Philippa Kaur

To understand the significance of the drawn-out takeover battle for Spirit Airlines, a Florida-based ultra-low-cost carrier (ulcc), it helps to know something about one of the main protagonists. Even his opponents describe Bill Franke as brilliant. The entrepreneur is now in his 80s, but he once recounted how, on his first experience of air travel, as a young boy flying with his family to Paraguay in 1948, he had to suck oxygen from a tube as the Douglas dc-4 ascended over the Andes. It must have gone to his head. Since then he has become one of few people to have made billions out of aviation, despite the industry’s tumultuous ups and downs.His secret has been rigid adherence to the no-frills model: low basic fares, lots of add-ons, single-manufacturer fleets, fuel efficiency and strict cost-control. In 2006 his private-equity firm, Indigo Partners, took over Spirit, sold it in 2013 and bought Frontier Airlines, a ulcc based in Denver. Indigo has big stakes in Wizz Air, one of Europe’s biggest low-cost carriers, Volaris in Mexico and Jetsmart in South America. This year he went further, orchestrating Frontier’s $2.6bn cash-and-shares merger with Spirit. The aim was to create America’s fifth-largest airline, a jumbo-sized ulcc that would combine networks on either side of the United States with little overlap. It was Mr Franke at his intrepid best. Against him was a bigger-spending foe, though. JetBlue Airways, on the more gentrified end of low-cost air travel, had offered $3.7bn in cash for Spirit. On July 27th Spirit and Frontier called off their merger agreement. A day later JetBlue said it had agreed to buy Spirit. Whether the deal succeeds partly depends on the answers to two related questions.The first has to do with the zeal of President Joe Biden’s antitrust crackdown. His administration wants to usher in a new era of pro-competition litigation. Airlines are near the top of its hit list. The second question concerns the structure of the industry itself. Who could do more to bash down the prices of the high-fare heavyweights such as Delta, United and American Airlines? Is it the “tweeners” like JetBlue that call themselves low-cost but resemble full-service airlines? Or the insurgent ulccs that promise a Spartan model, grumpy passengers notwithstanding? In its campaign to inject more competition into American business, the White House has drawn attention to what it considers an overconcentrated domestic airline industry. The Department of Justice (doj) is on the warpath, too, on behalf of “travellers who cannot afford a plane ticket home to visit family”, as Jonathan Kanter, assistant attorney-general, has put it. He makes clear the doj is keen to “litigate, not settle”. Last year it sued to block the so-called Northeast Alliance between American and JetBlue in America’s lucrative north-east market. This would not only harm passengers in New York and Boston, it argued, but diminish JetBlue’s incentive to compete on fares with American across the country. The case goes to court in September. It is a big reason why Spirit has reservations about selling itself to JetBlue. It could drag on for months, leaving Spirit’s shareholders in limbo. There is a bigger reason, however. JetBlue’s takeover of Spirit would be even likelier to fall foul of the doj than either the Northeast Alliance or a Frontier-Spirit combo. The transaction could potentially be tied up for not months but years. JetBlue, after all, has its sights set on eliminating Spirit, America’s largest ulcc, simply to bag its aeroplanes, pilots and airport slots. JetBlue also intends to remove seats on aircraft it takes over from Spirit in order to offer its plusher service, which would inevitably push up average seat costs. Moreover, it will have less incentive to sell its lowest no-frills fares on routes formerly operated by Spirit.JetBlue counters that acquiring Spirit will make it a stronger rival to the network carriers, bringing down prices overall. It cites the “JetBlue effect”, which, it claims, forces legacy carriers to drop fares by about 16% on average when it goes head to head with them on non-stop routes. That may be so. Yet it ignores the impact of its higher fares on passengers who might have flown on Spirit. That leads to the second question: what industry structure would promote lower fares and more choice overall? JetBlue contends that its in-between model has three times more of a fare impact on legacy carriers than the ulcc model does on similar routes. Frontier calls this a fantasy. It notes that JetBlue itself has admitted to lowering fares in response to its no-frills rivals. It also argues that the “ulcc effect” drives fares down for longer than the JetBlue effect does.Moreover, it is possible that a bigger no-frills carrier would create demand from a new cohort of travellers, as has happened in Europe. Keith McMullan of Aviation Strategy, a consultancy, notes that in 2019 Spirit and Frontier had a combined domestic market share of 8%. That compares with a total of 20% in Europe for Ryanair, a Dublin-based no-frills giant, and Wizz Air. A combination of Frontier and Spirit, especially with the hundreds of new Airbus jets both firms have on order, might have increased that share significantly, making it as disruptive as its European counterparts. No thrills JetBlue shrugs off the threat its annihilation of Spirit would pose to America’s no-frills market. Its advisers argue that Frontier and other ulccs could quickly move into parts of America vacated by Spirit. That overlooks the troubled state of the industry since the covid-19 pandemic. Pilots, crew and engineers are thin on the ground (and off it). Travel chaos abounds. Normally, when the industry suffers a slump, a shake-out helps ease such bottlenecks in favour of low-cost airlines. That hasn’t happened yet, perhaps because overconcentration has cushioned the impact on the debt-laden legacy carriers. It may do soon. It is a pity that a combined Frontier and Spirit, chaired by the indefatigable Mr Franke, may not be around to fly the flag for creative destruction. ■Read more from Schumpeter, our columnist on global business:Meet Keyence, consultant to the world’s factories (Jul 23rd)Watch Russia’s Rosneft to see the new direction of global petropolitics (Jul 14th)What does the future hold for Reliance, India’s biggest firm? (Jul 9th) More

For digital-ad sellers, 2021 was always going to be a hard act to follow. As work, play and shopping shifted online during the covid-19 pandemic, internet advertising boomed. In America spending rose by 38%, to $211bn, compared with average annual growth of 21% in the preceding five years, according to eMarketer, a research firm. Smaller social-media firms such as Pinterest and Snap at times hit triple-digit year-on-year quarterly revenue growth. Even giants such as Alphabet (Google’s parent company) and Meta (Facebook’s and Instagram’s), which receive a third and a fifth of the world’s digital-ad dollars, respectively, clocked rates of 50%. The contrast with 2022 is stark. On July 21st Snap reported that its sales grew by 13%, year on year, in the second quarter, its most anaemic ever. In a letter to investors, the firm confessed that so far this quarter revenue was “approximately flat”. The market was spooked, and the company’s share price fell by almost 40%. The next day Twitter, which also depends on advertising, reported that its revenue had fallen slightly in the three months to June, compared with last year. That triggered concern about the health of online advertising, dragging down the share prices of the industry’s titans. On July 26th Alphabet duly disclosed Snap-like quarterly sales growth of 13%, down from 62% in the same period last year. That was less terrible than expected (its market value rose by 8% on the news) but still pretty bad (it remains a bit below what it had been before the Snap bombshell). A day later Meta said that its revenue declined for the first time, by 1% year on year. Upstart challengers like Snap are the most exposed. When marketing budgets get trimmed, advertisers tend to stick to what they know, says Mark Shmulik of Bernstein, a broker. And they know Google search much better than they do Snap’s experiments with augmented reality. The big firms also boast larger and more diverse sets of customers; Meta serves 10m advertisers globally, compared with Snap’s estimated 1m or less. That insulates them somewhat from softening demand. Somewhat, but not fully. Last year’s covid-boosted baseline is not the only thing weighing on the digital-ad market. Ad-sellers are feeling the delayed effect of Apple’s change last year to the privacy settings on iPhones, which stops advertisers from tracking people’s behaviour on its devices, and thus from measuring the effectiveness of digital ads. Snap cited the Apple policy as a reason for recent weak results. Meta estimates that the change will shave $10bn, or 8%, from its revenue this year. Both Alphabet and Meta are also facing fiercer competition. TikTok, a Chinese-owned short-video platform beloved of Western teenagers, is taking eyeballs from American social media, and ad revenue with them. Perhaps more concerning, previously ad-incurious tech titans are also getting in on the action. In the past couple of years Amazon has built the world’s fourth-biggest online-ad business. Apple has a small but growing ad operation. And Microsoft has just been named as Netflix’s partner in the video-streaming giant’s new ad-supported offering. Another reason for the big ad-sellers’ slowdown is similarly structural. For years they shrugged off blips in the broader economy, as many customers came to see online ads as a virtual shopfront that needed to be maintained even in tough times—often at the expense of other ad spending. That has left ever fewer non-digital ad dollars available to be diverted online. In a pinch, advertisers may now therefore need to take an axe to their digital billboards.The pain isn’t felt equally. Google, whose search ads rely less on the sort of tracking Apple has curbed, may have benefited from Meta’s misery, helping offset some of the slowdown. On July 27th Spotify bucked the trend among challenger platforms, reporting unexpectedly healthy ad revenues from its music-streaming service, which helped buoy its share price by 12%. Even so, the business cycle may be catching up with big tech. ■ More

Climate activists love to vilify ExxonMobil and Shell. These and other private-sector energy companies have been on the receiving end of proxy battles, legal challenges and other forms of pressure to force them to dump oil and gas in favour of renewable energy and other green technologies. The supermajors certainly make for an attractive target: they have ubiquitous distribution networks, well-known brands susceptible to consumer boycotts. Such pressure is often welcome—in the fight against global warming every little counts. But in the oil market the private sector counts for less than you might think. Whether the energy transition can succeed will depend in large part on the behaviour of the world’s state-led oil behemoths.If the supermajors are big oil then national oil companies (nocs in industry lingo) are enormous oil. Together they produce three-fifths of the world’s crude and half its natural gas, compared with just over a tenth for large international oil firms (the rest is pumped by smaller independent companies). They sit on roughly two-thirds of the remaining reserves of discovered oil and gas globally. Four—adnoc of the United Arab Emirates (uae), Saudi Aramco, pdvsa of Venezuela and QatarEnergy—possess enough hydrocarbons to continue producing at current rates for over four decades. If you thought that private-sector oilmen were making out like bandits of late from crude prices of $100 or more a barrel, as the latest quarterly earnings of Exxon and other supermajors are expected to confirm later this week, their haul pales beside that of their state-sponsored counterparts. According to Wood Mackenzie, an energy consultancy, if oil prices averaged $70 a barrel until 2030, the 16 largest nocs would pocket $1.1trn more than if they averaged $50, the base case. Half of that bounty would go to the Emirati, Kuwaiti, Qatari and Saudi nocs. Russia’s energy giants such as Rosneft, mostly shunned by the West after its invasion of Ukraine in February but embraced by China and other Asian customers, would capture nearly a fifth. And as the private sector gets shamed and squeezed into embracing a lower-carbon future, the nocs’ clout will only grow. It is therefore worrying that enormous oil’s record on decarbonisation has been so poor. Whereas the leading Western majors’ emissions of greenhouse gases have already stabilised or peaked, the same is true of just two state-run firms: Brazil’s Petrobras and Colombia’s Ecopetrol. Kavita Jadhav of Wood Mackenzie reckons that the state-run giants are allocating less than 5% of their capital spending to the energy transition, compared with 15% on average for American and European firms. Between 2005 and 2020 developing-world nocs also filed many fewer patent applications for green ideas than their international rivals, according to research by Amy Myers Jaffe and colleagues at the Climate Policy Lab at Tufts University.Not all state mastodons are the same, however. As Daniel Yergin, an energy expert now at s&p Global, a research firm, observes, nocs are much more diverse than private firms. s&p Global identifies 65 of them worldwide, ranging from basket cases like pdvsa, long mismanaged by Venezuela’s left-wing dictatorship, to professionally run firms which are listed and, at least in principle, accountable to minority shareholders (notably Aramco or Norway’s Equinor). Small wonder that they differ in their shade of brown, too.Many of the brownest nocs are in Africa, Asia and Latin America. Most are poorly run and have smallish or unattractive reserves. The Algerian and Venezuelan companies emit three to four times as much carbon in oil production as do the more geologically blessed and better managed firms such as adnoc and Saudi Aramco, and flare seven to ten times as much methane, another potent greenhouse gas, per barrel as does QatarEnergy. This record, combined with long-standing governance problems, is increasingly costing such firms the support of international companies that have historically supplied them with technical and financial muscle. By the calculations of Christyan Malek of JPMorgan Chase, a bank, the oil majors underwrite between 40% and 60% of investments made by nocs outside the Persian Gulf. Now, as one Western oil executive confides, even huge revenues from an African project may not be worth it “given how much grief I’m getting”. Ben Cahill of the Centre for Strategic and International Studies, an American think-tank, puts Mexico’s pemex, Algeria’s Sonatrach, Indonesia’s Pertamina, Angola’s Sonangol and Nigeria’s nnpc in this category. The danger is that these troubled firms may boost their dirty production now, to squeeze out as much revenue as possible before their assets become completely stranded. At the other end of the green spectrum, some ambitious nocs are using today’s oil and gas windfall to expand into cleaner energy, especially in countries with dwindling reserves and relatively ambitious targets to slash greenhouse-gas emissions. Alex Martinos of Energy Intelligence, a publisher, reckons these mostly medium-sized firms have in the past three years followed European majors in accelerating spending on cleaner energy, often outpacing similar investments by American companies. Examples of this second group include Malaysia’s Petronas and Thailand’s ptt, which More

Keyence is not exactly a household name, even by the low-key standards of corporate Japan. Ask most people, including some professional market-watchers, and the odds are they will struggle to say much about it. Put the same question to the world’s factory-owners, and they will recognise it instantly. Founded in 1974 by Takizaki Takemitsu, a young entrepreneur without a university degree, the company has for decades been helping manufacturers get the most out of their factories with sensors and robotics. Its clients include giants from just about every industry, from aerospace (Boeing) to semiconductors (Samsung and tsmc). Listen to this story. Enjoy more audio and podcasts on More

As summer descends with a vengeance on the northern hemisphere, you may be fantasising about the promise of “working from anywhere”. A colleague’s PowerPoint presentation would go down better by the poolside, washed down with a mojito. For most office grunts such fantasies remain just that—“anywhere” boils down to the discomfort of the sweaty kitchen table, a noisy café or the office hot desk. Listen to this story. Enjoy more audio and podcasts on More

Generation z is different. As a whole, Americans born between the late 1990s and early 2000s are less likely to have work or look for it: their labour-force-participation rate is 71%, compared with 75% for millennials (born between 1980 and the late 1990s) and 78% for Generation x (born in the decade or so to 1980) when each came of age. As a result, they make up a smaller share of the workforce. On the other hand, they are better educated: 66% of American Gen-zs have at least some college (see chart 1). The trend is similar in other rich countries. With graduation ceremonies behind them, the latest batch of diploma-holders are entering the job market. What they want from employers is also not quite the same as in generations past. And as the economy sours following a pandemic jobs boom, those wants are in flux.Listen to this story. Enjoy more audio and podcasts on More

Pity those looking for a slice of luxury this summer. Consumer prices are rising fast the world over but at the fanciest hotels they are soaring. Last year you could book a night at Le Bristol, Paris’s best, for less than €1,000 ($1,170) a night, if you looked hard enough. Now rooms are going for hundreds of euros more. The price of a gin martini at London’s Dukes hotel (straight from the freezer, and hands down the city’s best) is shooting up faster than the tippler’s blood-alcohol level after the first sip. A basic room on a Monday night in November at a new Four Seasons in California’s wine country is going for about $2,000. The cost of staying at a posh hotel crashed amid the first wave of covid-19 but has roared back. str, an analytics firm specialising in the hospitality industry, finds that the typical worldwide daily rate for a luxury hotel has more than doubled in the past two years (see chart). Prices for rooms at lesser establishments are up, but by nowhere near as much. Hotel accommodation, as measured by America’s consumer-price index, has risen by 27% in that period, twice as fast as the index as a whole. Two factors explain why the very swankiest hotels are raising their prices the most. The first relates to labour costs. Fancy places employ a lot of people, from porters to car-parking valets, in order to satisfy their guests’ every whim. As a consequence, they are more exposed to wage rises than are regular hotels, where guests wait longer to be served and more services are automated (or, increasingly, dispensed with entirely). The latest data suggest that rich-world pay is currently rising by about 4.5% a year in nominal terms, the highest rate in decades, and it is surging even faster in America. The second factor has to do with profit margins. Luxury hotels find it easier than others to pass on higher costs to customers. Business travellers using corporate cards do not study prices on menus very closely. The rich are probably even less price-sensitive than usual while on holiday. After a couple of years of less or no travel, and with their savings pots even fuller, they are ready for a good time. To a microeconomist that all makes sense—even if it doesn’t make the price of a glass of champagne at the Ritz any easier to swallow. For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

As summer descends with a vengeance on the northern hemisphere, you may be fantasising about the promise of “working from anywhere”. A colleague’s PowerPoint presentation would go down better by the poolside, washed down with a mojito. For most office grunts such fantasies remain just that—“anywhere” boils down to the discomfort of the sweaty kitchen table, a noisy café or the office hot desk. Listen to this story. Enjoy more audio and podcasts on More