Bloomberg Audio Studios, podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. The White House is pretty busy these days, not only dealing with the war in Iran, But they're also playing a big role here in Spirit Airlines, embattled in its second bankruptcy in about one year. Who wants to own an airline? I don't know. Well, maybe the U.S. government is going to own a stake in the airline. Let's bring in George Ferguson. He is our senior aviation aerospace defense analyst here at Bloomberg Intelligence. George, the reporting right now is the White House is close to reaching a financial rescue package for Spirit. And we're hearing that this agreement would offer up to $500 million in financing in exchange for warrants to purchase stock. Is this kind of out of the great financial crisis playbook of bailing out a company? It sort of seems out of almost the pandemic playbook, right? In the pandemic, we decided we couldn't let any airlines fail and so came in to support them. Not sure why we need to do it here. I think that the market has certainly recovered. The airline market has recovered since then. I think that there's probably too much capacity right now in the U.S. market. And that's why some airlines are having problems generating profits. Spear, at the tip of that spear, having the most problems generating profits. And so it seems to me that we, again, need to cut down on capacity. So, you know, having some airlines leave the business is probably sort of the right way to fix it. But I guess the White House feels differently. That's kind of where I want to go, George. I mean, what's the marketplace telling us here? It just seems like, well, if you're not one of these big three airlines, it's just a tough business. I mean, is there a market for some of these more regional, lower cost airlines? I think there is. Right. But the market has definitely turned, I think, against sort of most harshly against these low cost carriers. Right. Because I think really, you know, right now, sort of the state of play in the U.S. airline business is you need a strong loyalty program. So you need to be able to put a credit card in the hands of your your loyal flyers. They're using that credit card for dinners, groceries, everything else. You're selling the credit card company miles, which is boosting your profits, which you can use to support the flying business. And then the big full service carriers, they also have the premium. I think there's a lot of premium travelers, a lot of baby boomers who've retired, business travelers who will pay more for the front of the airplane. And the back of the airplane seems very competitive. They're using those loyalty programs and that premium revenue to subsidize the back of the airplane to a degree. So, again, telling me that there's just too much basic economy capacity. capacity, having Spirit leave the market would be one way to get rid of some of that basic economy capacity. We're seeing airlines start to reduce capacity as well because of the higher costs from fuel. Does that bring us back, bring us more back into balance? It's a beginning for, it's the beginning of that process. Absolutely right. And so Spirit had its problems before the Iran war. So again, that's why I think it's more a, you know, the market really does have too much capacity. I think now, for however long we're going to see these much higher fuel prices, the market has even more excess capacity, right? So look, if we return to, you know, $2 a gallon jet fuel, I think a lot of these airlines that are starting to take some capacity out would take those parked planes, put them back in service, and we'd be off to the races. But at these higher fuel prices, the airlines have to push through price increases. And, you know, the economics of that is when something costs more, less is demanded and the airlines are seeing it. They can't get fares to rise enough to cover that increased fuel price with this level of capacity in the marketplace. And we saw United, we saw Delta, we saw Alaska I'll announce cutting back at least growth plans. Nobody's cutting in to capacity levels that they flew last year, starting to cut growth plans. More probably has to happen. George, United Airlines out with some numbers and they reduced their full year guidance. Now, this looks like an earnings estimate like I would put out between seven and eleven dollars a share. You can drive a 747 through that, George. Does that just reflect the uncertainty they have in kind of their whole P&L? Yeah, I mean, it's a wide range. And, you know, United has really gone to the less is more on the guidance world. So every other airline will give us a sense of what the cost available seat mile could be, right? They'll talk to us about where operating margins could be. United for the last, I think it's about a year now, they just throw an EPS at us, a wide EPS. And they're like, yeah, you guys go figure it out. So they the poster child for less is more in the guidance world And yeah that what they gave us this time too It kind of how they figured they going to play the game right Let talk about Boeing which narrowed its cash burn in the first quarter because of rising deliveries. How do these numbers look to you? Yeah, I mean, they looked as expected, all right? And so look, you know, the progress towards the recovery of Boeing continues. Lowering cash burn's always great. The defense business showed a profit, which was nice. Global services continues to ring the bell. You know, it's 18 percent margins. We love that business. It's a little bit of a black box. You don't always know what's going on there, but I hope it just keeps going. And the commercial airplane side, Spirit Aerosystems got folded in at the end of the year. That's right. And we would have expected a better result out of commercial airplane until Spirit got rolled in. And so there's some work to do down at Spirit. Boeing said, go figure. They were buying fuselages for more than Spirit can make them for, or less than Spirit can make them for. Stay with us. More from Bloomberg Intelligence coming up after this. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. or watch us live on YouTube. Let's talk a little tech here. Why not? It's always in the news. Ed Ludlow, he's in town, usually based out there in Silicon Valley. Pier 3, I think it is. Ed Ludlow, B-Tech co-host, joins us here in our studio. Ed, do I need to pay attention to this anthropic mythos model being accessed by unauthorized users? I'm not a mythos user, but how should I think about it? You should pay attention. How confused are you all by the ongoing story of mythos? I'm trying to keep up. I thought people couldn't use it in the government, but the government is also coming out with rules on how to use it. I really sympathize with everyone that's reading about this and listening to us talk about it. It's so complicated, but okay, there is a community of people who hang out on Discord, which is a platform for programmers. And one of these people, a single individual, was a contractor who had a contractor relationship with Anthropic and therefore had credentials to access Mythos. Mythos is a general purpose AI model, but it's very good at detecting vulnerabilities in source code. So it's like a chat GPT. It's the underlying model, but its primary competence is that it can go through really big bodies of code. Take, for example, a bank. Banks are built on lots of software and it can quickly go through that software code base and say, ah, I found a flaw and I know how it could be exploited. And if I wanted to, I being the model, I could exploit it. So what we know is that this contractor with a merry band of fellows and colleagues from this community got access around April 7th. It was supposed to be a very limited release to the biggest tech companies and banks, a group of maybe 40 entities. So it was supposed to be closed off. They did not use it for anything malicious. Actually, the other thing the model is really good at is making websites. So it's just very good at generating software. The concern is they should not have had access. They were unauthorized. How could that have possibly happened? And this is good old fashioned kind of hacking. They did use credentials. That's so important. I keep underscoring that. This person had access, but shouldn't have used it. Maybe companies should hire full-time staff rather than use contractors who have no loyalty to the company. Just a thought. But they also use logic and were like, where do we think that the code for the model itself is hosted? and they went through the internet sleuthing is the word we've used in the story and found it um and so it's completely bizarre the net result is that anthropic has confirmed that this has happened they didn't do anything malicious with it um and that it was within the sort of closed confines of this contractors but they could have but they could have and so here's the hypothetical what if a bad actor this could be a state level um piece of espionage it could be a malicious uh group of hackers what if they got access through the same mechanisms and did something actually bad with it i mean it's one thing to hack some code back in the day it's another thing to get access as you were saying ed to this type of technology which i don't think we as users certainly the regulators in Washington, I can't imagine, know exactly how powerful this can be. I mean, you could paint some really dire scenarios. The reason I'm sympathetic with the audience is that we use blanket terms like cybersecurity. Cybersecurity is a good thing. You know, it's the defense against potential bad actions. Right. And so, like, let's make this really simple. It's a model. A user can say to the model, here is a very big body of code, the code of a bank. Go through it and find vulnerabilities. Now, the Fed and the Treasury want those banks to do this proactively so they can find the flaws and patch them to de-risk. So it's a race to see who can get to it first. But what if there were a bad actor? So this is the hypothetical, and it is a hypothetical. There's no evidence that there is yet a malicious actor out there that has access to this. It's so complicated but the potential is that the model can go through lots of code much more quickly in more detail and find things that an army of humans cannot do at least as quickly That the basics of what we're talking about. Stay with us. More from Bloomberg Intelligence coming up after this. Watch us live on YouTube. All right, here's a headline. When I read this morning, I'm like, are we back in the 1990s? Deutsche Telekom seeks to build number one carrier T-Mobile deal. I mean, this is the stuff we were doing back at Salomon Brothers and Credit Suisse back in the day when telecoms were just buying and selling each other left and right and spending money, which we like. As opposed to being a utility business. Exactly. Boy, we like to fund those people because they are capital intensive. So let's take him with John Butler. He knows what's going on out there. He covers all the telecoms for Bloomberg Intelligence. Hey, John, did this surprise you this morning to see that Deutsche Telekom is maybe thinking to buy the whole thing out there in T-Mobile? I think the timing was a little surprising, Paul. I didn't expect it sort of out of the blue. It came midday yesterday. Bloomberg reported that Deutsche Telekom was considering this move. And as you said, it's kind of back to the future with this mega merger here. Keep in mind, Georgia Telecom is the parent of T-Mobile. They own 53% of the company and have for a while. They have 56%, I think, in their voting rights here. So what they're really after is Europe is a much more mature market than the U.S. And so T-Mobile has been a real profit engine for them. And I think they're looking to sort of boost their profits by bringing in T-Mobile into the fold as 100 percent holding. Is this something that regulators in Germany and here in the U.S. would be OK with? That is the big question mark, Skorlet. It's going to be really interesting to see how the current administration here in the U.S. reacts to it. I can't speak to Germany, but I do believe here in the U.S. they may look at it and say, gee, do we really want a foreign entity holding 100 percent of T-Mobile, which has U.S. spectrum licenses across a broad swath of different frequencies? And it's, you know, they would have obviously control over the customer relationships, call it 85 million, I think, at T-Mobile. So I don't want to second guess the administration and how they're going to react to it. But my sense is there might be some pushback there. The U.S. may even seek some sort of a deal with Deutsche Telekom to, you know, favorable terms, if you want to think of it that way, to clear the path for getting the deal done. In the Bloomberg News reporting today on this story, U.S. Congressman Jim Jordan, chairman of the House Judiciary Committee, said Tuesday that the U.S. government would look at the details of any deal, quote, a foreign company taking over T-Mobile will get our staff's attention, end quote, he said. So there's certainly going to be something from the congressional side here. Would do you think that would Deutsche Telekom's full ownership, would that mean anything to Charlie Pellett, who's a T-Mobile customer? And are you a T-Mobile customer? I am. And Scarlett's a T-Mobile customer. And Scarlett. So I'm a Verizon customer, but I do have a single line with T-Mobile. It is a great network. I look at a combination in the scale that comes with it, and I see potential for investing more heavily in the network. I think they would have access to greater source of funds. They would have greater leverage over suppliers potentially, so they would get better deals on equipment, lowering their cost of capital. So from that standpoint, Paul, I think we could see a real uplift in T-Mobile's network. They've been investing in it over the years and have done a very good job of building out 5G coverage and capacity. But that's an ongoing process, right? So you're constantly investing there and you're constantly seeking more funds to be able to do more on that front. And I think a deal would favor that. So Charlie can rest assured that his service would probably get a lot better, not worse. All right. I like hearing that. John, where does that leave the number one player in the telecom space here in the U.S., which is AT&T? It just reported earnings. Wireless service revenue did come up short in the last quarter. It did, Scarlett. I think investors should look beyond that. In 2Q, we're going to see a price increase across the base, which is going to lead to higher wireless service revenue. The one thing that AT&T has done, and I suspect Verizon and T-Mobile are doing exactly the same, is they're relying more on subscriber growth now to drive the revenue equation as opposed to driving up rates. So again positive for consumers We going to see fewer price increases although as I said just a second ago AT is implementing a price increase on some of the older plans starting in 2Q So that'll help to lift that wireless service revenue. But you don't have that dual engine of rate increases and subscriber growth at work. Stay with us. More from Bloomberg Intelligence coming up after this. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Earnings out again for a lot of companies this week. This is a big week. Philip Morris International out with some better than expected numbers. The stock's up about 6.6 percent today, so a big move for that stock. It's up about 2 percent year to date. Let's break down the numbers from Philip Morris. Ken Shea, Bloomberg Intelligence Senior Consumer Products Analyst, joins us here. Ken, what's driving Philip Morris' businesses these days? Well, Philip Morris today allayed any fears that some competitive activity with their oral nicotine products in the U.S. is going to derail them, hitting their numbers. They didn't. They beat their numbers handily. Top line up 9 percent, EPS up 16. Helped a bit by currency, but the underlying business is healthy. Cigarettes unexpectedly, or I should say as expected, volumes were down as the long-term secular decline continues. But pricing was up 8% over a year over a year. Smoke-free products, top line was up strong. Gross margins were up about 70%. And so the big picture is that they're on plan with their transformation to move away from legacy cigarettes to these smoke-free products, which are on trend. And now that business, Smoke Free, is a scale business, a $16 billion business that's now being positioned, I believe, for separation at some point soon. Oh, interesting. Yeah. I mean, the kids, I hear Zin, like in social media posts from younger folks. I'm not really sure because I think Zinfandel wine, but that's not it. No, this is Z-Y-N, not Zinfandel. Okay. So, yeah, talk a little bit more about that Smoke Free business and how a spinoff might be on the way. Why would Philip Morris want to do that? So their smoke-free business, as I mentioned, is powered mostly by Icos. That's their heated tobacco device, which uses its Marlboro and other branded plugs, if you will, units that you put into the device. And it heats tobacco rather than burn it like a combustible cigarette. And thereby is smoke-free and a less harmful alternative. The two other legs of the stool of Smokefree are its e-vapor product. That's a closed system, meaning there's no plugs involved. It's just that once you use it, you're done. That's called Vive. That's a more economical version, and that's catching on well. And then you have the oral nicotine products that I alluded to before, which they have a 60% share in the U.S., a big share outside the U.S. in selected markets. It's still prohibited in many European markets. But where it is legal, it's doing well. And that rounds out their smoke-free business. It really is the fastest growing element to Philip Morris, this smoke-free. The company is providing the disclosure that analysts love. It's a double-digit grower. It's got high margins. It's on trend. And I think they're going to market it that way probably, like I said, I believe at the end of the year as a really attractive spinoff. So I'm just looking at the PGEO function, which gives you the segment revenue. And Smokefree is now 40% of total sales there. That is just extraordinary. Talk to us about the competitive landscape for that Smokefree products. Philip Morris, to their credit, was really out in front, well ahead of its competitors, namely British American Tobacco, Imperial Tobacco, Japan Tobacco, who have similar products. a heated tobacco and, you know, an e-vapor or e-cigarette products. They are way behind with Philip Morris, to Philip Morris. So they have like a 75% share of where they compete with these products and the Icos product. So they're way ahead. You know, they're not immune to competition, but they're so far ahead that they're already coming out with second and third generation products where their competition is trying to catch up. Do we see any impact from the war in Iran on Philip Morris, whether it has to do with just costs overall or transporting its products? They said there was a small impact, namely the duty-free shops you see in airports with less travel. They had a downturn there, they said. They did cite some input costs. They have some of their own distribution costs, transportation, things like that. It's a relatively small impact, though. And, you know, it's something worth keeping an eye on, but I don't think anybody changed their margin profile on the company just yet due to that. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal. on you.
