Airline Stocks, Bitcoin ETFs, Babies | Barron’s Streetwise

Top analyst Helane Becker of TD Cowen talks air travel. Jack covers a Deutsche Bank crypto prediction. A Mette mystery is solved.

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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 hello and welcome to the baron

StreetWise podcast I’m Jack how and the voice you just heard that’s helain 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 Hela 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 metat 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 uh 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

Uh 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 beads 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 and twin B from the looks of the photo and she sent a photo and uh I saw it and uh look I’m going to score them on a handsome scale I’m giving them

A 20 out of a 10 and that that is that is 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 got I gotta get out of here you know 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 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 or some sort of cash infusion from the bank for

Doing that right they could 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 uh come up with anything new

Here we’re a couple of steps behind the Danes that’s that’s not a call back to your to your having kids compared with meta’s count oh gosh um are we ready for Bitcoin right please $46,000 uh as I’m looking now it was up over 47,000 the news this past week was that the SEC

Made a landmark ruling uh 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 uh 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 can 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 Black Rock plans to charge 0.12% as a fee that’s pretty cheap but it’ll rise to .25% after a year or once the fund

Reaches $5 billion in assets okay so forget all that tenth of a percent stuff what people want to know is what happens to bitcoin from here because of this can I make 400% of my money by Easter and the answer is 400% and Easter specifically it’s probably a toll order but deuts 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 deuts

Bank says and you can see if you agree with their reasoning they say there’s three 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 and 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 uh deuts 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 M Micah will come into effect in 2024 I’m not sure how I feel about that jackon remember we had the fell from research Affiliates on here who is 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 because 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 flipping speculation is as good as someone else’s

Overly mathematized analysis what say you Jackson higher or lower it it takes the fun out of it if you know your count isn’t going to just disappear one day that’s you’re saying you got to keep that excitement alive okay yeah yeah now is that it for the Preamble we

Covered the metat twins the Danish mortgage we talked about Bitcoin and uh time for Airlines yes yeah we got a segue to airplanes well as you know I don’t do Segways 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 seem to have uh removed itself from an 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 uh so this is you know we we don’t mean to make light the the the all of the passengers survived thanks to the the uh the great work of the captain and crew there but this is a big problem the the aircraft involved was a Boeing 737

Max 9 it’s called and so those have been uh suspended they’re 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 this no listen this is a this is a

Serious you do not want to make life because you know what right you’re right right you never know you never know but the by the time this podcast airs let’s hope that there are no more door plug issues I think they’re they’re talking about loose bolts they 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 in them 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 ious issues on the 737 Max concerning the uh 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 the market values were down 61% in other words the stocks aren’t getting credit for the progress these companies have made on on their profitability but

That’s because what investors really seem to want to see is are these Airlines going to hold the line on capacity are they going to 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 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 the 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 BFA Securities recently upgraded United Airlines holding to buy straight from underperform that’s a it’s a twin upgrade that’s what the industry calls a double baby upgrade now calls it that they say the United’s High exposure to international travel is paid off nicely of late we’ll hear more from Helen 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 in this massive yearslong 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 BFA basically points out the stock looks too cheap they say it’s in the bottom 25th percentile of its historical valuation so that’s BFA 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 mid2 22 that’s good news for Airlines there has been a sharp divide a bifurcation

Between the premium Airlines and the lowcost carriers the lowcost 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 helain 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 this quick break welcome back we’re talking about airlines in the year ahead let’s get to my recent conversation with TD Cowan analyst helain Becker so what does the airline business

Look like in 2024 what is demand going to look like presumably everybody got their post covid uh 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

Going to 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 things Thanksgiving and last week and we expect that for the

Next five weeks we won’t see such good traffic and then in mid-February around President 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 singled digigit traffic growth so somewhere around let’s say 5 to 7% or four to 6% somewhere in that four to 7% range but for 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 four big Airlines serving the New York area specifically to cut their capacity by 10% through October of 202 24 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 um does that have a big impact on United and Alaska it has a bigger impact on Alaska than United it represents 9% of of United’s Fleet but United has aircraft that they can backfill the 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 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 event you have to notify your customers well in advance whether you know 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 in 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 um 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 New York that may leave an hour earlier 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 nework until tomorrow the next day and I never understood why Airlines don’t do that proactively Delta starting to United is has started to do that um 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 um you know Wall Street research some people turning a little more positive on United and uh so I wonder first of all where do you stand on United what do you think is um 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 you Ed 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 two years of United is Delta and that’s in part because like United they have a very large Pacific footprint um they

Have great Hub Partners in in km and Virgin Atlantic and 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 to buys or strong buys from hold and I think one of the reasons or maybe two of the reasons for that is American deferred some capex this year they uh 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 co-pilot seat to the captain seat and they’re improving their balance sheet versus United which uh announced a 60 billion 60 with billion with a beat CeX program from 2023 to

2032 when you do the that averages to $6 billion a year but it’s $24 billion over three years the first three years 23 four and five or about eight and a half million dollars each year you see this is why I don’t go into the airline business if I spent eight billion on

Planes in a given Year my wife would be furious with me but I but I but I wondered like there’s this perception among investors I I’ve I’ve heard it um for years they say Well Airline stocks yeah 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 um in

Fact my mom of blessed memory um 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’s it tends to be to your question a trade more than a Buy and Hold and I I don’t know how to think about it I mean I’ve been doing this for so many years for you know 40 years and 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 three places Americans go south Florida Las Vegas and South Southern California I mean I know they go other places but that’s the main those are the three 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 fairs come down and then when we 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 um and saying look we are Delta um American or United we deliver this amazing product to our

Customers and we should charge more than Spirit Allegent or Sun Country which also delivers a great product to their customers but it’s a different cust customer Marriott does it international hotels group does it uh 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 Weston shtin 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 the JetBlue uh spirit deal is that gonna

Happen or no do you think well I don’t know when they first announced it um 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 15 or 16 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 check the DL and rule in favor of the doj does that put either of those companies under pressure you know going forward over the next couple years yeah

But you know by the way I don’t think Jeff blue will be too unhappy frankly we think Spirit um 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 in 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 disc 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 lores would renegotiate the leases especially because demand for narrow body aircraft remains very very strong worldwide so I could see lassor pulling the aircraft out of spirit and maybe they don’t even stay in the US I think jeffl would want

Some of those assets but I also think those aircraft could go to India China Brazil um elsewhere in the world where there’s very strong demand for narrow body 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 cop they’re an all 737 operator they do have the max 9 they’re Beast Panama um and in Panama the took human International Airport a sea level airport so compared to other airports in the region it doesn’t ever take a penalty for being um

Like Bogota 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 or0 multinational companies headquartered there because Copa delivers such a great product to um its customers uh so they’re another app form further a field we like Sun Country which is an ultra low cluster line Bas in Minneapolis um they’re relatively

Small 30 some OD aircraft they fly 10 planes for Amazon so about 133% of Revenue comes from that another 20ish percent of Revenue comes from flying Charters like NCAA sports teams Casino Charter 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 um and we like Alaska Air we’re getting a buying opportunity here we think Alaska’s a really well-run company um with a great management team those are probably our top four five ideas elen I I always enjoy speaking

With you I’ve learned a ton uh 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 harelson 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 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 canell is our producer you can

Subscribe to the podcast and podcast Spotify or wherever you listen and if you listen on Apple you can write us a review see you next week