Yet Another Value Podcast - Lionel Hutz' breakdown and analysis of the JetBlue $JBLU / Spirit $SAVE merger DOJ case

Episode Date: October 3, 2023

Lionel Hutz, Editor of the Lionel Hutz Newsletter on Substack, joins the podcast today to discuss the JetBlue (NASDAQ: JBLU) / Spirit (NYSE: SAVE) merger DOJ case. Lionel's JetBlue/Spirit write up: https://lionelhutz.substack.com/p/in-the-spirit-of-competition Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:48] What is so interesting about the JetBlue / Spirit DOJ case [4:18] JetBlue / Spirit merger saga - background [11:34] Why is the "Northeast Alliance" relevant [20:26] DOJ case - "Route Pair Analysis" / "Local Market Pairs [27:06] Airline market / thoughts on divestitures [32:44] DOJ argument about relevant markets [44:03] Hurdles for DOJ to show anti-competitive effects [47:15] Notion of "Hot Docs" and their relevance to the trial [54:07] Judge for this case, his background and why this matters [59:08] Consensus around JetBlue's paying a huge premium for Spirit. Why doesn't JetBlue just walk? [1:06:34] Department of Transportation joined the DOJ to block the merger - what this means? [1:14:12] Trial scheduled to start October 16, could there be a settlement between now and then? Today's episode is sponsored by: Alphasense This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the #1 rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities, like Smart Synonyms and Sentiment Analysis, provide even deeper industry and company analysis. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a Yet Another Value Podcast listener, visit alpha-sense.com/fs today to beat FOMO and move faster than the market.

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Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot. If you could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have one. I think this is the third time, maybe the fourth time.

My friend and everyone's favorite cartoon lawyer, Lionel Hutz. Lionel, how's it going? It's going great. I am psyched to be back. I've been looking forward to this all week. I've been looking forward to it too because it's one of my favorite situations right now. I think previously we've done Twitter twice, which was obviously a massive winner. Laquidia, which is still pending, though I have very high hopes for.

we might talk about that at the end. And now we've got this one. But before we go there, just quick disclaimer, remind everyone, nothing on this podcast is financial advice. Lionel might be a cartoon lawyer. I am not. We're going to be talking about a legal pace here. So people should just keep in mind, not financial advice, not legal advice, no type of advice. Please do your own work, consult a financial advisor. Lionel, that out the way, the situation we want to talk about is one of my, is bar none of my favorite merger arb right now. And that is JetBlue is buying spirit. The Department of Justice is suing to Block Spirit, and I think it's very interesting, but I'll stop there.

You did a great write-up on your blog, which I'll include a link to in the show notes, but I'll stop there and turn it over to you. What is so interesting about the JetBlue Spirit DOJ case? Yeah, well, you know, first of all, you know, Matt Levine, I think had a great write-up. I think it was just yesterday saying he was specifically talking about the FTC, but basically saying that the frequency with which these antitrust cases, are being brought to challenge mergers has just created an environment that is really conducive to a lot of merger ARB involvement. It's created a situation where you can almost expect antitrust action to be brought. And so if you're willing to put in the work, you can hopefully, you know, turn that into a profit. I think this is a situation that, you know, I like to write about

high conviction ideas. I will say that, you know, I don't think this is a 98% chance of closing, 96% chance of closing. But I do think the market has this pretty significantly mispriced and happy to talk through the detail of why I think that is. Look, I'm with you, you know, a lot of people for a while investing, investors got really into the Kelly Criterion when they were sizing bets. And I think we mentioned it a lot with Twitter. And I think investors felt out of favor with that because the world, like Kelly Criterion is really popular with Blackjack, where you have exact probabilities, right? I think, think people quickly realize that in investing the tails are much fatter than they are in kind of

black jet and so the kelly criterion didn't work and if you were following the kelly criterion you would blow up but you know i do think people look at this and the market to my mind we can go through this has this price at 25 to 30 percent to go through and i just think that's wrong right you and i will probably talk about but i probably think like jet blue is 65 to 70 percent to win and actually i think it might be a little higher than that but i'm discounting for a bunch of different things. And if you can find, this is obviously going to be an end of one, but if you can find five situations that are priced at 35% and they're actually 65% and you can bet on all of them, you are going to make a heck of a lot of money. So I agree with you. It's not 90%, but it's way

higher, in my opinion, than the market is pricing. Let's go to it. So maybe we should just start back up. Spirit, you know, the merger saga kind of starts in early 2022. And I think that's actually important to the story. Do you want to go through kind of the whole merger saga and how we got here? Yeah, absolutely. So, So back in February of 2022, Frontier, which is another ULCC airline, happy to talk about, you know, what... Can you just very quickly buy ULCC? So there's a few categories of the airline market. There's the GNCs, the global network carriers, that's the United, the American, the deltas of the world that have partnerships all across the globe.

You can pretty much go to any city in the world with, you know, them or one of their affiliates. You then have a low-cost carriers, and that would include JetBlue and Southwest. Some people would say that JetBlue is no longer a low-cost carrier. We can kind of talk about that a little bit, but those are the airlines that, you know, usually they fly to maybe non-hub destinations, so you can kind of think like Chicago Midway versus Chicago O'Hare. You know, they're flying to cheaper airports, maybe in the same general geographic region, and they have lower pricing.

Then at the bottom you have ULCCs, these ultra low-cost carriers. That would be Spirit, that would be Frontier, Allegiant, SunWest. These are airlines that make it their business to just absolutely extract, you know, any margin out of very low-cost, you know, low maintenance costs, low operating cost types of situations. So they typically run one type of plane. So, for example, Spirit only flies the, I think it's the A300 series from Airbus. You know, if you just look at the fleet matrix for Spirit or for Ryanair, you see a single type of plane generally. And, you know, they're characterized by low prices, unbundled prices, you know, typically not amazing service and not a lot of legroom on the flights, but just cheaper airlines overall. The way to tell is if your flight has first class, then you're in kind of the legacy

cares. If your flight doesn't have first class, but it does have free drinks on it, then you're on like the JetBlue hybrid model. And if your flight has, if they charge you for, if they charge you for drinks and you're packed in like sardines, then you're on the ULCC. You know, Ryan, Aaron. Go ahead. You know, I didn't talk about the hybrids, but, you know, there is the hybrid between the low cost and the GNCs. We've got the Hawaiians and Alaska's. of the world. And I think a lot of people would put JetBlue in that category. You know, they offer international routes to like London and to, I think, parts of like the

Caribbean. So they're not quite just like a domestic low cost anymore. They're a little bit larger than that. But the ULCC, did you ever hear? So Ryanair, which I believe was the first one of the ULCC's, right? And they figured, hey, you know, why are we giving out free drinks? People can pay for their own drinks. They famously, they explore charging people to go to the restaurant on the flight. And their theory was, which in hypothetically, it makes sense. Look, if you're flying, like if you're going from London to Paris, if you go to the bathroom before, there's facilities before, right? A, you can use those. We don't have to clean the toilets.

We don't have to empty the toilets as much. And they even had like, hey, if you're bringing, you know, a hundred people bringing a full bladder versus an empty bladder onto the plane, that's a little bit of extra weight and, you know, a little bit of extra fuel. So they thought about it. And I think even the, the CEO is an eccentric guy. I mean, he is, like, militant about his margins, and, you know, they've included all sorts of crazy proposals in the past. And they're, you know, if you want a laugh, go on their Twitter. I mean, it's like people complaining about things on Ryanair. And the response is always like, well, what did you expect?

It's Ryanair. But I think, I can't remember that story is just like a pocket. I'm pretty sure it is a true story, but they realize, yeah, we can't charge. Anyway, so JetBlue, I guess where we were just at is Frontier and Spirit in February, 2022, if I remember correctly. Yeah. Enter in a merger. So let's continue from there. Yeah.

So basically you've got the two largest ULCCs proposing to combine in a $6.6 billion stock deal. Later, Frontier would add some cash on top of that, but, you know, majority stock deal. April of 2022, you know, JetBlue has caught wind of this. They submit their own bid for Spirit. May 2022, Spirit turns down the JetBlue offer. in favor of the frontier merger, June 2022, JetBlue is like, you know, adding, you know, all sorts of kind of incentives on top and trying to sweeten the deal. By July of 2022, Spirit had delayed the shareholder vote and would ultimately reject the frontier deal,

but they were kind of like keeping, you know, the vote for the frontier deal at bay while they were evaluating whether or not this JetBlue deal could really become sweet enough. October of 2022, Spirit shareholders end up approving the sweetened JetBlue merger. And then earlier this year, March of 2023, we have the Department of Justice suing to block the merger. Again, we can get into like, you know, this is DOJ, not FTC. I see a lot of comments online about like Lena Khan. that's a separate entity, but happy to kind of go into how we got here.

That was a great background. If I can just add one more thing, because it will become important later. Spirit did not want to merge with JetBlue, right? Spirit in May of 2022, when the JetBlue offers on the table, they're publishing decks that says do not accept the JetBlue merger. We think this cannot get through antitrust review. We think the Frontier's offer is better for X, Y, and Z reason. They do not want the JetBlue offer.

And what happens is, Spirit, you know, they delay the shareholder vote in June until early July and eventually take the JetBlue vote. Their shareholders said, hey, the JetBlue offers too much money. And JetBlue had really sweetened the pot with break fees and everything. So they're almost forced to take the JetBlue deal by their shareholders. And that is going to become important later. So I just want to. Yeah, you know, not only did you have these comments saying, you know, the JetBlue merger isn't going to go through. I mean, you had comments.

people were kind of cynically saying like this is just jet blue trying to kill the frontier merger they're not actually serious about this like this is just for purposes of of kind of like you know distraction uh and so you know you'll see later on we can talk about some of the hot docks in the case uh these hot docs uh basically say you know jet blue is is unserious this is this is not a a winning merger. And I think there's, you know, kind of rational explanation for that once you realize that ultimately JetBlue was very serious, put together a sweetened deal. And, you know, we're obviously in the situation we are now. Anyone who thinks that a multi-billion dollar corporation putting out a public merger offer that, you know, can get signed is unsirious. You know,

you just have to go ask Elon Musk how playing around with multi-billion dollar legally binding merger offers, how much those are jokes and how much you get held to them. So anyway, March 2003 comes around. And before we get there with the DOJ suit, I think it's important to give one other piece of background. JetBlue had entered into what's called the Northeast Alliance. And I do think it's important to just quickly talk about what the Northeast Alliance was before we get into the DOJ lawsuit.

Yeah, absolutely. So in July of 2020, so predating anything we just talked about, July of 2020, JetBlue announces that they're entering what they called the Northeast Alliance with American. in what this basically did, it was like code sharing, sharing of slots, you know, being able to like book with the other companies, airline miles, things like that. Basically, it's, it's an agreement more or less not to compete in the Northeast region. So really Boston and New York, they, you know, we'll get to, well, we'll talk about the Northeast later.

Yeah, the JetBlue, the JetBlue spirit deal is the. combination of the number six carrier and number seven carrier, trying to become the number five carrier and compete with the big guys. This, even though you had JetBlue involved in the Northeast Alliance, you had in these particular regions, it was like the number two and the number three. Like JetBlue is really big in the Northeast, Americans big in the Northeast. So, you know, whereas you can think of the JetBlue Spirit merger as a merger of smaller entities trying to compete with the big guys, you know, the Northeast Alliance with American was really JetBlue, you know, creating, you know, much more of a monopolistic effect in the Northeast.

And so, you know, they enter this in July of 2020. In September 2021, so again, predating anything we talked about, the DOJ sues to break up the Northeast Alliance. They say this is anti-competitive. You know, these two entities have created a, what they call a de facto merger. The DOJ will end up winning that suit in the middle of all of this merger stuff that's going on. They win the suit in May of this year. So after the merger agreement with Spirit has been signed, you know, they, they, well, yeah, I'll leave it there. And we can kind of talk about specifics. It's just important because we're going to talk about the DOJ suit in a second.

It is one of, if not the, it is one of the main thing Spirit is pointing to saying, hey, we can't merge with JetBlue because Northeast Alliance is clearly problematic. Yeah, you know, the other thing I would just quickly add, I guess, is, you know, a lot of people have a misconception on, you know, they think like JetBlue gave up the Northeast Alliance in favor of this merger. They did give up the appeal. They said, once they got this verdict, they said, you know, we won't pursue it any further. We're leaving the Northeast Alliance and we're pursuing this, this spirit deal. But they did not, you know, they actually lost the lawsuit with the DOJ in May of 2023. This was ruled anti- competitive. And I think, you know, the reason for that is twofold. You know, antitrust law really hates kind of just a pure land grab. And they really hate partnerships and agreements rather than merger. So pure land grabs are, you know, despised for obvious reasons. But doing so in a way that doesn't have the administrative costs of a merger is very dangerous, right? Because you can create situations where the costs to enter these agreements is basically zero.

And you can, without having mergers, you can create these agreements that ultimately, you know, function very similar to a merger effect. Can I purely in grab what you mean is, hey, we merge the number one and number two players together to create 100% market share, right? Obviously, antitrust hates that because so horizontal versus vertical, yeah. And then as you said, this is a JV alliance. They can just do this. a JV is not subject to antitrust review, right?

They JV their Northeast Alliance without antitrust review. So just one day you have JetBlue and American competing with each other on Boston to New York routes. And the next day, they say, hey, we're JV, no more competition. And, you know, for, as you said, for obvious reasons, they hate that. So, but let's go to the merger complaint, right? DOJ fires a merger complaint, March 2023, an antitrust complaint, March 2023 against JetBlue and Spirit. And it's important to note, May 2023 is when the Northeast Alliance is going to be ruled anti-competitive and it's going to eventually be broken up. March 2020, JetBlue is still in the Northeast Alliance.

I just want to highlight that. So why don't you talk about March 2020, what the merger, what the antitrust complaint, the DOJ file says. Yeah, so the DOJ files this complaint, Northeast Alliance very much alive at this point. And they say that the JetBlue Spirit merger is going to create these. anti-competitive harms in four different areas. They say, one, it's going to remove head-to-head competition between JetBlue and Spirit. Two, it's going to lead to higher ticket prices and reduced capacity. Three, it's going to result in less consumer choice. And four, it's going to facilitate increased coordination between JetBlue and the remaining competitors. So they

outline this. They provide a bunch of support and some of these hot docks that we'll get into. But also just littered throughout this complaint, particularly when you're talking about facilitated coordination with JetBlue and the other major players, you see reference to the Northeast Alliance and not just the Northeast Alliance, but these regions that are very sensitive. And I think, you know, kind of going back to the top for a minute, it's like that's really the core of the thesis here is, is, you know, the price that, and I haven't looked in the last hour, but, you know, the price that Spirit is currently trading at is not materially different than what it was in March, April, et cetera. Yet the deal that the DOJ is challenging and

will challenge at trial on October 16th is a fundamentally different deal than the deal they were challenging in their complaint. You know, I, as you know, and I guess we can fully disclose, both of us have revealed this before. We are long the stock. I am long options to for the full disclosure, but I'm with you. You know, when I first had some friends mentioned this to me a few weeks ago and started really getting bold up on it, my first response was, oh, I've looked at the merger complaint. You guys are crazy, right? The DOJ has Spirit and JetBlue, not dead to rights, but this is a really, really effective

merger complaint. And then the pushback was, dude, read the merger complaint. 66% of the merger complaint relates to the Northeast Alliance. And the Northeast Alliance is dead. JetBlue is going to go to court and be like, they are talking about something in the past, you know? So that's what really got me excited. As you said, in March 2020, when this is filed, you say, hey, JetBlue's got a chance, but it's not much of one. Today you look at that complaint, you say the complaint, yeah, it's a strong complaint. It has no bearing in the real world today.

Obviously, we'll talk to best and everything. And I just think if somebody asked me and people have asked, hey, what do you think the edge is? I think the edge is if you read all the legal documents, you're like, oh, the DOJ has a great argument here. All the legal documents were before the Northeast Alliance was gone. And the Northeast Alliance is gone. It's no longer relevant. Yeah, you know, it doesn't render everything moot. I think, you know, I've seen broad characterizations on Twitter of like, you know,

the DOJ has no case. They definitely have a case. And we'll talk about the standard, you know, the burden that the DOJ has, the standards that will be applied and like what they can show in support of these things. But yeah, a major chunk of this case has. has been taken out by way of the Northeast Alliance falling apart. And then some of these divestitures, which again, we can talk about in just a minute. And now a quick word from our sponsor.

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Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend. Stream has the solution for you. Head over to their website at streamrrg.com to learn more. Thanks for listening and we'll catch you next time. Let's talk. So the Northeast Alliance is gone, right? That was the strongest part of the case. Hey, and if you look at what Spirit was saying when they were saying don't vote for JetBlue, they were saying, look,

JetBlue with the Northeast Alliance, clearly anti-competitive. There's no way the DOJ is going to let them have the Northeast Alliance and Spirit. Northeast Alliance is gone. So that part of the DOJ's case is gone. I think there's one other really effective piece of the DOJ's case where the effects of change. And that's on the route pair analysis, right? DOJ says, hey, think about LaGuardia, something like LaGuardia, Newark, Boston, and Fort Lauderdale. JetBlue and Spirit, if they merged, we're going to have a lot of market share, right? I think in Fort Lauderdale, they'd have over 50%. And anyone who knows antitrust knows antitrust can define local markets. And, you know, if you and I are merging grocery stores and we nationwide have 1% of the market, but in

Cleveland, Ohio, we have 100% of the market put together. That's an antitrust issue, right? So And you're referring, well, not not referring to the Kroger Albertson's deal with the top of but yes, we're seeing the exact same thing in two live cases right now where you've got these entities merging and they're saying, okay, well, what markets are the issue markets? And maybe to kind of just take one step back for a second and talk about like, why are we talking about specific markets? Like, can you, like, what does it matter if one market benefits and the other one doesn't? So the way these antitrust suits work is.

And this is true of DOJ and FTC, I guess even one step further back. We're in front of the, we're litigating with the DOJ, not the FTC. So this is Jonathan Cantor, not Lena Kahn. For those who are, yesterday there was a story in the Wall Street Journal that was talking about how Pentwater made a lot of money betting against the FTCs trying some very novel antitrust blocks. You know, anybody who's listed to the podcast, Activision, Microsoft, but the real ones were like Horizon therapeutics, Cgen, one or two other.

others, I can't remember. But so, you know, that article comes out. I say Lionel's coming on, and everybody says, what's the FTC doing with this case? Yeah, yeah. It has nothing to do with this case. It has nothing to do with it. Well, you know, it does in the sense that everyone is kind of bought into this, they call the new Brandeis movement. It's like big as bad. And, and as part of that, you know, the DOJ and FTC have been bringing boatloads of cases because, you know, the law is based on precedent. And you can't, you know, it's, there's a lot of precedent. There's, you know, decades, centuries of antitrust precedent, and you can't, you know, steer the ship overnight. You need to build up, you know, small wins.

And so you see, you know, the FTC has gotten a small win in kind of extending the doctrine of actual possible competition. You know, there's all sorts of like little wins they're getting along the way. But more frequently than not, they're losing. These are loser cases. And so, you know, the JetBlue spirit case, it's one of their best. Now, that's not saying a hell of a lot. You know, it's not a slam dunk case for either side, but it is one of the best. And so, you know, there's there's a good chance that this thing goes through trial because, you know, the DOJ will take a swing at something rather than settle if they can get a small win.

Historically, the DOJ, particularly when compared to LenaCon at the FTC, has been more willing to negotiate and settle with defendants than the FTC has been. but I don't know if that's true just because this is kind of one of those bubble call cases that the DOJ could theoretically win. So that's why we're talking about the DOJ. When it comes to mergers, you know, the DOJ and FTC basically just split up the jurisdiction. They say like FTC, you handle like pharma cases. We handle airlines. Traditionally, the FTC was more like false advertising type of stuff, which is why pharma makes more sense. It's like, you know, what does the prescription label, say, yada, yada, yada. But nowadays, for merger purposes, it's basically like industry segregated, and the DOJ has the airline industry. So anyway, that's why we're

talking about the DOJ. Notably, also Jonathan Cantor, who is not leading this case for the DOJ. It is, and I apologize to her if this is an incorrect pronunciation. Doha Mecki is leading the case for the DOJ. Not a ton is known about her, but, you know, I suspect. Beck cheese kind of bought into this whole new Brandeis movement. So just to go back, so I believe there were three major legs to the complaint, right? We've already discussed Northeast Alliance. I think we started talking about local markets, the local market pairs. The punchline here is JetBlue and the merger contract had said we'll divest the problematic

local market pairs. I think they have you can talk about local market pairs in any way you want or we can just go to the divest. Yeah. So I guess, you know, to talk about the standard and like what the DOJ has to show, right? So these antitrust cases, the plaintiff, so FTC or DOJ, will define a relevant market, and relevant market is a key term. It's a term of art. And then within that relevant market, they have the burden of first showing that there will be an anti-competitive

harm in that market. If they are successful in showing that there will be some substantial anti-competitive, it can't be just ancillary. It has to be a real anti-competitive harm. then the burden shifts to the defendants, and the defendants have to show some pro-competitive rationale for restraint. If the defendants are successful, the plaintiff, the DOJ or FTC, basically gets another shot at then saying,

okay, yes, that might be true, but we're going to show that that pro-competitive justification can be reasonably achieved, or cannot be reasonably achieved, through, did I say that right, cannot be less? They have to show that the pro-competitive justification can be reasonably achieved through less anti-competitive means, and that the anti-competitive harm outweighs the pro-competitive benefit. So all of this is to say, they call this like rule of reason, right? It's there's no, you know, if you define the markets,

the relevant markets as these origin destination pairs, which we'll talk about, they're not going to say, oh, well, you know, there's five in favor of pro-competitive and four in favor of anti-competitive, and we're just going to, like, net those out. It's not really, you know, one anti-competitive effect is not necessarily equal-weighted to another. It's kind of this, this holistic view of everything. And there's not just like a simple, you know, arithmetic solution. No, that's great. That's great. But I guess I don't make sense. So look, the DOJ, It's the market here is the airline market, right? And I think one of the things when people look at this, they'd say, oh, as you mentioned earlier, JetBlue, the number six airline, merging with Spirit, the number seven airline.

They become the number five airline. Together they have maybe 10% market share. The big four, which is Southwest United, Delta and American has 80% market share. So, hey, nationwide, how is this problem? The answer is it's not. But if you look at the local markets, again, Fort Lauderdale, I think Spirit plus JetBlue would have well over. 50% of the market when they combine. Yeah, you know, the DOJ and FTC, they're always going to try to characterize the market narrowly.

You know, you see there's a Google ad tech antitrust case and an Amazon, uh, e-commerce, uh, antitrust case going on. Uh, and, and, and, you know, the FTC and DOJ in those cases will, we'll try and say for Google, you know, the relevant market is, uh, online, you know, web-based ad sales. and Google will say, no, the relevant market is ad sales. Like, it's mobile ad sales, it's billboards. It's like they try and expand it. TV advertisements, podcast advertisements, yeah. Because obviously the effect that they have on the billboard market is nothing.

Well, maybe not nothing, but it's, you know, it's hard to, you know, it's a very attenuated connection. Similarly with Amazon, I think that's FTC in that case, Amazon, or FTC is saying the relevant market is, is e-commerce retail. And Amazon is saying it's retail. That's the relevant market. So the plaintiff here, you know, DOJ, FTC, they're always going to try to narrow it to show that you have a super anti-competitive effect in a narrow market. And a great, you know, to bring it back to the airline industry, you know, they will try to say that it's, you know, is there anti-competitive effects between St. Louis and Newark?

And JetBlue will say, no, it's not relevant to look at St. Louis and Newark. It's more relevant to look at St. Louis to the greater New York metropolitan area because you have two other airlines, right? And so if you can expand the scope of the relevant market, it is less likely that you have an anti-competitive effect that raises up to the level of being problematic. And that level is defined. There's an index that is generally used. It's called like the HHS index. It's basically a sum of the square of market share. And I forget what the number is, but it's like if it's, you know, 1,500 or above, it's presumptively. anti-competitive. Anyway, point being, if you can expand the market, the less likely you are to have a dominance in market share that triggers concern. Well, and just so if I, and you can correct any part of this is wrong. There are four markets that would have pretty clearly on the local market basis been anti-competitive. And, you know, JetBlue since March, since this was filed, they had already agreed to divest in the merger contract, but they actually reached hard, you know, definitive agreements. Frontier, they will divest spirits.

Liguardius spots the Frontier, which is another ULCC, they'll be important in a second, and they will divest some Fort Lauderdale assets as well as their Newark, Spirits, Newark, and Boston assets to Breeze, if I remember correctly, which, again, is another ULCC that's important. So they're divesting the obviously problematic local market. So that's kind of leg two of the DOJ complaint, kind of getting knocked down by divestures that have come. I'll turn. Yeah, I mean, if you look through the complaint, you basically, you know, you see these origin destination pairs called out. I think I mentioned it in my article. I said, you know, Boston is

referenced 15 times or something like that. I think the only market that hasn't really been touched as far as divestitures that I think was raised in the complaint was Las Vegas. I can't even remember if that was actually raised in the complaint. But it is a market where JetBlue and Spirit currently compete head to head. And I think that's the only market where they do so. If you look at broader, you know, metropolitan areas that hasn't seen the divestager. But the point is that, you know, JetBlue is doing everything that you would expect a serious, you know, someone who intends to close this deal. They're doing everything you would expect of them to make this deal palatable to the DOJ and general public. So those are legs one and two. And I think this is why you and I are so

bullish on the case, right? If you go back to, if we reround to March 2020, as we said, when you file this case, say, oh, this is a pretty serious case. You know, yes, JetBlue. has agreed to divest these markets, but they haven't yet, and we don't know who the buyer is. And you can find bad buyers, right? But in my opinion, they found good buyers. So the local market issues are off the table. The Northeast Alliance, you know, at the time seemed very problematic. That's gone. That's off the table. So I wanted to talk about the other points the DOJ makes, but any other points on the buyers, the investures, the Northeast Alliance, you think we should hit before we turn to them? No, I think that's fair. I mean, you know, like if we just go back

through those four areas, you know, the divestitures, you know, they've divested the kind of to head, Marcus. They've, they've divested, you know, like you say, to ULCC. So you're not, you know, incredibly worried that there's less consumer choice because there's still going to be a ULCC carrier in that market. You know, when they talk about higher ticket prices, it's like, yeah, you know, JetBlue might, but like they divested to these other entities that have, you know, strong incentives to commit to lower prices. So it kind of touches on like at least three of those four areas and really, you know, weakens the DOJ's case there. So let's jump to that last area.

So there's one other piece of the case that, you know, I kind of go back and forth on how I define it. But, you know, this is not to say that the DOJ doesn't have a shop. There is one other argument they're making. And it's kind of hybrid. So the argument is, hey, JetBlue is buying the largest ULCC spirit. And by buying it, like JetBlue is not going to keep the Spirit brand forever. JetBlue, they have internal documents that we can talk about the leak. But, you know, JetBlue is going to switch spirit over to the JetBlue model.

They're going to have, you know, their base price is going to be the bundled price, which is higher. They're going to put a little bit more leg room. They're going to introduce, like, the extra legroom seats, which takes out seats. And I think the DOJ has two arguments here. And they're both a little superfluous. But one is, hey, just JetBlue buying spirit is going to raise prices broadly is number one. And number two, JetBlue buying spirit takes out, it's kind of, as you said, in defining the market. Don't define the market as the overall airline market, define the market as the ULCC market.

And if you buy the largest ULCC carrier and convert them to a hybrid or normal character, you foreclosed on the ULCC market. So I think that's the third argument. I personally am skeptical. I think you're skeptical not to kind of lead the witness, but I want to turn over to you. There is a pathway to winning there for the DOJ. So what do you think of those arguments? Did I do a good job describing it? What do you think all that?

Yeah. So, well, it's important to realize when we talk about the relevant market, so if you go through like the pretrial memorandum, there's uncontested facts and then contested facts. And so the uncontested aspect of the relevant market is that both parties say that scheduled air passenger travel is a relevant market. JetBlue characterizes it differently from there on. They say, you know, we disagree that these specific origin destination pairs are, you know, probative or dispositive of the relevant market. We think that you should take a more national, et cetera, look. So the arguments are less, is it ULCC or is it, you know, all airlines as a whole? As far as I can tell, the case the DOJ is putting on is just we're looking at airline travel and then we're looking at very specific routes. And the case that JetBlue is putting on is we think you should expand that lens a little bit. Now, you know, that's not entirely true, right?

Because one of the arguments that the DOJ makes is that you're removing consumer choice. And so, you know, that taking out of the ULCC kind of relates to a few of these different points. You know, there's a few responses, right? one, in the key markets, they've divested those routes that we just talked about to other ULCCs. So you're promoting growth of other ULCs, which is critical because, I mean, the reason why JetBlue wants this deal is because it's really hard to get gates and slots, slots being like the times you can leave, you know, take off from the runway. It's just hard. Like there are very few like bidding opportunities to get these. And so, you know, when they are-

Can I, it is hard, but it's, there are markets where it's not hard, right? If you think about a new growth market with lots of land, it's really hard in LaGuardia, right? They're not building a new terminal in LaGuardia. So one of the key reasons like LaGuardia, and it's mentioned multiple times in the complaint, LaGuardia is a gate restricted slot. So as you said, if you want a new gate in LaGuardia, like it's really hard to get access to that. The fact they're divesting LaGuardia is great. If you think about Austin, Austin, Texas, right?

Tons of land. There's lots available slots. you're not super concerned. If you're a UCC, there's a reason Southwest started in Texas, right? Allegiance starts in Florida. Because it's pretty easy to go find a gate over time. That's where they start. It's really the northeast market. Sorry to add in there. I just wanted to add that bit of context. Yeah, there's a few, you know, so I think what you're highlighting to is like, you know, a lot of these arguments, they really bleed into one another. And so, you know, I try and delineate it as best I can. But, you know, the responses include we have divested specifically to. to ULCC's. So we're promoting ULCC growth because we know that in these key markets, it's really tough to get gates and slots. So we're, you know, we're not just saying like somebody's going to come, because one of the things the DOJ says is even if a new entrant, a new ULCC comes onto the market to fill the void that spirit leaves, it's not going to happen fast enough. And so now JetBlue is saying, what are you talking about? It's going to happen tomorrow. It's going to happen the day we close,

these ULCCs are coming online in the markets. And to add that, and as you said, in these markets, Jeff Blue could have said, oh, yeah, like the ULCCs will come, but if they had divested, you know, LaGuardia to Southwest or to United, to one of the big four, that's why I said earlier, the divestures are so great here because if they divested to Southwest, well, all of a sudden LaGuardia has, you know, seven less gates and slots that are to ULCC. Because they divested to Allegiant, there's a ULCC who, as you said, steps in tomorrow into that role. Yeah, yeah. Sorry, I'm just taking a couple notes here, making sure I hit everything. So another argument that JetBlue has, you know, JetBlue currently, when you talk about removing consumer choice, you're talking about largely the business model of like unbundled pricing, which tends to decrease price fares because you're not paying for the ancillary items. JetBlue has an unbundled product. They call it Blue Basic. I don't know all the details if it's like one-to-one mapping of like what is unbundled versus spirit. I don't know if it's like

you can remove your free drink or whatever. But anyway, they have an unbundled version. Sorry, I don't know if you are. Go ahead. I don't need to describe JetBlue Basic. Yeah, it's, you know, I'm not a JetBlue guy typically, but anyway, I know they've got an unbundled version. And so, you know, when you talk about consumer choice, one of the concessions that JetBlue has, one of the levers they're able to pull to get this deal done is like, we'll keep

Jet Blue Basic. We'll just, we won't deprecate it. You're so worried that one spirit leaves the market. that we'll have no reason to continue this practice, we just promise that we'll keep doing it. And there's a history of these promises. Now, Lena Khan would tell you there's a history of those promises being broken,

but there's a history of making promises to get antitrust regulators off your back. If you go all the way back to like AT&T Bell, like they were acquiring network providers or however they characterized way back in the day. And antitrust action was brought, And they basically said, we'll stop acquiring people. And, you know, that'll be enough.

They did antitrust, regular, got off their back. Ultimately, they kept acquiring entities, but that's a separate story. Microsoft Activision recently, right? Obviously, the FTC sued, but one of the ways Microsoft got around it in a lot of other courts is they said, hey, look, we agree, we will not make call of duty exclusive to Xbox. We will make it available on PlayStation. We're going to make it available on Nintendo. So there's that history. I guess I just want to say, you know, that offer, the keeping of JetBlue offer, JetBlue basics, it's not on the table currently.

I think you and I have jumped a little bit ahead to what could be offered in a settlement concessions they could make. But that is an important point. They have a ULCC and they could offer to keep it. Yeah, I think, you know, look, it's just to highlight that the way these things can get settled or the way they can come to a resolution is highly bespoke, right? I mean, to your point of Microsoft Activision, like, there's not really precedent to be like, we'll offer a game, do another console. Like, you know, there's no, like, one-to-one precedent of, like, if you give this up, we, you know, get off your back and, you know, let you continue. Anyway, so they have that lever that hasn't been discussed, but I think could easily be something that is discussed as a commitment moving forward. Another thing JetBlue would say, as far as, you know, reduced choice and price concerns, is, you know, they have the JetBlue effect.

It's funny, if you go through the complaint, you know, the DOJ says, there's this spirit. effect and when spirit enters a market, everyone else is forced to come down to their price level. You know, so much that it's like 30% in some markets when, you know, even on top of JetBlue, it's an additional 15.5% of discounts compared to just when JetBlue is in the market alone. One, that is a likely very oversimplified number. And I want to put this out there that a lot of the numbers that are quoted in the complaint and numbers that have been leaked to the public, which again, we can talk about that, are numbers that are, you know, these are the DOJ's numbers or the plaintiff in the private Clayton

Act action. And so you expect them to look really bad, right? What I'm sure it doesn't take into account, for example, is the fare that Spirit passengers typically pay, right? Almost nobody is paying the truly stripped down, you know. Let me ask you a question of that. So what, what Lion was referring to here is, if you fly Spirit, you know, if I'm flying New York to my home, my hometown of New Orleans, New York to New Orleans might be $100. But if I fly that on Spirit, right? But if I want to carry a bag on, they'll charge me $35. If I want to buy water on the plane, they'll charge me $5. If I want to do a couple other stuff, they'll charge you. Let's say the base fare is 100, but I would end up paying 150, right? And then JetBlue, because it's all bundled,

their base fare might be 125. And this is an argument, and I've done a lot of recalls. I've gone back and forth. If JetBlue says, hey, you know, our bundle pricing is 125 and the average spirit customer pays 150 all in, right? Is that a winning argument for JetBlue? Or is the government coming and saying, look, maybe the average person pays 150, but there is one person. Lionel is a cartoon lawyer and he gets paid in cartoon money and being able to fly for $100 by having no legroom, sitting crisscross, bringing nothing on board with him. That is important. And if this deal closes, that $100 offer will be gone because JetBlue will have bundled everything for $125. It does not matter that it saves the average consumer money.

What it matters is Lionel and his cartoon legs will not be flying. And I have an open debate about that. What do you think about that argument? First of all, I'd be honored if I was specifically named in any briefing or in the courtroom at trial. I think this goes back to the standard, you know, the burden the DOJ has to show, right? They don't, what the court will not do is say, how many passengers will be affected and how many won't, and let's put them on the scales of justice and whichever side is, you know, heavier ends up.

That's not going to happen. That being said, one person, particularly a cartoon person, is not going to be a reasonable justification to block the deal. I don't have that number. I don't think anybody has that number. And, you know, there are not specific guide. For certain industries, there are guidelines that the DOJ or FTC will follow to show

like relevant market and total effects. That doesn't actually technically exist. There is a, let me throw three numbers at you. Yeah. If the government can show that 10%, 25% or 40% of people are kind of that Lionel Hutz person where they would no longer fly. like the price went up $25 in the scenario from the bundling versus unbundling. Would any of those numbers, where would those numbers cause you to be like, oh, the government's got a real good

case here? And obviously, JetBlue has other defenses because JetBlue can say, hey, we can still unbundle, all this sort of stuff. But we're. Yeah. So I think, I think any of those numbers would would get the DOJ past that first fade, that first hurdle of showing the anti-competitive effect. I think though, even 10%. I think 10%. I mean, I think the court will, will continue the inquiry. But where it's going to falter is the benefit and the reasonableness of blocking the deal. So JetBlue has the argument that you'll get better service. You'll have more leg room. There are benefits. And yes, it might take away some consumer choice, but it is ultimately beneficial to the consumer. They will say, hey, we've got this.

JetBlue effect, prices come down when we enter the market. They will also say that this deal is creating synergies and we are going to pass those synergies onto the customer. Now, look, the court's going to be a little skeptical of that. So far, what we know from the DOJ's characterization of things is the JetBlue has itself characterized those synergies as revenue synergies rather than like, you know, synergies that ultimately get passed to, to the customer. And the DOJ has been skeptical that there are any synergies at all. They're saying, like, you guys are just doing this land grab thing and this is not about, like, efficiency. I would say that's a stretch for the DOJ to say that. That's an overstep. One, I mean, you always have, you know, the typical

like SG&A synergies just by, you know, when you have similar entities joining. But I think the, the larger thing is that if you actually look at the fleet matrices, you see that JetBlue flies, I think they have 260 planes off the top of my head in their fleet, and I think 200 of them are A300. And so you have, you know, the maintenance cost will come down because you can buy these parts in bulk, and your pilots and your flight attendants will be trained across the same, you know, type of plane. So they're more fungible. I agree with all that answer yes and what you were saying. So this is one of the reasons that people pointed JetBlue in particular said Spirit is the perfect merger partner for us, right?

Almost all of our planes are what Spirit flies. So we buy Spirit, we get all of our planes that's going to maximize all those G&A maintenance efficiencies you talked about. And the other thing I think JetBlue would point to, and maybe you could say, hey, Spirit will do this no matter what. But Spirit has a big order book of planes, right? So Jet Blue would point to, hey, we buy Spirit, we get access to more planes. Spirit's got good contracts with their pilots. we get more pilots, we can bring the jet blue effect to more people. Now, the government might push back.

If we block this merger, Spirit will bring the spirit effect to more people. But I do think that's interesting. Let me turn to something because we've mentioned the JetBlue effect several times. So I want to turn to something called Hot Docs. And Hot Docs, you know, as it's been described to me, hot Docs are a lawyer's dream in any trial. A hot doc is something where I say, hey, Lionel, you and I are going to go buy company X. And once we do, we're going to have monopoly power and we're going to raise prices and no one will be able to do anything. Ha, ha, ha, ha.

And then the government shows that in court and says, hey, this is their plan. They think they're going to have monopoly power. You should block this. It's a monopoly, right? Hot talks. There's hot talks on two sides. To me, there are hot talks on two sides. I want to talk about the more interesting hot talk first.

The most interesting hot talk to me is the government just sued to block the Northeast Alliance. And in that suit, they mentioned the JetBlue effect 15 times, right? And they say JetBlue, when they compete with the big four, they bring prices down. And I think the government even says JetBlue is the only company that can compete effectively with the Big Four, right? So there's a hot talk on the government side. And JetBlue starts to say this in their counter complaint or in their response where they say, hey, the government literally just won an antitrust complaint saying the JetBlue effect is real and it's serious and it's the only way to fight the Big Four. We're trying to buy spirit to bring the JetBlue effect to more people to more people. This is not an anti-competitive merger.

This is the most pro-competitive merger you can imagine. What do you think about that hot top? I think there are easy ways, you know, I'll probably say this of all of the hot dogs. I think there are fairly easy ways to explain away a lot of the benefit or harm. You know, there the DOJ is going to say, look, we were saying that JetBlue is the only one who can do this because they're realistically the only partner of American that made sense, right? Like American Flyers are not Spirit Flyers. And so, you know, it was never going to be the case that Spirit could have achieved.

achieved this Northeast Alliance and, you know, had this ridiculous partnership in the same way that JetBlue could have. They will also say, yeah, JetBlue has a JetBlue. But there's an additional effect on top of it of, I think the number is 15.5%. And so I think there are ways to kind of soften the blow for the DOJ. But I do think it's important. And look, I think there's a lot of things out of that decision. They're important. I mean, back to the relevant market. Like, you know, Judge Sorkin, it said, you know, Massachusetts District Court judge who was who was presiding over that case, you know, he basically said, yeah, the, you know, the relevant market is scheduled air passenger travel and, you know, the origin destination pairs are relevant, but I'm not going to get into detail on whether like Newark is the same as LaGuardia because it's not necessary for me here. Point being, like, I think there are a lot of things in that decision that will ultimately get ported over to this case. But as for that hot dock or hot decision in particular, I think it's helpful for JetBlue.

It's maybe more helpful than neutral, but not like a slam dunk. Let me turn to the other side because, again, I talk to a lot of experts here. And the thing that they keep coming back to was, hey, there are real hot talks from, if people remember back to the start of the podcast, when Spirit was fighting off JetBlue, they literally published a slide. You can go look at the slides. It's from May 2020. publish a slide, JetBlue will not be allowed to buy us. This is hugely harmful for antitrust reasons, right? They cannot bias. Now, there is a caveat. 95% of what they said, said JetBlue will not be allowed to bias, dot, dot, dot, if the Northeast Alliance stands, but not 100%. And I

would have to imagine if they have slides in public that says, hey, this is a huge antitrust issue, there's going to be private things that are going to be found in discovery that say this is a huge antitrust issue and even more bold font. So I guess my question to you is these hot docks from Spirit fighting JetBlue, how much do you think they're going to play into and matter in the trial? Yeah, I have so many thoughts on this. I'm going to try and say this coherently. So at the outset, it's important to remember that this trial with the DOJ is a bench trial. Why do I say that? I say that because juries are far more likely to become passionate than a judge will. a judge is far more likely to grapple with the relevant facts and address the situation in

context and context is super important here far more likely to do that than a jury will so if you look at the documents that you're referring to so that slide from i think it was a board meeting where somebody is saying this jet blue spirit deal will never happen another quote from that same document is they say consummation of the proposed jet blue combination with the Northeast Alliance remaining in place seemed almost inconceivable or seems almost inconceivable. So you have to remember that, you know, that document was drafted at a time when the deal was different and the circumstances were different. Now, you know, they, they, DOJ will point to the fact that the document also says something like, you know, even without the Northeast Alliance,

it'll remove about half of the ULCC capacity in the United States. Again, JetBlue has a response. We have specifically divested ULCC capacity in the problem markets. So yes, you know, there might be a drop in ULCC capacity in less controversial markets, but in the market's issue, we are maintaining ULCC power and pricing power. That's really important. thing, and we talked about this earlier, you know, there's another document that a spirit executive characterized the JetBlue proposal as, quote, a cynical attempt to disrupt spirits

merger with Frontier, which JetBlue views as a competitive threat. So again, you know, this is all going in front of Judge Young, and we can get to him in a second and why I think he's a good judge for this. Like, this is a guy who is super reasonable, super rational, will grapple deeply with the relevant facts and view them in context. And the context for those particular documents was nobody believed the JetBlue proposal was serious. They thought it was just to disrupt the frontier deal.

And also JetBlue had this ridiculous, you know, de facto merger with American. And that was obviously going to be problematic if they had both of those things, the alliance plus the merger. not to fast forward but we've we've covered a lot and we've almost gone an hour already and we've got other stuff i could talk about this again it's one of my favorite situations right now i can talk about this for a long time but i want to go to a few different things that people kind of in the know have been asking them and you mentioned the judge so let's start there i'm not going to i'm not even

going to lead the witness here what do you think of the judge is there advantage to either side from having this judge yeah i don't i don't think there really is a strong advantage either way it's really easy to look at his credentials and say, oh, this is great for JetBlue, right? He's a Reagan appointee, been on the bench since 85, I think. You know, so very easy to say, oh, he's a right-leaning judge, free market, like he's going to rubber stamp this thing. I don't think that's the case, right? He is, one, despite the fact that this is not a jury trial, he is a huge proponent of juries in the jury system. What does that tell me? It tells me he's a fairly humble guy. He's okay taking the back seat. He thinks that, you know, the process of law is very important. And he has

written books on jurisprud, right? He is, he is a scholar and a judge, and he takes this job very seriously. He is not somebody who is simply, you know, free market. He's also, you know, there are things about him that you wouldn't expect out of a right-leaning judge. I mean, you know, he's in many ways almost what you'd call like a bleeding heart liberal. I mean, he can name every single person that he has sentenced to life in prison who later died in prison. Now, that has nothing to do with the facts of the case other than to show you, like, this is a guy who takes his job. Is anyone going to prison here? Let's hope that that's not relevant. It's just to say, this is a guy who takes his job incredibly seriously, and he is okay taking the backseat in a fact-finding mission.

now he will be front and center in this case but i think it shows that he's a he's a humble guy he's uh also the other thing i didn't mention he's semi-retired right he has senior status so he retired from the bench uh i think 2020 2021 can i can i just so for those when i kind of started leading the witness a lot of people have said hey here you have a reagan appointee who is semi-retired as lino mentioned and you know he drew the the wheel on this one. And I believe this is his first case. He's trying in almost a year. So a lot of bulls that I've heard have, you know, that writes itself. Reagan appointee, you've got an overbearing government. He gets the chance at a trial. And even though he hasn't taken a trial in about a

year, he decides to take it. And you can see the story right itself, right? He goes, he smacks the government down. He wins one for a free enterprise. That's the story that people are saying. I'm with you. I don't believe that. Though the fact that he's semi-retired and chose this one. And again, I don't think he'd done a case in quite some time. Maybe there's some truth to that? I don't know. Yeah, look, I can't pretend to understand the inner machinations of his mind and why this was the case that he kind of stepped up for. Or if he was, if it was dictated to him, right? They could have said, hey, we'd love you to come back and, and address this. I don't know. I think it would be a little bit of a folly to say that, you know,

he's coming back just to put the government in its place. I mean, I don't think he's done a lot of antitrust cases throughout his career, but there, you know, he has, I pulled up a couple decisions where he had, you know, certified class for, you know, class action, antitrust behavior type stuff. And, you know, it didn't strike me that he was overly favorable to either side. He's, you know, I think he's an incredibly even-handed guy. I will, I will add three things. I've talked to two people who tried in front of him previously, both of them said he,

they agreed. they thought he was even very even handed, though one of them that said, hey, he might have even been like a little bit more open to hearing the government's thing. So, you know, probably even handed. Number two, while I don't think this is like a big win for either side, it's certainly not bad for JetBlue because I believe he's the last Republican appointee in the Massachusetts federal court. So, you know, you could imagine a much, much worse draw than this. So that's not. And the number three, as you said, he wrote a book. I have ordered the book, but, you know, it is not a Kindle book. It's like a very thinly printed book.

So I've been waiting for, I think, 10 days. I think it's going to get delivered in the next week. I can't report on what's in the book, but the book is like how to manage a trial and the joys of manage your trial. So this is a guy who just loves trials and loves the loss. You're one step ahead of me. I haven't ordered the book,

so I'll have to steal it from you. I'll just lend you my copy once I get it. When you're done, I will say, you know, look, he's a guy. I think, you know, the summary is don't read in libertarian to him. Like, even if he is right-leaning and favors like a smaller government, I think he's a guy that understands the role of government and the role of the process, right? And he respects that process deeply.

So I think it would be an incredible mistake to overlook that and think he's just, you know, looking to minimize government effect in any way. I also think whether you're right reading and left leaning, the more you've been on a federal court, like you tend to talk to other federal judges, lawyers who are presenting. Like I think just that whole experience, your circle kind of like moderates you out in terms of the law. I don't know if that's true or not. That's just my thesis. Let me turn to, there are two more things that I want to hit before we kind of wrap this up because, again, we're running long.

A lot of people have pointed out, look, stock prices are down a lot since this deal was announced. And not just stock prices, but airline prices are down a lot. And JetBlue's stock price in particular is down a lot, right? So this deal, the Spirit deal is announced in February of 2022. Spirit stock, despite having this huge premium is down maybe 30% since this deal was announced, JetBlue stock is down 65%. Spirit's best competitor frontier, their checkers ULCC, is down about 65%. I mean, if Spirits didn't have this deal, their stock would be down a lot further, right?

So a lot of people have pointed to that Spirits results currently are an absolute disaster. They filed an 8K with their Q3 results that were like way worse than anyone thought they were going to be. A lot of people have looked at that and said, hey, JetBlue's paying a huge premium for these guys. Like, why doesn't JetBlue just walk? Yeah, well, I mean, first I kind of point everything. everyone to the merger agreement in the same way that we, we discussed the Elon Musk deal. So the- The joke I've been making with everyone is, hey, go ask Elon Musk how easy it is to walk just because you struck a bad deal or you have full-feet.

Currently, the outside date, I think, is July, July, 2024. I forget the exact date. But it's, you know, there's time to close this thing, right? So, you know, look, I've seen a lot of questions, like, what's the downside here? I think it's really tough. I think the options are a better evaluation of the likelihood of closing because the downside is so unknown. I will not pretend to be a valuation expert on airlines. You know, I have seen some people say, oh, it's a zero.

I think that's a little ridiculous. I mean, you know, airlines may not be the best businesses, but, you know, there's a reason that they're decent high yield debt, right? Because they have assets, right? They've got the planes. they've got the rewards programs they've got you know i think you know united had some loan it was like collateralized with their mileage plus program in 2019 like there are there are assets there i don't you know again that's a separate conversation but if i remember correctly frontier does not own

their planes they lease their plane spirit owns all their planes right so they do have a lot of debt on the balance sheet but they own all their planes i don't know if they own all of them i know they own at least half so they own a lot of their planes but they own a lot of their planes so you know there is real asset value there. As you said, like one of the reasons JetBlue wants to buy Spirit is you get all of Spirits people and JetBlue's loyalty programs a lot better than Spirit. So you get all the people get them in that might get you some, like their assets. I don't think it's a zero. As you said, I'll just remind everybody, options are risky. Please consult financial advisor, consider just how risky options are. But if you look to the market market. I was, I was not

suggesting that anyone go buy options. I think the options are maybe just a better reflection of probabilities. I'm just going to use the options market to prove to show. So the January, you know, in all likelihood, we can talk time in a second, but in all likelihood, this ruling will have come down by the end of this year or early January. So, you know, the January $20 call options last traded for $2.97. They'll be worth about $10 per option if this deal goes through. So you can kind of do the math and say the market's pricing this at just under 30% to close. And if you do that math, you can back into the options market is implying about a $10 downside in spirit stock price. I personally thought the downside would be

$7 to $8, but you know, the market's a lot smarter than me. So who am I to say what the downside is? But that's kind of what the math that the options market is implying. Yeah, I think, you know, the other thing to remember, so I was reading through some of the comments on Twitter and semi-related, you know, I saw a comment from from Bill Brewster who shout out to Bill. I do not know him personally, but I like his stuff. And he was saying that, you know, he thought the best outcome here would ultimately be a frontier spirit merge, like back to the original. And I think, you know, just to your point earlier of the stocks, you know, falling off a cliff, the original frontier deal was a, I think it was like 20 bucks-ish in stock and like four, 450 in cash. And so I think that

deal just becomes completely untenable, at least in the structure that they had, uh, originally contemplated. So, you know, I don't think there's really a situation at least currently where, you know, we're just able to kind of like hit the reset button on all of this. And look, just because you think a deal is a better deal? Cool. Like, I guess it just comes to, A, there's a contract signed. This is the deal. And like, we don't live in, hey, let's, it's not a fantasy draft where we can put companies together. Like, you know who I want to merge? I want Nintendo and Comcasts emerge because I think Nintendo's strategy with their mobile games is terrible. And I think it'd be a huge premium for all my Nintendo friends. I think it'd be great.

But you can't assign people like that, right? Like, yeah, I should, I should, you know, look, I genuinely love Bill's podcast, the business ruin. I mean, that was not me trying to pick up. I was just going to say, yeah, I don't think that deal exists. anymore. I think we're, you know, we're past the point of no return. You can't unring the bell on these, you know, the guidance from. Just to wrap it up on the JetBlue, if they can walk. I mean, and again, please tell me if I say anything wrong. There is a signed merger contract. This is a large company. Large companies are have a little bit more reputation at stake than Elon Bust did. There is a signed merger contract. The outside date is July 24. If they don't

have regulatory approval, the merger financing is committed unless they're going to claim material adverse effect, which I love it. I'd love to have another material adverse claim. to talk to you about, like, there's just no out for JetBlue at this point unless they lose the trial. Actually, one question of that. Some people have said, hey, if JetBlue really regrets this, why don't they just tank their own trial and lose the trial on purpose? Can you comment on, like, if that's even doable or how that would work? Is it doable? I mean, sure, there is absolutely no indication that this is happening. And I think, you know, if they were to do so in such a way that it was obvious, I think, you know, there would be sanctions from the court, right? Like,

you can't throw a trial in an obvious way. Now, if you want to create more bubble calls throughout the trial, I don't know. But, but, you know, I think number one, there's absolutely no indication that JetBlue wants to do anything other than close this thing. And two, if you did that in an obvious way, that would be a big ethics no-no and just a, you know, tremendous waste of judicial resources. in an otherwise constrained set of judicial resources. There's discovery, people talk. You have to go to your lawyers and be like, hey, go against your ethics, go and do this.

And the one other thing I would remind people is, look, JetBlue, they lost the Northeast Alliance, right? They signed that and their stock is way down. They have already paid spirit shareholders hundreds of million dollars in special dividends. Yeah, we didn't even talk about this structure. Yeah. It is a weird show.

But we don't have to, but it is a weird show here. But I would just remind people, look, if you're at the C. and you did this deal that your shareholders hated, you went to the mat, you threw out hundreds of millions of dollars, the Northeast lines gets broken. If you lose this as well, he's gone. He's probably gone. So maybe in his heart of hearts, if he had to do it over again today, would he want to do this deal? Probably not at this price. But his incentive is to get this deal done. Because if not, I think his head is on the chopping block. Yeah. And look, there is real value to JetBlue here in terms of the gates and the slots. And yeah, I don't, I don't think there's a world where, where they come

out of this in any way cleanly if they decide that they try and, you know, break this thing now in some clever way. So yeah, I think, you know, I don't know how much else you want to talk about. I have one other question and then I'll let you wrap it up. There's one unique piece to the case that a lot of people have looked at that I just want to quickly address. The Department of Transportation joined the DOJ in blocking this merger, which, you know, was unprecedented. I think it's the first time they've ever tried to block it is yeah a lot of people when you bring this up will say look this government hates mergers hates big companies they're the department of transportation doing this it just shows they will use every tool in their toolkit to block this merger

this merger this merger is never going through no matter what do you think about the DOT trying to block this murder yeah so just to kind of set the stage so it's it all stems from a mid-2021 executive order I think it was executive order 14-036 that was saying we have this whole government approach to trust. Like every, you know, all hands on deck. It's not just DOJ and FTC anymore. Elizabeth Warren wrote a letter in September of 2022 to Secretary Buttigieg saying, hey, you actually have this power. You didn't even know that you had. You can block the transfer of certificates. So these airlines get certificates that allow them to fly these routes. And Elizabeth Warren was saying, you don't even know you have.

have this power, but you have this power that when domestic airlines are merging, you can tell them we're not going to allow you to transfer that certificate to the new entity. Now, there's a couple of problems with this in terms of just authority and like statutory interpretation and deal structure. Deal structure first. So this is a reverse triangular merger. what does that mean? It means that the target company spirit will survive after the deal is closed.

The acquiring company drops down subsidiary, the merge the target survives. What that means is it's kind of unclear that the certificate needs to be transferred at all. The JetBlue CEO has said, like, we're just going to truck through this if the DOT threatens to, you know, block the certificate transfer, I think there's probably a very good justification to do that and basically just run them as separate entities. Now, that would prevent JetBlue from recognizing a lot of the synergies if they can't, you know, run their staff across all of their planes and everything like that. But it's a way to close the deal. In terms of the authority, so let me, let me pull up my notes and make sure that I'm quoting this correctly and

referring to the correct statutory item. So this authority in Title 49 of the U.S. Code, you have section 4115. It says certificates may only be transferred when. So what Elizabeth Warren is saying is you have this

affirmative authority. It is actually more powerful than the authority that the DOJ and FTC has. It says like you may only transfer the certificate when and it lists a few things. One of those things is that it has to be in the public interest. It says, what, certificates under 4112, yada, yada, yada. Anyway, it has to be in the public interest.

It has to be in public convenience and necessity. If you go to what does public convenience and necessity means, it has all of these things. It's section 40101A, if anyone wants to look this up. And it says, you know, you have to do this competitive analysis. I can tell I'm losing you already. Anyway, it says that you have to consider, you know, the competitive nature of this. There is an argument, however, that this power has never been used to block the transfer of a domestic airline certificate transfer.

It's only been used in the context of foreign routes. there is some particular language so that section 4115 also says you have to consider the foreign effect of all of this, which makes you think, you know, in a statutory interpretation realm, like they wrote this foreign clause in there, which obviously wouldn't apply to a domestic transfer. So does the public interest and necessity? Does that also apply to only foreign certificates? Or does that apply to domestic certificates as well? It's very unclear. I I think we would end up in a situation where, you know, JetBlue would close this deal. The Department of Transportation would say, come sue us if you want to get the certificate's transferred. JetBlue would say, come to us if you want to block this deal. I think it would likely close. But the moral of the story is, you know, I think there's questionable statutory authority in that, you know,

section 4115 certificate transfer. And, you know, I think the other kind of the last bit on this, there's a performance. at Harvard. His name's Jacob Gerson. And he has written greatly on the authority of agencies within the government. Normally there's what's called Chevron deference, which is you defer to an agency's own interpretation of their authority. Yeah. And he, you know, so there's all sorts of reasons why, you know, this is now an issue. But basically he has said, you know, in situations where you have overlapping authority. We should not defer to an agency's own interpretation of their authority. And so you have Elizabeth Warren saying, hey, you guys have this power. You never knew

existed. And, you know, the DOT's like, well, you know, we've never used it. You know, our own behaviors basically say that, that, you know, we only use this for foreign certificate transfer. But nonetheless, Pete Buttigieg is, you know, kind of looking to make a splash. He has said, I will, quote, beat up airlines. He's used this very kind of, you know, flagrant, aggressive language. And so I think, you know, there's a little bit of teeth in that the DOT might be willing to pursue it with what level of success. I don't know. I don't tend to credit that a lot.

And on top of all of that, you have Biden just nominated, this guy, Mike Whitaker, to lead the FAA. And he was a United exec back in the day. And he, you know, he was a big proponent of. of going from six airlines to three. And yes, Buttigieg is technically his boss, but he's kind of the guy in the aviation space now and he's been very pro-consolidation. So I tend to not credit the DOT argument too much,

but it is absolutely a factor that we need to consider. And now a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert

transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. I'm completely with you. I just, you know, if the DOJ loses here, I have a hard time believing the DOT is going

to stop this deal because, A, I think Jeff Lee will close around them. People don't like to be losers, they're going to get sued and I think they're going to lose pretty easily. Like, hey, didn't we just have a trial over this and like, what are you doing, DOT? And I think like, if you're Pete Buttigieg or whoever, you can read the room, be like, hey, do I really want to go to trial and be like, yes, a court has already said that this merger is not anti-competitive, but I want to keep jet blue, which is like, kind of liked as an airline from buying spirit, like, which is the butt of every joke. Do I really want to do that? Get hauled in front of Congress to explain why I'm stopping this merger with like extra. ordinary powers, like, I don't, I don't think it's a good deal. All right, actual last question then we go. Yeah. Settlement. What do you think the odds of settlement are here, right?

The trial is scheduled to start October 16th. As you and I have discussed, the trial will run through mid-November. I'd expect the ruling by the end of this year. Could there be a settlement between now and then? It's possible. I kind of doubt it. I think, you know, going back to steering the ship of stare decisis. It's kind of like this, this is the best case that the DOJ or FTC have brought in in a while or one of the best cases. So I think they're willing to take a swing at this. I wouldn't rule it out. I'm pretty confident that they've been, you know, having these ongoing discussions. But I think DOJ is probably more likely than not willing to go to the mat. I do think, you know, there's a quote, I think it was like yesterday or the day

before from Lena Khan and again FTC not DOJ but you know I think her quote was like it's not our responsibility to figure out a deal that works like like basically saying like you know it's not our job to like negotiate this very complicated settlement like it either is anti-competitive or it's not and so you know again that's FTC not DOJ but I think you know given the kind of cross-pollination there of ideologies I think you know they're more than willing to take this one through trial. I thought there was a decent chance of settlement before JetBlue announced the most recent divestures because you could have this nice little press release that said, hey, divesting all problematic markets, we keep JetBlue basics, we're going to expand

the JetBlue effect to XXX. Now, what's the headline now? You know, like after they've already agreed. Now, I do think, you know, if I go back to this was FTC, but Horizon Amgen, FTC started seeing how like the pretrial motions it wasn't going to be pretty for them and they settled. and if I go to Spectrum Brands, they had a DOJ case earlier this year, and the DOJ, you know, they went in the courtroom, they saw what you and I did, and they saw that they were getting beat in the courtroom pretty badly, and they settled with Spectrum Brands. So I don't think a pretrial settlement was possible, but if you went and, you know, the first week happened and they saw that the judge was like, hey, we've got the divestures, we've got, the Northeast Alliance is gone, we've got the divestures. What are we arguing about here? I think you could see a settlement then, but I'm with you. I think they want to take this to the mad. unless it becomes pretty clear that there is, the mat is going to get taken. I absolutely agree. So, yeah, you know, trial set October 16th. We didn't talk about government shutdown, but, you know, there's a chance that gets delayed.

I don't think there's a situation where, like, government shuts down the day before they say, like, let's just start the trial and then risk, like, having to stop the trial if they kind of, like, run out of funds, so to speak. I told you before. I did some research here. Government shutdown, courts can run for two to three weeks and a government shutdown. So if you're talking to trial, if you're talking, but the government shutdown would happen in October, I think, October 1. So if you're talking a two-week shutdown, then this trial is on. But if the shutdown is still going on October 16th, that's about when the court shut down anyway. So if the shutdown was a really long one, the trial could get delayed. Yeah, so I think that's it. You know, it's like, I don't think the court, if it's still shut down, I don't think the court is going to start the trial thinking, like, oh, we might have to stop on day three. It's a four-week trial, like, 70, total hours, chess clock rules, you know, just you get however much time you want for each witness, tap the clock when you're done kind of a thing. And so, yeah, I don't see them starting the trial if that is a looming threat or, you know, a threat that is hanging over the trial

from the start. I do think you're right, though, like you could easily see a settlement mid-trial. I don't think you see a settlement before October 16th. With Twitter, obviously you and I could listen to the cases live. With the FTC versus Activision, you could listen to the cases is this case going to be live streamed or do you think we'll have to head up to Boston to hear it in person? That's a good question. I don't know. I would suspect it would be available given the amount of interest. I would suspect it'll be available via some audio stream. I am happy to look into that and make sure that is on my... That was my suspicion as well, but I did talk to someone earlier who was like, oh, I don't know, Massachusetts federal court. Like, I don't know if they're going to live

stream. So I don't know. Anyway, Lionel, this has been fantastic. People can probably tell we love this because we've gone on for at least an hour. I can talk about this for another three hours, but I'm with you. Look, to me, like, as I said, 30% chance to me, to you, I think it's way over 50-50. You don't get those odds a lot. The case is just fascinating and even excluding of that. But again, I'll include a link to Lionel's write-up in the show notes. If people can go kind of read that in the written form if you want to see it there.

It's been great. And I'm looking forward to having you on again. Awesome. Thank you so much. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Thanks.