# 713 – ⚔ Southwest vs. Elliott – The Average Joe

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    # 713 – ⚔ Southwest vs. Elliott

    victorlei

    June 11, 2024

    Good morning. The Deep is back with another Deep Thoughts powered by Vought International — pondering why we keep saying there are plenty more fish in the sea when their numbers are dropping each year. Luckily for the global fish population, aquaculture has been booming.

    • A new report from the UN’s Food and Agriculture Organization reveals that in 2022, a whopping 94M tonnes of fish were farmed, surpassing the amount caught in the wild for the first time ever.

    • The FAO calls this sector “the fastest-growing food production sector” — with the annual average consumption doubling since 1961.

    Teach a man to fish, you feed him for a lifetime. Teach a man to farm fish; you feed him, his family, and many generations to come.


    AIRLINES

    Activist Investors Could Be Coming For Southwest’s Famous Open Seating and “Bags Fly Free” Policies

    Southwest ($LUV) liberated American airports from the tyranny of high fares, bag fees, and seat assignments — but those same features that made it an American mainstay are causing its unraveling. In the 1990s, Southwest won over customers with discount fares, earning the love of regulators who dubbed it “the Southwest effect” for its industry impact. However, after thirty years, the airline famous for doing things differently is beginning to blend in with the crowd.

    Deep freeze: While Southwest might be America’s most popular airline, its financial performance paints a different picture. In 2022, outdated infrastructure led a holiday crisis, resulting in thousands of flight cancellations and billions in losses. Since then, the airline, operating solely with Boeing ($BA) 737s, has struggled to meet growth expectations due to limited deliveries.

    • Compared to competitors like Delta ($DAL) and United ($UAL), Southwest’s reluctance to charge for seating and baggage has hindered its revenue generation.

    • As a result, the airline is contemplating departing from its signature practices such as group boarding, open seating, and “bags fly free” — risking the alienation of its loyal customer base.

    From Southwest to Southworst

    Facing pressures for change, Southwest must act swiftly — or activist investors will do it for them. This past weekend, Elliott Management acquired an 11% stake in the airline, intending to bring in external experts to beef up revenue by introducing charges for bags, seats, and other services.

    • Elliott Management’s proposal includes a leadership overhaul — aiming to replace current executives and board members.

    • They believe this change, coupled with a revised strategy, could boost Southwest’s stock to $49 per share, a 77% premium over current prices.

    This means war: Southwest is already evaluating its operations, but Elliott’s aggressive approach clashes with the company’s culture of internal promotion, exemplified by CEO Robert Jordan and Chairman Gary Kelly. If a compromise isn’t reached, Southwest might find itself engaged in a lengthy and costly proxy battle with its new largest shareholder.


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    LARGECAP RECAP

    💳 How One Overlooked Company Earns A Cut Of America’s Credit Card Fees

    We've gone full circle: from metal coins to paper cash, then to lightweight plastic cards, only to return to metal once more. But this time, it’s in the form of credit cards. In a bid to win over affluent customers, major players like American Express ($AXP) and JPMorgan ($JPM) have embraced metal to give their credit offerings a premium feel. And since 2010, a modest $500M firm has produced over 144M of these metallic cards, solidifying its position as the driving force behind America’s heavier wallets.

    • CompoSecure ($CMPO) says it produces over 150 different metal payment cards, including popular ones like the Amex Platinum and Chase’s Sapphire Reserve.

    • In 2023 alone, the company raked in a staggering $391M from card sales, with a margin of over 50%. And for 2024, it’s aiming for even higher revenue of $408M-428M, maintaining a similar margin.

    Pedal to the metal: With figures from 2022 showing that CompoSecure pockets ~$12 for each metal card it ships, it’s definitely riding the wave of the credit industry’s lucrative fees. The company could ship over 33M metal cards this year by its projections. And among these, you’ll find some of the most unique payment cards ever seen in the industry — like Delta’s ($DAL) card crafted from 747 steel and Robinhood’s ($HOOD) exclusive Solid Gold card.

    📱 Apple’s AI Announcement Leaves Much to Be Desired

    Investors are demanding a refund — not for their purchases, but for their patience (and, maybe soon, even their shares). After eagerly awaiting Apple’s ($AAPL) plans to catch up with nearly every other tech giant whose already announced their AI plans, the world finally got a glimpse during yesterday’s Worldwide Developers Conference (WWDC) 2024. With iPhone sales slowing and revenue flat for two years, investors are hopeful these innovations will boost growth and keep Apple competitive with Microsoft ($MSFT) and Google ($GOOG).

    • What’s new? After a decade-long wait, Apple introduces the calculator app on the iPad, alongside iPhone screen mirroring and the Vision Pro headset, expanding to eight more countries, including China.

    • What else? New home screen customization options, streamlined management across iPhone and Mac, an all-in-one password manager, and more.

    And the product we’ve all been waiting for: It’s official. Apple is teaming up with OpenAI to introduce ChatGPT-like features to the iOS ecosystem. It’s all part of “Apple Intelligence,” a new platform described by Apple’s SVP as “AI for the rest of us.” This integration of AI into apps like Siri, Photos, and Maps offers features such as AI-powered summarization for articles, emails, and messages. However, despite this announcement, with $AAPL down 2% yesterday and up only 4% this year, Apple still hasn’t figured out how to game the AI hype.


    JOE’S MARKET PULSE

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    Markets & Economy

    France calls election for Jun. 30: After left-leaning parties were steamrolled in the EU Parliament election, French President Emmanuel Macron dissolved the French parliament and called for an election for the end of the month — with the fate of the country’s presidency on the line. [Read]

    Google avoids jury trial: The Department of Justice’s big antitrust case against Google’s ad business was set for a jury trial, but a $2.3M payment from the tech giant has helped it avoid this scrutiny. [Read]

    Toyota ($TM) scandal wipes $15B: Last week, Japan’s transport ministry found irregularities in the country’s largest automaker’s vehicle certifications, including false test data, causing the stock to fall over 5%. [Read]

    Business & Wealth

    United Airlines enters the ad business: United began pushing personalized ads on seat back screens during flights this weekend, a bid to diversify revenues — and replicate a cash cow that has turned tech giants and connected TV businesses into multi-billion dollar companies. [Read]

    Xbox teases handheld: Microsoft’s Gaming Chief, Phil Spencer, told IGN that Xbox “should have a handheld, too,” hinting at interest in the lucrative handheld gaming market. [Read]

    Moderna ($MRNA) combo vaccine shows promise: In a late-stage study, the biotech firm’s new combination COVID-19 and flu vaccine showed positive results, potentially making it the first to market. [Read]

    *Thanks to our sponsors for keeping the newsletter free.


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    CHART


    DIGIT OF THE DAY

    American CEOs Earned 196 Times More Than Average Employees in 2023

    Executive salaries are climbing up the corporate ladder — leaving workers behind. As living costs rise and inflation bites, the average S&P 500 CEO now pockets a hefty $16.3M each year. To put it in perspective, it would take the average employee nearly 200 years to earn what their CEO makes in just one year.

    • The average pay package for S&P 500 CEOs shot up by 12.6% year-over-year, while workers saw a mere 4.1% wage increase. Shockingly, some CEOs enjoyed raises of over 50%.

    • From 2010 to 2023, the median pay for S&P 500 CEOs surged by 63%, while the S&P 500 index soared by 462%, including dividends, according to FactSet, showing a strong link between stock prices and CEO compensation.

    Legislation keeps a close eye: The spike in CEO pay is part of a pattern where top executives gain considerable wealth, largely fueled by stock market gains, as CEOs rake in hefty sums through stock awards. With companies posting record profits and stock prices hitting new highs, the Dodd-Frank law now requires that companies disclose how market fluctuations affect CEO stock holdings. This transparency sheds light not only on base salaries but also on stock values, exposing the widening gap between CEO and worker pay.


    EXTRA JOE

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