WRFH/Radio Free Hillsdale 101.7 FM - Wall Street Weekly: The Runway to Ruin

Episode Date: January 26, 2024

Join Patrick and George as they discuss the long-term consequences of Spirit Airlines failed merger with JetBlue, and Boeing's most recent blunder. 

Welcome to Wall Street Weekly, a show where your host, George and Patrick, cut through the financial jargon to keep you educated and informed about the markets that affect our lives. Enjoy the show. Ladies and gentlemen, boys and girls of all ages, we cordially welcome you back to Wall Street Weekly on Radio Free Hillsdale 101.7 FM, the long-awaited episode that was supposed to air last week. Supposed to air, but bad things got in the way, didn't they, George? Yeah, I got down with a little bit of that. but gave me an extra week to prepare. As we talk about airlines today and what could be more interesting than stuff breaking on airplanes. Airlines is not something we've not covered before, but they seem to find their way in the news outlets repeatedly, especially over the last few months.

I was thinking about maybe not doing this story because we had talked about airlines in the past, but I feel like it would be kind of turning a blind eye, the fact that a door just ripped off a plane when that's what the rest of the investing world wants to talk about. And of course, that's what we love to do on this show. analyze events that are popping up in your everyday news sources on CNN and Fox and whatever, and seeing how those impact the stock markets. We plan to continue to do that throughout this semester as we start, I guess, are we going to consider this season three? Season three, starting right at this moment. One thing that we're going to try to do a little bit more of this semester is try to get

a few more interviews. I think me and Patrick or Patrick and I have great perspectives, but obviously if we can bring more of those unique perspectives and I think the show will benefit as a whole. Speaking of the show, we want to remind you that this is for entertainment purposes only. As always, contact trusted financial counsel before making any decisions. Before we talk about airlines, let's talk about the general stock market since we've last been on the airwaves. Stocks finished the year 2023 at record highs, actually 8% since we last recorded, and up 18.5% since November 1st. Of course, I'm referring to the S&P 500, generally referred to as the market benchmark.

This can be largely attributed to investor expectations of interest rate cuts ahead by the Federal Reserve and robust corporate profits. An interesting note that the futures market is pricing in about 2.65% is going to be the Federal Funds rate in November of 2024, dramatically down from, what, above 4% right now? What is the federal funds rate? Federal funds rate is basically when we refer to the interest rate. Okay. That is what we're talking about. We can talk about that more in depth

in another episode of what goes into that, the mechanics that can affect that. It looks like it's actually still over five right now, but even things such as the one-year treasury suggests that we're going to see that drop dramatically over the coming months. And just for a little economic perspective, when we consider economics and stock market as a whole,

is it usually the case that when interest rates are cut or when there are expectations that interest rates are going to cut, that the stock market generally does well? Yeah, because generally you're going to see more investment when that happens. If you can borrow money at a cheaper rate, projects that you undertake can actually be more profitable than if they would in the past. I mean, just think about home ownership. When mortgages are at 8%, the calculation between renting and buying is a lot different than when they're at 2 or 3%. And it's a lot harder to justify that investment. Okay, so loans generally stimulate the whole economy?

When rates are lower, yeah. Okay. And while all of this is extremely interesting, we try to follow the news, and corporate profits have not dominated the headlines, or been parodied like today's topic has. To kick this off, let's take a listen to comedy legend Trevor Noah. So as of today, any plane that might be unsafe to fly will be grounded until it can be repainted with Spirit Airlines on the side.

Spirit Airlines, how are we not grounded? A little bit of foreshadowing there to both of our stories about Spirit Airlines and Boeing, but let's kick it off with Boeing and Alaskan Airlines. Everyone saw what popped up in the news articles. Door fell off of Alaska Airlines flight. Some quick narrative. On January 5th, this year, an Alaska Airlines flight was flying over Portland, Oregon. And according to a passenger, Kwong Tran, after the crew called the altitude at 10,000 feet,

there was a loud swoosh sound and the emergency door at the row right in front of him just flew off. Immediately the wind started vacuuming everything close to him. So his phone, even the socks and shoes he was wearing flew off of his person and out the door. And until the cabin pressure was stabilized, Tran was being crushed into the chair in front of him, which is kind of crazy. Fortunately, only one person was in that row. No one was in the seat next to the door that fell off. And the person in that row, his shirt was sucked right off of his body. So it's just a slightly humorous to read about, but I can imagine horrifying in the moment.

That's got to be a crazy experience. However, I think for the airlines, there's probably going to be a lot more rule following of the fastened seatbelt sign. If you're worried that you might get sucked out of the plane. I don't know. Absolutely. Maybe there's a silver lining to this all. Yeah. That must have been some scene, everyone waiting at the gate, and then this plane rolls up.

then these two passengers come out of the gate. One's not wearing a shirt and another's not wearing socks or shoes. Like, man, what happened? Do you think they got Alaskan Airlines or Boeing merch out of the deal before they walked through the airport? I'm sure they had to get some shirt and clothes on. Maybe they had some spare flight attendant clothes or something. They walked off with a captain's shirt. And later, I think this is just incredible. Kwong Tran's phone that flew out of the airplane was found on the ground in Portland, virtually undamaged. for Apple. They're happy with this incident, I guess. The plane landed, but obviously the troubles were only just starting for Alaskan Airlines in Boeing. Soon afterwards, it was determined that the

door fell off simply because of loose bolts on the door. And all of Boeing's 737 Max andines were recalled for inspection by the Federal Aviation Administration. And loose bolts were ultimately found on many more of the planes. That only generated more anger at Boeing's quality control. because, I mean, it's just like a simple thing. This doesn't seem like the type of thing that would make national headlines, I guess. It seems like you should be able to have these down to a T, these small details. You have to be so precise, I would assume, with aircraft and making sure everything is right because you're flying in a metal tube in the sky.

But you don't even hear this a really on car company's stuff just falling off. It's pretty amazing. But I think the main problem that they had is they didn't have some guy hit the side of the plane twice and say that's not going anywhere. Bowen's instituting that on all new aircraft. Good one. The max nine plane accounts for a larger percentage of Alaska's fleet than of the fleet of any other airline.

And so that caused many more of Alaska's flights to be canceled or delayed immediately, and that only increased the number of lawsuits and fingers pointed at Alaska Airlines. Their PR strategy, I think, was pretty good, was to initially apologize to the passengers that were on that plane, but then shift the blame to Boeing,

since I guess technically they were the ones at fault, not Alaska. Alaska said that they would start to explore options from other suppliers in the future. We all know that means Airbus. The airline industry being a duopoly. Yeah, so Airbus is the biggest competitor for Boeing currently. And recently, I'm not sure how recently, but somewhat recently, they've taken the lead over Boeing in different numbers. And the latest bit of news came out January 24th,

yesterday as of January 25th when we're recording this, and that is that the FAA will clear max nine planes to fly again if they pass inspection. It's the last bit of the story. Now we'll get into some analysis specifically on some more investing in stock things. Some of the impact to the stock is that Boeing's shares fell 10% directly after the incident. Another interesting aside is it didn't really seem to affect Alaskan stock. Their stock did crater 12%. But Delta and American Airlines and it seemed like the whole airline industry was actually falling between 10 and 15%. So that's not out of the ordinary. Whereas Boeing, when compared to Airbus, Airbus actually went up during that time. Right. Airbus went up that time, which tells us this is an important little case study for a lesson here in

investing. Airbus went up when Boeing fell. And so that tells us that there wasn't an preexisting industry problem that changed all the stocks. So that's how we can basically figure out, yeah, it was probably this incident that took Boeing stock down. And so that lines up. It's not all of Boeing's revenue driver because they also do a lot of defense contracting with the U.S. government specifically. However, I think it accounts for about 30 to 35 percent is their commercial aircraft, what it contributes to the revenue. If you just look specifically at the commercial airline segment, I'm sure it's not just 10 percent, which it fell or that people factored in when looking at this stock, but probably much more significant than that.

just specifically for that segment. So what's in the future for Boeing? Well, for the airline industry as a whole, airlines, airplanes still provide a very valuable resource, and so there's going to be still a demand for flying, even though scary incidents like this do happen at times. What about Boeing specifically? You know, I don't think we can pin demise on them at this point

because of this incident. Things like this have happened for all the history of aviation. They're still very much in the game, but I think the fact that basic standards weren't met in the production process is definitely going to encourage other airlines, at least for a time, to buy their planes elsewhere. And Airbus is the obvious alternative, since they're the only other company that makes large commercial planes. Probably the most concerning for Boeing is how much publicity this got in general culture,

because Everin flies, or most everyone flies. And you can imagine for the foreseeable future, there's going to be a lot of jokes made about whenever you're on a Boeing plane, oh, is the door just going to fly off? Yeah. And as funny as that can be your S&L making fun of your company or different late night talk show hosts, commercial aircraft is the type of industry that you don't want to get a bad reputation with.

And people will stop buying your planes. If they're trying to offer the highest level of quality, I got to believe that an airline is going to choose airbus over Boeing, even if it's slightly more expensive, if they think that passengers won't fly because they operate Boeing. Right, and I think the airlines recognize that there's still a decent number of the population that won't fly because of a fear of airlines. And there might be some that are very reluctant to fly, but maybe they have to because of business trips or something.

And this is the type of thing that could push them over the edge as far as comfort level. Airlines have got to prioritize a sense of safety and comfort, and this just doesn't help them. You're listening to Radio Free Hillsdale 101.7 FM. continue to talk about the airline industry. We just finished up talking about Boeing and what that could do to their business potential going forward. Another airline company that has serious doubts about their future would have to be Spirit Airlines after a failed merger with JetBlue. Let's first take a step back and look at the 35,000 foot view on this. Good pun. I actually looked it up in 35,000 feet is about what commercial aircraft fly. Okay, okay. We get it. You put the effort in for your

effort in for the pun. All right. Maybe one person recognizes that. All right. Yeah. But Department of Justice sued against the JetBlue, Spirit Airlines merger, and Justice Young, who is a federal judge, ended up issuing a permanent injunction, meaning that those two companies would not be able to combine.

This was very disappointing to shareholders. The stock price cratered about 50, 51 percent within minutes of the announcement. Wow. A big disappointment is a lot of shareholders. they bought Spirit Airlines because they thought it would be acquired. As the last five years, Spirit has actually been shopping themselves out to try to get acquired. So do you think that a lot of the investors in Spirit Airlines just hopped in Spirit just to take advantage of this deal?

I don't know how many specifically, but I would wonder if it's close to a majority of shareholders who were doing it to try to take advantage of the deal. I wasn't initially going to get too deep into the specifics, but essentially, Spirit Airlines was trading at between $14 and $16 for the last few months. And if the deal were to go through, each Spirit Airlines shareholder would receive $28, I believe it was. Now, that's oversimplified. It's not free money because, obviously, if it gets turned down, you lose a lot of money. And there was different philosophies on whether JetBlue was going to try to renegotiate.

It's important to understand that I'm way oversimplifying this. But all the same, people were trying to make a quick profit off of this. A lot of people now see this injunction as a destruction of value. Because the future of both of these companies is uncertain, quite potentially much more uncertain than it would have been had the merger gone through. Though JetBlue and Spirit Airlines were both profitable from 2014 to 2019, both were hampered by the COVID-19 pandemic. This isn't the root of Spirits problems. Because during COVID-19, you had a lot more recreational travelers and a lot less business. travelers. So the market share for Spirit was actually comparable to that of United Airlines during

2020, which is absolutely incredible. Do you know, or would you say that most of Spirits customers come from a vacation or business side of things? It's much less business focused and a lot of leisure travel or day trips. Day trips, that's right. Because you can't have carry on unless you want to pay another billion dollars. They're called an ultra low cost carrier because that's exactly what they are. The bare minimum of comfort, but you also pay the bare, bare minimum prices. The bare bare minimum of comfort. I like how you phrase that. Yeah. However, this is a double-edged sword because Spirit Airlines customers are also among the most responsive to price changes. When fuel prices and cancellations led to increased operating expenses, management couldn't significantly increase prices without

significantly decreasing the quantity demanded. Because that would take out their whole system, because their whole scheme is based on the lowest price possible. Yeah, and if Delta or United Airlines has to increase prices by 10 or 20 percent, people are just debuting it to the business account or they're less sensitive. They don't really care as much as Spirit Airlines where even a 10 or 20 increase might be the difference of driving or different methods of travel. Definitely. Like I mentioned, this is because fuel expense makes up a larger portion of the flight expense and their aircraft on average. I saw where it was, they fly their aircraft. eight to nine times a day because they do a lot of short trips so they might go between

Detroit and Minneapolis for instance that's a two-hour flight they're trying to do that eight or nine times a day to get the most efficient use of their aircraft which are airbus oh well okay interesting yeah that sounds like Southwest's old strategy I remember doing a case study about Southwest for my business class last year and we were talking about how they did short haul trips that were direct travel all the time so they could maximize the planes time in the air and decrease the time of turnaround, you know, when the planes are taxing on the ground. That's exactly what Spirit was trying to do. A lot of ultra-low-cost carriers have been very successful operating in niche markets where they'll fly out of very small hubs and compete with the existing carriers. Spirit has

also become, in the opinion of many analysts, less effective, the bigger that they had become, just because then you're having to fly from major hub to major hub where you can't make as much money. It's a widely held opinion that the ultra-low-cost carrier method is ineffective business generally when you're flying outside of the niche markets. However, many investors still saw the benefit because, again, they thought Spirit would be acquired. They have a lot of existing infrastructure that can be used for cost-saving. A big reason for the JetBlue acquisition was because Spirit Airlines is, if you will, first in the queue for a lot of new Airbus planes. And because of supply chain issues from 2020, 2020, 2021, 2022,

there's a lot of backlog of orders. So people are trying to get their hands on planes by any means necessary. Though the merger would be no doubt anti-competitive for very few routes, JetBlue, along with many internet spectators, argued that the only reason that Spirit Airlines had been so cheap was because it was a flawed business model and they're subsidizing every single traveler, they had lost an average of $135 million each quarter for the last 16 quarters.

How did they think that, if that's true, how would they think that that's an effective business model? Remember that during this time, fuel costs were up and that there were some delays, and they figured once those things ceased to exist, they would emerge with more market share. Okay. And then once those inefficiencies had been rooted,

out, then they'd be able to go back to their 2015 respectable level of profitability, and that just never really happened or materialized. Okay, got it. To the chagrin of many, Judge Young, who was actually a Ronald Reagan appointee, ruled against the merger, as I said, issued a permanent injunction. I just want to highlight a few things from the ruling that rubbed me the wrong way a little, so this is going to be opinion-based. I apologize for that.

He said that getting rid of Speard Airlines would remove an innovative competitor from the market. Now, I have ridden Spirit Airlines many times, and innovative has never been a word that I've used to describe my experience. Yeah, it really depends on your definition of innovative. It's not the most common strategy in being the low-cost leader like that, but it's not a brand-new idea, I guess. And also, it's an idea that loses money. I think that's hard to call innovative. Yeah, if that statistic is true. It is. Okay, yeah. Additionally, Summer interpreted his ruling that even if a single customer in a relevant market was harmed,

it's grounds to block the ruling. People were upset because they don't really think that was the purpose of the Clayton Act. How would customers be harmed? Because prices would have to go up. Oh, harmed is a very loose word there. And also another thing that dovetails well off of this is that he uses an econometric consideration, which he says because there's less capacity, which is anti-competitive, the reduction of capacity, JetBlue wanted to take Speard Airlines planes, take them from 150 seats on Spirit Airlines to 120 seats on each plane.

That way they could charge more money because they're giving a better experience. And Judge Young said that this reduction of capacity would be harmful to the consumer, even though testimony by JetBlue defendants found that a majority, they did a survey, and a majority of even the most cost-conscious consumers would pay more for the increased comfort that JetBlue provides. Wow. Granted, take that with a grain of salt. That is the defendants there

who have incentive for that to be the case. Yeah, it's actually really interesting. But you can tell the judge in this case knows his ruling is going to be big. I think it's a very dangerous precedent, the reduction of capacity. That would be like saying, it's illegal for me to knock out a wall in an apartment

and make two one-family apartments to a one-family apartment, it would be like saying you can't do that because that reduces capacity, which I think is a wild standard or precedent to have to uphold. But the judge knew he was upholding a precedent or that his case opinion would be widely viewed. And the thing that irritates me the most is a poem at the end that reads, Spirit is a small airline, but there are those who love it,

to those dedicated customers of Spirit, this one's for you. So he was appealing to the spirit customers, those dedicated spirit customers? It sounds like he wants to make himself a hero in this case. To be adored by the spirit faithful, again, my opinion is very biased, as I had some skin in the game on this case. But that's about as much as I'm going to say about that. Well, that's about all the time we have for today, unfortunately. Next week, we're going to give you another exciting episode because we do that every single week. I have no idea what it's going to be about.

Neither do I, but we'll figure something out. Come to think about it, maybe we'll talk about Bitcoin and the new ETFs and what that means for investors going forward, as they seem to be very pervasive and have the potential to be included in many new portfolios. As always, we'll do our best to present that in a way to keep our audience educated and informed about a very relevant current event.

Thank you so much for listening to Wall Street Weekly today. If you've missed any of our past episodes, as a quick reminder, you can find those on Twitter, also known as X, at Wall StreetPod. Thank you for listening to Wall Street Weekly on Radio Free Hillsdale 101-7 FM.