Airline Stocks, Bitcoin ETFs, Babies

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The FAA has to tell the airlines, and in our case, United and Alaska, who are the two U.S. airlines that fly the aircraft, what they're supposed to do in terms of the fix. Both airlines found loose bolts on other aircraft that have to be repaired.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Helane Becker. She's a veteran airline analyst now at TD Cowen, and she's talking about loose bolts, which are newsy at the moment. But bolts weren't the main point of our recent conversation. In a moment, you'll hear from Helane about the setup for airline stocks in 2024. I'll explain why one analyst called this year one of the most consequential in airline history. But first, I'll babble for a few minutes about Bitcoin and mortgages. Listening in is our audio producer, Jackson. Hello, Jackson. Hey, Jack, do we start with the Meta Twins? Get right to the Meta Twins.

Meta Twins activate.

Indeed. Now, this falls under the category of answering listener questions. We've gotten this one a bunch. People say, what happened to Meta? Meta, of course, is your counterpart. She's the other audio producer that's been on this podcast, and she left a few weeks ago. Now, in an episode, I said, let's give a hint. And the hint I gave was, double babies.

That was the hint about why she was leaving. And I kind of thought that that like spilled the beans, but maybe people didn't hear that hint, or maybe they weren't sure what it meant.

Um, Meta has had twins. Meta has had twin A, twin B, from the looks of the photo. And she sent a photo and I saw it. And, uh, look, I'm gonna score them on a handsome scale. I'm giving them a 20 out of a 10. And that is not a combined score. I'm giving each one a 20 out of 10 individually. Congratulations, Meta and her husband and her first son, who I'd like to point out was also born during this podcast. Quite a fruitful podcast.

I gotta get outta here.

You know what that means, Jackson.

You're sounding like my grandmother.

Okay, so now we're gonna segue smoothly to, uh, to Danish mortgages or to Bitcoin? Let's do Danish mortgages. Remember, Jackson, in a recent episode, maybe last week actually, we were talking about mortgages and how a lot of people have fixed, uh, mortgages at these low rates, let's say 3% or less here in the US, and that rates had shot at one point up over 7%. And, uh, so those people are staying in their homes because they don't want to lose their mortgage rate, and And we said it would be nice if there were a mechanism by which people could sort of refinance those mortgages at higher rates in exchange for some sort of cash infusion from the bank for doing that, right? They could lock, they could capture the value of timing on their mortgage rate. Well, we got an email after that from a listener named John, and he points out that there is such a thing. It exists in Denmark. And The Economist writes about the product. There is no problem of locked-in homeowners because a seller can end a mortgage by buying it back at its market value which falls when rates rise, thereby cashing out the value of their interest rate fix. So you see, Jackson, we haven't come up with anything new here. We're a couple of steps behind the Danes. That's not a callback to your having kids compared with Meta's count.

Oh gosh.

Are we ready for Bitcoin, right?

Please.

$46,000-ish. As I'm looking now, it was up over $47,000. The news this past week was that the SEC made a landmark ruling. It approved the first-ever spot Bitcoin ETF. So now if you want to invest in Bitcoin, you don't have to open some weird crypto wallet. You don't have to buy something funky that tracks futures, which may or may not be be accurately tracking the spot price of Bitcoin. And you don't have to build a supercomputer in your basement and dim the neighborhood lights while you frantically mine for Bitcoin yourself. You can buy just, uh, just like you would an S&P 500 ETF. You'll soon be able to buy shares of a Bitcoin ETF. There will be a lot of them soon. 11 applications for them were more or less immediately approved. They will be cheap, some of them anyhow. Uh, BlackRock plans to charge 0.12% as a fee. That's pretty cheap, but it'll rise to 0.25% after a year or once the fund reaches $5 billion in assets. Okay, so forget all that 10th of a percent stuff. What people want to know is what happens to Bitcoin from here because of this. Can I make 400% on my money by Easter? And the answer is 400% and Easter specifically, it's probably a tall order. But Deutsche Bank, for one, thinks the price is headed higher. We should point out that starting this past September 9th, Bitcoin shot about 80% higher on expectations of that SEC approval. So some of this is already priced in. Deutsche Bank says, and you can see if you agree with their reasoning, they say there's 3 reasons to think that Bitcoin might go higher from here. First of all, the approval of a Bitcoin ETF opens the doors for greater institutional investment. That makes sense. Second, central banks' rate cuts in 2024 will drive more investors to invest in crypto for higher return. I mean, the reasoning there is a little abstract, but the idea is if you're getting a good return on your cash in money markets, maybe you're reluctant to give up your, say, 5% and put money in Bitcoin, which will yield zero, and roll the dice there. But if rates fall and you're no longer getting that 5%, maybe you're only getting 2%. Well, maybe you're more likely to give up that 2%. It's a, it's a lower opportunity cost of leaving your money market and buying some Bitcoin, that sort of thing. And there's some precedent there because Deutsche Bank points out, as the governments were pumping billions into economies through successive stimulus packages, that's back when Bitcoin topped $65,000. So we'll see. Its third reason is that comprehensive regulation is on the horizon. It says The EU Markets and Crypto Assets Regulation, or MiCA, will come into effect in 2024. I'm not sure how I feel about that, Jax. Remember we had the fellow from Research Affiliates on here who was basically saying about Bitcoin that the worst thing that could happen for the price is that the promise of it becoming a valuable utility or currency is one day fulfilled. Once it's actually doing a job, it becomes more boring. It has less sort of open-ended potential and there's less hype and then the price doesn't run up. And he says, really, the reason that people are buying is for the price, not because they think it's the future of money. That was his thinking. I think with regulation, it's kind of like, doesn't Bitcoin have to be a little bit naughty to keep going up? Once there's regulation, doesn't it become— doesn't it become less naughty? I think that Bitcoin needs to never grow up for the price to keep rising. But what do I know? I realize, of course, that's flippant speculation, but you know, it is a currency that was conjured out of thin air like a dozen years ago. So I feel like my flippant speculation is as good as someone else's overly mathematized analysis. What say you, Jackson? Higher or lower?

It takes the fun out of it if you know your account isn't going to just disappear one day.

That's— you're saying you got to keep that excitement alive. Okay.

Yeah.

Now, is that it for the preamble? We covered the Meta Twins, the Danish mortgage, we talked about Bitcoin, and time for airlines. Yes.

Yeah, we got to segue to airplanes.

Well, as you know, I don't do segues. I do awkward transitions. We should acknowledge the news that everyone's watching. There was an Alaskan Airlines flight where— what do you call that thing? A door plug, right? That's when you have—

that's a word no one knew before this week, but It's where a door would go on an airline, but you don't need a door there.

So you put a plug instead, which is just supposed to close the fuselage. Well, one of those seemed to have removed itself from an aircraft in transit and it dropped into an Oregon backyard. Do we say Oregon or Oregon?

I think the bigger problem here is the piece of plane in the yard.

Just don't— just don't drop a door plug on them.

Yeah.

So this is, you know, we don't mean to make light.

The—

all of the passengers survived thanks to the great work of the captain and crew there. But this is a big problem. The aircraft involved was a Boeing 737 MAX 9, it's called. And so those have been suspended. They're grounded for now while there's an investigation about what went wrong.

And when they come back, I'm going to think twice before booking a seat in 26A or F.

Listen, this is a serious— you do not want to make light because you never know. You never know.

By the time this podcast airs, let's hope that there are no more door plug issues. I think they're talking about loose bolts and need to maybe address some of the bolts. We'll see. But this is— but this is a problem in that you have planes grounded that should have passengers and they should be raising revenue now and they're not. The expectation is that this will be a relatively quick fix. It's nothing like the earlier and much more serious issues on the 737 MAX concerning the, the auto—

the maneuvering characteristics augmentation system.

Yes. The thing that you said. Now, there's some good news here for the legacy carriers. Their shares underperformed the market over the past year and they got hammered this past Friday after Delta issued a profit warning. But flight demand was expected to collapse during the second half of last year, and in fact it accelerated. These legacy carriers are also solidly profitable. They're expected to remain profitable now in up cycles and down. And there's reason to believe that the stocks are cheap. Morgan Stanley pointed out recently that the largest airlines last year were only down 19% from pre-pandemic 2019 on profits, but their market values were down 61%. In other words, the stocks aren't getting credit for the progress these companies have made on their profitability. But that's because what investors really seem to wanna see is, are these airlines going to hold the line on capacity? Are they gonna restrain capacity growth so that it doesn't run ahead of demand growth? Like it has so many times in the past. Morgan Stanley says this will be one of the most consequential years in airline history. They say the market, now that we've gotten past the pandemic and its aftermath, that the market can, quote, finally settle the debate on whether capacity growth can match demand or whether old bad habits will creep back in. And they say if management teams can make good on their promise to restrain capacity growth, then, quote, a broader base of investors are likely to return to the space and reward the stocks with historical multiples. That sounds pretty good. Morgan Stanley recently upgraded American Airlines to overweight from equal weight. They say it's lagged behind its peers on getting some recognition from investors. They say that's because of a high debt load, but that management is dealing with that. And they point out that American plans an Investor Day during the first half of 2024. They say it hasn't had one of those since 2017. So maybe it has some good things it wants to talk about, or at least it wants to lay out its vision for investors. Maybe that'll help the stock price. B of A Securities recently upgraded United Airlines Holding to buy straight from underperform. That's a, that's a twin upgrade. That's what the industry calls a double baby upgrade. No one calls it that. They say that United's high exposure to international travel has paid off nicely of late. We'll hear more from Helene about that. There's also an efficiency program going on. The company has historically had too many planes with low seating capacity, which is bad for efficiency. It's going on this massive years-long buying spree for new planes, which is going to increase its number of seats per flight. That'll be good for efficiency. It will really constrain free cash flow probably for years, and that's a risk. But, but BofA basically points out the stock looks too cheap. They say it's in the bottom 25th percentile of its historical valuation. So that's BofA on United. And I'll just point out that JP Morgan also calls United its top idea for the year ahead. They say that on operational reliability, it has eclipsed the longtime leader Delta. So I'm intrigued by all these upgrade notes. The price of fuel is way down since mid- 2022. That's good news for airlines. There has been a sharp divide, a bifurcation between the premium airlines and the low-cost carriers. The low-cost carriers are really struggling right now. Most of them weren't profitable even during peak travel last year. But premium seats seem to be selling well. International travel is selling well. And I wanted to speak with Helane about those topics and how investors should position themselves in the year ahead., and we'll get to that call in a moment right after this quick break.

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Welcome back. We're talking about airlines in the year ahead. Let's get to my recent conversation with TD Cowen analyst Helane Becker. So what does the airline business look like in 2024? What is demand going to look like? Presumably everybody got their post-COVID revenge travel out of the way. And, and so where are we, uh, what kind of situation are we in now? And what about supply? How are those two gonna match up in the year ahead?

So year to date, we're up 10% on, um, airline traffic on numbers, you know, people through TSA throughput. So we're, we're definitely starting off very strongly. You would normally expect the first week of the year to be pretty good though. Um, for two reasons. One, not everybody goes away the week between Christmas and New Year's. Some people go away the week before and some people go away the week after. Um, but we've seen pretty good traffic between Thanksgiving and last week, and we expect that for the next 5 weeks we won't see such good traffic. And then in mid-February around President's Day weekend, it will pick up again. From a capacity perspective, which you specifically asked about, we're expecting that capacity will grow, but probably at a lower rate than demand. We think that in 2024 in general, we'll see mid-single-digit traffic growth. So somewhere around, let's say 5 to 7%, or 4 to 6%, somewhere in that 4 to 7% range. But capacity, we'll probably see under 5% growth. And, and that's for a couple of reasons. One is the lack of air traffic controllers, experienced air traffic controllers, and the fact that the FAA has asked the 4 big airlines serving the New York area specifically to cut their capacity by 10% through October of 2024. And then, um, the MAX 9 grounding obviously isn't helping this week. We expect it to be back in service probably within the week, but the FAA has to tell the airlines, and in our case, United and Alaska, who are the two US airlines that fly the aircraft, what they're supposed to do in terms of the fix. Both airlines found loose bolts on other aircraft that have to be repaired. But in general, we have supply chain issues. Airbus and Boeing, while they're starting to catch up, we think they'll they'll probably fully catch up in second half '25. But '24, we think there'll still be delivery delays and that will limit capacity growth.

That 737 MAX issue that you mentioned with the bolts, does that, does that have a big impact on United and Alaska?

It has a bigger impact on Alaska than United. It represents 9% of United's fleet, but United has aircraft that they can backfill. Aircraft with. Alaska, it represents 31% of the fleet and they don't have the aircraft to backfill with because you may remember or not that they eliminated the A320 and the A321 fleets that they had acquired from Virgin America.

What's the profile right now of a thriving airline? What, what are, what kind of exposure do you need to have? What do you need to be doing different from the others? Who's doing the best and why?

That's a good question. So to be a really good airline or to be perceived as a really good airline, you have to consistently deliver a good product to your customers. And by that, I mean you have to be on time. You have to be reliable. If there's weather-related events, you have to notify your customers well in advance, whether it's a day or half a day, but before they get to the airport that they're going to have an issue with their flight. And if you think they're flying into a storm, you need to talk to them about rerouting them. The thing about airlines that I never could understand, and I've been doing this, Jack, for a long time, I admit to more than 40 years, but less than 50. And airlines have so much information about their customers. And when you have a customer that's going from point A to point C over point B, they don't really care how they get to see, do they? If they're— let's take an example. Fargo, North Dakota, going to London, England. Do they care whether United connects them over Chicago or Newark? No, they don't. They care that they get to London when they're supposed to get to London. So why not notify the passenger, hey, if you take this flight to Chicago to connect to our London flight, You're going to run into, or you may run into issues because of weather in Chicago today. However, we can get you to London tomorrow as promised if you're willing to take this flight to Newark that may leave an hour earlier or an hour later. And we can guarantee you that you're not going to run into the same issues because that storm that's in Chicago today won't be in Newark until tomorrow or the next day. And I never understood why airlines don't do that proactively. Delta is starting to. United has started to do that. I think that goes a long way towards customer satisfaction. And I think that's what you have to do as an airline. Really be mindful of your customers' time.

I've seen in some of the Wall Street research some people turning a little more positive on United. And so I wonder, first of all, where do you stand on United? What do you think is— what do you think people are seeing there that they like? And, and, and if you could also give, give me a sense of which stocks in the industry you're, you're positive on right now.

Yeah. So United was our top pick for 2022 and 2023. And a lot of that was because we saw that strong demand in the domestic US market in 2022 shifting in 2023 to international strength, especially in the North Atlantic. But our best idea After 2 years of United is Delta. And that's in part because like United, they have a very large Pacific footprint. They have great hub partners in, in KLM and Virgin Atlantic and Air France. They also overfly into leisure destinations. They deliver a great on-time product. Atlanta has been a good, has been a good connecting hub. So those are the reasons we, we like those two in particular, we've noticed that American has been getting a lot of love in the past couple of weeks as people have upgraded them to buys or strong buys from holds. And I think one of the reasons, or maybe two of the reasons for that, is American deferred some CapEx this year. They deferred delivery of 10 787s in part because they couldn't get enough captains. They couldn't get enough pilots to shift from the right seat, the copilot seat, to the captain's seat. And they're improving their balance sheet versus United, which announced a $60 billion— $60 billion with a B— CapEx program from 2023 to 2032. When you do the math, that averages to $6 billion a year, but it's $24 billion over 3 years. The first 3 years, '23, '24, and '25. Or about $8.5 billion each year.

You see, this is why I don't go into the airline business. If I spend $8 billion on planes in a given year, my wife would be furious with me. But I, but I wondered, like, there's this perception among investors— I've heard it for years— they say, well, airline stocks, you know, they're good for a trade now and again, but they're not really long-term holdings because eventually there's, I don't know, there's price wars or there's just so much capital spending or whatever. Is that what's your perception of the industry? Has the industry changed? In a way that can make some of these companies structurally more profitable for longer? No.

Right? In a word, no. In fact, my mom of blessed memory used to ask me why I was so negative on airlines. And I said, I'm only wrong an hour a year. And so, I think what tends to happen with airlines is that they do well and people pile in. And then they have a bad number and people pile out. And it tends to be, to your question, a trade more than a buy and hold. And I don't know how to think about it. I mean, I've been doing this for so many years, for 40 years, and it's never really changed. And the movie doesn't end well. It kind of is on repeat. I always jokingly say there's only 3 places Americans go: South Florida, Las Vegas, and Southern California. I mean, I know they go other places, but that's the main— those are the 3 main locations domestically. And what happens is startups tend to go northeast, specifically New York to South Florida, and then they'll add Las Vegas, and then they'll add Southern California. And what happens is all the capacity, air quotes around all, go into the market and fares come down. And then when we've sort of gone through all these cycles of ups and downs, No pun intended. The airlines tend to price to the weakest competitor. So instead of segmenting the business, which I think they should do, and saying, look, we are Delta, American, or United, we deliver this amazing product to our customers and we should charge more than Spirit, Allegiant, or Sun Country, which also delivers a great product to their customers, but it's a different customer. Marriott does it. International Hotels Group does it. Hilton does it. They have different brands, right? They have the Marriott brand, for example, has Courtyard. They have Ritz-Carlton. They have Marriott. They have Westin, Sheraton. I mean, they have a lot of choices. And as a customer, I can pick the experience I want. Why shouldn't that be the same on airlines? But that's not what happens. They say, oh, well, this person wants to fly from Fort Lauderdale to Philadelphia and Spirit is in that market and therefore we're going to charge that person $39 for a flight that they should charge $250 for or $150 depending on, you know, capacity, time of year and so on.

The JetBlue Spirit deal, is that gonna happen or no, do you think?

Well, I don't know. When they first announced it in April of 2022, I thought there was no chance the Justice Department would approve it. So it was nice to be right about that. Um, I understand the judge will render his decision pretty soon. We are thinking second half of January, probably the week of January 15th or 16th, the third week of the, of the month. I understand from talking to a bunch of people that he's working on his decision with an eye towards what precedent he's going to set. So sometimes judges will. Talk to their colleagues about it. And I think that's what he wanted to do. But all of that aside, I think he's going to reject the deal and rule in favor of the DOJ.

Does that put either of those companies under pressure, you know, going forward over the next couple of years?

Yeah. But, you know, by the way, I don't think JetBlue will be too unhappy. Frankly, we think Spirit, which just raised $419 million in cash through selling aircraft and leasing them back. So that's a whole, I mean, not to dumb it down, but the whole industry of leasing aircraft, kind of like you would lease a car, only they lease the aircraft so they don't have to buy it. And it's a whole balance sheet decision, which by the way, we put on balance sheet. Anyway, Spirit raised $400 million and that would argue for them providing their own DIP financing and being ready to go into Chapter 11, which by the way, to be really bearish here, we, we think if they go into Chapter 11, they won't come out. And there are a lot of reasons for it. I don't know that we have time to discuss each one, but one of the reasons you go into Chapter 11 as an airline is you get to renegotiate your labor contracts and you get to renegotiate your aircraft leases. Well, in Spirit's case, they lease almost all their aircraft now, especially with the transaction they did in early January. So the idea that they would have capital to go in, there's no guarantee the lessors would renegotiate the leases, especially because demand for narrowbody aircraft remains very, very strong worldwide. So I could see lessors pulling the aircraft out of Spirit and maybe they don't even stay in the US. I think JetBlue would want some of those assets, but I also think those aircraft could go to India. China, Brazil, elsewhere in the world where there's very strong demand for narrowbody aircraft.

Who are your other outperforms? You still like United. You prefer Delta. Who are your other outperforms?

Copa, which is a Panamanian-based airline. We love Copa. They're an all-737 operator. They do have the MAX 9. They're based Panama. And, and Panama, the Tocumen International Airport is sea level airport. So compared to other airports in the region, it doesn't ever take a penalty for being, um, like Bogotá or Mexico City would be high and hot airports where in the summer months you can't fly a full payload and probably lose money on some of the deep South American flights that they're flying. But that aside, Panama uses the US dollar. People forget that. They have a very well-educated local population. They've got about 150 or 160 multinational companies headquartered there because Copa delivers such a great product to, um, its customers. Uh, so they're another outperform. Further afield, we like Sun Country, which is an ultra low cost airline based in Minneapolis. They're relatively small, 30-some-odd aircraft. They fly 10 planes for Amazon. So about 13% of revenue comes from that. Another 20-ish percent of revenue comes from flying charters like NCAA sports teams, casino charters. So they got about a third of their revenue from non-scheduled service and that that's profitable flying for them. So we like Sun Country and we like Alaska Air and we're getting a buying opportunity here. We think Alaska's a really well-run company with a great management team. Those are probably our top 4 or 5 ideas.

Elaine, I, I always enjoy speaking with you. I've learned a ton. You've been generous with your time. Thanks a lot.

Thanks, Jack.

Thanks for having me. Spirit Airlines did not return a request for comment. Chief Financial Officer Scott Harrelson, in an earnings call last year, said, our team is resilient and nimble, and we are committed to returning Spirit to sustained profitability. Thank you everyone for listening, and thank you John for sending your note about the Danish mortgages, and thank you to the Meta Babies for brightening our day. Jackson, anyone you want to thank?

I want to thank all the bolt-tighteners out there for working overtime.

Is that a— that's a door plug reference, is it? Maybe. Is it a— is it a heartfelt one?

It's heartfelt.

It's not a sarcastic one. Good. Yeah. I would like to point out that air travel remains one of the safest forms of whatever, whatever. Jackson Cantrell is our producer. You can subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. And if you listen on Apple, you can write us a review. See you next week.

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