Airlines are All-In on Premium Seating

Airlines are going all premium. Mly full hidden gems investing starts now. Welcome to Molly Hidden Gems Investing. I'm your host Tyler Crowe and today I'm joined by longtime full contributors Matt Frankle and Lou Whiteitman. So today we're going to test a little bit of what we call our baloney meters, whether or not what is going on in financial news media actually makes sense or not. And then we'll also of course hit the mailbag as we always do. But we wanted us to start today on the premiumification, if that is a word, if not I just made it up, of airlines. The reason that we're bringing this up today is that one of the lead stories in the Wall Street Journal was on Alaska Airlines basically really upping their game in terms of their first class cabin. And as we started discussing this in our channel to prep this morning, Lou also sent a a picture over of a United flight where their new cabin configuration was like more than 50% first class. And it does seem to be that this is where a lot of the airlines want to go is this we are pretty much a first class flyer and then you know maybe we'll toss in four or five econ economy seats while we're at it. And this is it, at least to me, it seems like a clear change in the way that airlines want to do their business. So guys, what is the business case for doing this? Because first class means fewer people. Fewer people, but hopefully more revenue, right? As usual in this industry, everyone's following Delta's playbook. And that is basically how this industry has worked since about 2008 when Delta went bankrupt. Ironically, they followed them there, too. But back in 2024, the Delta Investor Day, they said they are done treating upgrades as perks. They see them as revenue opportunities. And fast forward two years, today more than 3/4 of Delta tickets have at least one upsell. That could be, you know, just baggage or it could be economy plus or whatever. Um, so yeah, all of the full service airlines re are rejiggering their cabins. They're trying to give you more premium seats to sell. Uh basically every time they try this and they say can we sell this many and the answer is more and so that's what you're seeing. Remember an airline has massive fixed costs per flight. That plane costs X amount if whether there's one person on it or 280 people on it. Any incremental revenue helps there. You know once you decided you're going to fly the plane an extra 10 bucks is just revenue on the top. It's not just the premium guys. Southwest is doing their own version of it by charging for sea seats and charging for bags. Now, even Bill Frankie, the father of the modern discounter, says Frontier, which is an ultra discounter right now, even Frontier can learn from it. So, this is the way everyone's going. Yeah. I mean, you mentioned Frontier that the discounters are are hanging on for dear life right now. I mean, what happened with Spirit? I mean, even JetBlue, that's us that's usually considered a more of a discount friendly airline is is leaning into its premium product a little bit more. Uh, this does change the business model quite a bit. It kind of starts shifting the airline model to a commoditized business to a a real product ladder, especially for leisure travelers, which historically have not been what you see in first class. Uh, Lou mentioned Delta. Delta already has three different tiers of tickets for both of its cabins. And it's not just that they're trying to sell directly sell first class to, you know, travelers like me. Uh it's it's after you buy a ticket, they'll, you know, use dynamic pricing to offer you an upsell and even a little bit more incremental revenue on that, like Lou said, would help. I mean, I there have been times when I've upgraded for not very much money. Uh Delta's premium cabin, not only are, you know, three4s of Delta tickets now uh coming with at least one upsell, but the premium cabin now out earns the rest of the plane. Uh historically, that has not been the case. It's really a a a smart business decision, and I'm I'm surprised it took airlines so long to figure out you don't give away what people are willing to pay for. Um but Delta figured it out, and now everyone else is following suit. I can see the strategy to it. But here's the thing that I keep coming back to it too is, you know, this is an extremely uh and notoriously cyclical industry. I mean, as you just said, we had bankruptcies during the great financial crisis and a lot of them during COVID during 2020 were practically brought to their knees as well. And so, like on the it's so over, we're so back scale, this really screams we're so back. And while I can see the incremental revenue gains, yeah, that makes sense in good times, but as we see with these cyclical industries during the downtimes, capacity does matter. You still need to put butts in seats. And it would seem to me that this is a riskier move for a cyclical industry that when you know the times get hard and they're trying to fill seats, this is doesn't seem like it would be as good of a way to do it. Am I looking at this wrong? >> Well, one thing to consider here, and you know, coming out of deregulation in the 70s, this was an industry that was about empire building. Everybody wanted to have the prettiest map. Everybody wanted to be the largest capacity. And that's that age is over. At least it's on the decline. Right now, the focus is on profitability, not who has the most roots or who has the most passenger flown. I can tell you their answer to this is, and we've already seen Delta and United talk about it after the holiday season, if demand falls, take capacity out of the sky. Don't take don't change to your cabin configuration. Look, the nice thing about automated pricing is is that you can cut all of your fairs by 20, $30, $50, whatever you need to, and still try and upsell that $5 for a a better seat. So, I think you will see them take capacity out of the sky if the cycle turns. And I think, you know, they will try to manage the cost side, but still just try to upsell as many people as they can at whatever price they can. >> The fact that they're using a dynamically priced model to to upsell as much as directly sell their premium seats, to me, it means that the that revenue in a recession wouldn't exactly fall back to what you would normally see in a recession like, you know, the 2008 recession in airlines. But I mean, on one hand, premium is usually the more cyclical part of airline revenue. uh you know economy revenue tends to not do well but it it tends to hold up better during tough times than premium revenue but in previous recessions more of premium cabin revenue came from business travelers than leisure travelers and that's not necessarily the case today. Um, so you know, the dynamic pricing helps. There are a lot of ultra premium products. Uh, you know, they're they're not eligible as free perks anymore in a lot of cases. If demand really collapses, and I mean, in addition to what Lou said, take them take some, uh, supply out of the sky, the airlines can go back to that free upgrade model. they have that optionality and use it as more of a catalyst for their credit card relationships which that was the saving grace for a lot of airlines during the the most recent recession and during the co pandemic especially uh when they didn't have a lot of capacity in the sky. So leaning into those type of relationships and and giving away what people are no longer willing to pay for is also is always an option on the table. >> So you guys have made the case but look airlines have not necessarily been the best investment uh over the long period of time for myriads of reasons. So with this specific strategy change that we're seeing, does it really make airlines a worthwhile investment for everyday investors? >> For most people, no. I will say this. I think that the whole industry is much better run. There's fewer carriers. Consolidation now for airlines have 80% of the domestic market. The odds of a bankruptcy among the major airlines, the non-french airlines is lower. So there's less downside risk. But for a buy and hold investor, no. I think if if anything you play the cycles here or you just buy air cap. >> Yeah. I mean it makes the major airlines less fragile, not necessarily less volatile in tough times. Um I mean the discount competition like Spirit went away is is is less than it used to be. The way loyalty programs have worked has has shifted. It's devalued them for a lot of travelers. Uh but it's shifted them toward monetized parts of the business rather than just a free perks model. At the end of the day, these are still airlines uh and and should be treated as such. The the reasons that Warren Buffett abruptly got out of the airlines after the COVID pandemic still apply today, but it's a it's a smart move by the airlines to to lean into premium and to not give away what people are willing to pay even a little bit of money for. >> Yeah, the Berkshire Hathway purchase and then subsequent sale was very much indicative of the airlines where it's like just when you think things are getting good, something comes around the corner and really ups the industry. So hopefully that won't happen again, but history might suggest otherwise. Coming up after the break, we're going to play a quick game of do you buy this news story. One of the more important skills I would say as an investor and I think Lou Matt you guys would agree with me on this is after a long time you build a little bit of a since this is a family-friendly show we'll call it the baloney meter where sometimes when you see news stories as an investor uh sometimes it's you know hyping up a company or hyping up a major investment or a major uh announcement. We kind of were poking fun at it a little bit yesterday with Nvidia's buyback uh story, but there's a little bit of as an investor, do you actually believe that what this story says is material to your investment? And so, there's been quite a few news stories hitting the the news reels recently that as an investor, you might change the way you might uh go about your investment thesis. So, what I want to do is we're going to do quick hit news stories today and we're going to play a game of do you buy this? As in, do you actually believe what management is saying with this or is there perhaps like something about this story doesn't sniff quite right and as an investor I'm either going to ignore or perhaps this is just not something I I'm going to consider here. So, we're going to start for the first one and this is the claim. So, Aura, the Health Ring Company, I I don't I'm sure that there's some very long description of what this is as a business, but you know, Health Ring Company, it's delaying its IPO. Now, do you buy that there is overwhelming demand for its shares as management claims in this IPO delay? >> I do. I mean, there there's caveats there, but as you mentioned, our prep meeting, uh there's a lot of IPOs that have been uh that have been delayed. So, I don't think they're alone here. Uh, there's the question of at what price, because I think you can always get an IPO out the door if you don't care about price, but I do think it's a relatively small offering and when it goes out, it'll be oversubscribed. What happens from there, who knows? But I do think there is more demand than there are shares to be sold. Yeah, as Tyler said, the baloney meter is an important skill for investors to have, but that doesn't mean we have to agree. So, I'm going to say I don't buy it here. Um, I was skeptical about Aura's ability to succeed as an IPO uh before management decided to delay. Um, even some recent overs subscribed IPOs uh have quickly fizzled out and I wouldn't be shocked if that were the case here. I it's a solid product. I don't know how much, you know, how much long-term interest there is especi day one before I would even make a decision on that company. >> Open debate for the first one. Second one here we have open AAI say it's delaying the release of its newest Frontier model uh to the public. Do you buy that this is completely for safety and altruistic reasons? Thank you for putting the word completely in because that makes it easy. And no, I don't buy it. I mean for one, I think all of these preIPO companies in particular, they are starting to realize that maybe throwing all this cash at the frontier isn't the way to show revenue for your IPO. So, I think look, maybe there's some safety concerns, but this is pretty convenient way to um to reallocate resources ahead of a potential IPO. >> Yeah. I mean, I I kind of buy it in the sense that I believe it's for safety reasons, but not necessarily that it's not like a self-s serving uh move here. You know, dur during internal testing, their their unreleased agents have have gone rogue recently. There's there are several reports of that. releasing a model that actively breaks into government and corporate databases could be a disaster for a company aiming for a trillion dollar IPO next year. So I yes it's for safety reasons but reasons but it's kind of more to protect themselves. >> The anthropic S1 was released or leaked to the media but we have not yet seen it so we didn't want to get too deep into it but the risk section of that one is sure going to be a fun one. All right so here's the next story here. Indian steel maker Msabi Metallics says it wants to build a 15 billion dollar and 7 to10 million tons of steel per year plant in the United States. This would have a profound impact on the steel industry, steel producers like New Cor steel dynamics, things like that. Even maybe even bring down costs for automakers. Do you buy that this will happen by 2030 as claimed? by 2030 is tight. And I'm not sure I believe that, but I do think that it will get built. For one, they've been trying to do this for decades now. And maybe that's a reason I maybe that's an argument against me, but I do think that there is a will to get this done. And I don't even I don't think a change of control situation in Washington will cut back on the eagerness to um hand out tax incentives and to think about reshoring. I think it gets done. The question is what year? See, I don't buy it. And my reason is because you put the asclaimed uh you know, wording in there. We've seen this movie before. Uh you know, Foxcon was supposed to build a $10 billion plan. That's what President Trump announced at the beginning beginning of his first term. It ended up getting scaled way back to about $672 million. Big difference there. So, I think the plant will ultimately happen, but at the scale that's being claimed, maybe not. It certainly does sound like a a few of those soft bank investments that ended up being fractions of what the number they originally spoke. All right, and this is our last one here. And of course, when it comes to the bologoney meter, we're going to go with Elon Musk because he always has some very strong statements. And Elon Musk said that SpaceX's orbital compute will beat its 2028 forecast. Do you buy the timeline? I feel like this one's a layup because it's timelines and Elon Musk. >> Yeah. And the answer here is not a chance in the world. So we do have our first data center going up into space. Google's project suncatcher is expected to be launched early next month. It is 1 kilowatt of capacity with a K. Musk the the right now the target is 1 gawatt by 2028 which would basically be the size of a modern data center in space. We will barely have proof of concept data on the suncatcher by then. No way we have a fully constructed full-size data center up in orbit by in two years. >> Yeah, I I don't buy it. This seems aggressive even by Elon Musk's standards. And the Tesla Roadster that is being revealed this week was announced 10 years ago. Uh you know, too many regulatory and engineering hurdles to overcome for that short of a timeline. I mean even SpaceX's own filings project the start of their deployment as at the start as 2028 at the earliest and and there uh SpaceX's president has said even internal testing isn't going to begin until the end of 2027. The vision of orbital compute itself is very viable uh but not that soon. >> One thing with all of these uh in new news stories that we saw it it all involves very large money. There's a lot of moving parts that are happening here and kind of similar to the Aura IPO, it does seem like more and more people are being more I wouldn't say skeptical, but certainly giving these these bold propositions a little bit more uh rigor in terms of due diligence. So, we will see how this all goes, but I think we're pretty online here with a lot of these timelines and a lot of these numbers seem much more optimistic than what investors should expect. Coming up after the break, we're going to hit the mailbag. Today's question comes in from Vignesh and he says, "I've been listening to the MLYful podcast for the past year and I started investing around that time. My question might be a basic one, but are there growth stocks in the sectors such as consumer staples or agriculture which are important to our day-to-day living? The need for these sectors are going to exist forever. and why are they not growing as other growth stocks? I realize I'm missing something, but this has been in my mind for a while and I keep going on a loop. So, any general insights on how these sectors work would be really great. Thanks in advance. So, I'm going to open this uh and I'll I'll send it to you guys in a second here. One thing I want you to keep in mind, Vnesh, is that even though an industry itself can be incredibly resilient, you know, that food and agriculture is obviously an important thing that's going to exist forever, doesn't necessarily guarantee the resiliency of a company. Grocery stores go in and out of business all the time. And as far as like consumer discretionary, consumer cycles, Sears, people thought Sears was going to last forever and then I don't know, Eddie Lampbert got his hands on it and look where it is now. So guys, what are your thoughts on the growth of consumer staples in agriculture and where should Vignesh be looking? >> So the first question is define growth because there are companies in this sector that will grow better than others. I mean Costco on the retail side, ADM at times has been a great grower relative to the industry, but if you're talking Nvidia AI type growth opportunities, no. And part of that is is resilience kind of the trade-off with resilience is kind of slow growth. It's yes it's necessary but look at the nature of the industry. We are not going to 3x 5x what we eat and except as an economy probably not 3x 5x the staples that we buy. We need x amount we buy x amount and so that is not a formula for rapidfire growth sectorwide. And just for those of you who aren't deep into all the tickers of the agricultural industry, uh ADM is Archer Daniels Midland and the other ticker is ADM. So just want to catch that one because sometimes Lou can get pretty deep in agriculture. >> Yeah, I I would add to what Lou said that growth in consumer staples generally comes from taking market share, not from growth in consumer staples itself. For every Sears, like Tyler mentioned, there's a company on the other end of it who's happy to pick up that market share. Um, so that's generally where you're going to see the best like Costco like opportunities. Um, Costco absolutely got market share when when companies like Sears went out of business. Um, I would also point out that growth and returns are not the same thing. Um, think Philip Morris, which I know we've discussed several times on this show. Uh, it's been one of the best performing US stocks in any sector over the past say 50 years despite having a shrinking core business. There are a lot fewer smokers in the United States now than there used to be. Uh so things like steady cash flow, dividends, smart buyback strategies, especially in consumer staples or agriculture when when you know stocks often trade at significant discounts can easily beat pure growth over the long term. So I would keep that in mind before you you you look for companies. And the last thing I'll just kind of chime chime in here at the end before we go is if you're looking for growth in these particular sectors, sometimes the places you need to look aren't in the most developed markets where these are very mature slow growth markets like the United States. This does portend to industries in emerging and developing markets where there is a much more in less formalized economy around this and companies in those areas that are coming up and coming can take market share and can take a a much larger portion of it along the way. So if you are looking for growth in these very resilient sectors, maybe emerging markets is a place you need to look. Just something to consider. That's all the time we have for today. As always, people on the program may have interest in the stocks they talk about, and the MLY fool may have formal recommendations for or against. So, don't buy or sell stocks based solely on what you hear. All personal finance content follows MLY Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided forformational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to our producer Dan Boyd, the rest of the Molly team, for Matt, Lou, and myself. Thanks for listening and we'll chat again soon.