Hawaiian Air's Quality and Local Routes Will Offset Southwest, CEO Says

of Hawaiian Holdings joins us now, Mark Dunkley. Mark, always a pleasure to speak with you. UM. I want to set this stage back in July during the the earnings conference call, and I just want to parenthetically say, I know that you're going to be releasing your results next Thursday, so you're a priet period, so UM, you know you can kind of do the air quotes and we'll make

believe we understand what you're saying. But on the conference call last quarter, you talked about things like the extra comfort seats UH, the new A three NEOs from air Bush, the relocation at the loss at the at L a X, also first route expansion, because of the new aircraft. Now I'm an invest not me, but i'm you know, an investor comes to the call next Thursday and says, yeah, but wait, the stock is down thirty this year. What

is happening? How? What can you say given the quiet period, in order to at least make people not go bananas when they when they get on the call. Yeah, well, I think you know, when you look at our share price performance over last several years, we were this sort of bell of the industry. UM, seeing our stock appreciate. Uh. In the last couple of months, there have been too prominent announcements by competitors that they're going to add capacity

in our market. And that's clearly weighing Southwest for example, Southwest has one and united with the other a couple of months ago. UM. I think the things to to look to though, are a couple of factors. One is that we continue to talk with great confidence about the superior superiority of our product. The fact that you know, for for what we do, which is uh, flying to Hawaiian selling, Hawaii's a destination around the world. Uh, nobody's

got a better formula than we do. And we we frankly wouldn't trade places with with any of our competitors, and you know, we're sort of backing up that confidence as recently as a couple of days ago, we announced a quarterly dividend that we're going to pay um and that's, you know, very deliberately to to send a signal to say that, you know, at least looking into the long term, looking beyond what may happen with additional capacity coming in

next year, looking to the long term. We're in the management team and the board of directors have great confidence in our franchise. Okay, So, and the dividend what the twelve centsers share, So that's like one in a quarter percent based on today's a stock price of thirty eight dollars. Can you maybe just describe to people the franchise that you have inter Island and how perhaps the revenue from that franchise almost offers a kind of annuity to the

business that other airlines may not have. Uh yeah, we we we account for about eighty five of all the travel between the islands of the state of Hawaii. And for the for your listeners who may not be as familiar with Hawaii, is that certainly like to be Um, what I can say is it's a bigger business than than people perhaps have in mind. I mean, we we fly thirty two times a day in each direction between Honolulu and Maui. Just to give you a sense of

the scale. We carry more passengers between Honolulu and can Louis than all airlines combined fly between Washington National U and LaGuardia Airports in New York. So it's a pretty big business. We have eighty five or thereabouts of that market. And it's a business that that sort of carries everyday life here, school groups, people going to see their the doctors, things like that. So it tends to have pretty low

price elastics you've demand and pretty low income elastics. You've demat tell us a little bit about Japan Airlines alliances and the new routes from Haneda and Narita. Well, you know, you've followed our story for for a long time, and as your listeners may perhaps again not appreciate fully, Um, the bulk of our expansion over the last seven years, and we've could roupled in size during that period of time. That the bulk of that has come from expanding around

the Pacific room most prominently to Japan. And three three or so weeks ago, we announced a relationship with Japan Airlines, which is one of the world's absolute best airlines and means a quality, quality company. Uh. And together we're going to in the first instance, be code sharing and um

uh you know, doing those kinds of cooperative activities. But but we're also both committed to seeking to enter into a joint venture which we believe will it improve choices to customers and also make us better able to compete in the market and better for our company. If not that you get to choose between seven eight sevens and are NEOs. I know that that's been an issue, but the trend is what to have aircraft that are more economical, that can fly longer, such as even you know, the

the new seven three seven Max. Right. Yeah, we're taking delivery in a couple of weeks time of our first A three twenty one near which is a narrow body UM in its class. It is the most fuel efficient narrow body best suited for the markets that we're going to fly with it, which is the small markets between the US West Post and Hawaii. Uh. It is it's a new breed of airplane and both Boeing and airbus have airplanes a fit in that category, this particular one

for this particular mission. Uh, the near by airbus is head and shoulders the superior airplane for the route. So maybe just step back for a second and as someone that's a veteran in the industry, what does an aircraft like that and even the Boeing Max what does that Due to the sort of whole strategy of where you fly, how you fly, and how you allocate the fleet. We spent a lot of time on that on that very question.

I mean, you know, costs are sort of everything in the airline business, and finding the right aircraft of the right roots and the right size is a paramount importance. Um. You know for for many airlines, uh, they're blending their needs. You know, they fly roots that are two hundred miles, five hundred miles, thousand and three thousand miles and they have to find aircraft that are sort of the ideal

compromised for all of those routes. What's I think pretty unique about Hawaiian uh is that we have a very shorthaul business between the islands, just one or two hundred uticle miles. Then we have nothing until auticle miles where we have almost half of our business is between the US West Coast and Hawaii. UH, and then beyond that we go to eight to ten hour up to almost twelve flights. So we have these very specific needs, UM, and a lot of time and attention goes into choosing

the aircraft that's right for the needs. And both air framers a bus and going make terrific airplanes, as do the engine manufacturers who power them. I want to thank you very much for spending time with us. Mark Dunkley is the president and the chief executive of Hawaiian Holdings that is the ut parent company of Hawaiian Airlines, and they will be releasing their results next Thursday. Our next guest is Rick Lazio. He is the senior vice president

of Aliant Group. He's the former US representative from the York serving in Congress from to two thousand and one. Representative Lazio, thank you very much for being with us. UM. I wonder if you can just get your response to

UH comments made earlier today on Bloomberg Television. Larry Summers, former Treasury Secretary, was speaking with David Weston and Alex Steel, and he said, I believe that when you put something forth called tax plan, it has to be described in a way where people can figure out what their taxes would be under it. You need some data, and he says,

we're operating outside of those parameters. What's your response. My response is that the bill hasn't been drafted yet, and it will run through committee and those numbers will be provided by what's called the Joint Tax Committee in Congress, and UH Secretary Summons will have all the data that he'd like. I'm sure he's going to have an issue with with with the assumptions that are made, but they will be plenty of dat it before the bill is

actually voted on and sent to the President's desk. Okay, so understanding that we're going to get more details representative Lawso so far the details that we have gotten have led to a number of different think tanks to say that it could potentially raise taxes on certain middle class workers in the United States, and it could potentially provide a boon to say hedge funds or independent contractors who could claim to be passed through entities. What's your response

to that. My response to that, again is that we have to sort of look at wait for the details and see overall how this affects the general economy. The name I think the challenge here is how do you get growth rates back up to a consistent three cent rate? And that is where we've been in past expansions. We've been running at to to two since the beginning of

this expansion, so it's it's suboptimal. The major culprit, and my sense of my belief, is a business investment that has been holding down both productivity and overall GDP growth, And the best way to get at that is to incentivize more business investment. And that's partly through things like the research and development tax credit and other business incentives, as as well as expensing equipment and um and factories and the kinds of things that we want businesses to

invest in. It ultimately to hiring more people and paying their workers more more in salary. Understood, So this sort of virtuous cycle. But representative laws, how are we able to even uh negotiate or discuss a plan that, as you say, is missing so many details? And you know, is it unusual or unwise to not open it up and be more forthcoming during the negotiation phases because normally there are more details at this point in the process. Well, I think we can talk about what we know so far.

We know that there is general consensus among Republicans in the House and the Senate to collapse rates from seven rates down to three and would probably will end up being four before all is said and done. We know that there is an effort to move towards an extra territorial tax system and try and repatriate two and a half or three trillion dollars of money that's trapped overseas.

We know that there's general agreement on reducing the c corporate corporate tax rates, and we know that there's going to be a extraordinary effort to try and make sure that there is some rough parody with pass through entities and the small businesses that employ about half of all American workers will also see relief. So there are a number of very critical pillars to the reform that's being put forward that we do know a lot about. Do

we know exactly what the languages know? Will have to wait until that bill is drafted, and it obviously won't be voted on until it's drafted. Do you believe it whatever bill is drafted and passed should be revenue neutral. Well, I believe that they that that Congress and the President need to be mindful and realistic about the budget deficite. I think that the size of the deficit is a threat to future growth, so that yes, that's a that's a that's what do I think it needs to be

revenue neutral? I think they need to look at it in terms should we be all able to understand how it's going to be paid for? Yes? Of course. Okay, then do you believe that threatening sitting senators like the Democrat Joe Donnelly from Indiana who is on the committee, UH, that the president is going to work for his defeat unless he falls into line with the tax plan and he's been asking for information about what exactly this is going to do to the budget? Does that make any sense?

I always think that you are better off in the long run appealing to somebody's better angels and to persuading through positive UH, data and arguments. So you know this part of the body politics these days, on both sides, they are, of course it is. Do I think it's what the way approach I would take. Now, it's not representative. Lazio, you represented New York and New York could potentially be the one of the bigger losers from this whole plan,

since the local deductions would be eliminated. What's your view on that, Well, it's very difficult to get rates down, marginal rates down if you don't address deductions, and then one of the largest deductions of state local taxes about one point three trillion dollars in revenues revenue lost through that. UM, I think if you're from New York, or you're from California, from New Jersey, and by the way, those states are the are are major consumers of the state and local deduction,

especially upper income people. I mean about about for example, of UM, the benefit for state income taxes and sales taxes float for people making over two hundred thousand dollars, So this is this would affect mostly upper income people in high tax states, and of course California, New York,

New Jersey are are three of them. UM. If I'm in a town hall meeting and I'm talking to a constituent, I'm gonna be consistuents going to raise their hand and about my state and local taxes, I'd say, well, number one, let's see how you do overall. The standard deduction is proposed to be doubled um Right now, most Americans don't file itemized returns because they get a standard deduction. Even fewer Americans will will file itemized returns if the standard

deduction is doubled to thousands. So it could potentially be lesson than people are expected, or it might affect the only the wealthiest people. Rick Lazio, I would love to continue the conversation. We have to. We have to run Rick Lazio as senior vice president for Alliant Group. He also was a former US Representative from New York, serving Congress from nWo one. Well, the hottest spot in credit markets this year is arguably emerging markets credit credit and

the riskier the better. In fact, Aviva investors just came out and so that they view local currency emerging markets debt as safer than US treasuries. Here to weigh in on what we've been seeing in the emerging market spaces. Damian Sasaur fixing come strategist focused on developing markets for Bloomberg Intelligence, and he joins us here in our Bloomberg eleven three oh studios. Damien does it um Well, I

don't think it scares me. Per se. I mean, I just think it speaks to the state of liquidity and developed markets right now and tight spreads, low yields broadly speaking across the whole of you know, fixed income. So I think there's a lot of cash out there and there aren't a lot of places to put it, and

that's what's driving y AM here. Well, one of the places that people are putting it is in the e t F e m B. This is the I Shares Emerging Markets Debt Fund right this is uh the one that JP Morgan has put together, and the fund is up more than nine percent so far this year. But here, this is what I want you to explain if you can um Egypt, El Salvador, Argentina, Hungary, Uh, can you explain what it is about these other than the yield? Peru, Poland,

I could go on Panama. You really, does anybody really believe that these are better credits? These are governments now, that these are better sovereign credits than the U. S. Treasury? Well, now, I mean, I think what you have to get when you're evaluating any sovereign issuers, you have to look at their current account, their balance sheet, their current account balances.

You have to look at their external debt exposure, right, because when we get into times where, for example, in September twenty the Federal Reserve announced that, hey, they're not going to be data dependent any longer, they're gonna be hiking.

And regardless, you know, you have to look at what that means for local currencies, and and that means if you have a lot of external debt exposure, i e. You're hungry and you've issued a lot of US dollar debt, you might be in for a little asset liability mismatch if things go south on you. And then there's effects reserves,

there's real effective exchange rates. There's a lot of metrics you can look at when you're evaluating sovereign risk exposure, but by and large, that is um you know, that is basically what investors are looking at, and that's what

driving returns. I'm struck by the flood of money into local currency emerging market step because you're talking about the currency exposure, and actually if you look at the flows into e m B, which is the US dollar Emerging market study t F versus e M l C, which is the local currency e M debt, it's the money has gone disproportionately to the local currency debt. And I'm wondering how much is this completely a wager on the dollar staying week and possibly weakening further. Oh, that's exactly

what it is. I mean, currency attribution for local currency government debt from eroaching markets is roughly eight percent of the equation, right, So you're absolutely right, it's a play on currencies. But this is a more recent occurrence. I mean the flows into em into local em rates. Uh, that's really only been the last call it six months, But for the better part of the last two and a half years, you've been seeing flows into hard currency

e M debt and it's been off the charts. So how much would the dollar have to strengthen to cause some serious pain? That's a that's a tricky question. I mean I can't really say. I know, our our friends over in bi economics have basically called for a stronger dollar over the better part of you know, well, really when the FED starts, you know, uh, you know, rolling off, you know, the excess, it's basically tapering, it's it's pulling

back the balanty, etcetera. I think I think it would take quite a bit for you to see things start to go, but when they go, that can go in a hurry. I'm just looking at the difference in the yield between the funds that invest in the local currency debt and the hard currency debt of the same nations, and you're talking about a spread of anywhere from four and a half percent for the hard currency to getting maybe a little bit more five and a quarter percent

for the local currency. UH funds, Is that really are you taking more risk when you come when you think about the reward? I mean, is seventy five basis points really that much in the overall scheme of things that you're gonna take that that risk not at all? And I think you have to be clear about who the constituents of those two industries are, right and eating hard currency, You've got a lot of those, you know, single beast sovereign names you had mentioned previously, kind of the Iraqs,

the Turk Medasin, I mean, Kajikistan. I mean like, there's been a ton of single beast sovereigns that have come to marketing hard currency debt of the better part of the last few years. In local currency, UH investable local currency government debt from emerging markets there's only a handful. I would say, you know, twenty at the most, and

you're really talking about the majors there. I'm wondering how much the investors who are pouring money into emerging markets right now are looking at these specific countries and their respective issues, and how much is coming in through broad market index funds. The reason why I ask is because it's sort of disingenuous for us to sort of lump a whole vast swath of countries together as just emerging

markets and to view them completely unilaterally. I mean, do you feel like people are delineating between better credits and worst credits? No? I don't think they are at all. I think it's as you said, I think it's passive investment. I think it's UM. It's really just, you know, basically people saying I want to own it all. I want to own everything, and I want to own it in

whatever incremental side it's coming to marketing. UM. I will say, though, just if you're looking at UMM, thank you the land of ETF right, Well, I mean you don't get the pick and shoes, right, I mean, you go into an e t F like this, you don't get to say, oh, I want rething, but debt from Uraguay. I just think

the risk that you're you're mentioning is structural, right. I mean the fact that the underlying emerging market bonds, even the hardcorency US dollar bonds, the fact that an e t F is allowing you to provide daily liquidity in and out of those positions when those bonds don't really trade like that. That could be an area of concern going forward, just that structural liquidity mismatch, so to speak. And and so that is an area that I'm looking at. It's an area that my peers, I know, I've looked

at very closely. But you know, we're not quite uh, we're not quite sure what to makeup at this point. And of course Chinese, the Chinese Congress meets next week, and I could also throw some potential opotatoes. And it's interesting how liquidity can dry up so quickly, uh, particularly in the debt that is maybe not universally traded. I have to watch this, and that's why we got Damian Sassar.

He is are fixed income strategist for Bloomberg Intelligence. Late last night, the European Central Bank officials were said to be considering cutting their monthly bond buying, but at least half starting in January. This was reported by Bloomberg News, and the reaction to this is sort of surprising because you think, Okay, the e c B is tapering, it's stimulus. People would sell their bonds, their German government bonds? What

do they do? They bought here to explain why and what this means about the great Central Bank unwind, going forward to Scott Kimball, portfolio manager of the b MO at tc H Core Plus Bond Fund, which trades under the ticker m c B i X, and he joins us here in our eleven three oh studio, Scott, I don't know. If this can't get people to sell their

government bonds, what will Well? That's first of all, thank you for having me, and uh, just to chime in on what you were talking about there with the e c B. UH, you know Chairman grip Draggy coming out and talking about reducing the quantitative easing program. Uh, it comes with really two different lenses you have to look

through it. One is the view of what that means inherently for the bond market, which is, UH, if people are holding onto German bunds, Spanish debt, Italian debt at and expecting that the ECB is going to come in and purchase those securities from them over the near term. Then they could be potentially disappointed in the fact that they've come out and said, well, we're going to continue buying,

but not quite as much. What should, in theory put pressure on the spreads between those two move higher in rates to move higher accordingly, UH, what happened is that we saw investors come in and actually begin purchasing bonds again today very strongly at a faster pace, which we interpret as meaning that while the ECB is reducing the overall size of the program, UH, the investors are still betting that it's going to continue further on into the future, and that the e c B is rather just sort

of keeping pace with what the FED and other central banks are doing, and that they're not taking away the punch bowl entirely. There's still a lot of reasons why liquidity needs to remain very high in these economies, but they're just taking some of the sugar out of it. We've seen a very strong recovery throughout certainly the US from our cycle Japan, we've seen the equity market over there come to life, and we're seeing that European data has been strong. So, uh, this is probably a fairly

appropriate step from the ECB. But we don't anticipate that they're going to be exiting this bond buying program in the intermediate term, which is why we think you saw investors come in and sort of reassert their position. Hey, Scott, I'm just wondering maybe there's a third, a third possibility, and this could then we get into some talk about what's in the York portfolio. But um, all right, let's

say that rates do rise. If they ever do rise in Europe, that's going to make the new bonds more expensive. And if you are an investor rather than a speculator, I mean, has anyone ever really gotten fired because you know they missed twenty five basis points or fifty basis points over a thirty year or twenty year period. I mean, you know, what are you gonna do? You're gonna go out and sell your whole insurance portfolio of government bonds because you know, oh, I could get twenty five basis

points more. I think you bring up an important point, and that's really something that's kind of been in the heart of our positioning in the in the Core Plus Fund, which is that when you look at what's going on in the world and what these banks have engineered, it's a world where there is a wash with cash. Insurance companies in particular, you know, it's a very important name that you brought up, is the insurance industry. They have

gigantic pools of cash and very long dated liabilities. There's a bigger risk to them misstepping on liability management side than missing twenty five or fifty basis points on interest rates.

So we would be complete agreement with that. Okay, So then I want to want you to follow up on what's in the portfolio and how you construct your portfolio of the Core Plus Bond Fund, because one of the things that I've note when I look at it, you've got a lot of floating rate debt, absolutely, and that floating rate debt is a strectural opportunity for us to position Core Plus Fund and really any of our strategies to take advantage of different segments of the bond market.

What we do is look for bottom up value across the entire spectrum of fixed income and say where are their structural and efficiencies. One inefficiency that we noticed that went back really about twelve d eighteen months was that libor and the FED funds rate, we're sort of behaving uh counterintuitively to what you'd anticipate from a rising FED. So that meant that floating rate notes were very cheap.

You could buy uh interest rate. These are interest rate bond instruments just like any other corporate bond, and when rates rise, their coupon rises, so there are sensitivity to rates is not particularly strong, which we thought was very important for protecting the dollars we had invested on the front end. And we're talking about companies like Abbott Labs, eBay,

Daimler Finance, IBM, Craft, Hiens, Activision, Blizzard. I mean, those are the kind of corporate names we're talking about with some of this floating rate there absolutely so when we use when we look at the core plus fund and decide where we want to take risk and how we want to budget risk, that is a pocket the floating rate notes, the front end, the shorter day and securities where we're looking for a lot of liquidity and we're not looking for credit headaches, So we use a lot

of high quality companies whose equity prices have given their balance shee's a tremendous cushion. Is there anything that you're avoiding? Certainly. So when we look at where we are in the credit cycle, we keep hearing that referenced by constituents, investors, UH, fund managers, UH. The word credit cycle, the term credit cycle keeps getting used. Our opinion is that we're in the seventh inning stretch, UH and take me out to the ball game keeps playing on repeat, and that's exactly

what central banks have engineered. So what we're looking at is trying to balance the idea that risk probably still does well for the next twelve months, but at the same time keeping the powder dry to take advantage of some opportunities that might be created. And that's say, for example, high yield bonds. Our allocation to high yield bonds as that's as that sector has outperformed, has been trimmed back with the anticipation that is, we're not getting paid as

much to own it. Maybe we can raise some liquidity and an event there's a market disruption, we could jump in and buy some yields. What are you buying for yield? Then? Are you buying emerging markets. We're not buying emerging market debt. We've been focused primarily and moving a little further out the yield curve and investment grade where we're willing to

take a little more duration. At this point, we think that interest rates have been pretty subdued, and then we look at the corporate bond market, we see dislocations occur that don't make a lot of sense. So one example I would give you is, you know, Amazon buys Whole Foods and the debt of Kroger Corporation sells off. We think that might be unjustified. We jump in and we lock in the yields at higher rates than they were over the day before. So it sounds like you're expecting

a flatter yield curve. I think that it's consistent with the FED rhetoric and the FED action that the yield curve continues to flatten some. But we do think that the FED is very conscious of what the potential percursor could be if the yel curve were to invert. So we think that a flatter yel curve, but a very incremental FED As it flattens, and you're to date, the fund is up a little bit more than four percent, and you're getting one of like a two point nine

to three the yield on the on the payoff. One of the things I want to ask about has to do with the way in which you construct your portfolio, because I noticed, you know you're buying in very specific lots. You know you're buying twenty thousand here, fifteen house and there is how do you organize? I mean, you're gonna buy the same amount of Fannie May paper as you would eBay floating rate paper. How do you or is

it just inventory what's available? It really reflects what what where we want the overall risk and return profile of the fund to be. One thing you'll notice about the Core Plus Fund relative to perhaps others, is that we don't carry thousands of securities. We have two fifty individual line items. So we really have a thorough understanding of

this bond adds value. There's a value proposition. We own the security, and we own it an amount that reconciles the way we expect the portfolio to perform in various scenarios. Your ability to do that gets heavily deluded if you have too many individual line items and just quickly give you ten seconds. Cash, you got about four and a half percent of cash going to just keep it there.

Cash is really residual of what we do, and that reflects the fact that we do think, um, you know, there's a lot of opportunities we have of our fund invested, but we have a little bit there for those really unique opportunities to come along, all right, just as you said those floating right now about twelve to eighteen months ago. Thanks very much for being here. Scott Kimball, always a pleasure.

Portfolio manager of the BEM t c H Core plus bond fund symbol m c BIX m c b i X. 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 Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.