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- [00:03]
A
Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.
- [00:19]
B
Airlines across the board are pruning some of the unprofitable flying the Tuesday, Wednesday flying right now, given fuel. But I think it's just that much more difficult for the weaker players in the industry. We've already seen a lot of challenges in the ultra low cost carrier space over the last handful of years.
- [00:34]
A
Hello and welcome to the Baron Streetwise podcast. I'm Jack Howe and the voice you just heard, that's Tom Fitzgerald. He's an airline analyst with TD Cohen. Airlines have been plenty newsy lately. Mostly bad newsy. We'll talk about that. We'll hear whether there are any buying opportunities in the group. We'll also speak with an analyst from Morgan Stanley about airline suppliers. Listening in is our audio producer, Jackson Cantrell.
- [01:03]
C
Hey Jackson, I'm already in airplane mode.
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A
Nice for you. That usually means wearing seven layers of clothing so you don't have to bring a bag, right?
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C
Yeah, that's my low cost flight airplane mode. If you think about it, every time they charge extra fees, if I'm avoiding those extra fees, that means that other people are subsidizing the cost of my air travel. So it's, it's all a win for me.
- [01:27]
A
That's very zero sum game of you. There has to be a winner and a loser and look who's a winner. The guy in all the layers. Give me a price check on jet fuel since February 27th. While you're looking that up, I will issue my first fun fact of the episode, Jet Fuel. Basically, kerosene. I mean, I assume it's fancy kerosene, not just like the regular stuff you put into a kerosene heater. Kerosene is a lot safer than gasoline, which is one reason why you'd want to use it in jets. And it also performs a lot better in cold temperatures. I'm sure there are more and cooler reasons than those for why jets run on kerosene. What do you got for a price, Jackson? How much will a gallon of jet fuel set me back?
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C
$3.93. That's up from, it's not too bad, $2.43 a few months back, and which is up 62%.
- [02:20]
A
Okay, so it's in the same neighborhood of, you know, what we pay to gas up our cars, but it's just way up. And if you're an airline, that's like a third of your expenses. That's serious money that's cutting into profits. There's been a swirl of kind of unsettling news for airlines. We had that awful, deadly, in fact crash, the Runway crash for Air Canada in New York. And that's raising questions about, I guess, a rising number of near misses. People are asking why is that happening? Is it the infrastructure? Is it the equipment? Is it the personnel? Are we not equipped to handle the amount of volume coming through these airports? And then of course there are these extraordinarily long wait times inside airports. There's a partial government shutdown and with it a shortage of TSA screeners and people having to wait hours online. Some people are missing flights because of it. That's not at every airport. But when you read headlines like that, combined with the rising jet fuel prices and the fact that airlines are going to have to raise their fares in order to pass those prices along, it makes you think that now must be a pretty lousy time for flying. In fact, it is anything but. Apparently demand has been super strong. That's one of the things we're going to talk about in this episode. Look at some of these comments by airlines at a recent conference. This was earlier this month, Delta said, and over the last week our sales are up 25% on a year over year basis. United said we're currently running booked yields, let me see, up between 15 and 20%. American said in March we're expecting greater than 10% unit revenue performance. Southwest cites broad based demand strength and JetBlue talks about strength that has accelerated. So people are flying. We're going to hear about why demand has been resilient. We'll also hear about what's happening with supply and how airlines are responding on higher fuel prices. I'm sure you can guess what the effect has been on profit estimates for airlines. They're falling for this year. The effect on share prices, however, has been pretty mixed. Delta was recently down only a few percent for the year. Is really trading in line with the S&P 500 index. That's not what I would have expected. No worse than the market let's let Warren Buffett describe the investment prospects for the airline industry. I can think of two ways that he has done so in the past. Jackson, I've got the one about Kitty Hawk. What's the one about Air airlineholics or airaholics or.
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C
Yeah, I have it right here.
- [05:03]
B
I've got an 800 number I call now whenever I think about buying an airline stock. I call them up any hour that
- [05:09]
A
fortunately I Can call them at 3 in the morning.
- [05:10]
B
And I just dial and I say, my name's Warren, I'm an aeroholic, you know, and I'm thinking about buying this thing. And then they talk me down. I mean
- [05:20]
A
I have the other quote. It comes from his 2007 letter to shareholders for Berkshire Hathaway. He writes, the worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines here. A durable competitive advantage has proven elusive ever since the days of the Wright brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. Now that's pretty tough talk, right?
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C
That's harsh. I love the idea of this turning into a movie where 90 something year old Warren Buffett gets access to a time machine and he decides to use it to go back in time.
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A
And studio executives are leaning forward right now. Go ahead.
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C
He goes to a beach in North Carolina somewhere and he shoots down the Wright brothers.
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A
Yeah, it's got kind of like an, an Abraham Lincoln vampire hunter kind of vibe where the title just, you know, grabs you.
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C
Right.
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A
Just doesn't.
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C
And he could go back in time and, and shoot down all the industries that have been poor performers, low performers,
- [06:33]
A
low returns on invested capital. I'd give you some notes on the plot, but it's perfect as far as I can tell. I'd say just start casting immediately. I want, let's put calls out to Sam Elliott and I'm thinking maybe Bryan Cranston. This could be a Cranston.
- [06:50]
C
I like Chalamet as one of the Wright brothers.
- [06:55]
A
So the non panic and Delta shares gets me wondering if after 120something years after Kitty Hawk, which by the way, Jackson, Kitty Hawk is where the Wright brothers got their mail. That's where they stayed. The actual flight happened in a village called Kill Devil Hills and it's a few miles away, too far. You can't, you can't go to Kitty Hawk to shoot down Orville. That's the second fun fact of the episode and a potential plot point for your movie. But let's just point out that Delta over the past three years has made investors 118. That compares with 73% for the S&P 500. United has made investors 124%. So there are some airlines producing attractive returns. Not everyone, of course. There's still the matter of American and JetBlue. We're going to get into it in a Moment with Tom from td. There are huge differences among these airlines. Delta and United are set apart for the amount of business travel they do and premium fares and the amount of international travel. Delta owns an oil refinery. I was surprised to learn from Tom that not many of these companies hedge fuel prices anymore. But Delta has a built in hedge. It's one of the reasons its stock is holding up so well. American is a poor performer. Over the past few years and especially year to date it's down 30%. Why? Well, it's more focused on domestic leisure travel. That's not where the good money is right now. It has a lot more debt than the others and it just basically has a long way to go to achieve the same operating efficiency and performance of the likes of Delta and United. And then there's JetBlue, which is relatively small and leisure focused and cash burning for years. You have to go back to, let's see, 2019 to find just a trickle of free cash flow. JetBlue has been a terrible performer over the past three years. But year to date, the stock was recently almost flat, doing even a little better than Delta. How do you explain that? One way you explain it is that JetBlue is weaker than the others to the point where it's a common subject of rumors about takeovers and mergers. A lot of people think it ought to combine with a larger airline and there's been some recent reports and speculation about that, although no hard news or announcements. That's one of the things that makes it tricky to trade airline stocks. In the near term, you could have two obviously weaker performers like American and JetBlue. Their shares could suddenly jump. You would expect American shares to jump if the war in Iran were to wind down relatively soon and if jet fuel prices were to subside. And JetBlue of course could always jump on deal speculation. But long term investors, if they want to venture into airlines to begin with, against Warren's advice, they'll probably want to focus on the strongest performers. And one of the ways to think about what has been a difficult decade for airlines is that it's shaking out weaker performers or causing them to scale back. And that's been pretty good for the strongest players. They're gaining share anyhow. Tom will have more to tell us about that. Let's get to part of that conversation now. Last I heard airline demand was going strong. Is that still the case? What are the latest signs that you see? And if it remains strong, what do you think accounts for that? Is that just generally a healthy economy
- [10:12]
B
or what's happening thus far it's been strong. I think there's debate about how long that can persist given where gasoline prices are and in terms of what accounts for that. We entered the year with a lot of momentum. Consumers were getting tax refunds. We saw research from some other banks that were showing a higher propensity for consumers to spend their tax refund on discretionary services like travel and leisure. We're also lapping really favorable comps. So some of the year over year stats are buoyed by that, but the demand is still strong even on a two year stack.
- [10:46]
A
I speak fluent Wall street analysts, but I'm going to translate for people. When you say you're lapping favorable comps, you mean the comparisons with a year ago, it's easier for airlines to show some growth and even if you compare with two years ago, it looks pretty favorable. Is that the idea?
- [11:01]
B
Exactly, that's correct, yeah. Last year during the, during the booking window, it was right around Liberation Day and all the noise from tariffs and you had doge impacting government travel and airlines tend to make the bulk of their money in the second and third quarter. So. And this is in the peak booking window for that. So we might end up having a better than expected summer 2026. If a lot of people psychologically have the view that hey, I was planning on taking this trip, I'm going to still, I'm still employed, I have the money even though it cost a little bit more now I'm going through that again like maybe we lose demand as we go further into the summer. After you take the summer trip, everything else is marginal then.
- [11:37]
A
In the past I've described the airline industry as like you almost want to panic at the first sign of profits because you start to worry about what's going to happen, is there is, is everybody going to increase supply so much that it's going to, you know, ruin the good times. What was the case with supply heading into this year and what's that look like now?
- [11:56]
B
It was very favorable and it's been a more favorable environment than what you described. Was kind of the history, the typical history for airlines post Covid coming out of the pandemic, all the supply chain issues at the aircraft and the engine OEMs were really almost acting as a structural gating factor on airlines ability to be irrational with capacity deployment. And then you also later on, the further we got from COVID you had a lot of the profitability challenges in the ultra low cost carrier segment which led to a lot of unprofitable capacity being cut from the system. So it was going in, you had the strong demand environment paired with a really rational supply environment. So prior to the war, it seemed like it was going to be a blue sky year for the sector.
- [12:39]
A
I'm going to come to the war in just a moment. But the airline industry is almost, for some investors, it's been like a punchline over the years. In the past, Warren Buffett has famously made a lot of wisecracks about it. I mean, is this a head fake or have we entered a different era for sustainable long term profitability for airlines and maybe better prospects for returns for their shareholders?
- [13:03]
B
I think that's definitely been the case for United and Delta. Their earnings have been much more resilient against all the volatility. 2024, there was probably too much economy class supply. 2025, you had the tariff related demand swoon. Now we have the fuel volatility through all of that. They have the most diverse revenue streams, they have the best balance sheets, they're definitely prepared to weather the storms. And I think you've seen that reflected in the relative share over the last few years versus peer group. And then I would say the others, American, Alaska, southwest, they're all JetBlue. They're all on an upmarket journey to become more like the big two. But the free cash flow generation there hasn't been the same as Delta and United's.
- [13:43]
A
So now we come to the war in Iran and the spike in the price of crude oil, which is going to of course raise the price of jet fuel. I often hear people talk about, well, the airlines hedge so they'll be okay in the near term. What can you tell me about the nature and extent of that hedging?
- [14:00]
B
It's a great question, Jack. Interestingly, no one actually hedges anymore of the US Airlines. Actually, the benefit of that is everyone's facing the same fuel cost curve. So you don't have anyone cheating in the past where someone might have had a really advantageous hedging profile that would allow them to undercut the industry on pricing and take share. Now you have everybody facing the same cost curve. So they're all incentivized to push through fare increases. And we've seen about three go through since the war began. So it's leading to a more rational pricing environment. That said, it's a huge impact at this point in time. On the second quarter, we lowered our estimates several margin points versus where we were expecting at the end of February. So it's critical. I mean, it can be anywhere from 20 to 25% of revenue for any given airline. The only airline who has some defensiveness built into their operations is Delta. Delta, they own the Monroe Man Finery in Trainer, Pennsylvania. And that can offset maybe around a third of the increase in crack spreads. They've owned that for about 13 years now.
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A
The crack spread is the difference is the margin between the price of crude oil and how much you get for the refined products. Right. So when that spread increases, they make money, Is that the idea?
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B
That's correct. That's the idea.
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A
What do you think happens to profitability for the airlines in the near term? It must take a hit. What's your best projection about what happens later on this year? What happens this quarter? What happens later on this year?
- [15:28]
B
Yeah, we lowered about a week ago after the J.P. morgan conference or two weeks ago, we had lowered our estimates and then we took them up a little bit further after the JP Morgan conference and the positive comments on revenue, but still lower than we had initially been coming out of earnings season in January. The big question is the second half and how quickly it can come down. If fuel is close to these levels at the second half, that would be a downturn, downside risk. If fuel eases further, that would be upside risk. And then same thing for 2027. It's the big overhang and it's the big debate on the sector right now.
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A
What's everybody trying to do right now to become more successful? Last I heard, all of the airlines had figured out you have to have more premium seating because that's where the money is. And I know that the US Companies that have more international routes seem to be doing well. What else is there? I mean, I know that some of the Southwest, obviously that hadn't had baggage fees is adding them. So you. More fees, I guess. Is there anything that you can tell me about the direction that airlines are trying to go in to become more profitable?
- [16:32]
B
Yeah, going upmarket, offering more premium products, improving your geographic diversity. Those are all. All the items you mentioned are definitely top of mind, I would say. You have Southwest installing the extra legroom seating, which went live at the end of January. You have JetBlue planning to launch domestic first class seating in the second half of 2026. A lot of American, they're really excited about the A321XLR, which is a narrow body but has a lot of range, where they can do secondary markets in Europe and Latin America, but also use it on the transcon routes. They're really excited about the premium cabin. That's a very premium heavy aircraft there. Delta United, as I mentioned, they've been out in front benefiting from the upper end of the K this whole cycle. Alaska going into even pre Covid, they had a really nice premium mix that they've done really well with, but they're overhauling their domestic first class cabin. The Hawaiian merger has allowed them to really turbocharge their growth into becoming a premium full service carrier. And what they're able to do with the Dreamliner order book out of Seattle and turn that into a global hub and better capture the premium international corporate demand. I think there's a broader consensus among the industry that there's an argument that you've really underpriced the product for a long time and there's better ways to go about offering value for consumers in a way that they'll pay more money for.
- [17:51]
A
I somehow, you know, you say underpriced the product. I know everybody grumbles about air travel, me included. But then sometimes I think to myself, wait a second, you're gonna lift my rear end four miles up into the air and then take me a thousand miles down to Florida and bring me back and you're gonna charge me a few hundred bucks for that? Like, it's pretty remarkable. And then also when I see like, the amount of money being made, let's just say the amount of money being made on AI chips right now versus the amount of money made to fly people around the world, you know, cumulatively. And I think if these two things disappeared tomorrow, which one would hurt more? Like, life would probably, you know, we'd probably figure out a way to get it go on without AI right now. But like, you need air travel, it's so essential. So you almost feel like there ought to be a bigger profit line for that industry. Am I wrong there?
- [18:41]
B
I think that's what a lot of people think from afar. But, you know, this is an industry where fuel can be 20 to 25 points of margin. It's very labor and capital intensive. There's this exposure to black swan risk. You're only building the bookings out every 40 to 60 days. So you're trying to predict demand constantly in real time. The rest of the value chain has been very great investment for people, whether the OEMs, the Lesurs, the airport concessions, but the operators. It's been a tough go of it.
- [19:12]
A
Is there any possibility, let's say, that this becomes a difficult stretch for the airlines because jet fuel prices are way up. Are we in a situation where that might end up being a long term positive for investors in the right airlines. In other words, do you have weaker operators out there that might have to downsize or might this end up being favorable for supply for the strongest players going forward? What do you think?
- [19:40]
B
Absolutely. I think that's definitely a scenario, a longer term upside scenario for investors in the space and another reason we think Delta and United are so attractive here. I think you're already seeing that where airlines across the board are pruning some of the unprofitable flying, the Tuesday, Wednesday flying right now given fuel. But I think it's just that much more difficult for the weaker players in the industry. We've already seen a lot of challenges in the ultra low cost carrier space over the last handful of years. I doubt the fuel environment is going to make that any better. Even among the big six, I think the least profitable airlines, I would imagine them to, the longer this goes on, be starting to have to take a look at more and more flying potentially.
- [20:19]
A
I mean, we're not going to have those flights like the ones Jackson used to take where you wear all your clothes at once so you don't bring any bags and you fly for $30 halfway across the country. We're not going to have as many of those flights going forward. It sounds like.
- [20:32]
B
Yeah, I think the $19 Transcon fares are going to be tough to come by. But you can still on certain days you can still see an Uber ride in New York to the airport costing more than the flight somebody's taking.
- [20:43]
A
Jackson's doing better. Jackson's moving up the world. He doesn't wear all his clothes anymore.
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C
Those flights, those extra fees just subsidize me because I have a high pain tolerance.
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A
That's, that's a spirit. Hey. Hey, Tom. I learned a ton. Thanks a lot for taking the time to speak with us.
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B
Thanks so much for having me. I really appreciate the opportunity.
- [21:00]
A
Let's take a quick break. When we come back, we're going to hear about some airline suppliers. We're going to speak with Christine Lueg. She's an aerospace analyst and defense analyst at Morgan Stanley. We're going to hear mostly about the commercial airline business, but she'll touch a little bit on defense. That's coming up after this quick break. Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful. For you, Morningstar, where data speaks. Jackson, we ready to talk about jumbo jet toilets? Is that we're going to get into it.
- [21:52]
C
I'm always Ready? I want to know how those things work.
- [21:55]
A
When you say how things work, you're talking about. I hesitate to ask, but you're talking about what happens after you leave the restroom, Right? You haven't been confused all these years about the actual mechanics of how to, how to work the place while you're in the room, right?
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C
Because no, it's just like what's happening after you flush. Like, you know, there's a lot of noise there.
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A
So it's what happens after you're. I gotcha. Where do things go? I can't think of a better opportunity for Chat GPT. Chat GPT is just waiting to tackle this one for you.
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C
Well, I tried that first. Then ChatGPT started talking about blue ice. And that's a whole nother thing.
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A
I'm going to hate myself for asking. Blue ice is, I think it's the
- [22:42]
C
frozen sewage material that comes from a mix of human biowaste and liquid disinfectant.
- [22:48]
A
They don't just drop it over like upstate New York.
- [22:51]
C
It's unintentional, but leaks do sometimes occur from a plain septic tank and there's actually dozens of documented incidents, including as recently as 2020.
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A
I have one more thing to worry about. Thank you. I didn't have enough.
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C
Here's a news article. Stephanie Moore said she was woken up by a crashing sound and saw a huge hole in the ceiling in the hallway less than 15ft away from where she was sleeping.
- [23:14]
A
I'm gonna. I'm wearing a blue eyes helmet to work every day from now on. The conversation coming up is not primarily about airplane toilets. It's just one thing that suppliers provide to jet manufacturers. We're going to talk about engines and flight control systems, all of it seats mostly. We're going to hear about stocks. There has been a sell off in shares of companies that supply aircraft manufacturers. The thinking among investors, and we'll hear from Christine on this. It seems to be that jet fuel prices are up. So airlines are going to make less money and they're going to have to find ways to cut their costs. And what they're going to do is maybe find some ways to save money on their maintenance or their upkeep or whatever it is that they're buying from these suppliers and that has caused the shares to sell off. And Christine says those fears are not really well founded and that creates a buying opportunity for investors. I'm going to keep an eye out the window for incoming blue ice. Let's hear part of that conversation now. I read with great interest A recent report of yours, it's titled Aftermarket Pullback Creates Buying Opportunities Amid Oil Driven Volatility. And your focus there, it seems to be on the, on commercial aerospace and some of these aftermarket companies. If we look at those before the war in Iran, what was the outlook for the group this year? Was it pretty favorable?
- [24:46]
D
The outlook for aerospace was very favorable. Global air traffic was steady. Despite macroeconomic concerns. The consumer who were flying felt pretty good. And also the biggest input cost for global airlines, that's variable is oil. And with oil at roughly below $70 a barrel, sometimes 60, it was a very sanguine, very benign environment for operations. And so the outlook for aerospace and the suppliers and the industry that supports these aircraft flying is very positive. We're seeing record margin, record growth and the concern now. And we've seen a pullback of the stocks that serve this market in the aftermarket.
- [25:31]
A
I'm looking down a list of them now. I see a few that are down by, call it low double digit percentages this year. So investors are concerned about something. What's on their mind, do you think?
- [25:44]
D
What's on their mind is if you look at the median group and I'll call out which these companies are. So these are ge, Transdyne, lor, fti, HEI and Standard Aero. These are the names that I've highlighted as more commercial aerospace aftermarket focus that I cover. The median performance of these stocks were down 15% since the start of Iran war versus the S&P 500 only being down 4%. The concern here is that in a period where for airlines and you know, the customer of these aftermarket players, if they're not feeling great because profitability is pressured from higher oil price, that they may actually cut the services and the profitability of these aftermarket players. And so that pullback and the concern is what's weighing down the sentiment in these stocks. Why I'm positive and why I see this sector as a buying opportunity is because there's a disconnect between airline profitability and their actions for when you would have to take these aircraft to be serviced. Happy to go through that dynamic but net net, we don't see any impact on the actual earnings of these aftermarket players. And that's why this pullback's attractive.
- [27:00]
A
So the thinking from investors is jet fuel prices are going up. That's going to maybe crimp the profits of airlines in the near term, long term, maybe they'll have to raise prices to recoup some of that. So I guess maybe investors are thinking, okay, airlines are going to be looking for ways to cut costs, maybe they're going to cut spending with some of these aftermarket companies. And you say that's unlikely to happen. Why is it that you're confident that business will continue as usual for these companies?
- [27:31]
D
It's driven by two things. The first one is the regulatory requirement for servicing. And the second thing is the structural supply demand where the industry is still significantly undersupplied aircraft. So digging deeper into the first one, if you're an airline and you want to keep flying your aircraft because of FAA safety regulation requirements, if you have a check engine light, maybe if you're driving, you might ignore it. In aviation, you cannot ignore that. Safety is paramount. And so if you want to keep flying that airplane, there are life limited parts, meaning that if a certain part in an engine flies after a certain number of hours, it doesn't matter if that part is not broken, it must be replaced. So for airlines, if they're looking at an environment where, okay, profitability is under pressure, if the check engine light is on, it must go to the shop or you cannot keep flying it. And so even if you want to save money, that's just not an area you can do it in. Now, the structural supply and demand balance, there's a shortage of slots at these, you know, the engine garages, There is a shortage of slots. If you are an airline and you want to cancel your slot, you have to wait at least another 12 months for another slot. And that engine turnaround visit is going to take at least nine months for the work to be done. Which means if you cancel your slot today, as an airline, it will take you almost two years to get an asset that you can use again. So in the environment where this could be temporary in nature with a higher oil price, you have to be judicious about the cancellations. And that's why I think they're not going to cancel because it's got a two year effect. Also, for most consumers, what you don't realize is an aircraft asset life is about 25 years. So when airlines buy these multimillion dollar airplanes and a brand new 737 might cost you 50 to 60 million dollars and it's going to have a 25 year asset life, the inability to use that asset and fly that aircraft for two years will have a significant financial impact. So this is the balance that airlines would have to consider. And that's why I don't think they're going to be cutting these services. And that's why this industry is pretty attractive for me.
- [29:55]
A
The comparison you make with driving really brings this home for me because we've all been to the dealership and they tell you, well, it's, it's time for new tires or it's time to have this fluid replaced. And I almost automatically think to myself, okay, if they're telling me now, that means I can go, I can wait one more visit to do that thing and, you know, save a little bit of money. But in, in the, in the airline business, I can, I can get what you're saying, that it's not an option when they tell you this needs to be replaced. It has to happen now. That mostly if you have this sell off on this fear by investors that you don't think is well founded, that must have left some of these companies attractively priced right now. Do you have favorites in this group?
- [30:36]
D
Yes. So among the companies that I listed, I have four favorites. I call out, so that's overweight rated GE Aerospace, overweight rated TransDigm, overweight rated Lore, and overweight rated FTI. So FTAI. So when I think about these four, the one that also stands out to me the most with this pullback is fti. So FTI is not very well known, actually. So some of the others, like ge, you know, most investors would know, but FTAI is this smaller company and what they're doing is very different in this aftermarket world. And so the pullback is a bit more severe for the company, but it also makes them more attractive. What they're doing is this company used to be primarily an aircraft and engine leasing business. They would lease them out, so they were the owner and they would rent them to airlines. They started an MRO maintenance, repair and overhaul capability targeting one specific engine, and that is a CFM56. The CFM56 powers the Boeing 737 NG and the Airbus A320 aircraft. This is basically the workhorse of the global fleet for the airplanes were three seats on one side, three seats on the other side. Very popular. What they did is they came up with a novel approach to be able to service these engines cheaper, and they were able to win market share from the existing players. In an environment where airlines are feeling the pinch for profitability, you're going to look at these cheaper alternatives that are still FAA certified, follows all the regulation, but could do it for you a little bit cheaper. And so the FTAI business model stands out to me as a real beneficiary of this environment, not just of the Recovery. But airlines who may not have considered using them or using their approach would probably at least take a look at their offering if it could save them money.
- [32:41]
A
The others that you're. You also have positive ratings on the three others. Ge, I think many people know that's the, you know, back when GE was one big company, people used to say, well, one of the parts that's working very well is the part that makes aircraft engines. And now that now the business has been split up and that's on its own. So I think people know about that one. What about the other two? Could you give us a couple of bullets on each of those and why you like them?
- [33:08]
D
Yes. So Hommet is a company that came from Alcoa Aerospace. This was actually from Alcoa, it was part of Alcoa Aerospace and was carved out to be iconic. And then from Arconic carved out the aerospace piece. And you have what is now known today as helmet. What helmet does is casting and forging in the aerospace and defense industry. And they're a key supplier to ge, Safran, Rolls Royce, Pratt and Whitney. So when you look at an aerospace engine, you're going to have the blades, and these blades have to withstand a few thousand degrees hot, rotate at thousands of RPMs, and perform at 99% plus reliability in the snow, in the heat, on the ground, at 35,000ft when it's freezing, in all these environments and not break. That's what homit does. And so they are a key provider for the supply chain, for new engine build and also for servicing the existing engines, because these are the things that are going to cost money to replace. Transdigm is a very unique business and most people don't know this, but Transdigm is one of the highest margin industrial manufacturers in America with over $20 billion in market cap. Their EBITDA margin is over 55%. And what they look for are unique parts of an airplane where they have proprietary sole source capability and you could have very strong pricing power in the aftermarket. So they make the things like seat belts, the toilet, the seat track, the little latches to move your seat back, things that passengers touch. Very high, low volume, but very profitable. And so ultimately, as you know, you keep flying airplanes, these are the companies that benefit. So if you ever took off the faucet in a bathroom, which I don't recommend in an airplane, that would be Transdigm. All those seat belts that, you know, have the lift to unbuckle and it feels kind of heavy and they all kind of feel the same no matter what airline you're flying. 99% of that market share is Transdime.
- [35:17]
A
Jack, we've got our headline profits in airplane toilets. That's. I learn. Learn new things all the time here. Christine, thanks so much for taking the time to speak with us.
- [35:26]
D
Happy to do it. Thanks for having me.
- [35:29]
A
I also want to thank Tom from TD Cohen and Warren Buffett and the Wright Brothers. Jackson is going to send, I'm guessing, Harrison Ford back in time to protect Orville from Warren. And the title of this production, Jackson, have you got it yet?
- [35:46]
C
Buy low, aim high.
- [35:49]
A
That's the one. You got it. First try. You got it. Tickets on sale? Never. Jackson Cantrell is our producer. Thank you all for listening. If you have a question you'd like played and answered on the podcast, send it in. It could be in a future episode. You just tape it on your phone using the Voice Memo app and you email it to Jack Howe. H O u g h barons.com See you next week. Data is everywhere. But is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.