What's With Ghost Flights?

In this episode of Market Foolery, Motley Fool analysts Chris Hill and Bill Mann take a look at what's happening in the markets. They discuss why European airlines are flying near-empty flights. PepsiCo (PEP 0.78%) made an interesting acquisition. And the talk about how the current crisis is having ripple effects across various sectors and much more.

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This video was recorded on March 11, 2020.

This video was recorded on March 11, 2020.

Chris Hill: It's Wednesday, March 11^th. Welcome to MarketFoolery. I'm Chris Hill, with me in studio, back by popular demand, it's Bill Mann. Thanks for being here.

Bill Mann: How are you, Chris?

Hill: Day-to-day.

Mann: [laughs] Day-to-day. That's right.

Hill: Like all of us, we're day-to-day.

Mann: Where I'm physically able to perform. So, before we came on, you and I were talking; we did a YouTube Live segment yesterday afternoon that was --

Hill: You, me, Andy Cross, live Q&A on YouTube. And The Motley Fool's YouTube channel is there for anyone to check out.

Mann: Yeah. And it's available for replay. And in the middle of it, I asked you a question which I really, you know, I thought more about, I thought it was a great question, just to prod myself up a little bit. So, I went and asked on Twitter under @TMFOtter, which March 9^th, do people feel it felt worse? Because March 9^th, 2009 was the literal bottom during the financial crisis of the markets; that was when the S&P 500 hit 666. And the news on March 10^th wasn't great.

Hill: No, it wasn't great. And two days ago, we saw a worse drop than we're seeing today.

Mann: Yeah. And only 3.5% as we record, so you know, we're getting off light today. I mean, not to make light of any of those, because it is painful and it's hard for people, but at some point, you have to recognize. And we've been talking about this for years at The Motley Fool that at some point this type of volatility will come and it will feel real because it is real and is based on real uncertainties.

Hill: If I recall correctly, and hopefully I can because it was just yesterday afternoon, I think what I said was, "2009 felt worse, in part, because ... " And I don't want to sway anyone's vote before they go on Twitter to vote but, "2009 felt worse because it had gone on for longer." At that point, we had had a really solid seven months or so of systemically bad news. And the market -- now, what we've seen over the last four to six weeks, this doesn't feel good either. But it's more dramatic and it's a different type of uncertainty because of the public health crisis.

Mann: That's right. And it really does stand to remind people that now is a really good time to check yourself, because now is the time when you literally can feel and know what your risk tolerance is, because it is a time of stress. And, you know, up until last week, a lot of us had really forgotten about how we felt in 2009.

So, anyway, TMFOtter, there's a poll up, it'll be up till about 10:00 Eastern Time tomorrow, and I'm really excited to see what people say.

Hill: So, we actually have corporate news to touch on, including Pepsi making a pretty interesting acquisition, but I want to start with the latest in the airline industry, which we've obviously talked about a bunch recently, but you were pointing me to a story and I'll just read the headline here out of the New York Post: "Why airlines are running 'ghost flights' amid coronavirus panic." Again, reading directly from the story. Controversial regulations are forcing British airlines to fly empty jets amid the coronavirus outbreak or risk forfeiting vital airport slots. This is originally reported in The Sunday Times, and these are "use it or lose it" rules governing European airports, basically saying, if you're going to get a slot at an airport, you got to use it.

And maybe there were really good reasons for these rules when they set them up but, holy cow, does now seem like the time to suspend these rules.

Mann: Yeah, get it together, because the cost, the environmental cost, the financial cost. We were talking yesterday about whether we thought the airlines were in good shape or not, and they said, well, obviously, they're not generating nearly the revenues, but they're in much better financial shape and they have the ability to limit some of their marginal costs by virtue of not flying planes. In Europe, that doesn't exist right now. Airlines have to take up 80% of the flights, if they go above a 20% cancellation rate, they can lose slots. And this just -- oh, gosh! this just seems like something that's such a no-brainer to take your foot off the gas on. I mean, pardon the allegory there too, for legislators to say this is something that we need to set aside right now as an emergency.

Hill: And closer to home, it'll be interesting to see what are the equivalents. I have no idea if airports in the United States have some sort of similar regulation in place and how quickly, how nimbly, whether it's state government, local government, or the federal government can move, because this is one of those things that seems. As you said, it seems like a no-brainer. It doesn't involve an outlay of cash; it isn't the government coming with a bailout. It's not, we're going to give you a tax break. It just seems like common sense.

Mann: It simply prevents empty tubes flying through the air literally lighting money on fire.

Hill: We'll move on to Pepsi. Pepsi is buying Rockstar Energy for $3.8 billion. Pepsi's had a distribution deal with Rockstar Energy for a little over a decade. It's kind of tough to know, because this is not a normal day in the market, if it were a normal day.

Mann: They're outperforming; [laughs] down only 3%.

Hill: Yeah. If it were a normal day, if the market is flat and Pepsi is down 3%, you can reasonably read the tea leaves and say, "Well, maybe they paid a little bit too much for that." But as you said, with the market down 4.5% and Pepsi only down 3%, maybe this is seen as a good sign.

Mann: People are excited.

Hill: Maybe. And we've seen these major beverage companies make acquisitions in the past, in the case of Pepsi and Rockstar Energy this points toward a weakness within the Pepsi empire that has come out in the last few earnings reports, which is Mountain Dew really has been struggling as a brand.

Mann: Yeah. And one of the things that they're looking to do, and when you look at the size of Pepsi as, well, over a $100 billion market cap, you can view this as a tuck-in acquisition for the company. It is not a huge acquisition, but it does give them another nameplate. And in a time when the sugary drinks, which has been the mainstay for PepsiCo, are really, really weak. And Mountain Dew which has been their version of an energy drink, almost by happenstance, isn't really gaining traction in that area, it gives them a little more credibility and it also gives them the ability, maybe to bolster the Mountain Dew brand a little bit. You've got Mountain Dew by Rockstar. I am pretty sure that those are the kinds of things that they're going to be considering.

Hill: Yeah, I think you're absolutely right. And it does indicate -- you know, once you start to look into the distribution deal that they've had with Rockstar. And the fact that it was a good deal for both, but it essentially prevented Pepsi from going out and cutting similar deals with other energy drink brands. So, now that it's in-house, expect to see more moves from Pepsi, whether it's development of mashup beverages or more acquisitions.

Mann: And it comes at a time when there has been a rare misstep by Coca-Cola, because Coca-Cola has a distribution deal with Monster, which is a very big, substantial competitor, you know it's a very deep tie-in. And Coca-Cola last year lost an arbitration with Monster, because it came out with its own branded energy drinks alongside Monster; which didn't make them all that happy. So, I see some opportunity here for Pepsi. I don't really consider this to be huge, but in a game where you've had a downward trajectory in their core businesses, going to areas like this where there is growth and putting your stake in the ground is very smart business.

Hill: It is. It's also a tried-and-true method that, both, Pepsi and Coca-Cola have executed for decades, whether it's a distribution deal as a way to get to know a smaller brand or in the case closer to home, D.C. area company, Honest Tea where Coca-Cola took a small stake in Honest Tea, expanded it and then eventually brought it into the empire completely.

Mann: Yeah, they have absolutely seen the trends in sparkling water and still beverages and none of it spells good news for their flagship brands.

Hill: So, yesterday we talked about Occidental Petroleum slashing their dividend and I mentioned that it, sort of, made the lightbulb go off in terms of "Oh, wait, we're probably going to see this with other dividend payers out there." I looked at this Pepsi acquisition, similar lightbulb, I just thought, "Oh, boy! put aside the beverage industry, get ready for more acquisitions."

I think that in the way that a lot of valuations of public companies and private companies have been knocked down or at least knocked back on their heels a little bit, one of the things that you and Andy Cross and I talked about yesterday on YouTube was Berkshire Hathaway -- the growing pile of cash that Warren Buffett has and is looking to deploy. And I'm not saying, he's going to go out and necessarily make all the acquisitions, but yeah this is one of those times. We saw it in 2008 and 2009, certainly in the financial industry, in the banking industry. But, yeah, I think we're going to be seeing more acquisitions.

Mann: It bears remembering, we are now down around 16% from our high, but the high that we started at, not just that it was an all-time high, in terms of the numbers of the Dow and the S&P 500, but we were at nearly an all-time high in terms of valuation. So, things have come down quite a bit. And in some industries, it's gotten pretty bad. Energy is probably the biggest of them. So, yes, I am certain that there are deals in the offing. And that scenario where Berkshire Hathaway has participated in the past and is currently participating.

Hill: So, we talked about the uncertainty, and 2008-2009, it was around the stability of the U.S. financial institutions and the housing market. And while there was uncertainty, we at least knew, well, this is where it starts. What we're dealing with now is an uncertainty in terms of public health, it is playing out in a lot of different ways. And I think part of what's a little scary for us, as investors, is we don't really know where it's going and what the ripple effects are going to be. And so, there are businesses that have succeeded over the past five years that you wouldn't necessarily think of maybe they are tech-based businesses. And you think, OK --

Mann: ... all are safe ...

Hill: ... yeah, this is a tech business, they're immune to housing bubbles, they're immune to other things. And one of them, which has been a great stock to own for the past few years is Match Group (MTCH), which is the parent of many relationship apps, whether it's Match.com or Tinder or any number of them. And they came out the other day and basically, I mean, it was not quite Pepsi coming out and saying, we don't think you should drink Pepsi for the foreseeable future, but it wasn't all that far off.

Mann: [laughs] That's right. Again, you laugh for want of being able to have any other reaction, but it is funny. And I thought, particularly of Tinder, which is somewhere between for people a dating website and a hook-up website, for the company to come out and say, "Hey, you need to practice social distance," which a lot of people think of as being staying away from large groups, but it also definitely means staying somewhat away from one person --

Hill: [laughs] Particularly, for example, if you don't necessarily know that person all that well.

Mann: Right, yeah, exactly. So, the person with a profile that says, "Well, I fly back-and-forth to China," right, you know, you might be able -- but there's not much way that you can tell and it has to have an impact. And I don't think it's going to push Match.com or Tinder off of its perch, but it absolutely is habit-changing.

Hill: It is. And, I think, whether we're talking --

Mann: ... not for me, I'm married. [laughs]

Hill: ... whether we're talking about our daily commuting habits, whether or not we go into a business, the frequency with which we eat out or even just go to the grocery store, I think for a lot of us, hopefully the majority of us, we are able to look at the near future, one to two months out, and say some version of, I can hunker down in the short-term. It's like, "Okay, my office is closed, I'm going to work-from-home for a month." "I can do that. It's going to disrupt my routine, but I'm going to do that." "I'm going to stop dating for a month or two; I can do that." The longer it goes on, though, then I agree with you, I don't think it knocks Match.com off their perch, but I think it does set them back a little bit as it would naturally.

Speaking of ripple effects. You and I are both big sports fans. One of, if not our favorite, my favorite sporting event is coming up this month which is the NCAA.

Mann: That's right basketball Christmas is upon us.

Hill: Yeah, college basketball tournament. Where do you think, whether it's the tournament, whether it's opening day for Major League Baseball, the NBA playoffs, the NHL playoffs, where do you think all of this is going? Do you think that the major sports leagues or the NCAA -- well, let's put aside the NCAA.

Mann: Yeah. It's already happening.

Hill: It is happening. We've seen some smaller conferences, you know, the Ivy League came out and said, we're not having a conference tournament.

Mann: Here's your title Yale.

Hill: Here you go Yale. You get to go to the tournament. And whether or not Yale alumnus, Bill Barker, pulled strings to make that happen, I don't know, I'm not going to respond to rumors, we don't do that on this show.

Mann: He did.

Hill: But he totally did. Where do you think this is going?

Mann: You know, one of the interesting things that I've been thinking about is not so much the venues, it is where else people go to congregate. And opening day of March madness is one of the biggest sportsbook days of the year. And I'm not sure that -- could you imagine if the sportsbooks in Las Vegas are all closed on that day because of social distancing requirements, things of that nature. I mean, some of the changes that are upon us, which I happen to think are all highly prudent, I mean, I really do.

Hill: So, do I. But now I'm thinking about the other side of that coin, which is, people who're in the business of mobile sports betting. If you're in the business of mobile sports betting. Aren't you going to legislators, whoever, and say, "Look ...

Mann: " ... Look, you get tax money from this and it's at risk."

Hill: Yeah. Am I wrong to think that -- Look, I mean, you just -- this is an audio podcast -- you just rubbed your hands together. We've touched on other businesses, Teladoc being one of them, Zoom Video being another, where management can't come out and say, "Holy cow! is this good for our business," but we can because we're not running those companies. It is good for those businesses.

Am I wrong to think that when it comes to television sports ratings that it would actually be good for business? Because I'm not going to be going to Vegas to the sportsbooks, I'm going to be watching the basketball. I'm weirdly more curious to watch the NCAA basketball tournament and even Major League Baseball; which I don't watch a lot of Major League Baseball, but the idea that they're going to have opening day in a few weeks and parks could be empty, I'm riveted to see that.

Mann: Yeah. So, in the state of Ohio right now, they are basically limiting all of the tournaments, including possibly the first four rounds next week, which will be in Dayton. The first four are the play and tournament games that are held every year in Dayton, Ohio, which may be played without an audience there. But they've given dispensation to the Columbus hockey team. So, who really knows, when it comes down to it? But I don't see that trend reversing any time soon.

Hill: Thanks for being here.

Mann: Good to talk with you, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.