The Wall Street Journal - 02.10.2019

B14| Wednesday, October 2, 2019 THE WALL STREET JOURNAL.

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FINANCIAL ANALYSIS & COMMENTARY

Delta Bets Against Global Alliances

The U.S. carrier is gambling that it has a better way to link far-flung markets than SkyTeam

Free Trades

Won’t Kill

Online

Brokerages

The airline last week said it would pay $1.9 billion for a stake in Latam, a steep premium to the Chilean carrier’s market value at the time.

PAULO WHITAKER/REUTERS

rate in the crisis-stricken fourth

quarter of 2008, for example, goods

production accounted for 7.5 per-

centage points of the decline. The

story was similar in the previous

two recessions.

That isn’t to say that the econ-

omy is currently on the brink of re-

cession. The manufacturing index is

based on a survey of purchasing

managers and can be influenced by

fleeting changes in sentiment that

can later be reversed. Some of the

real problems manufacturers face,

such as the effects of the GM strike

throughout the car maker’s supply

chain, will likely prove temporary.

But that the manufacturing index

deteriorated in a month when trade

tensions weren’t dominating head-

lines like earlier in the summer, and

when the stock market staged a big

recovery, stands out. Indeed, most

economists thought the index

would show a slight improvement

in September. That it got worse in-

stead counts as a cause for alarm.

—Justin Lahart

American manufacturing may not

be what it used to be, but when it

comes to the economy it can still

pack a wallop.

The Institute for Supply Manage-

ment on Tuesday reported that its

index of manufacturing activity fell

to 47.8 in September from 49.1 a

month earlier, hitting its lowest

level since June 2009, when the

economy was just emerging from

recession. Any level below 50 repre-

sents contraction.

Manufacturers’ plight seems out

of step with what is happening else-

where in the economy. The job mar-

ket remains strong, driving income

gains that are allowing consumers

to keep spending. Trade tensions,

slowing economies abroad, Boeing ’s

continuing troubles related its 737

MAX and, most recently, the effects

of the General Motors strike, may

be weighing on the sector, but they

have yet to really show up else-

where.

Manufacturing also accounts for

a small direct portion of the U.S.

economy nowadays. Employment in

the sector accounts for just 8.5% of

total employment, which compares

with 16% in 1990, and 25% in 1970.

Similarly, its share of gross domes-

tic product comes to just 11%.

But manufacturing’s influence on

the economy extends beyond these

direct effects, as factory-made

goods push their way through the

economy, getting loaded into trucks

and trains and ships, moving

through warehouses and ending up

on retailers’ lots and floors. Final

output of U.S.-made goods (most of

which—even cans of soup—count as

manufactured items) accounts for

about 30% of GDP.

Goods production also is often a

major swing factor in the economy.

When GDP fell at an 8.4% annual Source: Commerce Department

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20

25

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2000 ’10 ’19

Goodsproduction

asashareofgross

domesticproduct,

quarterly

Do airlines actually benefit from

global alliances like SkyTeam and

Oneworld? Delta Air Lines just bet

$2.3 billion they don’t.

Last week, Delta said it would

buy a 20% stake in Chilean carrier

Latam Airlines , likely becoming the

main shareholder in Latin America’s

largest carrier. This adds to a patch-

work of equity-backed partnerships

stitched by Delta in recent years, in-

cluding 49% ownership of both Aer-

omexico and U.K.-based Virgin At-

lantic ,stakesin China Eastern and

Korean Air , and joint ventures with

Virgin Australia , Canada’s WestJet

and Air France-KLM plus Alitalia.

Collaboration between airlines in

different regions is common in the

form of codeshares and alliances.

Latam is in the Oneworld alliance

with American Airlines and British

Airways, which it will now leave.

But Delta’s move looks to be part

of a more ambitious plan to scrap

alliances in favor of a new, deeper

model of international integration.

The bet may pay off, but it is risky.

Delta will pay $1.9 billion for its

Latam shares—78% above market

value—using cash and new debt,

and invest $350 million in the part-

nership. The steep premium for a

minority stake is particularly sur-

prising given that Latam’s anchor

shareholders from the Cueto family

seem eager to leave the company.

Earlier this month, Enrique Cueto

announced he would be stepping

down as chief executive after 25

years. For Delta, meanwhile, the

outlay is close to its entire free cash

flow for the year through June.

Moreover, Latam doesn’t make

much money. Many airlines have in-

vested in Latin America with an eye

on its strong passenger growth, but

low-cost competition and currency

crises made it the least profitable

market per passenger last year, ac-

cording to the International Air

Transport Association.

Yet the purchase of Latam may

make sense in the context of a

global network strategy. While

American and United Airlines are

preoccupied with weak profitability

and domestic expansion, respec-

tively, Delta has a window of oppor-

tunity to bolster its position abroad.

flagging hubs in the Andes.

Expanding into new markets has

often proved to be a poisoned chal-

ice for airlines, because the indus-

try benefits from few economies of

scale. Carriers have reconciled this

problem with the need to manage

large global networks by forming

alliances, which can coordinate

schedules and link up different ser-

vice offers through technology.

Delta remains a member of the

SkyTeam alliance, but has become

increasingly critical of the system

and seems to favor investment-

backed bilateral deals.

“We are not going to sit around

and wait for the alliances to de-

velop their technologies,” Delta

Chief Executive Ed Bastian told ana-

lysts last week.

It is an ambitious plan, given air-

lines’ history as domestically fo-

cused businesses. But if Delta

proves that forging closer links be-

tween distant markets can fatten

premium-seat margins, its rivals

may have to respond. The airline in-

dustry finally has a chance of going

global. —Jon Sindreu

Commission-free trading has

been trickling into the online-

brokerage industry for years. On

Tuesday, Charles Schwab opened

the floodgate.

The broker said it would no

longer charge clients to trade U.S.

stocks or exchange-traded funds.

Schwab has been engaged in a

long effort to diversify, and

commissions now make up just 7%

of revenue, according to analysts

at JMP.

These commission cuts may

reduce Schwab’s overall revenue

by just 3% to 4% next year, JMP

estimates.

Schwab shares fell nearly 10%

on its own news, but that wasn’t

nearly as much as its biggest

online-brokerage rival.

At TD Ameritrade , trading

commissions make up roughly 25%

of revenue, according to JMP.

Shares of brokerage Ameritrade

plunged more than 25% on

Tuesday’s news.

It is possible to focus too much

on that commission-share number.

Nearly half of Ameritrade’s

commissions are generated by

options, Sandler O’Neill analysts

estimate. Options trading is more

complicated and draws a different

breed of retail punter, who

appears to be less price sensitive.

Schwab is dropping the $4.95

flat fee for options too, but it is

retaining its 65-cents-per-contract

rate.

Already, Ameritrade charges 75

cents, plus $6.95, yet is on track in

the third quarter to maintain its

market share at about 37% of daily

average revenue trades, according

to Sandler O’Neill forecasts.

In the longer term, other trends

may break in online brokers’ favor.

Consolidation has long been

contemplated, and intensified

price wars could propel it.

Ameritrade’s $1.3 trillion of client

assets, including $147 billion of

cash balances as of the end of

June, are nothing to scoff at and

could position the company well to

compete with full-service asset

managers as the wider industry

evolves.

Now trading at less than 10

times forward earnings, it might

be a mistake to leave Ameritrade

for dead.

—Telis Demos

The Atlanta-based carrier has

signaled that the deal is above all

about expanding its frequent-flier

program and premium-cabin strat-

egy. These are huge money spinners

for Delta on U.S. and trans-Atlantic

flights, thanks to better passenger

segmentation and co-branding part-

nerships with credit-card providers.

Delta is quitting the purely local

market in South America by selling

its8%stakein GOL , a Brazilian

short-haul carrier. Latam has a

greater presence across the conti-

nent and it offers long-haul flights

to the U.S.—a market where Delta

trails its U.S. rivals by a big margin.

Delta’s traffic and money also

should help to reinvigorate Latam’s

If Delta proves it can

fatten premium-seat

margins this way, rivals

may have to respond.

Manufacturing’s Impact

Is Bigger Than You Think

Tech IPOs Aren’t Working for Mom and Pop

The market for initial public of-

ferings has taken a hit, and it would

be easy to lay the blame on an

hyped office-sharing outfit and a

maker of $2,000 exercise bikes.

Reality is more complicated

though. The fact is, even many of

the seemingly hot debuts this year

have been much less so for most or-

dinary investors. Most big new tech

issues from this year are below

their opening prices from their first

day of trading. That includes sev-

eral that scored strong first-day

“pops” relative to their public offer-

ing prices. This was the case even

before WeWork pulled its listing

plans last month, casting a pall over

the IPO market that carried over to

Peloton ’s disappointing debut late

last week.

Of the 14 notable tech IPOs so far

this year, only three— Zoom Video ,

Pinterest and Fastly —are currently

above their first-day opens, based

on Monday’s closing prices. The

broader IPO market has fared a lit-

tle better, though not by much.

About one-third of IPOs tracked by

Dealogic this year are above their

opening prices.

There are certainly some outli-

ers. The red-hot veggie-burger

startup Beyond Meat has more

than tripled from its first-day open.

Cases like that are rare, though.

For most new tech issues, the big-

gest gains come up front. Relatively

few investors get access to new

shares at the listing price. For those

who do, the gamble pays off more

often than not. About two-thirds of

the tech companies that have gone

public this year are above their IPO

prices, with the average size of that

gain at 40%. About 58% of all the

IPOs tracked by Dealogic are above

their listing price.

But for the majority of investors

who have to wait for trades to

open, the returns aren’t so glamor-

ous. CrowdStrike’s shares rose more

than 70% from the listing price on

the first trading day in June, but

are 9% below their first-day open

due to a poorly received quarterly

report—and a mention in President

Trump’s now infamous call with the

Ukrainian president.

These situations sometimes im-

prove over time. Zscaler , another

young cybersecurity outfit, went

public in March of last year and

made scant gains relative to its

open during the first few months.

The stock picked up serious steam

earlier this year, and is now more

than 70% above its first-day open.

But slightly over half of last year’s

major tech debuts are still down by

that measure, serving as a good re-

minder that investing in young tech

companies isn’t for the masses—or

the faint of heart.

—Dan Gallagher

OVERHEARD

On Wall Street, meat

substitutes are all the rage. But in

the world of dietary science, meat

may be making a comeback.

This was underscored by the

publication Tuesday of findings by

a team of researchers in the

Annals of Internal Medicine. The

team conducted four reviews of

various studies examining links

between red or processed meat

and cardiovascular health,

cancer risk and other health

outcomes. They concluded

that the evidence isn’t

strong enough to

recommend people reduce

their consumption of red

meat or processed meats.

That is something for Beyond

Meat shareholders to chew on. The

maker of plant-based burgers has

seen its market value rise more than

fourfold since listing earlier this year,

to $8.9 billion, on expectations that

the trend toward meat substitutes

has legs.

The findings are controversial and

already have been criticized by

other experts. What seems clear is

the scientific community remains

divided on this and other dietary

issues.

The result is consumer

confusion and market

fragmentation: Some consumers

avoid meat, others carbohydrates,

and still others want organic,

unprocessed foods.

In this landscape, meat

substitutes have a role to play.

Investors banking on a huge

shift away from meat

consumption may be

disappointed, though.

ANDREY RUDAKOV/BLOOMBERG NEWS A Beyond Meat burger