David Trainer of New Constructs and Ian Weiner of Wedbush debate whether airlines are improving structurally or just cycling. Trainer favors Southwest and Delta, citing lower ticket costs and higher load factors as secular gains. Weiner warns that rising labor costs and cyclicality make the sector risky.
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Joining us now to debate it are Ian Weiner from Wedbush, who's staying away, and David Trainer from New Constructs, who is buying the airlines. Welcome to you guys. Ian, I'll just start with you because this is a day filled with optimism about their numbers. Why are you not a buyer here?
Well, to quote another native of Los Angeles, Jack Nicholson, what if this is as good as it gets? At the end of the day, these are still cyclicals. There's not a secular shift going on in airlines. And so as you look out, you're going to continue to get costs going up for labor. They're not going to be able to raise fares as much. And you're going to see some increased capacity coming online. So at the end of the day, they look cheap, but that's how cyclicals always look at the top.
Nicholson also said you can't handle the truth. So, David, what is the truth about the airlines? Why, why, why do you like them here? Right. I think the truth is we are seeing a secular shift. The cost of flying has gone down dramatically over the years. It's dramatically more affordable as well. And we're seeing utilization rates or load factors higher than they've ever been. Think about all the technology and logistics that go behind flying and how much improvements we've seen over the last several decades in logistics and technology. So I think the, the airlines are more efficient than ever. They've got lower fuel costs than ever. And you've got an addressable market that's much higher than ever since the cost of flying is so much lower and people are wealthier than ever, too. So Well, the world is safer than ever as well. So I think we've seen some major macro secular shifts that make the environment for flying better than it's ever been.
And by the way, Ian, Berkshire seems to appreciate those characteristics. You want to be on the other side of their trade?
I don't know. There's been a lot of smart investors, even the Oracle, over the last 40 years that have gotten crushed in this space, more so than even people who own Dutch tulips. back in 1637?
You gotta go way back, I guess, to find— well, history's littered with examples of where there have been bad investments. And look, it's easy to go back and say they're cyclical. Well, times change, technology changes, businesses change, and I think the stocks look cheap and they're still a little bit cheap. Yeah, it's still a cyclical business. There's only so much room for, you know, flying and the number of people who can fly. There's a max there. The growth can't be perpetual.
But you just said it's secular. I'm saying it's cyclical, and I don't know where you're getting your data on people's wealth being higher, but 60% of this country doesn't have $500 in their bank account. I'm saying they look cheap because it's the top.
I think there are secular shifts underway. It's still cyclical business, yes, but there are cyclical shifts that mean that we're not at the top of the current cycle. And I believe that it's hard to argue that the American— the global population is more wealthy today than they were in 1970. Really, you know, what we're looking at in terms of the long-term sort of cyclical cyclicality of this sector. David, are they all created equal? Are you buying all the airlines or are some better than others? Never. And, you know, that's, that's the beauty of a market. You know, the leaders are the leaders and the laggards are the laggards. Look, Southwest is still the most profitable of all the airlines. Next is Delta. Those are 2 we'd recommend buying. If you want a smaller-cap name, we like Hawaiian Airlines, but there's risks there that one of the big players could get into their market. We don't like— of the big players, we don't like United because they've got the lowest returns on capital. But for the most part, yeah, we like a lot of the names. But then there's, there's a few dangerous ones out there where we think expectations have gotten too high.
Ian, same question to you. How would you describe who's kind of better and worse positioned throughout the sector?
I mean, honestly, I don't think You know, there's that much differentiation right now. Either you believe that there's a secular shift in this group or you don't. I don't believe there's a secular shift. I think they only look cheap because they always do at this level when it's the top. And I don't think it matters which one you short. They're all owned by Buffett anyway. Just pick your poison.
Ian, let me ask you about the pricing that seems to be helping their results lately. This whole thing about basic economy and different ways of slicing and dicing the fees to ultimately get people to maybe shell out a little bit more. Is that at least working? I mean, I can say personally, I feel like I've paid extra to get premium economy lately or whatever that means. I think it's extra foot space and maybe a bag of pretzels. Is that an important enough and lasting enough shift to improve their economics for you?
No, because the second derivative of that is already decelerating. And the bigger impact is going to be these labor costs. I mean, they're going to go through the roof over the year over year starting at the end of this year. You know, that to me are the issues for margins. And that to me is where you want to be selling these stocks, not buying them here. David, you've made your reputation poking holes in business models.
What, what could go wrong with your premise on airlines right now? Well, you know, I think Ian brings up a fair point. Labor is certainly one of the largest, if not the largest expenses, variable expenses for airlines. And so if it suddenly spikes, that would be an issue. But I don't see the likelihood of that being so, so high just because, look, they all just came through restructurings where they had to deal extensively with their labor unions. And in many cases, the labor unions put them in bankruptcy. So the fact that they would set themselves up so soon after bankruptcy to, you know, experience a similar problem doesn't make a lot of sense to me.
All right.
Good discussion, guys.
That was great.
Thank you both. Ian Weiner, David Trainer, good to see you.
