So for Delta Airlines, the economics on them buying and selling miles from their partners, the loyalty program partners and co-branded card partners, is big. And there's a large countercyclical element to that because you see, Delta's revenues from this segment growing, even though broad commercial credit cards are not growing as quickly.

So this does give the carrier working capital tailwind. It gives them support in terms of having a less volatile earnings stream. So we think this is a very attractive piece of the investment case that's somewhat overlooked.

JULIE HYMAN: Yeah. And this is the low. You can see it's also larger the money that they're bringing in from that. Secondly, when we talk about airlines, we tend to talk about their brand. How are they viewed by customers? And you say Delta's got a strong one.

STEVEN TRENT: I think they have the best one. We could even go back to simple things when we were going through the pandemic here in the United States. Delta was the very last airline to unblock middle seats. When you had a lot of people that were just starting to get comfortable with flying and just beginning to get comfortable with being seated next to a stranger, even though everybody had a mask on. So I do think that was an important differentiating factor.

You also look at other aspects of the case. Delta is the only major US airline that did not dilute its equity holders during the pandemic. So no convertible debt offerings. No equity offerings. And with the exception of a very small number of warrants that they issued to the US Treasury Department as part of the CARES Act, they really went the extra mile to protect the equity holder which I also think is somewhat overlooked by the street.

JULIE HYMAN: Right. So strong brand then, maybe on the part of investors too and not just customers. And then there's also what's happening with passenger trends and passenger revenue trends, both in the US and internationally. What's happening there?

STEVEN TRENT: Absolutely. So if one looks at the United States, we've definitely seen a metamorphosis in terms of the way people travel, how consumers decide to travel, and how consumers purchase tickets. Many people are no longer working five days a week in the office. So this hybrid work environment has also driven a metamorphosis, so to speak, in terms of how people travel for business.

So we've actually seen for this segment really good demand for let's say premium cabin or premium economy-type service offerings away from kind of main cabin, no frills service offerings that you see with low cost carriers. So that has been a really kind of robust piece of the investment case for Delta.

International sides, also very important. So transatlantic flow has been very strong. Transpacific flow, relative to 2019, is really just starting to spool up. And probably as we look into the coming quarters, transpacific is going to be a really important growth area, where the likes of Delta, United, Air Canada are going to see that benefit. So Delta actually fits nicely in terms of being able to benefit from that.

JULIE HYMAN: All right. There is one risk that we have to talk about that you highlighted for Delta, and that's regulatory risk. The CEOs in fact of delta and some of the other air carriers have warned against some changes that might affect their loyalty card programs. How big of a risk is that?

STEVEN TRENT: Yeah. Look, certainly, in terms of what happens on the regulatory side, what happens with government actions, one is, to some extent, reading the tea leaves. Could we have like a big risk that suddenly going to unravel a bunch of this co-branded card flow that Delta gets from American Express? I don't think that seems like a highly probable case. But could we see some disruption in that and maybe a little bit of an ebb in terms of the amount of growth they're getting from that segment? I presume that is a broader risk for the entire industry.

JULIE HYMAN: Got it. All right. Let's quickly get to your stock to avoid here today, and that is JetBlue Airways that we're talking about. One that you're not recommending that investors necessarily hold right now. So let's get to your case on that, and let's move through them at some pace here.

So first of all, the big news is the merger with Spirit Airlines. And you say that's not necessarily a good fit for investors.

STEVEN TRENT: Absolutely. So I think on one level, maybe JetBlue is looking at its own fleet. 12 to 13 years of age. Spirit Airlines does have a younger fleet. Today we have with JetBlue and Spirit, we've got an issue with Garrett turbofan engines that could lead to more grounded aircraft for both carriers. But beyond that problem, Spirit Airlines financials look a little bit difficult.

So in late 2022, when the deal was announced, Spirit had $3.8 some odd billion in net debt. Latest reported they're up to $5.6 billion in net debt. Late 2022, they were trading around 10 times 2024 EBITDA. They're now trading at over 900 times. So this is a tough thing to absorb, and it's a little hard to understand how the economics of this merger are going to work. Presuming, of course, that the courts allow the merger to occur in the first place.

JULIE HYMAN: Right. That it even goes through. And I pulled the trigger a little early on point number two, but you're talking about the financials of Spirit, but that's even at a time when JetBlue has not really reattained its EBITDA position, earnings position of pre-pandemic.

STEVEN TRENT: Yeah, absolutely. And I think part of that is stemming from what I mentioned earlier, that you've seen this shift to hybrid travel, this shift to economy plus or premium economy away from main cabin. So no frills offerings have done worse in the current environment than they used to.

And on top of that, you look at discount airlines. Very hard for them to get the black arrow utilization that they used to get. But with pilot delays, excuse me, delays in getting aircraft, shortage of pilots, shortage of air traffic controllers. In JetBlue's case, you have some of those same problems that you have with Spirit. Yes, they do have MINT, which does give them some premium flow. Yes, they do some transatlantic.

But if you look at the chart, you know, JetBlue also probably has taken a leg down because of the cancellation of the Northeast Alliance. So that looks like it's at unit revenue at the same time that they're also facing the risk of more grounded aircraft with the Garrett turbofan problems.

JULIE HYMAN: Yes. And you mentioned the Garrett turbofan. How many planes is this affecting just briefly, and what's the overall impact going to be?

STEVEN TRENT: Right. So you have a problem with a powder metal alloy that had some contamination. So each affected engine on each affected plane, that's basically 300 days of ground time just to do the maintenance. Not 100% clear exactly what portions of JetBlue's and Spirit's fleet hit those serial numbers that are affected by this alloy contamination. But broadly speaking, they do like they look like they're going to be the most affected in the region. So that could mean dozens of grounded aircraft over the next two years.

JULIE HYMAN: Well, and just like we looked at the risk to your upside case for Delta, the risk to your downside case for JetBlue is basically just that people would go back towards value, right?

STEVEN TRENT: Yes. So in JetBlue's case, I think it's actually somewhat related to customers and consumers from lower socioeconomic spectrums that have probably been having a much harder time with high interest rates and high inflation than wealthier consumers. So do we get a rebound in terms of that segment traveling, replenishing this flow into basic economy or no frills seats like you have with a Spirit, for example? I think that's definitely one thing that presents some risk to our very cautious view on JetBlue.

JULIE HYMAN: Gotcha. All right, Steve. Thank you so much. Really fun. So just to recap what you're telling investors. Buy Delta Airlines based on great economics on its co-branded card program, strong brand overall, and passenger revenue trends. On the other side, you say maybe avoid JetBlue right now. Its pending merger with Spirit Airlines presents some risks. It's also facing headwinds from Garrett turbofan engine issues. Steven Trent, thank you so much for being here. Appreciate it. And thank you so much for watching Good Buy or Goodbye.