Quick closing note on Spirit (SAVE)
Starting off 2024 with a heartbreak..
“Feel the pain, young Martin Luther King, with a dream
That one day me and my team, we can make it with this rapping
Now we swagging, making money in Manhattan, trick, what's happening?
They try to intellect with indirection just to test you
A rebel until my death, it's in my flesh, it's in my vessels”
Thoughts on Ruling
After a long excruciating lull period, Judge Young finally issued his decision. Having briefly gone through the ruling, I am engulfed in anger, not because of the money lost but rather, the profits foregone on what I thought could’ve gone the right way, perhaps in another universe.
Wading through “The Defendant Airlines’ Rebuttal” section (pg 81) onwards, I’ve been plagued with perplexity and here’s why..
As a refresher, antitrust law prohibits mergers that substantially lessen competition, and this of course is defined by the relevant market - a merger could substantially lessen competition for the Jacobson family living in New Jersey (for idiosyncratic reasons, perhaps maybe they are specifically reliant on a certain route and budget-constrained) but be perfectly viable for New Jersey as a whole (more routes, better value flights). In other words, the smaller the market definition, the easier to triangulate undue concentration and vice versa. Traditional antitrust analysis would attempt to capture the competitive intensity via traditional means i.e. HHI index, though in the airline industry, due to the mobility of assets and ease of entry, such traditional measures fall short - airlines reconfigure their routes frequently.
Judge Young was not shy in acknowledging this, reconfirming the dynamism of the airline industry and the low barriers to entry thereof. In the ruling, he explicitly stated that defendants have successfully justified the ease of entry (pg 85) and the likelihood of entry (pg 89,91) even going onto claim that the evidence of entry here is stronger than precedent successful merger cases; in support of the dynamism and fluidity of the industry, he discredited the Government’s market share data, citing dynamism as an impediment to obtaining accurate data.
The main issue Young seems to grapple with is whether Spirit’s presence could be sufficiently replaced in due time - a formidable task of proving no doubt. The reason for this is that Young seems to have a special relevant market in mind, arising from a Robin-Hood syndrome of sorts whereby he was anointed by heaven to protect the lower class of consumers (pg 105,106), which he simply cannot turn his back on or shake-off regardless of how hard he tries - specifically, a hypothetical consumer that would require a specific route and is budget-constrained - maybe a cash-strapped student intending to visit his/her family and can only fly the barebones fares (hey, if we add up the hidden charges then the price comparison is moot here) - rendering him/her a defacto “must-fly Spirit raw” customer.
This begs the question of whether Spirit’s presence can be replaced in time (for this customer) - of which Young seems to state his lack of confidence thereof, throwing out a barrage of numbers (gleaned from Dr Chipty, the govt’s expert, whom Young discredited the data of?) and glossing over the fact that legacy carriers feature a rapidly growing basic offering as well.
Of course, the right line of questioning from here would be that given Spirit’s flailing state, they may have to raise prices, or they may go under so the past is not indicative of the future. And it makes sense now that Young contemplated hard on this given the line of questioning in court but he seems to prefer not to make a call, preferring to “kick the can down the road” and perhaps let the passage of time be the resolution rather than extinguishing Spirit permanently via approval of the merger - he (arguably rightly) seems to hint that perhaps if Spirit does go insolvent, there are other acquirers anyway, perhaps Frontier could come for them then.
What makes me so mad about this decision is that the analytical points put forth by those who were long this arb were not invalidated (on the contrary, the Government’s data was invalidated) but rather justified - “the Defendant Airlines successfully met their relatively low burden”. Even Young acknowledged (pg 101), that there was strong evidence of pro-competitiveness by the combined entity and that consumers would substantially benefit, just not the subset of consumers he had in mind.
Reconciling the Young’s line of questioning in court, with his decision, the document reads as if the last 6 weeks of silence was essentially dedicated to the last 10-15 pages of the ruling; Young, in the final court day (in hindsight), had a mental-posture of deference to the lower consumer class and the government; he was clearly uncomfortable with a permanent injunction and was hoping to find a middle ground via remedies to remediate the pains inflicted on those who must fly Spirit, only for that idea to be nailed dead as the government stated explicitly that the only resolution is a permanent injunction against the merger.
Moreover, Young, set a dangerous precedent with the line of reasoning below:
If sufficient entry means protecting every consumer, in every relevant market from harm, then the burden is extremely high, rendering all future mergers to be enjoined in like.
Also, as pointed out by BluthCapital, Young, in remiss, cited Pabst as a precedent justification for enjoining the merger due to “substantially lessened competition in some of the relevant markets”. This is awkward because Pabst (nation largest brewer) tried to acquire Blatz (18th largest brewer) in 1958 which was blocked in 1959 (which is the case cited below), only for Blatz to go bankrupt the same year, and for said assets to be acquired by…… none other than Pabst the year after.
My current brief take on this seems to imply a rather biased-sloppiness in the decision (the application of case law and especially with the barrage of numbers at the end); it appears to me that Judge Young concurred with most of us analysts, that the government’s case was weak and that the merger passed the logic-smell test. As mentioned, this seemed to be a case of virtue signaling of sorts and Young wasn’t shy to hide it:
I could just imagine himself envisioning himself like this:
I don’t know if there are much lessons to take from this - one must always be careful of learning too much from your *mistakes* - other than this was a fat pitch turned skinny. The risk was that Young would dictate the case differently and regardless of whether it was a 30% or 40% chance, that outcome came to fruition.
It is also worth noting that the DOJ did not show much confidence in their case, especially with the Hail-Mary supplemental filings over the last few weeks so they’re probably trying to book celebratory dinner somewhere but hopefully the best restaurants are all too packed for last minute bookings.
The market seems to have digested that the key issue is tied to protecting the less affluent consumers (something quite left-field) and hence, HA didn’t draw down by much → this wouldn’t be a HA problem given HA is not an ultra low cost carrier. So those who were hedging this bet via a HA short would’ve walked away with nothing much to show for.
On the other hand, the wisdom of Buffett - to avoid airline investments - rings through once again:
“if a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
As a consolation, the current stock price of ~$8 is very surprising (thought it’d be $4), the sell-off in November was a massive market gift in hindsight (when I wrote about mustering the courage to double up).
Disc: no posn