00:00What do you make of this? Not only the fact that it was apparently floated by the United CEO,
00:04but that American felt the need to basically bat it down.
00:08No, I think consolidation is a theme that's going to happen in the industry.
00:13Delta CEO was on its earnings call last week speaking about that with Jet Fuel where it is.
00:18It'll force weaker competitors to either consolidate or eliminate themselves out of the game.
00:23We don't necessarily see a United and American Airlines merger happening,
00:28including Delta and Southwest. Those four carriers have 75 percent of air traffic in the U.S.,
00:33and it would put a combined United and American at number one globally and number one in the U.S.,
00:38which would make it tough competitively from an antitrust perspective.
00:42So we don't see the deal happening, but we could see additions, additional merger talks.
00:47I mean, especially if American comes out of the gate and says this would hurt competition,
00:50it would hurt consumers. That's like a poison pill.
00:53You can't turn that around later on if Delta makes or if United makes a good offer.
00:57Yeah, and where we see Jet Fuel, for airlines to break, to go back to where their profit levels
01:03were at the start of the year, we need to see 30 percent bear increases.
01:07Imagine that in one less large carrier. I think it's going to be a tough deal to pass through.
01:11Where do airlines stand? And we can separate, you know, U.S. from European ones,
01:16but in their ability to absorb the higher Jet Fuel prices and have those higher prices fully hit the carriers
01:22yet.
01:22You know, we heard that scare the market last week at the end of last week where the IAE came
01:28out
01:28and said there could be jet fuel shortages. And when Bloomberg posted the article Saturday morning,
01:33I had a few friends email me, emailing me, is this true? And, you know, what's going to happen with
01:38rising oil
01:38is airlines are going to force to cut capacity, as we saw Lufthansa do last week.
01:42Older aircraft are going to have to retire, whether it's their CIRJs, their A340s, their 757s.
01:48And it's going to, you know, limit the number of flights, forcing prices up.
01:52So that's what we're going to see if Jet Fuel stays where it is.
01:56Let's shift gears and talk about defense and aerospace more than, you know, just commercial airliners.
02:03Are you seeing a shift? Are your clients putting a lot more money into security globally,
02:11into energy globally, into infrastructure globally? Because it seems that that's where we're headed,
02:17every man for himself, kind of, in terms of, you know, national infrastructure.
02:21Defense is very hot right now. I think we saw 10 defense and space, aerospace IPOs last year.
02:28SpaceX is likely coming to market this week, starting its IPO process. So there's been additional demand,
02:34whether it's from tech investors, global investors, all putting money into U.S. defense contractors
02:40and European ones as well. We're seeing upticks in defense. The presidential budget is for $1.5 trillion.
02:45We probably won't get that, but we'll see at least a 10 to 20 percent increase with the base budget.
02:51So U.S. defense spending is hot. With that said, defense stocks peaked at the start of the war,
02:58at the end of February, which is very interesting. Even though they'll see EPS revisions,
03:01their multiples peak, because investors are unsure, especially for the larger contractors like
03:06Lockheed and Northrop that report this week, will they actually see EPS revisions or everything the
03:12government gives them on the top line will be taken away on the bottom line, either through
03:15lower profits or lower share buybacks, which they're not technically allowed to do with the
03:20executive order put in. I was going to say, how much of that political pressure are they still
03:24working through? And how much are they actually enacting, again, some of what that executive order said?
03:31To what degree do they have to comply with that? We haven't. They haven't been explicit in terms of
03:36cutting their buybacks, but we haven't seen any major share repurchases. So it'll be interesting as
03:41defense primes report Q1 that they actually repurchase shares. Also, what's constricting
03:48their share buybacks is the budget is so large that there's framework agreements put into place
03:52boosting missile programs like PAC-3, LTAMs, et cetera. And so what that's doing is that's driving
03:58additional CapEx, therefore limiting their share buybacks unless they want to lever up.
04:02Sheila, do you go as far as thinking about how a breakup of NATO would affect these companies?
04:08Because I imagine if that were to happen, then the Germans may be reluctant. They're spending,
04:13right, half a trillion dollars on defense. They might be reluctant to spend it at U.S. manufacturers
04:18and only look to spend it in Germany or in the EU. Yeah, we've seen European contractors
04:25do very, very well, especially in 25. Their share prices have been soft this year. But, you know,
04:30as we see NATO spending, maybe 280 billion additional spending, historically 50 percent of that has come
04:37to U.S. contractors. Maybe we see that cut in half because even the U.S. contractors can't fill
04:41U.S. capacity, let alone, you know, international ones fulfilling their own. So I think it'll be a mix
04:47of both. It'll certainly be a benefit to the U.S. contractors. By the way, is capacity a real concern
04:51for you now? Yes. Capacity. We're seeing large CapEx programs across the defense primes, even the
04:57smaller defense tech names. Everybody's talking about dual sourcing, affordability, scalability,
05:03smaller drones, more scalable. You know, there's there's just a lot of talk about who can actually
05:10fulfill this capacity.
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