that Mayor Mammondani and Governor Hokel are aligned on. And there's all sorts of other groups in the Democratic Party coalition that oppose it. And Mammani seems to be putting some political capital. toward actually trying to make that happen. Oh, yeah, no, no, no.

People don't like streamlining permitting when you actually try to do it because it turns that you have to actually change things. But when you just say it should be faster to get a building permit, people are behind that. Yeah, in D.C., for example, one of the things we would really need to do is either revise or get rid of the local ANC

advisory neighborhood commission review process, which bogs everything down, is used to extort concessions from developers. There's a very nice park in my neighborhood that was extorted out of the developers of some buildings near me. I like the park. I'm glad we have it. But that's what the process is used for. And again, when DC was booming and it sort of didn't matter, you could build any amount of housing as long as you get land for it, that was probably a reason.

Like, it was not that costly. But now it's really costly. But, you know, everyone loves streamlining permitting. On the other hand, when it's, you know, Kenyon McDuffie is a little bit. at least come out and said, we've got to stop the zoning lawsuits. These totally frivolous zoning lawsuits that people file to slow down the process to extort various things they want from developers or to try to kill the process. This happened with a, there's a, there was an old reservoir near me that the fight went on for like a decade and a half, maybe two decades. I'm not

actually sure. It was going on when I moved into the neighborhood in 2010. This thing is still under construction. I mean, they finally did get rid of it, but like it took a long, long time. Like, they did sort of put an end to the claims. It is under construction. I think somehow units are already up for rental. When you say reservoir, by the way, people might be envisioning something attractive like the reservoir in Central Park that you can jog around. This was definitely not that. No, no. It was an old sand filtration plant connected to the McMillan reservoir. It was actually kind of cool. And I actually, I was. In a post-al-a-opt-olyptych way.

It was, they preserved some of the little towers that were used, and it does look pretty neat. But anyway, like, this kept bugging down. So, for example, they promised the neighborhood there would be a grocery store. And then the neighborhood kept delaying the damn project with all of its demands and, no, we want to park, we want this, we want, you know, to keep this precious, abandoned sand filtration plant exactly as it is for the benefit of the children. And by the time the thing actually started construction, D.C.'s economy had changed. It was no longer booming the way it was 10 years ago. And they couldn't find a grocery store that was willing to take the amount of space. They promised like a big, big grocery store.

And so they couldn't find one. And so they came back and they were like, look, we're going to have to revise this. And it's going to have to be like a little grocery store, like a mom's organic market or something. And the neighborhood was like, no, we need to hold out for a bigger grocery. grocery store. Like, no, no, this is the problem, guys. This is not the solution. And that, those dynamics need to be fixed. If you actually tried to fix them, people would lose their minds. Not like me and my two nimbie friends, but like most people would lose their minds. And that's the problem of permitting reform writ large, right? Everything that's a permitting problem, almost, is a thing that

sounds good when you describe it to voters who don't know anything about it in the abstract. Can I ask about to go back to the Kennedy, who's Josh's best friend? Oh, I fucking hate that guy so much. His stupid face. His plan to make rent payments tax deductible, right? Yeah. I saw quite a lot of people who I would have expected not to like that on Twitter endorsing it. And going like, oh, actually, I've, you know, lived in New York.

And finally this, finally this former Vogue contributor who wrote a couple of blog posts has come up with a good idea. It seems to me not who, not economist. The problem is that like we have them. I mean, those people were saying, well, we've got them for mortgage payments, right? Mortgage interest. But that's to inspire because homeownership is like a virtue for society, right? And it makes the world better. That's actually not exactly why that deduction exists.

Okay. So that's what I'm asking, because it's clear to me, though, that what isn't good is rent going up for everyone. Like, there's no value in driving people into the rental market. That is how people describe it, right? That is what people say. But that's not why it actually exists. The reason it exists is that when the income tax started, low these many years ago back in 1913, all interest was deductible because almost all the people paying the income tax were rich. And so they tended to be business people.

And they had interest expenses. were, again, before, like, you have to remember how hard it is to build taxing state capacity. So, like, back then, we don't really have an infrastructure for levying an income tax. And we also don't have this neat separation between your personal and your business assets. You do for, like, a big corporation. But for most people, it's just like, I own a store. And the money flows into my accounts, and they're not necessarily separate. And so because of that, they just made interest.

deductible. So roll forward. We are now children in 1986. And the Reagan administration, having first done a big tax cut that just destroyed the budget and sent us into like a 6% budget deficit, is doing an enormous tax reform. And the idea is you're going to broaden the base. You're going to have a nice, like, everything's included, but the rates will be lower. And that is indeed what every economist thinks is the more efficient weight attacks. And they have a brilliant idea, which is they're worried about getting this past the lobbies. So they just put everything on the table. And all the lobbies swarm.

But there's literally so many deductions on the table that the lobbies, there's not enough congressional bandwidth for all the lobbies to lobby effectively. And so it's like a beautiful like, you know, three men enter, one man leaves, thunder dome kind of contest between the very. lobby's. And so credit card interest becomes undeductible. Most personal interest expenses become undeductible. But the home people got through. And like, and for good reason, right? Not because I'm saying this deduction is justified. It's not. But it is capitalized in the price of people's homes. People took out mortgages depending on, you know, like on the expectation this would, and because that's most people's largest expense, it was going to be. be a big political lift, and so they just left it.

Well, and the other thing there is that not only is the mortgage interest deduction bad public policy, we have actually been moving away from it over the years. There's a cap on the size of the loan that you could deduct against, and then we lowered the cap. The 2017 tax law greatly increased the standard deduction, which meant that the number of people who even get to take the mortgage interest deduction went down a lot. Most people, they don't pay enough mortgage interest for it to make sense to deduct it, rather than just taking the standard deduction.

And so, you know, in terms of, is it unfair the difference between homeowners and renters? It is, although, as Megan notes, the value of the mortgage interest deduction capitalizes into the price of a home. So you don't actually capture the whole value of the deduction because you have to pay more to buy your house in the first place because the deduction exists. But the way we should deal with that unfairness is by further reducing the value of the mortgage interest deduction rather than creating a new deduction for renters. The other thing is that because of that 2017 law, most people don't take itemized deductions at all. And especially renters tend to have lower incomes than homeowners. Most of them, if you created a deduction for rent, they wouldn't even be able to take it because they take the standard deduction. Now, if you're going to talk about a place in the country where you have a lot of renters with high incomes who itemize, it's going to be New York's 12th congressional district, which includes the core part of Manhattan.

There's a lot of high income people living in rental apartments that they pay, you know, six or $7,000 a month for. But are those the people who really need a new tax benefit? The, you know, relatively high income professional renters in this, no. I mean, we need someone to pay for the government. And if we're talking about who is, you know, too needy to be able to afford taxes, it's not, you know, some junior investment banker living in Midtown Manhattan who would like to deduct part of his rent. So like the, it's true that there is an asymmetry between the renters and the owners here,

but it's, you know, this is a really dumb way to try to address it. Who are the people who were sticking up for this in your feed? I don't want to say their names now. One, I don't know how to pronounce them. But also because I don't want to get them to be like, oh, look, I was just making a qualified ironic endorsement. I love the whoever it is, they always have this. What is that accent even from? What region is a New York accent.

It's what comes out of my ancestors. It comes out somehow. That's what he learned at the Fieldsden School. Yeah. Oh, yes. Yeah. Because there was a lot of people from Bayside there. Yeah, that's what should be deductible, is Fieldston tuition.

So expensive to send your kid to private school in New York these days. The government should do something about that. I think we can leave that there this week. Ben, Megan, thank you for joining me as always. Thank you. Thank you. Central Air is created by me, Josh Barrow, and Sarah Fay. We're a production of very serious media.

Jennifer Swannock mixed this episode. Our music is by Josh Momosher. Thanks for listening. and stay cool out there.