Rayfinkle
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Investor in private tech and unloved public companies. Former credit investor and CFO. Not advice / dyodd.
Florida, USA
Joined December 2010
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I've spoken to three big law antitrust defense attorneys over the past few weeks with respect to $JBLU / $SAVE case. Each has experience litigating against the DOJ, and two have worked on major airline M&A. In case helpful.... (1/21)
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$JBLU $SAVE closing briefs. In short, the defendants did better work here. The $JBLU brief systematically covers every key point and makes a compelling case WITH EVIDENCE. In contrast, the DOJ case is light on evidence and heavy on conjecture. Some specifics: (1/21)
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$JBLU $SAVE responds. Worth reading directly. Logical and clear. Dismantles DOJ's doc.
$JBLU $SAVE. The DOJ filed a notice of supplemental authority today. It points to a recent decision (FTC vs. IQVIA) where a judge in the southern district of NY enjoined a horizontal merger. DOJ cites two points from the opinion (1/8)
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Over the past few days there have been three docs submitted in the $SAVE / $JBLU case. These Notice of Supplemental Authority (and rebuttals) reference a recent 5th circuit decision on Illumina’s challenge to an FTC commission’s findings in a vertical merger case. (1/20)
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$JBLU $SAVE. Reading the court opinion of the US Air / American merger settlement. This stood out as strong language supporting a court’s unwillingness to engage in promoting specific business models or tactics.
1/7
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All experts put the odds of a ruling in favor of the merger at 70-80%. But they all used hedged language until I pushed… “more likely than not.” One expert said it well: in a bench trial, weird shit happens. 50% of great lawyers lose in trial. (21/21)
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$JBLU $SAVE. The DOJ filed a notice of supplemental authority today. It points to a recent decision (FTC vs. IQVIA) where a judge in the southern district of NY enjoined a horizontal merger. DOJ cites two points from the opinion (1/8)
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Overall, the government’s theory is sensible, but the evidence doesn’t support it. As a result the government has claims but not evidence. As a result, going in to the trial, the DOJ had a 70%+ chance of winning, but this is now clearly lower (2/21)
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In her view, the fact that the defendants did this–and the substance of Illum. Is supportive of their case. She dismissed DOJ’s flimsy response by saying “they can’t not respond without appearing to concede the point, so they’ll do the best they can.”
Not advice / dyodd
(20/20)
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...e.g., one customer harmed, one route impaired is sufficient to block a transaction, then they prob hit that burden. I think that’s unreasonable, bucks precedent, and requires the judge to have an agenda to block the deal. (21/21)
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Finally, the judge in the IQVIA opinion spills a lot of ink on how the FTC expert was more credible than the df'dt expert. Read thru here might be most important: judge's will credibility weight evidence, including experts. If Young does this, favors $JBLU. Not advice dyodd (8/8)
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The burden is on the df'dt to prove that post-merg. competition is likely, sufficient, and timely. To do this, JBLU brough experts and competitor CEOs. Those present said this testimony was strong in absolute terms and relatively stronger than DOJ expert testimony. (9/21)
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Section 7 of the clayton act says that merger is illegal if it substantially reduces competition in any market. Substantial means: not one person, but not everyone. This one seems like a toss up, Clearly some customers will be harmed, but many will benefit as well. (5/21)
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H: Is generally less tight. If the $JBLU brief was written by a 30 year anti-trust litigation veteran, the DOJ one reads like it was written by five associates and chat GPT. (18/21)
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÷The defense rebuts with strong evidence in the form testimony and action. Note, that much of this evidence is in the form of witnesses, including experts and CEOs. This is is strong evidence if and only if the judge finds it credible (3/21)
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DOJ argues that there’s no proof of capacity coming online. But this is a claim, not evidence. Absence of proof != proof of absence. DOJ has also argued that a successful merger creates the “big 5” and thus increases likelihood of collusion. (10/21)
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So while the market is losing one competitor as $SAVE is subsumed, the dominant market segment (big 4) is getting more competitive, thus reducing likelihood of collusion. Experts found this DOJ argument laughable. (12/21)
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This is speculative, and it goes against historical precedent that more competitors (in this case up-market) implies more competition. In this case, experts agree that it’s hard to see the DOJ winning on the likely, timely, or sufficient dimensions (18/21)
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$HRBR resolved issue w/ unsecured lender. rough #'s is accretive to BV by ~$0.10 / share. Prepaid $52.6M of debt for ~$47M. Both #'s include est. of accrued interest. To me this on its own is "meh" since the debt was cheap and wouldn't mature for two years. (1/3)
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Those in the court room seem to believe the judge’s body language, etc. supports that it is credible, but the truth is no one knows (4/21)
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Sufficient: United having x% of ULCC seats is a good fact. Presence of startup ULCCs helps. Frontier CEO’s comment on “feeding frenzy” helps (16/21)
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Markets are divided into product markets and geography markets. WRT Product markets, the key question is whether the market is a) ULCC airlines or b) ULCC capacity (e.g., seat miles, seat legs, etc.), regardless of which airline operates it. (6/21)
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All experts I’ve spoken to agree that (b) is the right answer and (a) is hard to argue. The counterfactual would be: what if merger fails, Spirit raises prices, etc.? (7/21)
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All experts agree this argument is weak, and is the opposite of what is typically argued in anti-trust. Usually the argument is collusion is more likely with more market concentration. (11/21)
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In general, DOJ / FTC has lost cases recently because they argue speculative harm but haven’t been able to prove it. Government’s lawyer says “jetblue will have less incentive to be a disruptive force in the future.” (17/21)
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WRT geographic markets, this comes down to the argument of gates vs. routes vs. regions, divestitures, etc. Precedent is that airline acquirers solve geographic issues with divestitures (e.g., SWA and Airtran in baltimore). JBLU has been proactive on this. (8/21)
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Finally, an anti trust lawyer told me that it’s common knowledge that filing for supplemental authority is not done lightly. You only do it if there’s new and compelling supportive evidence. (19/20)
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@variance_swap
I agree that it seems the $JBLU effect applied to the big four prob helps more folks than $SAVE exit hurts. And there’s legal precedent for this. But ultimately this comes down to what one smart but old person believes. As a smart friend said: “80+ YOs can have strange beliefs”
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Timely: judge questioning DOJ economist comment around how hard it is to get planes supports this. Note timely is not strictly defined, but likely within 2 years. (15/21)
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Overall, this reads clearly to me like $JBLU $SAVE nailed the closing briefs and DOJ did a B- job. I’m bought more $SAVE. But there’s still a path for DOJ: if the judge accepts their arguments on the legal standard... (20/21)
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In this case defense is not arguing that the benefit of up-market competition offsets the risk of down-market issues. But this argument was successful in US Airways merger years ago. (13/21)
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b) the court agreed. The opinion is supportive of the currently contemplated merger in a few other ways too.
Just observations, DYODD
7/7
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What’s fascinating is the DOJ does this sort of thing a few times in their doc: they take a point out of context, but ignore that if you read further the Illum. opinion argues the opposite position. Btw Illum. Won.
(11/20)
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In contrast, $SAVE $JBLU are not just making the argument that the market is dynamic, they are supporting is with a bunch of evidence that show that it is not just logically possible that the future looks different from the past, but it is likely that this will be the case. (5/8)
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Note that this opinion considers a proposed settlement and is therefore different from the $JBLU / $SAVE situation. But this language is just one example where a) the plaintiff in another case makes arguments that contradict DOJ arguments in this case and
6/7
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Now back to the prospect of timely, sufficient, and and likely competition. Likely: CEOs of United, Frontier, etc. support this. (14/21)
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The most pithy comment was this: “I would never put on a witness to make aspirational statement without also having a legal representation that a judge would find credible.” (20/21)
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I probed about whether judge will find competitor CEO’s credible when they have a vested interest in the deal going through. (19/21)
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as these “types of behavioral remedies would be exceedingly difficult to craft, entail a high degree of risk of unintended consequences, entangle the government and the Court in market operations,
3/7
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$JBLU a) dismantles DOJ arguments on 51 market pairs being presumpt. illegal, b) pokes credible holes in DOJ expert (Gowrisankaran) arguments, c) makes a strong case that the market is dynamic, and d) overall comes off as tighter and more reasonable. Lets dive into each: (2/21)
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Moreover, the Court notes that should prices increase on the Reagan National-DTW route as WCAA predicts, LCCs will have the incentive to enter this route and compete on price with Delta. “
5/7
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@SmallCapKing2
Sales strong and expect to continue. Language on cost reductions into next year was hedged--cotton, etc. confidently lower. But wages and logistics a bit murky. Maintained $100M+ debt paydown goal for this year.
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and raise practical problems such as the need for ongoing monitoring and enforcement.” Indeed, “[e]ven a full-stop injunction of the merger would not have guaranteed continued competition between the merging airlines on specific routes . . . .”
4/7
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Point 1: you dfdt doesn’t need to restore an industry to “the pre-merger level of competition” as this essentially requires that the dfdt show literally zero harm. “the Government’s proposed standard would effectively erase the word ‘substantially’ from Section 7” (5/20)
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With this context, the df'dt argued that the industry was dynamic, so the historical market shares were not a valid basis for assuming future share. Critically, the opinion cited no meaningful evidence that the df'dt provided on this dimension. (4/8)
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...even though $SAVE mgmt said repeatedly that current results have not “earned the capital” to drive growth. By citing backward-looking and stale info, the DOJ ignores the current and long-term reality of the market. (15/21)
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A1: Jetblue has exited 15 markets, and DOJ expert agrees this cures. “Dr. Gowrisankaran agrees if JetBlue or Spirit has exited a route, that route is not entitled to a presumption of harm.. (4/21)
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The DOJ seems to have hoped the judge wouldn’t read a few sentences past their quote to get to the substance and spirit of it all. (16/20)
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…but if you just read a bit further in the Ill. decision it’s clear this is taken out of context
From the Illum. decision (7/20)
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“The United States further explains that amending the Final Judgment and mandating that the merged airline continue specific routes or requiring an LCC to undertake a specific route would represent a solution that is neither feasible nor desirable
2/7
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I expect operating cash flow to trend nicely in Q4 as 1) cost increases moderate and bonus payments come in from AA, 2) litigation spend for UA issue sunsets. A bit of a stretch, but also could be a tell on the litigation outcome? DYODD / no advice (3/3)
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The defendant's response to the DOJ’s response says all of this concisely:
(17/20)
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It’s coherent in some places, but internally inconsistent in others. Others have pointed out that the DOJ also said that save is more maverick than the OG maverick. Weird. (19/21)
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D: Overall is a tight document. The doc is logical, well sourced, factual, and clear. More below, but DOJ doc is lacking on all of these dimensions. (10/21)
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Unlike in past docs the DOJ isn't misquoting. But the context of this case seems meaningfully different: It's not just that market is dynamic, but that the nature of this dynamism will likely result in a competitive future. IQVIA didn't make this argument, $JBLU does (6/8)
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First, vertical merger standards are different than horizontal merger standards, so take all of this with a pinch of salt. This is just one guy’s reading. (2/20)
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@Josh_Young_1
@nimblephatty
@Josh_Young_1
great podcast. q-for you if you don't mind: you guys discussed how backwardation is bullish. You mentioned that this is related to high near-term oil prices creating less demand for future delivery. Can you break down this mechanism more?
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1/5
~Not advice / DYODD~
$HRBR 10Q out. In short:
Positives:
+ More clarity on American contract and transition (thru 2025);
+ United prepaid $50M of ~$60M note receivable;
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A2: 35 of the 51 nonstop “presumption” routes have either been exited by at least one party, or have experienced an entry or addition in service by another carrier during or after this time period. This is another 20 beyond the 15 exits that have competition introduced. (6/21)
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@FCWellenstein
Yeah I think it would have to require 1/ a very narrow view of substantial harm and 2/ a rejection that divestitures cure the harm
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On both arguments, the defendants quoted simply from the decision and presented in a way that was consistent with the court’s opinion. (4/20)
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C: Makes the case the mkt is dynamic. By showing many examples of route entries/exits, describing varying growth rates, citing $SAVE engine prob, etc, the brief makes it hard for any reasonable reader to not conclude that the airline mkt is a fiercely competitive jungle. (9/21)
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Point 2: the gov’t tried to argue for a higher standard for the defendant, but no dice. Note I’m mixing here what defendants said, what DOJ rebutted, and what was in Illum. From the DOJ: (6/20)
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In contrast, DOJ brief was messy and included less evidence and more presumption. It e) uses conjecture more than evidence, f) argues that the market is static, g) doesn’t take arguments to their logical endpoint, and h) is generally less tight. Let’s dive in: (11/21)
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First, defendants issued a notice for supplemental authority citing Illumina. Specifically they reference two points: 1) what the standard is wrt restoring competition, and 2) what the gov’t burden is on proving substantial reduction in competition. (3/20)
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@LionelHutz_Esq
Just read the briefs. The merger is DOOMED. Never seen so many f bombs in a defendants brief. 😔
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(“So your concentration analysis that reports HHIs and market shares throughout, that did not consider the impact of divestitures, correct? A. Yes, that’s correct.”).” (5/21)
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G: DOJ doesn’t take arguments to the logical endpoint. Again, lots of examples. But here’s one. On one hand, DOJ hammers home that ONLY a ULCC airline (not a ULCC seat) and ONLY unbundled low prices satisfy the demand for the subset of customers that $SAVE best serves. (16/21)
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More interesting question IMO is why this solution and why now? Probably its that lender had leverage and wanted to recycle capital out of cheap debt. But if you're HRBR, aren't you more apt to do this if you see cash coming in? (2/3)
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Overall, the Df'dt position in the IQVIA case is not good in a few ways. For example, even the df'dt experts put combined mkt share at >30%, past precedent thresholds for presumption of illegality (Philadelphia Nat'l Bank). (3/8)
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Next the DOJ mentions as an afterthought that the "weakened competitor" defense doesn't fly. I don't think this is transferrable to the $JBLU case for a few reasons. Most importantly, they are not making a meaningful argument around a weakened competitor. (7/8)
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The DOJ also argued that remedies should be considered later and not be part of the judge’s opinion: (12/20)
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A: Dismantles DOJ arguments on market pairs: DOJ argues that 51 markets are presumptively illegal. JBLU includes a table breaking down each market. (3/21)
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@ai_factcheck
@loneelmcapital
Not sure yet but I’ll try to do a update after reading the post trial briefs
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E: Uses conjecture more than evidence. Lots of examples. Here’s one: DOJ asserts that defendants “did not point to evidence that Frontier or Allegiant will plan to operate on the same routes that Spirit serves today out of the divestiture airports.” (12/21)
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This is basically arguing that the prima facie case is stronger, because you don’t need to consider the divestitures and therefore the presumptively anticompetitive universe is bigger. The Illum. opinion makes two points: (13/20)
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1) that a "dynamic and fast-moving industry" can still be evaluated based on current state competitive dynamics, market shares, etc., and 2) that a "weakened competitor" defense is a "weak ground for rebuttal" of the FTC challenge. I read the FTC vs. IQVIA opinion. (2/8)
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Absence of proof is not proof of absence. Besides, forcing companies to adopt specific routes and models is not supported with strong precedent. (13/21)
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1) the “burden shifting” from DOJ to defense can be fluid and ultimately all evidence gets jumbled (14/20)
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@ManForAllMkts
@ai_factcheck
@here4dam3mes
@puppyeh1
I think the question is whether a “prod mkt” is 1/ biz mod. (airline that exclusively offers ULCC) or b/ ULCC seats, regardless of whether offered by ULCC or big4. 2 seems more sensible. And even 10% of united seats would replace the 30% of $SAVE seats that are truly floor price
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annoyingly, the judge cited Dr. Chipty's analysis after earlier in the opinion saying this expert wasn't persuasive or credible. (6/7)
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$SAVE $JBLU. Not what I wanted here, clearly. Here's my read of the opinion. The judge found that a) the gov't had a prima facie case (step 1), and b) the dfdts rebutted it (step 2). (1/7)
$SAVE merger permanently enjoined. Gotta say I’m surprised by this one. Reading through the decision now.
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F: DOJ argues that the market is static. It cites backward looking trends. For example, the argument that $SAVE grew quickly in the past ten years so it will grow quickly in the next ten years is repeated in a bunch of forms... (14/21)
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@puppyeh1
@invertedfragil1
Yeah. I read it as a court won’t affirmatively require a business model. Eg won’t enjoin the merger and require that spirit stay as a (money losing) ULCC. Market is dynamic.
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On the other hand, it cites many examples of "competitive price retaliation" where $JBLU price decreases are retaliated on with price drops in other mkts by the big4. So.... there's intense price competition? (17/21)
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@chihosays
@invertedfragil1
@RAMCOCAPITAL
I read it as: 1/ divestitures work and don’t create ongoing burden for court, 2/ companies can handle their own biz decisions (eg if $SAVE wants to raise prices they can) and 3/ higher prices invite more competition.
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5/5
Overall mixed results but reinforces highly probable $3+ valuation support
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1/ $HRBR quick read. h/t
@do_em_go
(see his s'stack) and
@twoandtwenty_
for their views over the last day.
$HRBR 10-Q is out. 15 min skim reveals company turned cash flow positive again posting $1.4M in EBITDA. United dispute resolution now expected in Q1 ‘24. Became eligible for bonus payments for AAL in September. Bought back ~350K shares since last 10Q filing. Overall satisfactory
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Overall, clearly got this one wrong. I thought the judge's opinion was thoughtful. It does not seem to be "appeal proof" (see
@LionelHutz_Esq
tweet on this earlier). No opinion on likelihood of appeal.
I'm out, good luck! (7/7)
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