Airline Mergers Give Us Something to Talk About

In this podcast, Motley Fool analyst Jason Moser and host Deidre Woollard discuss:

• The possibility of the Alaska Airlines and Hawaiian Airlines deal going through.
• If airlines become less special as they grow.
• The race to bring GLP-1 weight loss drugs to market.

Deidre chats with Solo Brands CEO John Merris about the company's collection of brands and where it could be headed next.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Dec. 04, 2023.

Deidre Woollard: Two state named airlines, one big merger. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst, Jason Moser. Jason, how's it going today?

Jason Moser: Hey, Deidre, doing well. How about yourself?

Deidre Woollard: Doing well. So yesterday afternoon was all of a sudden a go to your computer moment for me because a big merger in the airline world was announced yesterday. They had the conference call and everything. So Alaska Airlines and Hawaiian Airlines, they're combining in a deal worth around 1.9 billion. The first thing that came to my mind was, wait a second, we've already got a deal going on with JetBlue and Spirit and they're fighting the DOJ. Is this one going to happen?

Jason Moser: Well, yeah, that's a good observation. JetBlue and Spirit, that definitely is not a done deal to this point. Still in court I think just wrapping that up. I do think I feel like the JetBlue and the Spirit that it could have an impact on this deal. I don't think it will though. The main reason why I think the JetBlue and the Spirit deal there's greater implications on the value focused consumer where that deal is concerned, I think. Those are two airlines that are very clearly focused on the value consumer, which is great. You want that market that can scratch every inch, so to speak. I think from that perspective, these deals are different enough. Alaska and Hawaiian aren't necessarily as focused on that value oriented customer as they are about the geography of the locations that they serve and those locations are unique. I don't know that it's necessarily something that impacts that value focused consumer as much. I think from that perspective, they're different enough. I feel like this deal probably has a better chance of going through. Certainly it shouldn't go through the same scrutiny, I think that the JetBlue and Spirit deal are going through now. But by the same token, hey, listen, anything can happen.

Deidre Woollard: [laughs] That is something we've learned. But yeah, you make a good point there because with the JetBlue and Spirit thing, you have that overlap on routes and you don't have that as much with these two. The other thing is also is that Alaska is the distant fifth at this point to the major airlines. Although this deal could make it if it happens, a closer competitor even though it's still relatively a niche player.

Jason Moser: Yeah. You look at these airlines put together, the merits here I think they make a lot of sense. They are pro consumer. I think it's pro competitive. I think when you look at these two combined, you would have 1,400 flights per day, only 12 really areas of overlap there. You're having something where you're not having to get rid of a ton of redundancies. It does feel like it just makes this entire network more valuable. They'll be able to expand the unique location served and ultimately, I think an important part of this is that they're really going to be able to broaden the international portfolio over time. When you consider where these two locations, Alaska and Hawaii, these are areas that really open up a whole new side of the world that maybe they wouldn't have necessarily had the opportunity to pursue otherwise. They did put some numbers around it feeling like this could result in $235 million, potential synergy savings that even seems like a low number when you look at the context of the deal and I think a lot of that really boils back down to the fact that this is not something where they're eliminating a lot of redundancies. It does seem just more to make the entire network more valuable and I think that's important to note.

Deidre Woollard: Yeah. I think that is important. I think the other thing with this one too is, it's a different airline thing too. Because these airlines are very niche and they're very particular. One of the things that I think about with Alaska is they talked about minimal disruption, so that's a good thing. But they talked about what they learned during the Virgin America acquisition. I really like the Virgin. I like their safety videos. I like the vibe and Hawaiian Airlines I don't know if you've ever traveled on it, but there's a Hawaiian spirit to it. There's the whole Aloha thing. I don't know, I worry that there is going to be that loss of character. What do you think?

Jason Moser: Well, there could be, but I'm glad you made that point because I think there is something to that. I think on the one hand, when you're just talking about domestic travel here in the contiguous 48, airlines are just a commodity, I think for the most part. People just want to get from point A to point B at a reasonable cost and they're not so worried about the identity, or the culture, or the vibe as the kids these days might call it. But it is something when you look at Alaska, when you look at Hawaiian Airlines, I think, Copa Airlines is another one that stands out to me and that's just because, we used Copa when we flew to Costa Rica back. There's an identity associated, a brand, a feeling that I wouldn't say is necessarily a competitive advantage, but it's a differentiator. It's neat, it's nice. It's something that I think makes the traveling experience a little bit more fun, a little bit more adventurous, a little bit more memorable. So I do think, it's important to note, both CEOs feel it's very important that assuming this does happen, they want to maintain both brands, they want to maintain both identities. They're not looking to really create some hybrid here. It's just a matter of utilizing the scale to better serve people, and so I think that's something they'll make sure to focus on is continuing that distinct identity that they both have built up through the years.

Deidre Woollard: Yeah, and I think the vibe matters more when you're on vacation. It matters less if you're just taking a flight that you have to take for business or business travel or something like that. It's just different. But it made me nostalgic for the brands that [laughs] we've lost because there were some airline brands, like little niches that I loved. Like when Delta had Song that used to run from Boston to Florida, I love that. There was a very particular vibe to that. Are there any that you remember that you just loved? Did you like Eastern Way back when?

Jason Moser: I can't believe you said because I was going to say that is exactly the name I was going to point out here. I don't know that I would look at Eastern as being so unique. Maybe in its time, I guess it was. But I definitely, have found memories of Eastern Airlines back in the day and the reason why ultimately is it's the first flight I ever took by myself. No parents, I was like five years old. I flew to Greensboro, North Carolina to go visit my grandparents. I was on my own. This was a really big deal. It was a life event for me, a life event for my parents. I was five and I still remember it vividly when you asked that question that Eastern was the first one that popped in my mind. I can't believe you said that.

Deidre Woollard: [laughs] I remember it because I grew up in Boston and I used to be able to take the shuttle to visit my aunt in New York City at then, and it was one of those things where they would actually take your credit card on the plane. [laughs] You could just get on the plane, it's crazy. Well, the New York Times had this opinion piece related to the JetBlue merger and the headline was that the bigger airlines get the worse they become. What do you think? Is that accurate?

Jason Moser: There's probably something to that. That maybe goes back to that brand identity and focusing on that niche customer that you're serving, like the experience, that vibe, whether it's Hawaii or Alaska or Central America, whatever it may be. Yeah, I think the bigger things, they lose a little bit of that touch. I think that the airlines, retail, restaurants, I think that that's just one of the unfortunate things that comes with growth in many cases.

Deidre Woollard: Well, the market hasn't really loved this for Alaska, obviously, they loved it for Hawaiian. But one of the things that I was thinking about with this was not just the commercial side of this, but Hawaiian has this partnership with Amazon, I think it was announced last year, this relationship to ship packages, which they kind of needed at the time. It was material to their business. It feels less material to Alaska's business right now, but maybe there's a possibility there that this becomes a bigger part of it and that actually might be really good news for Alaska down the road a bit.

Jason Moser: I think it could be. When you look at the nature of this deal from the get-go, I agree, this is something that's more important for Hawaiian than it would be for Alaskan. There's no reason it shouldn't continue though, I don't think. When it was announced, I believe it was late 2022, there's an eight-year contract, aircraft are provided by Amazon. I think it's interesting to note, there are some costs associated with the relationship that will be ultimately pass-throughs for Hawaiian, high-margin revenue for Hawaiian, I think in this case. Certain costs like fuel, for example, fuel is a pass-through for them. This is something where Amazon is really getting in there and offering a lot of support to be able to make this happen and relying on Hawaiian's expertise and their hubs, their network, their ability to be able to get things to places in a timely manner. I don't think this is anything that really prevents that relationship from continuing, and I agree, I think that when you look at the combined entity, I absolutely can see a world where Amazon would want to expand this relationship. Because ultimately, this is something that I think will give these two airlines, if they're combined, a greater international presence with new markets served. Well, mostly in the Amazon, it's all about new markets served. They're looking for as many markets as they can find, so I think this is something where it wouldn't surprise me at all to see the relationship with Amazon ultimately grow if these two do end up combining.

Deidre Woollard: Well, and also Amazon, as part of that deal, they got a stake in Hawaiian, so that starts to become more interesting as you go down the road a bit.

Jason Moser: Warrants to acquire up to 9.4 million Hawaiian holdings, common shares over the next nine years, so going to be interesting to see how that all shakes out.

Deidre Woollard: For me, that's the wild card in this deal. The rest of the deal is pretty standard. We see these things with airlines all the time, but that was the part of the deal that made me get a little more excited about it.

Jason Moser: Oh, yeah. Absolutely.

Deidre Woollard: Well, I want to switch over to talk a little bit about another MNA Monday, which is the deal for Roche, the pharmaceutical company, to acquire Carmot Therapeutics for 2.7 billion in cash. Which is really interesting considering I think equity invested in it is about 385 million, so this just seems to me like, boy, everybody wants in on these GLP-1 drugs. [laughs] They just got to spend to get it. With Carmot, they're working on both the oral and the injectables for Type 2 diabetics with obesity and also one of them is for Type 1. This just seems like everyone just is rushing into this space right now. Does every major drug company need to be targeting this right now?

Jason Moser: This seems like the AI of the pharmaceutical industry.

Deidre Woollard: Right? Yes.

Jason Moser: Pharma obviously is going to tell you they're using AI for everything that they're doing as well and then they are.

Deidre Woollard: True.

Jason Moser: But this does seem like the AI hype for the pharmaceutical industry and they're all clamoring for presence in the space. I understand why, we've talked about the numbers before, but when you look at the data, you get 40% of Americans are considered obese, so you get 7.7% that are considered severely obese, over 30% of Americans considered overweight. All of that leads into the challenges with diabetes and whatnot, so these companies are all trying to figure out an opportunity at least. Because this is not an opportunity that's going to last forever, and so clearly, it's a problem, they're looking for ways to solve it and so it's not surprising to see Roche get in here and actually make this bid.

Deidre Woollard: It's interesting. You mentioned AI, and I'm thinking about these two cycles and I'm thinking about the ways that they're similar and differ. The way that they're the same is obvious, everyone's trying to figure out the angle, with tons of money flooding into this base. But with AI, your biggest risk is probably maybe oversupply of certain things or over-investing in areas. It seems to me with investing in GLP-1 drugs, you've got this other risk which is, any time you invest in biotech in a drug, it's like what if something happens? We're so new into this, what if something is discovered it causes cancer or there's other symptoms? We've heard already of certain digestive symptoms and pancreatitis and things like that. As an investor, you see these two cycles, how do you think about the risks with that?

Jason Moser: Well, I think it's a difficult situation because they're looking at a solution. They're looking at essentially a long-term solution to a serious problem, but they don't necessarily have the data to support whether it actually is an effective long-term solution. When you talk about using these types of drugs on an ongoing basis, and that's what it is really in many cases here. This is becoming a lifestyle thing and this is going to be something that you as a person will need to be doing for the rest of your life. They don't really have a lot of information as to how many of these drugs will actually impact you using them for 5, 10, 15, 20 years and beyond. From that perspective, it does feel like making this acquisition, getting Carmot, they get at least a pipeline with some potential candidates. Because a lot of these companies, you're either hitting a home run or you're striking out, and there's no in-between. It either works or it doesn't. Roche is getting three distinct drugs in the pipeline that are going through trials right now. You get CT-388 which is a Phase 2 ready drug, CT-996 which is Phase 1, and then in CT-868 which is Phase 2. They're going through the process. That's great, that's what you want to see, but that's not the end. I mean, just getting them cleared then ultimately they need time to understand the data and the only thing that cures that is time. Now, hopefully they discover the drugs that are more challenged earlier on and they're able to eliminate those from contention. But it is a very, very difficult process to get through and just a really tough one because there are so many different potential outcomes with so many different potential drugs. The possibilities seem endless at this point, which is both a good thing and obviously a challenging thing as well.

Deidre Woollard: It's interesting because that happened last week with Pfizer, they're testing GLP-1 pill and they've got a twice daily, one that they're testing in a once daily, one that they're testing in the twice daily one, the side effects were too great and that just tanked the stock. It is injecting a little, pardon the pun. [laughs] It is bringing a little more risk to these companies in that they're now really tied to this a bit more and with a 2.7 billion dollar acquisition, that is a very big bet and that could go really well or not so well.

Jason Moser: It is. Playing the odds they feel like that size of a deal, you're getting that pipeline and that's really the nature of these kinds of deals. You're not necessarily looking for the certainty, but you're looking for the pipeline that will give you the best opportunity for a more certain outcome. I think that's what Roche feels like they're getting with this deal and given the pipeline there, it seems like a reasonable assumption.

Deidre Woollard: Yeah, I think so. Well, thanks for spending this M&M Monday with me, Jason.

Jason Moser: Yeah, you got it. Thank you.

Deidre Woollard: If you're a regular Motley Fool Money listener, you're probably well aware of how dividend stocks have the potential to really supercharge your portfolio's returns. Dividends have accounted for around 40% of the total return of the S&P 500 since 1930 and of course have been an important tool for all time greats like Benjamin Graham and Warren Buffett. Our top notch analysts at Motley Fool Stock Advisor certainly agree and have put together a list of five quality dividend payers that are also recommendations in our Stock Advisor service. The report is free to you just as a thank you for listening to our podcast. No purchase necessary. Just go to fool.com/dividends and we'll email it directly to your inbox. That's fool.com/dividends to claim your five dividend stock recommendations now. Solo Stove recently made headlines for its viral stunt with Snoop Dogg. I sat down with John Merris, CEO of Solo Brands to discuss the company's unique collection of brands and where the company's headed next. Well, I'm excited to talk about the brand umbrella and let's start by talking about what Solo Brands is, because you've got a variety of different, really eclectic products. You've got the fire pits and the stoves, which are very popular. You've got clothing, you've got kayaks and paddle boards. I was trying to find a link here and I feel like it's like a strong social presence upstart beloved brands and also lifestyle focused. Is that how you view it?

John Merris: Yeah, absolutely. Maybe said differently, the two commonalities that I tend to center around are first and foremost that these are brands that we're all digitally native. They all started out as e-commerce businesses first and then rolled into a retail component, and have some element of that. But there was a center around e-commerce and around building direct relationships with customers that we really liked. Then the second one being that all of these brands are very focused on experiential, putting smiles on faces, making people's lives a little bit better via those experiences. We really like the smiles experiences component to it and then obviously our ticker is DTC. That's the ticker we trade under and we're very focused on that direct to consumer relationship and being able to drive that relationship directly with the customer.

Deidre Woollard: Yeah. Interesting because they are, I would describe them as enthusiast brands. Solo Stoves has really become popular, people like it. But these are one time purchases except for the Chubbies, although I know with Solo you've got accessories and things like that. I was curious about that because now you've moved into the pizza of a category, which is a category that didn't really exist that much a few years ago, and now it seems to be a very popular category, people do love their pizza. How do you discover shifts like that when you're trying to build businesses? Because it seems like some of these businesses you've actually found an opportunity where there wasn't really one before.

John Merris: It goes back to what I was just describing on that direct-to-consumer relationship because most of our transactions, especially in our first decade, came through e-commerce as a channel. We had this one to one relationship and customers were giving us feedback all the time, sometimes indirectly, just through the way that they're purchasing, but oftentimes directly. They're saying, gosh, we found this product and it's really cool, so a customer might find a backyard pizza oven product. But then they would have a frustration with it, like, it does this really well, but it doesn't heat evenly, and Solo Stove should totally look at this. What happened is we would just start listening to customers, and then ultimately that would drive us into new categories. Pizza is obviously the one that you highlighted. We just recently in the last couple of months launched basically the Solo Stove modern day version of a patio torch that a lot of people have seen in the past. This is basically you stake it in the ground and it's literally like a torch, you put gel fuel in, and it's citronella and it's an insect repellent, it's an ambiance deal and burns for five hours, but this is just customers like super frustrated, every year they were having to change out their torches and they're like Solo Stove, everything seems to last longer could you guys design something? Most of our product innovation and our category expansions have come from customers telling us categories that they want us to play in.

Deidre Woollard: You mentioned earlier that your ticker is DTC so direct to consumer, but your business is actually really evolving into multi channels. Tell us a little bit about what's happening there and how you're thinking about that balance of that direct to consumer business which has been really strong and also this new emerging wholesale business.

John Merris: So often, direct to consumer is referenced as a channel versus a relationship. The way that I think about DTC, or direct to consumer, is more as a relationship than a channel. When I think about channels, e-commerce, retail, wholesale, marketplace, even corporate for us, has become a really meaningful channel. These are all channels, but what's interesting is that we have found that via intentionality, we actually have been able to build direct relationships with customers through all of those channels. They just look a little bit different. For instance, with our wholesaler or retail partners, when a customer purchases a product in the store, we now are finding ways to drive that customer back to our site to register product, to follow up with an accessory purchase, to receive a free gift, and ultimately continue to still drive a new relationship, a direct relationship with a customer, even though their first entrance to the brand came through a wholesaler or a retailer. Somebody asked me recently, do you plan to change your ticker? Is DTC going to be irrelevant now? The reality is, my quick answer was, I've learned never to say never, but relationship is going to continue to matter, that direct relationship with the customer is going to continue to matter to us in a meaningful way, and regardless of the channel dynamic of where we're selling or bringing that customer in for the first time, we're still going to be very focused on driving a direct relationship with a customer regardless of that channel.

Deidre Woollard: As you get deeper into these relationships, on your recent earnings call, you talked about exporting goods, your growing relationship with Target. What are you looking for in a retailer and are you seeing variations by region or by product?

John Merris: There's two main focuses whenever we're going into a new retailer. The first one is, does it build brand equity? What I mean by that is, one, is it a retailer that when a consumer equates that retailer to our brand, is it going to build the brand? Associated with that is we think about it in a big way like traffic. We do traffic on our website. We can pay for traffic via digital marketing expense, or we can partner with a retailer who gives us broad exposure in a big way to eyeballs. Take Target as an example, this week we'll launch in 2,000 Target stores roughly across the entire US with a Solo Stove product and merchandising strategy. All of that traffic that's flowing through the stores are now going to have eyeballs on Solo Stove in a new way, and many of those customers are not online shoppers. That's a big brand awareness play for us. The second component for us is, we want to meet the needs of the customer. I've been talking about this, but the importance of the customer being able to have optionality and find us when they want us, where they want us, and making it convenient for consumer, to interact with our brand is really important. Retailers are helping us do that in broad scale. Those are the two things we're focused on is, brand building and brand awareness/traffic, and then ultimately meeting the needs of the customers by being where they are when they want us to be there.

Deidre Woollard: I know another thing that you've been pursuing within this wholesale effort is the the shop in shop strategy. I've been fascinated by this, studying retail, because now it seems like you have these two things you have. Putting things in stores, getting shelf space, that's one thing. But then there's this other thing now of having stores within stores, designated area, designated branding. I'm seeing more and more retailers pursue this. Target, which we've talked about, but Macy's everywhere seems to be really doing a lot more of this store-within-a-store strategy. Sounds like that's probably a tailwind for you, right?

John Merris: Absolutely. It is interesting. Like you said, it's two very different things. It used to be you just fight really hard to get into a new retail partner and then you're just on the shelf, and then over time maybe you fight your way toward, closer and closer toward that end cap. Now it's becoming much more experiential, and I think retailers have figured out, at the end of the day, retailers are looking at revenue per square foot. That is an important metric that they follow and via both case studies, even with our own brand, but obviously across many brands in different retailers. They're finding that their revenue per square foot actually can go up even when they offer more square footage, what might be considered less efficient real estate, because they are these bigger displays, they actually, are driving more revenue per square foot within those displays. These are important metrics. We're watching them closely and making sure that it's merchandised the right way, but we do feel and are seeing that consumers enjoy being able to come in and experience a brand in a different way, even within a retailer and it's driving better purchase activity and behavior in those shopping shops. We're hopeful in '24, that we're going to continue to expand in and several more of those shopping shops.

Deidre Woollard: Thinking about this strategy right now, as you're growing and potentially acquiring, how do you balance that with debt? Being a young company, needing to take advantage of opportunities, but also needing to be responsible as a publicly traded company. You've got a lot of different things, little details to keep in the air there. How do you think about that?

John Merris: We've had the good fortune to have very little debt on our balance sheet relative to our EBITDA generation. We've been a profitable business since the first year we started as Solo Stove in 2011, and we've been very cash generative during that time as an e-commerce business. When you put those metrics together, or those business qualities together of EBITDA positive and cash flow positive, it puts you in a stronger position to be able to open up doors for opportunities and make decisions not necessarily based on your liquidity capabilities, but more based on what's best for the business. This year we have talked quite a bit about how much cash we plan to be cash flow positive on the year and it's quite impressive. This is a business that is very profitable in the mid to high teens, from an EBITDA perspective. This year generating right around the EBITDA level of cash as we're generating EBITDA on the year. That's putting us in a great position. I think we're right around 1.6 times lever from a debt perspective, so a very low debt leverage, and planning to be at or below one times lever by the end of this year. We're in a very strong cash position and we have great liquidity, and as we see opportunities, we'll continue to find ways to invest in long term growth.

Deidre Woollard: Last question for you, if everything goes as you hope and your strategy goes along, what does Solo look like in five or 10 years?

John Merris: It's a business we've talked a lot about our international expansion efforts, but this is a business that we see tremendous potential to create a household brand. There are brands out there that we admire a lot. One that comes to mind that's just down the street from us, down in Austin, and we're up in Dallas, is Yeti. They've done a fantastic job building brand awareness. I'm not sure what their unaided brand awareness is, but I would imagine it's quite high. Ours is still very early in its story, I think 5-10 years from now, our brand is much better known. As popular as our products have become, there are still so many people that don't know who Solo Stove is as a business, or especially any of our other brands, and so we're continuing to drive that message and build more brand awareness. But this is a company that has a potential to be well into the billion dollar plus revenue range, continue to be profitable, and continue to be innovating great experiential products for our customers inside and outside home.

Deidre Woollard: 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. I'm Deidre Woollard. Thanks for listening, and see you tomorrow.