Hello and welcome to David Bonson's Capital Record brought to you by National Review, where last week we did a podcast making the case against the United States government rescuing Spirit Airlines and talking about the irony of the fact that it was the United States government that essentially took away what would have been a wonderful solution for Spirit Airlines, which was a private market merger whereby JetBlue Airlines had offered to acquire Spirit Airlines. The Biden administration sued to oppose it, and ultimately, on antitrust grounds, that merger never happened. And then now, through continued worsening conditions in the very impaired business that was Spirit Airlines, it resulted in a full-blown Chapter 7 liquidation bankruptcy over the weekend. And that means, as you can probably deduce, that the government did not bail out Spirit Airlines. And I'm quite certain that's because everybody involved was listening to David Bonson's Capital Record podcast. or actually because Secretary Lutnick had made the offer to actually pretty much do exactly the deal that had been laid out, a deal that I obviously very much opposed, which was a $500 million rescue package from the taxpayers, a loan to Spirit Airlines to get them through this pure liquidity issue that would be then accompanied with 90% of the equity of the business in the form of warrants belonging to the United States government. And bondholders, current creditors, who would have been crammed down by that, opposed it, I think for very good reason. And that deal did not happen. So now they go to chapter seven bankruptcy, a liquidation where the creditors will attempt to sell off the planes and parts to get back some of the money that they were owed. They will obviously take a major loss in a lot of the monies lent. and Spirit Airlines will be no more. Why am I talking about this again? Why am I spiking the football that we didn't do a taxpayer bailout of Spirit? No, I am certainly not. And I can understand the administration's desire to say we don't want to see an outcome that is going to lead to 14,000 job losses or take away a low-price consumer option or something like that. And for all the reasons I talked about last week, I don't think any of those things were compelling enough to violate basic free market principles that, by the way, most certainly, in my humble opinion, would have resulted in a lot more money being at risk for the taxpayers than just $500 million. dollars. But the reason I want to talk about it is that many have decided, well, you know, if JetBlue had gotten to buy Spirit, it isn't that that would have been a private market solution that avoided this problem with Spirit Airlines. It would have been a private markets disaster that would have been compounded now into two companies. The JetBlue would have gone out of business in addition to Spirit Airlines. And it reflects a, well, for some people, not all, some people, a reasonable good faith and inaccurate reading of the situation But it also is riddled with certain fallacies and certain misunderstandings that need to be unpacked because those of us that want to kind of continually make the case that government interventions distort and dislocate and misprice and misallocate and that private market solutions, which sometimes still lead to pain and suffering because there are losses, there are bad decisions, there are unfortunate circumstances, but that they are superior outcomes to government interventions. That sometimes we have to look at these things in a way that allows us to see the big picture. Would JetBlue Airlines be declaring bankruptcy right now if the Biden administration had not blocked them from acquiring Spirit Airlines? My answer is an absolutely unwavering, high conviction. In my opinion, clear as could be, no, they would not. JetBlue is not in a great healthy position. Oil prices are higher and there is a lot of problems in the airline industry. They are levered. There is a net debt to EBITDA situation that's problematic, but is not to the scope of Spirit Airlines. But why is it that it is not simple enough to say, well, JetBlue has problems, and then if they added Spirit's problems that led to Spirit's bankruptcy onto their problems, it would have just been one bigger problem, and now two airlines would have gone down instead of just one. The reason is the invisible effects. What was it that JetBlue was trying to accomplish in acquiring Spirit? Why were their shareholders, their risk takers, their people with skin in the game of both the risk and reward interested in acquiring Spirit Airlines? That particular transaction would have created immediate scale in markets that each airline had been limited in. There would have now been scale in the areas that Spirit was limited in, the JetBlue was not, and then vice versa. And there were ample areas that were examples of both, including, by the way, in certain very key eastern United States airports. There would have been hundreds of millions of dollars of cost synergies that would have been able to be realized between shared maintenance, certainly purchasing power from their Airbus fleet, as well as various IT back office functions. And so now all of a sudden you say somewhere between $300 and $500 million a year of annual synergies that could have de-levered the combined debt profile of the company. You would have had a really easy optimization of the Spirit Airplanes. I don't want to get into the nuances. My company has been investors in certain aviation parts and not specific to airlines in the past, but it's something we've studied a bit, that understanding the kind of specifics of airplanes themselves, that basically JetBlue would have had the ability to convert a lot of Spirit's fleet into higher-yielding products, the same planes that could have had certain revenue conversions that would have been higher yielding if they were remodeled as JetBlue planes There a whole list of issues that were really opportunistic in this proposed JetBlue Spirit transaction Look the strength of Spirit if it had one was that there were a lot of price leisure travel customers that appreciated Spirit's model. JetBlue had more of a premium offering, but still a kind of mid-tier leisure travel. Neither were strong in the business travel space, but they could have played into each other's strengths to some degree and then benefited from better capacity, better pricing, and by the way, better access at gate-constrained airports. There were fundamentally key, strategically key airports identified where these things would have been realized. The combined company also would have had higher access to capital markets. You say, how do I know that? Spirit Airlines never got back to profitability. JetBlue had taken losses during COVID like everybody else, but then was back to a $300 to $350 to $400 million EBITDA range in some of the post-COVID years that Spirit was not able to re-achieve. JetBlue has high leverage, but they also have $2.5 billion of available liquidity between about $1.8, $1.9 billion of cash and easily convertible securities that could be converted to cash, giving them something in the range of $2.5 billion of liquidity. That would mean a different cost of capital for a combined debt structure and greater access for capital. It by no means would have been a risk-free combined company, but it would have been strategically, tactically, financially, economically superior than the two separate entities and certainly than Spirit left on its own. Now, let's just say that you don't accept this business argument, that you think JetBlue would have been a troubled situation and you were an investor in JetBlue when they made the offer to buy spirit. Or you were an investor in spirit when JetBlue made the offer. And you just felt that this was not going to end well for either company. You would have had every opportunity to sell and to not participate. You could have even voted against it. There's a number of things that you might have felt about it. But at the end of the day, do we believe it's Joe Biden or Elizabeth Warren or Pete Buttigieg's job, a judge, a FTC commission, an FCC commission, a DOJ? Do we believe it is governmental actors that don't have a dollar of skin in the game in either company that it's their job to dictate what is a good investment? Now, again, they could determine something's a national security risk. They could determine that there's other legal rationale to block a transaction. But stating it would have been bad business, it's none of their you-know-what business. The last people on earth I want doing investment analysis for me are members of the United States Congress, are members of the United States Executive Branch of Government, period, point blank. So to even suggest that the blockage of that merger might have been a good idea because they were trying to help from a bad investment is outrageous. And furthermore if the deal had gone through and then business conditions got to a point because it is a difficult sector There have been a lot of bankruptcies in the airline space over the years If fuel prices or any other catalyst had tipped over a levered company, the JetBlue spirit combination would not be in chapter seven liquidation. if the net debt to EBITDA leverage caused it to have to go into a bankruptcy, it would have been a chapter 11 reorganization where then creditors and bondholders would have taken some losses and haircuts, but the company would still be functioning. The airplanes would still be flying. The customers would still have access to travel. So the best case scenario that the people wanting to say, well, maybe JetBlue would have problems anyways, is that they would have faced a far more benign bankruptcy filing in the form of reorganization chapter 11, not a liquidation chapter seven. And everybody knows this. And it is none of the business of the governmental actors that would want to play the role of investment analyst. and it happens to, in both fronts, be almost certainly untrue for all the strategic and financial reasons I laid out earlier. This is the bottom line of the message of Spirit Airlines. A governmental body got in the way of a private market solution that, in the worst case of outcomes, would have been far better off than what we're now facing for consumers, for employees, for counterparties, certainly for creditors that now face far less recovery than an orderly chapter 11 of a combined airline with greater assets and greater access to continue flying in the great skies above our country would have enabled. This is a governmental policy failure in the midst of a very difficult and impaired business failure. No one is trying to suggest that because of Joe Biden, Elizabeth Warren, Spirit Airlines became a bad business. It was a bad business before. But they tried to protect a bad business by blocking a merger that would have really resulted in a much better business and business outcome than we got. And that's always going to happen when you invite excessive government intervention into decisions that are best left in the hands of free market actors. This is what we believe at David Bonson's Capital Record. Thank you for listening. Look forward to being with you in a couple of days. Please note, we have a very special Capital Record that we'll post on Thursday, where I will be interviewing the founder of Chenier Energy, the largest liquefied natural gas export player in the country, building the terminals that are allowing us to export our liquefied natural gas to Asia, to Europe, to other Latin American, North American countries. A very significant pioneer in the American energy independent story coming on Capitol Record on Thursday. Thank you for listening. Look forward to being with you in a couple of days. Yeah.
