HOT AIR BALLOON FLIGHT

By Julia Horowitz • Tuesday, February 8

Good morning. In today's newsletter: The merger between budget airlines Frontier and Spirit could run into trouble. Plus, Peloton's shakeup has arrived, and bumper oil profits are reviving calls for a windfall tax.

 

US stock futures are flat. Markets in Europe were mixed in early trading, following stocks in Asia.

 

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NEWS ALERT

Frontier and Spirit want to merge. Prices could get in the way

 

Politicians are under huge pressure to fight inflation as a rapid uptick in prices hits consumers' wallets and offsets wage hikes.

 

That could fuel a tougher stance from regulators on mergers, as leaders like US President Joe Biden try to show they're on the side of anxious voters.

 

"This administration, they see various challenges, inflation being one of them," Andre Barlow, a partner specializing in antitrust law at Doyle, Barlow & Mazard in Washington, told me. "And they're going to scrutinize various transactions that come in front of them."

 

What's happening: Spirit and Frontier Airlines on Monday announced a $6.6 billion merger. The combination of the two low-fare carriers would create America's fifth largest airline. Shares of Frontier jumped 8%, while Spirit rallied 17%.

 

But there's already speculation that the tie-up could run afoul of antitrust regulators. The Biden administration has made increasing competition in the industry a priority. 

 

Executives from Spirit and Frontier went on CNBC Monday to emphasize that the deal "is the type of transaction the administration should in fact support." 

 

"It's beneficial to the consumer. It's beneficial to the employees, beneficial to the communities that the airlines serve," said Bill Franke, Frontier's chairman. "And at the end of the day, even on combination, these two airlines will control less than 10% of the market."

 

Ted Christie, Spirit's CEO, added that the "objective is to continue to push for lower fares across the United States to stimulate more activity."

 

Yet Savanthi Syth, airline analyst at Raymond James, said she expects "some objection" due to "the Biden administration's 'big is bad' approach."

 

The administration has shown a willingness to be aggressive. In September, the Justice Department sued to block an alliance between American Airlines and JetBlue to consolidate their operations in Boston and New York City.

 

Other industries are in the crosshairs, too. In January, the US Federal Trade Commission sued to block the $4.4 billion purchase of Aerojet, which supplies missile propulsion systems, by Lockheed Martin, the country's top defense contractor.

 

And last week, the Justice Department and the US Department of Agriculture launched a new online portal for reporting concerns about potential violations of competition laws in the meat and poultry industry — part of a broader effort to boost competition in the sector and lower prices for consumers. 

 

"Capitalism without competition isn't capitalism," Biden said last month after meeting with family-owned and independent farmers and ranchers. "It's exploitation."

 

On the radar: Airline fares rose 2.7% between November and December, according to US government data.

 

The Spirit-Frontier deal could still get done. But Tuesday brought a reminder that not all do.

 

SoftBank's record-breaking sale of British chip designer ARM to Nvidia has officially been called off due to "significant regulatory challenges."

 

Late last year, the Federal Trade Commission sued to stop the $40 billion deal, saying it would stifle competition and give the combined company too much control over chip technology and designs. National security concerns were also raised in the United Kingdom.

 

Step back: The Biden administration may be getting tougher. But last year still brought more announcements for mergers and acquisitions than ever before. Global M&A activity totaled $5.9 trillion, an increase of 64% and the strongest period on records from Refinitiv dating back to 1980.

VOICES

Biden pledges to scrap gas pipeline if Putin invades Ukraine

"If Russia invades, that means tanks or troops crossing the border of Ukraine again, then there will no longer [be] a Nord Stream 2."

 

Read more from CNN.

EARNINGS MONITOR

Peloton's shakeup has arrived 

Peloton is replacing embattled CEO John Foley in an effort to rebuild the flailing fitness company.

 

This just in: Foley, Peloton's CEO since he co-founded the startup about a decade ago, will transition to executive chair. Barry McCarthy, the former chief financial officer of Spotify and Netflix, will become CEO and president.

 

The company will also lay off about 2,800 employees. Twenty percent of corporate positions will go.

 

"I'm incredibly proud to have worked with such talented teammates over the years who have helped me build Peloton into what it is today, and I'm confident that Barry is the right leader to take the company into its next phase of growth," Foley said in a statement.

 

Peloton reports earnings after markets close on Tuesday.

 

These changes could indicate that Peloton wants to remain independent, rather than selling itself to a suitor — at least for now. Shares are down 6% in premarket trading. They gained 21% on Monday following reports that Amazon and Nike were exploring bids for the company. Analysts have also suggested that Apple could be interested.

 

Remember: Peloton's shares have collapsed over the past year as people started returning to gyms and industry competition ramped up. The company has come under renewed pressure in recent weeks following a report that it had stopped manufacturing new bikes and treadmills.

 

Blackwells Capital, an activist investor, recently said it has "grave concerns" about Peloton's performance and called on its board of directors to fire Foley and explore a sale.

UP NEXT

Harley-Davidson and Warner Music Group report results before US markets open. Chipotle, Corsair Gaming, Lyft, Peloton and XPO Logistics follow after the close.

 

Coming tomorrow: Earnings from CVS, Honda, Mattel, Uber and Disney.

WHAT WE'RE READING AND WATCHING

▸ Amazon is raising its base salary cap to $350,000 (Bloomberg)
▸ Bitcoin had a terrible January but is rallying again (CNN Business)
▸ Big companies are failing their own climate pledges (CNN Business)
▸ Two years into the pandemic, shoppers are still hoarding (WSJ)
▸ Ford is slowing production because it needs chips (CNN Business)
▸ Peter Thiel to step down from Facebook's board (CNN Business)

FINAL WORD

Bumper oil profits revive calls for windfall tax

News that Britain's biggest oil companies made $32 billion in profit last year is stoking calls for the government to impose a temporary tax on their earnings to help households pay soaring energy bills, my CNN Business colleague Mark Thompson reports.

 

The latest: BP posted an annual profit of almost $12.9 billion on Tuesday. Shell reported a profit of $19.3 billion last week after what it described as a "momentous" year. 

 

Both companies have been boosted by a huge rebound in oil and natural gas prices after they collapsed at the start of the pandemic. The bumper earnings have allowed them to accelerate investments in lower carbon and renewable energy projects while also handing back billions of dollars to investors in the form of dividends and share buybacks.

 

Shares of BP are up 24% in 2022, while Shell's stock is 25% higher. The FTSE 100, for comparison, has climbed less than 3%.

 

Not everyone is happy, though. For weeks, anti-poverty campaigners and opposition politicians have been calling for the UK government to introduce a one-off levy on major oil and gas companies to provide financial relief for the households that are already struggling with 30-year high inflation and surging energy prices.

 

The latest results could bolster this campaign, with the opposition Labour Party renewing its push on Tuesday — though there's no sign UK Prime Minister Boris Johnson is prepared to adopt such a proposal.