The End of Hellish Tarmac Delays? Or Increased Airline Ticket Prices?

The majority of Americans don’t know that they possess a variety of rights while they sit on an airplane, let alone a more robust bundle of rights that they possess at essentially every step of the air travel process. In fact, 92% of Americans have no clue what their rights are or entail. From the time that you begin shopping for airline tickets online to when you hit the tarmac at your destination, your “Airline Passengers’ Bill of Rights” kicks in and provides various protections as you enter sky-space.

Following well-publicized tarmac delays, some of which reached well over six hours, regulators answered the distressed public by implementing federal rules that allot a maximum of three hours on the tarmac for flights landing in the U.S. Violations are punished by monetary fines. During the delay, passengers are entitled to various necessities such as food, water, functioning toilets, and medical attention, if needed. All of this seems like it’s pointing favorably towards consumers, but some industry experts have voiced their skepticism with these regulations.

The very nature of the regulation is a massive carrots-and-sticks situation. The fines that the federal rules impose are not to be taken lightly – they are currently set at up to $27,500 per stranded passenger. On a standard commercial Boeing 777 flight, with a capacity of 300, the penalty for a single flight can be enormous.

Robert Isom, US Airways COO, has stated that the airline’s defense simply is “cancelling flights.” And this seems like a rational solution on the part of the airlines; as sophisticated players, they will inevitably establish a robust system to calculate their benefits and losses with the potential fines if they figure that simply cancelling a flight will cost them less than potentially violating the new tarmac rules. Vikrant Vaze, assistant professor at Dartmouth’s Thayer School of Engineering, found that “for every minute of tarmac time being saved there is, on average, a three-minute increase in the total passenger delay.” He, like others, have begun to discern the potential implications of airlines choosing to cancel flights instead of facing massive fines if they feel like a delay might occur.

On the other hand, these penalties seem to be a common method employed by the legislative and judicial branches in a variety of scenarios to encourage or discourage certain behaviors. At least in some respects, it is pushing more accountable behavior by airline companies. Delta has expended “millions to invest in new technologies” to reduce tarmac wait-time variability, investing money towards equipping their tarmac spaces with tools like deicing pads to better combat against issues posed by the weather, which is frequently responsible for these delays.

How these airliners will collectively react to an intervention by the legal system is yet to be seen. It could potentially end up protecting consumers from one of the most upsetting parts of air travel and simply make airliners responsible for the issues that they should have resolved years ago. Or, consumers may have accidentally asked for even more delayed travel time while also having the interim costs of improvement passed along to them.

The End of Hellish Tarmac Delays? Or Increased Airline Ticket Prices?

Advancing Convenience Using Technology or Sustaining Implicit Bias

In recent years, Amazon has developed and widely marketed its facial recognition technology. This new invention has made it quicker and more convenient for organizations that use the technology to identify individuals. Many police departments and federal agencies across the country have already begun to use the service. Although this new technology has the ability to make day-to-day practices more convenient, researchers have found that the technology is limited to individuals of certain appearances. More specifically, results from this research have shown that the technology does not have the ability to facially recognize those of the female gender and those with a darker complexion.

During further testing of the facial recognition product, results showed that the product had the ability to properly identify the gender of lighter skinned men with 100% accuracy while also misclassifying women as men 29% of the time and darker-skinned women for men 31% of the time. Although the program is still in its pilot stage, many concerns have been raised given its current errors. The first of which is safety. Amazon’s facial recognition service has been sold to numerous law enforcement agencies around the country. If the current errors persist, there is a high possibility that the product will misidentify suspects primarily those that identify as African American. Given the current relationship between communities of color and law enforcement agencies, these flaws will potentially lead to further instances of misconduct.

Additionally, the research not only raised concerns around bias, but they also raise questions regarding the marketability of Amazon’s product. If a given product will only serve a certain subset of the population, many consumers and agencies will not have the desire to purchase the product. If Amazon decides to market its facial recognition further to be included with everyday consumer products, its lack of inclusivity could present roadblocks. This creates a larger issue as you begin to consider the ever-increasing buying power of both women and people of color. Ultimately, this defect has become a hindrance on Amazon’s ability to popularize the face recognition product.

In addition to concerns regarding the economic viability of the product, there must be further research done to analyze the algorithms used in artificial intelligence products to reduce potential biases against underrepresented groups. Although bias exists within our everyday society, developers must continue to create ways in which to prevent this bias from affecting technological advancements as society continues to become more innovative.

Advancing Convenience Using Technology or Sustaining Implicit Bias

Boeing, You’re Grounded

In October 2018, a Boeing 737 Max 8, operated by Lion Air, crashed soon after takeoff and killed 189 people. In March 2019, another Boeing 737 Max 8, operated by Ethiopian Airlines, crashed soon after takeoff and killed all 157 people on board. In response to the two crashes, safety regulators in 42 different countries banned all flights of the 737 Max 8. Initially in the U.S., the FAA stood firm behind Boeing, a U.S. company, asserting no systemic performance issues that would require grounding all 737 Max 8 planes. However, on March 13, 2019, President Trump went against the FAA’s stance and announced the grounding of all Boeing 737 Max in the U.S.

Investigators fear that both the Boeing 737 Max 8 planes crashed due to a malfunction in Boeing’s Maneuvering Characteristics Augmentation System (MCAS). The MCAS system was added when Boeing updated the 737 Max 8 with more fuel efficient engines to compete with the Airbus A320. However, these engines were also larger and could cause the plane’s nose to pitch dangerously upward. Therefore, Boeing added MCAS, an automated system that would push the plane’s nose down when necessary.

As the investigation continues, Boeing’s relationship with the FAA will be under scrutiny as well. When MCAS was added to the 737 Max’s flight control system, Boeing and the FAA determined that pilots did not need additional training. Boeing’s main reason for not training the pilots was to minimize costs. However, this oversight may have left pilots without a full understanding of how to address the MCAS malfunction, which likely contributed to the crashes.

The proximity of the Lion Air and Ethiopian Airlines crashes have put Boeing on the defensive. Airlines plan to seek compensation from Boeing because of the 737 Max groundings. The surviving families likely will file lawsuits against Boeing as well. Further, the 737 Max is Boeing’s best-selling jet ever and the crashes have put 4600 unfulfilled plane orders or $550 billion in future revenue at risk. The disasters will also cause significant damage to Boeing’s brand and reputation. Hopefully in the future, other industry leaders will learn from Boeing’s mistakes and err on the side of caution when balancing safety and costs.

Boeing, You’re Grounded

Higher Minimum Wage May Have Unintended Consequences

A few weeks ago, Senator Bernie Sanders announced his candidacy for President of the United States. Joining a crowded field of Democratic hopefuls, Sanders called on his supporters to “complete the revolution” that he began in 2016. And, just as he did in 2016, Sanders is making wealth inequality a central issue of his campaign. When Sanders called for a $15 national minimum wage in 2016, the idea was derided as ‘radical’ and ‘extremist.’ Since then, both New York and California have passed legislation, raising their minimum wages to $15 per hour (the CA bill calls for an incremental increase, gradually raising the wage to the target level). Additionally, numerous cities across the U.S. have imposed a $15 minimum. Notably, Sanders’ most recent attempt to pass a Senate bill raising the nationwide minimum wage to $15 was co-sponsored by Senator Cory Booker, Senator Kamala Harris, Senator Elizabeth Warren, Senator Kirsten Gillibrand, and Senator Amy Jean Klobuchar—all Democratic candidates for President. Indeed, the entire Democratic roster of candidates now seems to support the wage hike. While it was once a revolutionary idea, it has become the rallying cry of the Democratic Party.

Certainly, the idea has its merits. Raising the minimum wage can create incentives to work. Theoretically, ‘voluntarily unemployed’ workers may be encouraged by the prospect of earning $15 an hour as opposed to $7.25—essentially, the more a job pays, the more likely people are to do it. Further, some evidence suggests a correlation between wages and marginal productivity. That is, when you pay workers more, they actually become more productive. Perhaps most compelling is the moral argument. As Senator Sanders has said countless times, “if you work full-time, you should not live in poverty.”

However, there are strong counterarguments counseling against the wage increase. A minimum wage is, in effect, a price floor. In a perfectly competitive market, setting a price floor above the natural equilibrium will invariably lead to excess supply. Stated in non-economic terms, a minimum wage will increase unemployment. If companies have to pay each worker more money, they will naturally hire fewer workers. At the same time, as mentioned above, the higher wages will incentivize more people to join the labor force. Due to the concurrent expansion of the labor force and reduction in hiring, we would see a massive glut in the supply of labor—simply put, a surplus of jobless workers.

In reality, the analysis is more nuanced. It is affected by the elasticity of labor-supply and a host of other factors. In fact, in some rare market scenarios (such as a monopsony), a minimum wage can actually increase employment rates. Still, as a general rule, a minimum wage translates to higher unemployment. Crucially, young people would be hit hardest by this increase in unemployment. Firms hire workers based on their marginal revenue product (MRP). With less experience and knowledge, younger workers tend to have a lower MRP. As such, they are the first to hit the chopping board when firms are looking to trim fat.

Hence, the debate rages on: Is a $15 minimum wage the path to greater and more widespread prosperity? A bigger pie and more equitable slices? Or, alternatively, is it a path to severe unemployment, particularly for young inexperienced workers? Amazon provides a perfect case study which may help us answer this question.

In 2017, Amazon acquired Whole Foods Market, Inc. Under mounting pressure from activists and politicians (including Sanders himself), Amazon raised the minimum wage of Whole Foods workers to $15 per hour. The move was applauded by Sanders, who commended Amazon for paying its workers a living wage. However, since the wage hike, Whole Foods employees have seen their hours drastically reduced. One worker experienced a 33% reduction in his hours—the cut was so drastic, he actually earns less money now, despite being paid a higher hourly rate. Part-time employees, who overwhelmingly consist of young people, saw the biggest cut with their hours dropping from 30 per week to roughly 20 per week. Meanwhile, full-time employees suffered a less dramatic cut, with hours falling from 37.5 per week to approximately 35 per week. One worker lamented, “Just about every person on our team has complained about their hours being cut…Some have had to look for other jobs as they can’t make ends meet.”

This comports with the above-described economic model. By setting a price floor above the natural equilibrium, Amazon created a surplus of labor—more employees were eager to work, but the company was correspondingly forced to pay fewer workers, since each worker now costs more. And, as per the economic theory, younger part-time workers were disproportionately impacted; their hours-reduction was almost 4 times greater than that of full-time workers. If the Amazon case study is representative, then a $15 national minimum may not be the best way to help low-skill workers. In an economy where many minimum-wage jobs are already disappearing due to automation, a wage hike would only further diminish the availability of these vanishing low-skill positions. Instead, subsidizing education, constructing affordable housing units, and expanding an earned income tax credit may be more viable options.

Higher Minimum Wage May Have Unintended Consequences

The Crony Capitalist of Omaha

Berkshire Hathaway, run by legendary investors Warren Buffett and Charles Munger, published its annual letter to shareholders on February 23, 2019. Some commentators speculate that Mr. Buffett subtly criticized President Trump in that letter. The passage reads, “It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone.’”

Those words may appear to reference President Trump. But, it would be a mistake to let one’s distaste for our President cloud one’s judgment. Make no mistake: Mr. Buffett was referring to himself.

Berkshire Hathaway is a successful American company. Its long record of outperforming the markets is unrivaled. Warren Buffett is undoubtedly the reason for this success. Even so, Mr. Buffett recognizes that he could not have done it alone. During the financial crisis of ’07-08, Mr. Buffett lobbied the government to provide a cash infusion to the financial institutions in which he held a significant stake. Berkshire Hathaway invested $26 billion in the largest banks that were about to implode, $7 billion of which was Mr. Buffett’s personal stake.

Perhaps Mr. Buffett was simply discharging his duties as CEO. Maybe he was simply acting rationally within a system designed to promote this type of behavior. He might have benefitted his shareholders by employing his political capital. Maybe he even helped save the economy by pushing the government to do more.

But the Oracle of Omaha he is not.

A successful investor, by Mr. Buffett’s own definition, is someone who invests in productive ventures for their long-term value. But, someone who uses his enormous influence to lobby the government for a handout of epic proportions, albeit indirectly? We have a word for that in this country: a crony capitalist.

The Crony Capitalist of Omaha

Victoria’s Secret Will Be Closing 53 Stores in 2019

Lingerie seller Victoria’s Secret will be closing 53 stores this year as the brand continues to suffer from underperformance and low sales. The store closings comes on the heel of 30 store closures in 2018, demonstrating a consistent decline on a year-to-year basis in the company’s storefront earnings.

The loss can be attributed to the desertion of the brand by many women to larger retailers. Both Amazon and Walmart have launched women’s underwear collections that have attracted customers away from Victoria’s Secret. Furthermore, with the recent announcement by Target that it will be releasing three new lines of low cost women’s underwear and sleepwear things promise to become even more difficult for the retailer. This is especially true since Target’s new private label brands are designed to appeal to teenage girls, a demographic that makes up a large part of Victoria Secret’s customer base. This means that new competition from Target could severely impact the company’s bottom line.

On the other end of the spectrum are emerging brands such as Savage X Fenty, American Eagle Outfitters’ Aerie and ThirdLove. Many of these brands tend to cater to a larger range of body types and have more friendly ad campaigns that perhaps are better suited for the #MeToo era. ThirdLove also pointed to its improvements in bra design, citing better fitting bras as another reason many women were choosing to shop there as opposed to at Victoria’s Secret.

Further, hypersexualized ads and runway shows may be contributing to Victoria Secret’s recent struggles. The fact that the Victoria’s Secret fashion show demonstrated its worst ratings ever may be indicative of the fact that super glamorized celebrity models may no longer be attracting customers for the woman’s underwear seller. Many of Victoria’s Secret’s competitors seem to think so. Startups like ThirdLove and Adore Me have opted to use average women as opposed to models in an effort to draw further potential customers away from Victoria’s Secret.

That said, a major image change for the retailer may not renew the flagging brand. Over the last 20 years Victoria’s Secret has become a titan in the women’s underwear industry by relying over-the-top sex appeal and well-known models. A move to pivot now could alienate the woman for which the ad campaigns are still attractive and strike other’s as inauthentic.

Sales at Victoria’s Secret stores open at least a year fell 7% last quarter, while its stock has declined more than 40% over the past year.

Victoria’s Secret Will Be Closing 53 Stores in 2019

Exxon Meets Microsoft in the Permian Basin

Out on the desert plains of west Texas, while searching for the Permian Basin, you may find yourself lost in geological time and space. This vast collection of basins, reefs, and platforms stretches across a land area of 86,000 square miles, nearly the size of Ghana and slightly larger than Belarus. Containing the world’s thickest deposit of rocks from the Permian geologic period, spanning 47 million years some 299 million years ago, the Permian Basin stretches from the southeast corner of New Mexico down to the Rio Grande, placing it on the Texas side of an international border and possibly a wall.

So what makes this stretch of beautiful, austere, yet otherwise unremarkable land so highly valued? Under this land lies a veritable bonanza of shale oil, a fossil fuel source extracted from sedimentary oil shale through a series of complex chemical processes. The Permian Basin is an epicenter for the shale oil boom and is poised to dramatically place the U.S. back into pole position as a top producer of hydrocarbon fuel.

Oil company Exxon has recently signed an agreement with Microsoft to use their “cloud technology” services to efficiently extract the basin’s oil shale resources, “[c]overing 9.5 billion barrels of oil and natural gas across 1.6 million acres.” Given that Microsoft has long lagged behind its competitor Amazon in furnishing cloud services, Microsoft’s investors are keenly interested in this highly lucrative and long-term contract. The company intends to deploy sensors, statistical analysis, and remote data storage (i.e. “internet of things,” “machine learning,” and “cloud storage” respectively) to help Exxon rapidly and efficiently take advantage of the Permian Basin’s resources, likely with recent gestures by Saudi Arabia’s Aramco to expand its natural gas holdings in the Red Sea in mind.

Alas, we must ask as investors, consumers, and, most importantly, global citizens whether another “oil boom” is what we need as the pressures of climate change bear down on our local ecologies and economies. The rugged interior of west Texas, especially the Trans-Pecos, has long been an environmental haven and one of the most biodiverse parts of the United States. Rapid natural resources extraction in the region will not only contribute to the global fossil fuel addiction, thus contributing to climate change, but will likely harm a far too undervalued ecological region. As Exxon and other companies face the prospect of securities litigation, they run the risk of further damaging their reputation and their bottom lines. Microsoft may wind up with a far better deal out of this arrangement than Exxon in the coming years.

Exxon Meets Microsoft in the Permian Basin

Hudson Yards Received Big Tax Breaks, But Don’t Compare it to Amazon

The New York Times reported that Hudson Yards, the 28-acre complex of office buildings and luxury housing, has received almost $6 billion in government assistance and tax breaks. This deal follows the failed Amazon headquarters deal, where Amazon would have received $3 billion in tax breaks and created 25,000 jobs.

Hudson Yards is an expansive real estate development that will be home to many high-end retail shops, major corporations’ headquarters, and luxury apartments and condos. New York City spent about $2.4 billion to extend a subway line to the site and is providing $1.2 billion for four acres of parks and open spaces within the complex. These numbers are included in the $6 billion number cited above.

The project’s adversaries say wealthy businesses should pay their fair share and should not rely on government incentives to take on projects. Opponents specifically criticize Hudson Yards developers’ receiving over $1 billion in property tax breaks. However, supporters say the government incentives will pay for themselves by creating a new business district, thousands of new jobs, and making significant overall improvements to the neighborhood at large.

Many are comparing Hudson Yards to the Amazon deal, however, that comparison is misguided for a number of reasons. First of all, the project was first conceived following September 11th, when New York was in a state of economic downturn and overall disarray. Nobody knew what the future held for New York City and the housing crisis was not what it is today. Indeed, 20 years in the making, the tax breaks and incentives the wealthy developers have received appear suspect. However, it is understandable that New York City, in the wake of a crisis, would jump at an opportunity to create more housing and a new business district that would be sure to bring in money in years to come. In comparison, in the current economy and housing crisis, the harm the Amazon deal would cause is much more foreseeable and unnecessary. Indeed, it would create jobs, but those jobs would be for relatively high earners who will add stress to the city’s housing predicament.

Similarly, the projects themselves are vastly different. Hudson Yards is adding 4000 units of housing to New York City’s market, including 400 below-market-rate units accessible through the city’s affordable housing lottery. Though Amazon would have created a vast number of jobs, most of those jobs would have been for software engineers and other skilled workers. In comparison, Hudson Yards will have numerous restaurants and retail stores, which will create unskilled jobs. Additionally, the expansion of the subway line and the creation of parks will require manual labor.

All in all, it is unfortunate that cities need to incentivize large companies to take on projects. The property tax cuts are particularly discouraging. But it will take tax reform across the board to resolve this issue. Corporations simply will not spend the money unless they have no alternative option. Cities will continue to strive for long-term, wide-scale economic benefits, even when they might harm individual taxpayers in the interim.

Hudson Yards Received Big Tax Breaks, But Don’t Compare it to Amazon

Kraft Heinz Faces Class-Action Lawsuit

On February 27, a proposed class-action lawsuit was made public alleging Kraft Heinz, CEO Bernardo Hees, and Brazilian private equity firm 3G Capital concealed injury to Kraft Heinz’s brands and internal operations. The company is the fifth-largest food and beverage company globally and owns brands such as Capri Sun, Jell-O, Kool Aid, and Lunchables. The lawsuit comes on the heels of 3G’s questionable sale of $1.23 billion in stock sixth months prior to the processed foods company’s abysmal earnings report late last month. Kraft Heinz Co took a $15.4 billion write-down on its iconic Kraft and Oscar Mayer brands, signaling a broader shift by consumers to healthier and cheaper private-label products. In response, the company slashed its dividends and announced that it would be subject to an accounting probe by the U.S. Securities and Exchange Commission.

The lawsuit further alleges that the defendants acted in concert to allow 3G to sell the stock at artificially inflated prices. In response, Hees explained in an interview with Reuters that the transfer was made within a “window to liquidity” for an investor exiting a 3G fund.

Though shareholder lawsuits are common following unexpected bad news, it is no surprise that investors are raising suspicions around the sale—while the $1.23 billion in stock was sold by 3G at a share price of $59.83 each, other investors are left struggling to make sense of a 27.5% drop in stock price. The plunge is perhaps most surprising because of Kraft Heinz’s other largest controlling shareholder—Warren Buffett’s Berkshire Hathaway. Buffett’s investing strategy has long emphasized timeless American classics, such as Coca-Cola and Wells Fargo, with all five of his largest positions being in American companies. However, with changing consumer tastes and an abundance of alternatives within the marketplace, it is unclear as to whether the hit will be limited to Kraft Heinz alone. Buffett and Berkshire Hathaway are not named as defendants in the case.

Kraft Heinz Faces Class-Action Lawsuit

Surviving Brexit? US Companies Should Prepare to Avoid Massive Brisruption

Ahead of the March 29 date when the United Kingdom (UK) is set to leave the European Union (EU), U.S. companies are fright with worry about the worse-case scenario. Brexit, short for “British Exit,” reflects the UK’s decision to leave the EU, a political and economic union of 28 countries which trade with each other and allow citizens to move freely between the countries. After British Prime Minister Theresa May’s exit agreement defeat in January, not too many remain hopeful of a smooth transition period.

What does all this mean for U.S. companies? In a “no-deal” scenario, the UK would sever all ties with the EU with immediate effect, providing no guarantees to citizens’ for rights of residence and significantly disrupting businesses through lengthy tailbacks of lorries, new checks on cargo, and overall instability. Travel might also be affected, making what used to be an easy trip for salespeople, technical personnel, and executives and drawn out process of clearing customs and less assurance of easy movement.

What’s more, Brexit has already impacted the flow of the U.S. economy. The day after the Brexit vote in 2016, the Dow fell 610.32 points, reflecting investors’ growing lack of confidence in the market. When the euro and pound fell, both increased the value of the dollar, which has the opposite effect of making American shares more expensive for foreign investors. The weakened pound also makes U.S. exports to the U.K. more expensive, and as American’s fourth-largest export market, it affects the U.S. farming and manufacturing sectors. A no-deal Brexit will not only affect U.S. stocks, but bond yields might also take a hit, forcing investors and other entities into government bonds for more safety. This means an effect on investment and retirement accounts for regular Americans.

There’s no use in ruminating over what the U.S. could have done to preliminarily prepare. What matters now is getting on the front-end of what could prove a bumpy ride. U.S. companies using the U.K. as a gateway to free trade with the other 27 EU nations might start considering creative and innovative solutions for a new gateway. On the up-side, Brexit as a symbol of anti-globalization could mean that the UK is taking a step down from the financial main stage. With the uncertainty flowing through the U.K. about the ability to keep its international clients, U.S. preparation could mean significant gains and a chance to reclaim its place as stable global finance giant.

Surviving Brexit – US Companies Should Prepare to Avoid Massive Brisruption