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Speaker 2: The White House is pretty busy these days, not only
Speaker 2: dealing with the Warren Iran, but they're also playing a
Speaker 2: big role here in Spirit Airlines, embattled in its second
Speaker 2: bankruptcy in about one year.
Speaker 3: Who wants to own an airline?
Speaker 4: I don't know.
Speaker 2: Well, maybe the US government is going to own a
Speaker 2: stake in the airline.
Speaker 4: Let's bring in George Ferguson.
Speaker 2: He is our senior aviation aerospace defense analysts here at
Speaker 2: Bloomberg Intelligence.
Speaker 4: George.
Speaker 2: The reporting right now is the White House is close
Speaker 2: to reaching a financial rescue package for Spirit, and we're
Speaker 2: hearing that disagreement would offer up to five undred million
Speaker 2: dollars in financing an exchange for warrants to purchase stock.
Speaker 2: Is this kind of out of the Great Financial Crisis
Speaker 2: playbook of bailing out a company?
Speaker 5: It sort of seems out of almost the pandemic playbook,
Speaker 5: right and the pandemic. We decided we couldn't let any
Speaker 5: airlines fail and so came in to support them. Not
Speaker 5: sure why we need to do it here, you know,
Speaker 5: I think that the market has certainly recovered, the airline
Speaker 5: markets recovered since then. I think that there's probably too
Speaker 5: much capacity right now in the US market, and that's
Speaker 5: that's why some airlines are having problems generating profits. Spear
Speaker 5: at the tip of that spear having the most problems
Speaker 5: generating profits, and so it seems to me that we
Speaker 5: again need to cut down a capacity. So, you know,
Speaker 5: having some some airlines leave the business is probably the
Speaker 5: sort of the right way to fix it. But I
Speaker 5: guess the white House fields differently.
Speaker 3: That's kind of where I want to go, George. I mean,
Speaker 3: what's the what's the marketplace telling us here? It just
Speaker 3: seems like, well, not one of these big three airlines.
Speaker 3: It's just a tough business. I mean, is there a
Speaker 3: market for some of these more regional, lower cost airlines.
Speaker 5: I think there is, right, but the market has definitely
Speaker 5: turned I think against sort of most harshly against these
Speaker 5: low cost carriers, right because I think, really, you know,
Speaker 5: right now, the sort of the state of play in
Speaker 5: the US airline businesses, you need a strong loyalty program,
Speaker 5: so you need to be able to put a credit
Speaker 5: card in the hands of your loyal flyers. They're using
Speaker 5: that credit card for dinners, groceries, everything else. You're selling
Speaker 5: the credit card company miles, which is boosting your profits,
Speaker 5: which you can use to support the flying business. And
Speaker 5: then the big full service carriers, you know, they get
Speaker 5: they also have the premium I think there's a lot
Speaker 5: of premium travelers, a lot of baby boomers who've retired
Speaker 5: business travelers who will pay more for the front of
Speaker 5: the airplane and the back of the airplane seems very competitive.
Speaker 5: They're using those loyalty programs and that premium revenue to
Speaker 5: you know, subsidize the back of the airplane to a degree.
Speaker 5: So again telling me that there's just too much basic
Speaker 5: economy capacity, having Spirit leave the market would be one
Speaker 5: way to get rid of some of that basic economy capacity.
Speaker 2: We're seeing airlines start to reduce capacity as well because
Speaker 2: of the higher costs from fuel. Does that bring us back,
Speaker 2: bring us more back into balance.
Speaker 5: It's a beginning for it's the beginning of that of
Speaker 5: that process, absolutely right. And so Spirit had its problems
Speaker 5: before the Iran wars. So again that's why I think
Speaker 5: it's more a you know, the market really does have
Speaker 5: too much capacity. I think now for however long we're
Speaker 5: going to see these much higher fuel prices, the market
Speaker 5: has even more excess capacity.
Speaker 2: Right.
Speaker 5: So look, if we if we return to you know,
Speaker 5: two dollars a gallon jet fuel, I think a lot
Speaker 5: of these airlines that are starting to take some capacity
Speaker 5: out would take those park planes, put them back in service,
Speaker 5: and we'd be off to the races. But at these
Speaker 5: higher fuel prices, the airlines have to push through price increases.
Speaker 5: And you know the economics of that is when something
Speaker 5: costs more less is demanded and the airlines are seeing it,
Speaker 5: they can't get fares to rise enough to cover that
Speaker 5: increased fuel price. With this levelcity capacity in the marketplace,
Speaker 5: and we saw United, we saw Delta, we saw Alaska,
Speaker 5: all announced cutting back at least growth plans. Nobody's cutting
Speaker 5: in to you know, capacity levels that they flew last year.
Speaker 5: Starting to cut growth plans more more probably has to happen.
Speaker 3: Georgia United airlines at some numbers and they reduce their
Speaker 3: for your guidance, now, this looks like an earning sestment
Speaker 3: like I would put out between seven and eleven dollars
Speaker 3: a share. You can drive a seven forty seven through that, George,
Speaker 3: does that just reflect the uncertainty they have and kind
Speaker 3: of their whole p and L.
Speaker 5: Yeah, I mean it's a wide range. And you know,
Speaker 5: United has really gone to the less is more on
Speaker 5: the guidance world. So every other airline will give us
Speaker 5: a sense of what the cost available seat mile could be, right,
Speaker 5: they'll talk to us about where operating margins could be.
Speaker 5: United for the last I think it's about a year now,
Speaker 5: they just throw an EPs at us, a wide EPs,
Speaker 5: and they're like, yeah, you guys, go figure it out.
Speaker 5: So they're the poster child for less is more in
Speaker 5: the guidance world. And yeah, that's what they gave us
Speaker 5: this time too.
Speaker 4: It's kind of how they figured they're going to play
Speaker 4: the game.
Speaker 6: Right.
Speaker 2: Let's talk about Boeing, which narratives cash burn in the
Speaker 2: first quarter because of rising deliveries.
Speaker 4: How did these summers look to you?
Speaker 5: Yeah, I mean they looked as expected, all right, and
Speaker 5: so look, you know, the progress towards the recovery at
Speaker 5: Boeing continues, lowering cash burns always great. The defense business
Speaker 5: showed a profit, which was nice. Global Services continues to
Speaker 5: ring the bell, you know, eighteen percent margins. We love
Speaker 5: that business. It's a little bit of a black box.
Speaker 5: You don't always know what's going on there, but I
Speaker 5: hope it just keeps going. And the commercial airplane side,
Speaker 5: Spirit Aerosystems got folded in at the end of the year,
Speaker 5: and we would have expected a better result at a
Speaker 5: commercial airplane until Spirit got rolled in. And so there's
Speaker 5: some work to do down at Spirit. Bowing said, go figure.
Speaker 5: They were buying fuselages for more than Spirit can make
Speaker 5: them for or less than Spirit can make our force.
Speaker 4: Stay with us. More from Bloomberg Intelligence coming up after this.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 4: Let's talk a little tech here.
Speaker 3: Why not? It's always in the news. Ed Ludlow, He's
Speaker 3: in town, usually based there in Silicon Valley Peer three.
Speaker 3: I think it is at Bludlow b Tech co host
Speaker 3: Joints us here in our studio, ed, do I need
Speaker 3: to pay attention to this Anthropic Mythos model being accessed
Speaker 3: by authorized users? I'm not a Mythos user, but how
Speaker 3: should I think about it?
Speaker 7: You should pay attention. How confused are you all this
Speaker 7: by the ongoing story?
Speaker 4: Well?
Speaker 2: I thought it would like people couldn't use it in
Speaker 2: the government, but the government is also coming out with
Speaker 2: rules on how to use it.
Speaker 7: I really sympathize with everyone that's reading about this and
Speaker 7: listening to us talk about it. It's so complicated, But okay.
Speaker 7: There is a community of people who are hang out
Speaker 7: on discord, which is a platform for programmers, and one
Speaker 7: of these people, a single individual, was a contractor who
Speaker 7: had a contractor relationship with Anthropic and therefore had credentials
Speaker 7: to access Mythos. Mythos is a general purpose AI model,
Speaker 7: but it's very good at detecting vulnerabilities in source.
Speaker 4: Code, so it's like a chat GPT.
Speaker 7: It's the underlying model, but its primary competence is that
Speaker 7: it can go through really big bodies of code. Take
Speaker 7: for example, bank banks are built on lots of software,
Speaker 7: and it can quickly go through that software code base
Speaker 7: and say ah, I've found a flaw and I know
Speaker 7: how it could be exploited, and if I wanted to,
Speaker 7: I being the model, I could exploit it. So what
Speaker 7: we know is that this contractor with some a merry
Speaker 7: band of fellows and colleagues from this community got access
Speaker 7: around April seventh. It was supposed to be a very
Speaker 7: limited release to the biggest tech companies and banks, so
Speaker 7: a group of maybe forty entities, so it was supposed
Speaker 7: to be closed off. They did not use it for
Speaker 7: anything malicious. Actually, the other thing the model is really
Speaker 7: good at is making websites, so it's just very good
Speaker 7: at generating software. The concern is they should not have
Speaker 7: had access. They were unauthorized. How could that have possibly happened?
Speaker 7: And this is good old fashioned kind of hacking. They
Speaker 7: did use credentials, that's so important. I keep underscoring that
Speaker 7: this person had access but shouldn't have used it.
Speaker 2: Maybe companies should hire full time staff rather than use
Speaker 2: contractors who have no loyalty to the company.
Speaker 4: Just the thought.
Speaker 7: But they also used logic and were like, where do
Speaker 7: we think that the code for the model itself is hosted?
Speaker 7: And they went through the internet slewth thing is the
Speaker 7: word we've used in the story and found it, and
Speaker 7: so it's completely bizarre. The net result is that Anthropic
Speaker 7: has confirmed that this has happened, they didn't do anything
Speaker 7: malicious with it, and that it was within the sort
Speaker 7: of closed confines of this contractors. They could have, but
Speaker 7: they could have. And so here's the hypothetical. What if
Speaker 7: a bad actor, this could be a state level piece
Speaker 7: of espionage, It could be a malicious group of hackers.
Speaker 7: What if they got access through the same mechanisms and
Speaker 7: did something actually bad with it.
Speaker 3: I mean, it's one thing to hack some code back
Speaker 3: in the day. It's another thing to get access, as
Speaker 3: you were saying, to this type of technology, which I
Speaker 3: don't think we as users, certainly the regulators in Washington,
Speaker 3: I can't imagine know exactly how powerful this can be. Yeah,
Speaker 3: I mean you could paint some really dire scenarios.
Speaker 7: The reason I'm sympathetic with the audience is that we
Speaker 7: use blanket terms like cybersecurity. Cybersecurity is a good thing,
Speaker 7: you know, it's the defense against potential catch up, right,
Speaker 7: and so like, let's make this really simple. It's a model.
Speaker 7: A user can say to the model, here is a
Speaker 7: very big body of code, the code of a bank,
Speaker 7: go through it and find vulnerabilities. Now, the Fed and
Speaker 7: the Treasury want those banks to do this proactively so
Speaker 7: they can find the flaws and patch them to d risk.
Speaker 4: So it's a race to see who can get to
Speaker 4: it first.
Speaker 7: But what if there were a bad actor? So this
Speaker 7: is the hypothetical, and it is a hypothetical. There's no
Speaker 7: evidence that there is yet a malicious actor out there
Speaker 7: that has access to this. It's so complicated. But the
Speaker 7: into is that the model can go through lots of
Speaker 7: code much more quickly, in more detail, and find things
Speaker 7: that an army of humans cannot do at least as quickly.
Speaker 7: That's the basics of what we're talking about.
Speaker 1: Stay with us.
Speaker 3: More from Bloomberg Intelligence coming up after this.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android
Speaker 1: Auto with the Bloomberg Business app. Listen on demand wherever
Speaker 1: you get your podcasts, or watch us live on YouTube.
Speaker 3: All right, here's a headline. When I read this morning,
Speaker 3: I'm like, are we back in the nineteen nineties, Deutsche
Speaker 3: Telecoms seeks to build number one carrier T Mobile deal.
Speaker 3: I mean, this is the stuff we were doing back
Speaker 3: at Salomon Brothers and Credit Swiss, back in the day
Speaker 3: when telecoms were just buying and selling each other left
Speaker 3: and right, and spending money which.
Speaker 4: We as opposed to being a utility business.
Speaker 3: Exactly what we like to fund those people because they
Speaker 3: are capital intensive.
Speaker 4: So it's teching him. John Bler.
Speaker 3: He knows what's going on out there. He covers all
Speaker 3: the telecoms for a Bloomberg Intelligence. Hey, John, did this
Speaker 3: surprise you this morning to see that Deutsche Telecom is
Speaker 3: maybe thinking to buy the whole thing out there in
Speaker 3: T Mobile.
Speaker 8: I think the timing was a little surprising, Paul, I
Speaker 8: didn't expect it, sort of out of the blue. It
Speaker 8: came midday yesterday Bloomberg reported that taught the Deutsche Telecom
Speaker 8: was considering this move, and as you said, it's kind
Speaker 8: of back to the future with this mega merger. Here.
Speaker 8: Keep in mind, Deutsche Telecom is the parent of T Mobile.
Speaker 8: They own fifty three percent of the company and have
Speaker 8: for a while. They have fifty six percent I think
Speaker 8: of the voting rights here, So what they're really after
Speaker 8: is Europe is a much more mature market than the US,
Speaker 8: and so T Mobile has been a real profit engine
Speaker 8: for them, and I think they're looking to sort of
Speaker 8: boost their profits by bringing in T Mobile into the
Speaker 8: fold as one hundred percent holding.
Speaker 2: Is this something that regulators in Germany and here in
Speaker 2: the US would be okay with?
Speaker 8: That is the big question mark scorelet. It's going to
Speaker 8: be really interesting to see how the current administration here
Speaker 8: in the US reacts to it. I can't speak to Germany,
Speaker 8: but I do believe here in the US they may
Speaker 8: look at it and say, gee, do we really want
Speaker 8: a foreign entity holding one hundred percent of T Mobile
Speaker 8: which has US license spectrum licenses across a broad swath
Speaker 8: at different frequencies, and it's you know, they would have
Speaker 8: obviously control over the customer relationships, call it eighty five million,
Speaker 8: I think at T Mobile. So I don't want to
Speaker 8: second guess the administration and how they're going to react
Speaker 8: to it, but my sense is there might be some
Speaker 8: pushback there. The US may even seek some sort of
Speaker 8: a deal with Deutsche Telecom to you know, favorable terms,
Speaker 8: if you want to think of it that way, to
Speaker 8: clear the path for getting the deal done in.
Speaker 3: The Bloomberg News reporting today on this story. US congress
Speaker 3: and Jim Jordan, chairman of the House Judiciary Committee, said
Speaker 3: Tuesday that the US government would look at the details
Speaker 3: of any deal. Quote, A foreign company taking over TA
Speaker 3: Mobile will get our staff's attention end quote. He said,
Speaker 3: So there's certainly gonna be something from the congressional side here.
Speaker 3: Would do you think that would Deutsche Telecom's full ownership?
Speaker 3: Would that mean anything to Charlie Pellett, who's a Tea
Speaker 3: Mobile customer? And are you a T Mobile customer?
Speaker 6: Scarlett?
Speaker 3: And Scarlett's a T Mobile customer and.
Speaker 8: Scarlet, so I'm a Verizon customer, but I do have
Speaker 8: a single line with T Mobile. It is a great network.
Speaker 8: I look at a combination in the scale that comes
Speaker 8: with it, and I see potential for investing more heavily
Speaker 8: in the network. I think they would have access to
Speaker 8: greater source of funds, they would have greater leverage over
Speaker 8: suppliers potentially, so they would get better deals on equipment,
Speaker 8: lowering their cost capital. So from that standpoint, Paul, I
Speaker 8: think we could see real uplift in T mobiles network.
Speaker 8: They've been investing in it over the years and have
Speaker 8: done a very good job of building out five G
Speaker 8: coveraging capacity, but that's an ongoing process, right, so you
Speaker 8: would you know, you're constantly investing there, and you're constantly
Speaker 8: seeking more funds to be able to do more on
Speaker 8: that front, and I think a deal would favor that.
Speaker 8: So Charlie can rest assured that his service would probably
Speaker 8: get a lot better, not worse.
Speaker 4: Than the I like hearing that, John.
Speaker 2: Where does that leave the number one player in the
Speaker 2: telecom space here in the US, which is AT and T.
Speaker 2: It just reported earnings. Wireless service revenue did come up
Speaker 2: short in the last quarter, it.
Speaker 8: Did, Scarlet. I think investors should look beyond that. In
Speaker 8: two Q we're going to see a price increase across
Speaker 8: the base, which is going to lead to higher wireless
Speaker 8: service revenue. The one thing that AT and T has done,
Speaker 8: and I suspect for Rizing and T Mobile are doing
Speaker 8: exactly the same, is they're relying more on subscriber growth
Speaker 8: now to drive the revenue equation as opposed to driving
Speaker 8: up rates. So again positive for consumers. We're going to
Speaker 8: see fewer price increases, although, as I said just a
Speaker 8: second ago, AT and T is implementing a price increase
Speaker 8: on some of the older plans starting in two Q
Speaker 8: so that'll help to lift that wireless service revenue, but
Speaker 8: you don't have that dual engine of rate increases and
Speaker 8: subscriber growth at work.
Speaker 4: Stay with us. More from Bloomberg Intelligence coming up after this.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
Speaker 1: weekdays at ten am Eastern on Apple, Coarclay, and Android
Speaker 1: Auto with the Bloomberg Business App. Listen on demand wherever
Speaker 1: you get your podcasts, or watch us live on YouTube.
Speaker 3: Earnings out again for a lot of companies this week.
Speaker 3: This is a big week. Philip Marsh International Alison better
Speaker 3: than expected numbers. The stocks up about six point six
Speaker 3: percent today, so a big move for that stock. It's
Speaker 3: up about two percent year today. Let's break down the
Speaker 3: numbers from Philip Marsh, Ken Sha Bloomberg Intelligence, Senior Consumer
Speaker 3: Products Analyst joints us here Ken. What's driving Philip marsh
Speaker 3: businesses these days?
Speaker 6: Well? Philip Morris today a late any fears that some
Speaker 6: competitive activity with their oral nicotine products into the US
Speaker 6: is going to derail them hitting their numbers. They didn't.
Speaker 6: They beat their numbers handily. Top line up nine percent
Speaker 6: EPs up sixteen helped a bit by currency, but the
Speaker 6: underlying business is healthy cigarettes. Unexpectedly, or I should say
Speaker 6: as expected, volumes are down as the long term secular
Speaker 6: decline continues, but pricing was up eight percent over the
Speaker 6: year of a year smoke free products top line was
Speaker 6: up strong. Gross margins are about seventy percent. And so
Speaker 6: the big picture is that they're on plan with their
Speaker 6: transformation to move away from legacy cigarettes to these smoke
Speaker 6: free products which are on trend. And now that business
Speaker 6: smoke free is a scale business, a sixteen billion dollar
Speaker 6: business that's now being positioned I believe for separation at
Speaker 6: some point soon.
Speaker 3: Oh interesting, Yeah, I mean the kids. I hear zin
Speaker 3: like in social media posts from from younger folks. I'm
Speaker 3: not really sure because I think Zinfandel line, but that's
Speaker 3: not it.
Speaker 4: No, this is Zyn not Zinfandel.
Speaker 2: Okay, So yeah, talk a little bit more about that
Speaker 2: smoke free business and how a spinoff might be on
Speaker 2: the way.
Speaker 4: Why would Philip Worse want to do that?
Speaker 6: So there's smoke free business I mentioned is powered most
Speaker 6: by Icos. That's their heated tobacco device which uses its
Speaker 6: Marlborough and other branded plugs, if you will, units that
Speaker 6: you put into the device and it heats tobacco rather
Speaker 6: than burn it like a combustible cigarette, and thereby is
Speaker 6: smoke free and or less harmful alternative. The two other
Speaker 6: legs of the stew of smoke free or it's evapor
Speaker 6: product that's a closed system, meaning there's no plugs involved.
Speaker 6: It's just that once you use it, you're done. That's
Speaker 6: called viv that's a more economical version, and that's catching
Speaker 6: on well. And then you have the oral nicotine products
Speaker 6: that I alluded to before, which they have a sixty
Speaker 6: percent share in the US, a big share you know,
Speaker 6: outside the US in selected markets. It's still prohibitive prohibited
Speaker 6: in many European markets, but where it is legal, it's
Speaker 6: doing well, and that rounds out their smoke free business.
Speaker 6: It really is the fastest growing element to Filla Morris,
Speaker 6: this smoke free The company is providing the disclosure that
Speaker 6: analysts love. It's a double digit grower, it's got high margins,
Speaker 6: it's on trend, and I think they're going to market
Speaker 6: it that way probably, Like I said, I believe at
Speaker 6: the end of the year as a really attractive spinoff.
Speaker 3: So I'm just looking at the PGeo function which gives
Speaker 3: you the segment revenue, and smoke free is now forty
Speaker 3: percent of total sales there. That is just external talk
Speaker 3: to us about the competitive landscape for that smoke free products.
Speaker 6: They Phillip Morris, to their credit, was really out in front,
Speaker 6: well ahead of its competitors, namely British American Tobacco, Imperial Tobacco,
Speaker 6: Japan Tobacco, who have similar products a heated tobacco and
Speaker 6: you know an e vapor E cigarette products. They are
Speaker 6: way behind with Philip Moore to Philip Morris, so they
Speaker 6: have like a seventy five percent share of where they're
Speaker 6: where they compete with these products and the icos product.
Speaker 6: So they're way ahead. You know, they're not immune to competition,
Speaker 6: but they're so far ahead they're already coming out with
Speaker 6: second and third generation products. Whether competition is trying to
Speaker 6: catch up.
Speaker 2: Do we see any impact from the war in Iran
Speaker 2: on Philip Morris, whether it has to do with just
Speaker 2: costs overall or you know, transporting its products.
Speaker 6: They said there was a small impact, namely the duty
Speaker 6: free you know shops you see in airports with less travel,
Speaker 6: they had a downturn there. They said they did site
Speaker 6: some input costs, you know, distribute, They have some of
Speaker 6: their own distribution costs, transportation, things like that. It's a
Speaker 6: relatively small impact though, and you know, it's something worth
Speaker 6: keeping an eye on. But I don't think anybody changed
Speaker 6: their margin profile on the company just yet due to that.
Speaker 2: This is the.
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