American Airlines CEO on Fast Flights With Private Air Traffic

three studios in New York. Thank you so much for joining us, Doug. We started out talking about privatizing air traffic control, and I would love your take. First of all, do you support the privatization of this aspect of air traffic uh? And also how much would it change your business if this were to happen. Yeah, we do support it. Um You know, priortization is a bit of a missing umer here. We're not I can to put it into

a for profit corporation. We don't think that'd be a good idea, but not for profit corporation that would allow us to invest the way that UM A TC needs to be invested in um to put in place the kind of technology that exists around the world that we're

not using in the United States. And it's we believe it's primarily due to the governance structure that we have in place that requires the FA to go back every year and look for you look for new authorization has themselves to the whims of sequesters and things that just doesn't that doesn't provide itself the right structure for long

term investment for a long period time. But Doug, do you think that there would be fewer delays, that just in general, that air travel would be easier and more streamlined if there was a privatization of air traffic control with things work better. Absolutely, That's why we're doing it again that I describe the governance that allows you to invest, we need to invest to but the technology in place that indeed allows us to provide the level of service

we know we could would be much more efficient. You know, it takes today to get from Dallas Fort Worth in Philadelphia about forty when it's longer than it did just fifteen years ago, and the airplanes are getten faster. What's happened is the air traffic control space has gotten backed up and Uh. There again, that shouldn't happen. It's not. It's not because we've done anything as a country other than that, we haven't invested in technology that keeps up

with the growth in the airlinesustry. Can you tell us an example of an air traffic control system in the world currently that you believe is the leader or a model. Um, Canada is very good. Um. Indeed, indeed that's where that's the model we're looking to replicate here. But but look, it's not just Canada, it's all over the all over the world. Um. There are countries doing a much better job with technology in the United States. But Canada did

it almost exactly what we're looking to do here. They had it as part of the government, they took it in a not for profit corporation. UH, and the results have been stunningly positive. Doug, how much would you in your business be willing to pay to improve the uh, the airports in metropolitan areas like New York and Chicago. How much would it would it benefit your business to

have a nicer infrastructure in those cities? A lot? And we're doing it actually, Um, you're personally investing money, Well, we are, Yeah, our our airline, and are some other airlines. I mean, part of the problem here is um that airlines, when we weren't profitable, couldn't invest very well. And that's that. And indeed how air how airports are financed is through rents and landing fees from airlines. So UM, we've certainly seen a lack of investment over time that needs to

be corrected. We we like other airlines, are investing billions of dollars throughout the United States and airport infrastructure, which we will then pay over time with higher rents and landing fees. And we're happy to be doing that. I just gotta think you've got a lot of things. It's like you're the guy that's got to keep the plates all spinning at the same time, right, whether it's security, government agencies, landing slots, capacity, the issues, uh, fuel issues.

What's the most pressing issue for you that you'd like to get across to individual travelers, because we I just cited the JD Power survey that says that people buy and large when they're asked really service, they like airlines.

It's getting better. Yeah, that that'd be That would be the message I'd like to get across the two travelers is look, we all know, um, you know, some high profile, hope, high profile events in the last couple of months, UM, have to say the least, yeah, exactly have highlighted some customer service issues that need to be addressed. But please don't think that's due to the to the team members

that American Airlines or the other airlines we have. We have phenomenal people out there who who do amazing things for our customers, who provide safe travel around the globe that makes our country run. Uh. And they're doing it every day, UM, in sometimes difficult circumstances. They're doing phenomenal jobs and all they want to do is have the tools they need to take care of customers to extend

their customer service issues. That's because we the airlines that put those people in difficult circumstances and that's for us to fix. UM. But you know, in this world where people are trying to you know, figure out how to be the next viral video by filming someone doing something on an airpoint, UM, that that doesn't disservice to our team who is really out there doing great stuff all the time. We're extremely proud of them, and that what

they're doing. We as airlines, uh, need to make sure we put in place policies and procedures that don't put them in difficult positions, but indeed rather to give them the tools they need to do the jobs they know how to do so well. So JUG, I'm looking right now at crude oil at a little bit more than forty four dollars barrel, and I'm wondering how much does it increase the profitability of American airlines if oil prices were to stay at this level for say another year

or two. Yeah, look, of course it helps. It's our second largest expense behind behind employee costs. So um, a drop in oil prices tends to you know, obviously falls to the bottom line in terms of expenses in today's In today's world, though we we we seem much of that go to the consumer, uh, much of not all, certainly in the longer term, because what happens as as

we've seen recently. You know, someone pointed out to me the other day that inflation is one of the primary reasons inflation is as low as it is in the United States because air fares have fallen so much. Well, air fairs have fallen so much because fuel prices have fallen, and when fuel prices fall, capacity comes in in nexcess demand and ferris fall. So, um, we get a benefit, there's no doubt about it, but much of that benefit

of cruised to consumers. All Right, I'm gonna give you it's almost like a game a game show here, duck be because I'm gonna give you the names of some of your hubs and I just want you to give me like two words each of three words each to describe what's going on and what's the most pressing issue. Let's start with Looguardia the Guardians. Guardians an infrastructure issue. Um,

we need we need to improve the airport. We also need to improve the airspace ATC performance help then all right, so that's look, Guardia, tell me what's going on in Miami. Miami great international hub for American airlines, struggling somewhat because of the economies, um in Latin America and South America, but they're rebounding nights. They were very encouraged. Can I can I interrupt the quiz? I'd love to get this. I'm are I was going to get the but a second,

but I want to get to it. To sort of the immigration and the whole concept of uh, the travel ban or the travel restrictions that are still being fought uh in courts. I'm just wondering, you know, all of this talk about limiting immigration has that affected international travel? It are you seeing declines as a result of that to the US? You know, we haven't, not that we can see. You know. The fact of the matter is we don't. We don't. American doesn't fly to any of

the countries that would be affected by the proposed ban. Um, so we haven't. We haven't seen anything that we can tell anyway, h that is that is affecting demand for air travel. But we certainly um, you know, but what we know is, um, you know, our business is all about being global and being inclusive and connecting the world, not not shutting down the world. So UM, we're we're always uh. We would prefer to see a world where

it's easier to fly, not harder. I was gonna just ask you you don't want to do the quiz to I was worried about some where you're up No, no, no, Well you want to about our nation's capital. I mean, would they benefit from a new air traffic control system. Absolutely. Yeah, there's there's a huge adclis in and out of DC. Yeah. All right. I want to thank you very much for spending time with us. I guess you could just send Doug an email when you know next time you're on

the tar Max. Also also person, listen, don't worry Doug time. Let's see all right, Doug Parker, thank you, American Airlines Chairman and chief executive. We are here broadcasting live from Pershing's Insight Conference at the Manchester Grand Hide in San Diego, and David Masa walked by David Mazes, head of Beta Solutions, Investment marketing and E t F specialists at Oppenheimer Funds US joined from State Street. Uh, David, it's so good

to have you. And you know, I'm struck by the shift that's going on in the e t F and the exchange traded fund industry right now. Moving from broad indexed funds, an easy cheap way to get access to stocks and bonds, moving now to I guess index that have perhaps a little bit of higher fees and somewhat a little bit more complicated strategies. What's the risk here that you know in some ways there's a sort of uh vasterization of the sort of beauty of what the

e t F industry was. You're touching on one of the most important trends that we're seeing in the et F industry, where there's now seven eighty five billion of assets and management in what are called smart beta strategies. And that's a term that nobody likes, but effectively, what it tells you is that it takes index like characteristics, so that's transparency, rules based and generally low cost, but combines it with some of the elements that active managers

have used for years. So and that's of course potentially looking at outperforming index maybe have lower volatility or increased diversification. So I just wanted to ask, can you just explain how they end up being categorized, in other words, in these portfolios if you have, as you describe both the best of both worlds to a certain extent, what the give us an example of the roles of each Yeah, exactly, so effectively, managers of course have been value managers for

a long time, right or growth managers. So these are individuals who have used a team of analysts or their own expertise to say I'm gonna look for the cheapest stocks in the universe, or I'm gonna look for stocks without best growth potential. But guess what, you can actually create rules around these strategies. So let me screen a universe for the least expensive stocks, or screen a universe for stocks with the best momentum or the best quality.

And that's really the beauty of it. You take um this evidence that have existed, these premiums that are out there. So those are things like stocks that are inexp sensibly valued tend to perform well. Those are stocks with strong momentum, tend to continue to have strong momentum, and you just you create rules around them, and you can then package those as strategies for investors to use in their portfolio

alongside maybe a traditional index fund. But data, they are usually higher costs, right, yes, so you tend to have to pay a little bit of a premium. But for example, uh you know, e t s of course have actually pushed down the price effectively for all um strategies that we're seeing actually active management go lower. And generally when we're thinking about smart data, these are an average about twenty five basis points to fifty so net net that's

actually still pretty attractive. You know. I'm wondering is this product, the smart beta. Is it being driven by the asset managers looking to pitch something to the investors, or is this coming from investors demanding a little bit more NUANCEDTF So I actually think it's coming from both areas. So certainly asset managers are looking to take their strategies that they've used, packaged them differently, and and for them as products. But if we look at the demand for this, it's

really coming from clients. We're seeing people who are skeptical, of course, of active management and saying, hey, we've had ten years. Every year comes out, this is your active especially in the US market's gonna return and guess what, we haven't really seen that. But some folks, some investors want the potential to outperform and if I can do so not paying a hundred basis points so a percent, but I can potentially do so at five that's where

they see the beauty of it. So a recent survey came out where cost used to not be a main driver of actual why you'd invest in smart beta. So this is looking at four years of data and now this year. Actually it's one of the top concerns that investors had. So in an environment where returns are hard to come by when economic growth is low, when other than the stock market potentially continuing to go up all the time, but seemingly the risk is that it that

will stop at some point. Investors are very of course, cognizant of what they're paying to get those returns. You know, in the presenting this, I'm wondering if being using the idea of smart beta is at this point in the life cycle of these kinds of products, almost a misnomer because it's not about smart beta, it's about having these specific strategies that you can execute. Yeah, I think you're right. That's why I mentioned earlier that nobody likes his term,

but that's what the market's coalesced around. Really, what you're right, it's about I think about the outcome, right, there's no one strategy that's going to be best for anyone, uh, whether or not that's cap weighted passive that you can get it very low cost or active management, and of course smart betafits of the intersection. It's what are we looking to get out of my particular outcome? Am I looking to get a strategy that seeks inexpensively priced stocks,

but maybe they also have quite high quality learnings. If I can do that systematically package at and generally low cost, that's a great benefit for invest because typically you would have to engage a very sophisticated organization that would charge you a very sophisticated fee, and that's the only way you'd be able to access that strategy. Exactly. Can you give us a sense of how strong the adoption of smart beta, however much people dislike the and what they're

and what they're adopting. I wonder what strategy they're all going for? How how how how big have the flow has been? How much is it run? Yeah? So total assets anw or close to seven five billion dollars if which so that that's significant from what from effectively nothing a few years ago. Uh, and so it's grown rapidly and and and the categories that have grown the most, of course, which would be consistent to the market environment, are strategies focused on low volatility stocks. And of course

there's been a lot of attention paid to this. There's work well, I mean, do they deliver on the promise if you're going to buy a lots been nowhere, so it doesn't really matter what you buy. Ltility hasn't anywhere. Everything's love altility, well, it does exactly, So you have to be when investing in these strategies. You have to know what you own and think about how long you want to own it. So low Altility is a good example.

It had done significantly well uh in the last last year up until the summer, and the money float into the strategies, but those stocks got increasingly more expensive, and then if you look at the performance post July to the end of the year, they underperformed. So I recommend you look at these strategies, use them, but don't chase performance with them. If you want low volatility, you should probably own that for ten years because I want to

smoother ride. That's a good thing. Smart data just with equities or is it another asset classes? So so smart beta is primarily with equities right now, but all of these things can actually be done for other asset classes. So fixed incomes a great example, and we're just seeing products being launched here. Is that there are some anomalies that exist in the fixed income market that managers have

used for years. Carry right. Of course, you get paid to own higher yielding parts of the bottom market term premium. You can create rules around all of this, the challenges the data is a lot harder to come by in the bottom market than it is in equities. Wow, so there's gonna be a carry trade smart beta ETF some time in the future. I can't I can't tell you if that's going to happen or not. But I can tell you is that there's a lot of work being

done to identify if it can. I do have to wonder whether e t F providers are a little bit nervous that they're gonna throw the baby out with the bathwater, because as ETFs get more complicated, there's more risk involved as well, and there's more potential for a potential sinkhole that investors will will be sort of shaken out of their their love for e t S that's in that sinkhole. That's a great point. That's that's so that's what we

have to be cognizittive. Is that you know, I'm a I'm a huge believer of e t F s. I've committed my career to it, if you will. But when we're looking to launch these new products and to the research around them. You have to be cognizant that you can create a rule around something, but it has to be a rule that's formidable and that actually works in a multitude of markets. So when we're just testing it, we're not just throwing the proverbial spaghetti against the wall.

We're saying, hey, does this work if I look at this ten year period or this twenty year period, thirty year period. Doesn't work in the US, does it work in emerging markets? Does it work in the United Kingdom? And if all of that comes to first and you can say, all right, there's actually something here, there's actually something that works, and then we can make an investment product.

All right, I'm gonna give you fifteen seconds. Is there a filter that you can apply to all these e t f s about what happens to them if interest rates increase? Well, that's that's the great question, right I'll I'll tell you if if we see interest rates increase, you're gonna want to be looking at if you've bought these low volatility e t s or divided ets for example, some of them have a lot of concentration in these bond like stocks, utilities, consumer staples, So be cognizant of that.

I'm not saying that that means you should sell them, because who knows. If interest rates are going to go up, these predictions are now going to go down again, and you know what, maybe more money will flow into those products. The area that's of course been out of favor is value UH and what we've seen in the last couple of days may change that, but who knows. We saw that of course after the election in the US. I

want to thank you very much for joining us. David Masa is head of Beta Solutions, investment marketing and E t F Specialists for Oppenheimer Funds. Joins us here at Pershing's Inside at the Manchester Grand Hyatt in San Diego. We are broadcasting live from Pershing's Inside conference at the Manchester Grant Hyatt in San Diego. And there is a

big debate raging in the bond world right now. It is the perhaps fifth year of this debate, which is our interest rates headed upwards or are they headed downwards? And I'm when I say interest rates, I mean benchmark rates, I mean the ten year treasury yield, the thirty year treasury yielding. With us UH. To solve this all for us and make it all clear. Marvin Low, senior global market strategist at BNY Melon joins us here in Santiago

and Marvin, where do you stand on this? Because we have some people saying, look, you know, yields will creep upward heading into the year, and people like Jeff Gunlock of Double Line, and then you have other people saying, no, nothing is different. People have overestimated growth. We see this by the shrinking yield curve and yield are going to go down. Yeah, you know it certainly is a big de bait right now. Um. You know, I think the

Fed has expressed its resolved that they want to increase rates. Um. There certainly are economic concerns around inflation, around those growth numbers. But you know, we have to remember that we're looking at trying to get healed into this new normal type of world. And when we have this new normal type of world, I think that we're going to creep up slightly, um, slowly, but you know, certainly not um the big jumps that I think a lot of people expected after the election.

If you will, so where is where are we going to end a year? But the tenure, you know, I'll put my dart board and say about to fifty or so to Marvin, A pleasure to see you. Uh. We uh, we run into each other at these kinds, at these

events on a regular basis, regular basis. I'm wondering if you could maybe characterize what you have, let's say, over the past twelve months, and uh, what that may portend for actual you know, investors who have to make a decision about what to do with some money, let's say over the next quarter. Yeah, you know, the last twelve ones certainly have been UM interesting from the perspective of investors needing to deal with UM things that don't necessarily

get modeled very easily into you know, all of our spreadsheets. UM. By that, you know, I primarily think about political risk and the confusion that it causes in when I see UM the reflation trade effectively, you know, move these asset classes by large amounts and then slowly creep back. It just really shows how difficult it is to UM put that into an economic growth perspective. UM. We certainly are dealing with asset values around the world that are very

very rich. UM. I think that's you know, pretty universal, if you will, UM risk assets certainly have done, done its run, I think, Um, the announcer earlier said the NASDAC was on, you know, the longest multi decade run starting at already a fairly high point um. So investors really need to keep that in perspective. And we kind of have this volatility, but it always comes and then

goes really really quickly. You know, Marvin, you said that you think that the ten year treasure yield is gonna end at two and a half percent, is currently almost less than two point two percent two point six roughly. I'm wondering what will it take for people to sell bonds? If you think about it. We were talking earlier about how big US companies just had their best earnings quarter for five years. We've already seen that, and a lot of people are expecting that the best news is behind us.

The economic data is a weakening. What will it take for for treasure yields to to really rise? You know, Um, what's what's driven yields lower and what's kind of driven the commentary now with the flatter curve maybe looking at some of the recession numbers, is inflation, and it, you know, certainly is always a big component of how you price a bond, and I would just take the contra argument that nobody expects inflation, so we're supposed to look at

it a little bit more closely. UM. I've been certainly noodling the concept that populism, which is I think a trend that's here to stay, has inflationary components to it. When we look at France and we kind of look at, um, how the vote arose, there were still ten million people that felt this populism type of movement. That's something that politicians aren't going to, um, just turn their back on. They want to make sure that they bring these people

in the fold. And is wage pressure is kind of pressure on greater social services part of that response, and does that have an inflationary component? Also have to remember that, you know, several of the FED members think that the unemployment rate is going to go below four percent within the next year. UM. You know, maybe maybe there's certain certain questions about what or not the Phillips curve is accurate, but that Phillips curve is, by the way, the idea

that there's an inverse relationship with unemployment rate and inflation. Right, yes, thank you, thank you, thank you. UM, if we if we, if we don't if we don't start seeing wage pressure when unemployment gets below three percent, I guess we'll revisit the concept of the Phillips curve. You know, having said that, the FED has a multi decade um focus obsession about the unemployment rate, so they're going to continue along that route.

So does that mean that there are like parallel strategies at work here that may actually be contradictory at the same time, Well, you know, UM volatility is really an interesting aspect of kind of that UM very easy and ultimately very difficult question to answer. UM. As long as volatility remains low, it's certainly UM is going to push

kind of this risk asset trade that's out there. And while we've got a couple of days of altility, you know, we have to remember that over the course of the last six months, you know, since the beginning there, however you want to look at it, these risk assets are still outperforming by a very large margin. UM. It's probably an opportunity to look at para trades. It's probably an

opportunity to look at UM curve flattening type trades. UM. It seems like you would be able to balance various risk calls with maybe some other calls that would give you a little bit of protection. It's hard to see just an outright by kind of given where valuations have moved over the last six months or so. What about cash do you recommend people boost their cash allocations? Um? You know, I think powder is always I think powder

is always good. Um, you know, certainly you know, waiting for a little bit of a correction, But you know, I kind of really look at the amount of liquidity that's still coming out of the central banks as keeping that volatility attempt. Do you think that the Bank of Japan and the European Central Bank and the fact that they've purchased more than a trillion dollars of assets in the past twelve months, It is just stunning. And you know, do you think that this basically makes the FED or

relevant at this point? Is it really all about the b O J and the e c B until we get um an actual decrease in the amount of liquidity that you're adding into the system. I think that it is. I think that there's a lot of insight into that statement. We've had years, multi years at this point where we've been adding half a trillion a trillion over a trillion, Like you said, um coming into the system. Even though the FED hasn't purchased single security in years. Next year,

the Fed's going to start taking liquidity out. Next year, the e c B is not going to be buying as much as it buys now. Next year, the Bank of Japan is probably not going to increase its purchases. When you look at that on a year over year basis, you're looking at a five hundred to six seven billion dollar contractional liquidity. That to me is an underappreciated aspect of kind of the thought process. Having said that, the

market is not focused on it right now. Volatility I you know, I feel that vaulatility is going to remain low until um, you actually have that occurring and people start to focus on it. Well, that's certainly something that we're going to be turning to you to help us understand when that happens. When much appreciated. Marvin Lowe is Senior Global Market Strategies for b N Y Melon and he joins us here at the Persian Inside in San Diego. Thanks for listening to the Bloomberg P and L podcast.

You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramoids One before the podcast, you can always catch us worldwide on Bloomberg Radio