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The White House is pretty busy these days, not only dealing with the Warren 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 US government is going to own a stake in the airline.
Let's bring in George Ferguson.
He is our senior aviation aerospace defense analysts 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 disagreement would offer up to five undred million dollars in financing an 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 and 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, you know, I think that the market has certainly recovered, the airline markets recovered since then. I think that there's probably too much capacity right now in the US market, and that's
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 a capacity. So, you know, having some some airlines leave the business is probably the sort of the right way to fix it. But I guess the white House fields differently.
That's kind of where I want to go, George. I mean, what's the what's the marketplace telling us here? It just seems like, well, 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, the sort of the state of play in the US airline businesses, you need a strong loyalty program, so you need to be able to put a credit card in the hands of 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, you know, they get 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 you know, subsidize the back of the airplane to a degree. So again telling me that there's just too much basic economy 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 of that process, absolutely right. And so Spirit had its problems before the Iran wars. 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 if we return to you know, two dollars a gallon jet fuel, I think a lot of these airlines that are starting to take some capacity out would take those park 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 levelcity capacity in the marketplace, and we saw United, we saw Delta, we saw Alaska, all announced cutting back at least growth plans. Nobody's cutting in to you know, capacity levels that they flew last year. Starting to cut growth plans more more probably has to happen.
Georgia United airlines at some numbers and they reduce their for your guidance, now, this looks like an earning sestment like I would put out between seven and eleven dollars a share. You can drive a seven forty seven through that, George, does that just reflect the uncertainty they have and kind of their whole p and 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're the poster child for less is more in
the guidance world. And yeah, that's what they gave us this time too.
It's kind of how they figured they're going to play the game.
Right.
Let's talk about Boeing, which narratives cash burn in the first quarter because of rising deliveries.
How did these summers look to you?
Yeah, I mean they looked as expected, all right, and so look, you know, the progress towards the recovery at Boeing continues, lowering cash burns always great. The defense business showed a profit, which was nice. Global Services continues to ring the bell, you know, eighteen 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, and we would have expected a better result at a commercial airplane until Spirit got rolled in. And so there's some work to do down at Spirit. Bowing said, go figure. They were buying fuselages for more than Spirit can make them for or less than Spirit can make our force.
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Let's talk a little tech here.
Why not? It's always in the news. Ed Ludlow, He's in town, usually based there in Silicon Valley Peer three. I think it is at Bludlow b Tech co host Joints us here in our studio, ed, do I need to pay attention to this Anthropic Mythos model being accessed by authorized users? I'm not a Mythos user, but how should I think about it?
You should pay attention. How confused are you all this by the ongoing story?
Well?
I thought it would like 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 are 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, bank banks are built on lots of software, and it can quickly go through that software code base and say ah, I've 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 some a merry band of fellows and colleagues from this community got access
around April seventh. It was supposed to be a very limited release to the biggest tech companies and banks, so a group of maybe forty 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 the thought.
But they also used logic and were like, where do we think that the code for the model itself is hosted? And they went through the internet slewth thing is the word we've used in the story and found it, 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, and that it was within the sort of closed confines of this contractors. They could have, but
they could have. And so here's the hypothetical. What if a bad actor, this could be a state level piece of espionage, It could be a malicious 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, 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. Yeah, 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 catch up, 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 d 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 into 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's the basics of what we're talking about.
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All right, here's a headline. When I read this morning, I'm like, are we back in the nineteen nineties, Deutsche Telecoms seeks to build number one carrier T Mobile deal. I mean, this is the stuff we were doing back at Salomon Brothers and Credit Swiss, back in the day when telecoms were just buying and selling each other left and right, and spending money which.
We as opposed to being a utility business.
Exactly what we like to fund those people because they are capital intensive.
So it's teching him. John Bler.
He knows what's going on out there. He covers all the telecoms for a Bloomberg Intelligence. Hey, John, did this surprise you this morning to see that Deutsche Telecom 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 taught the Deutsche Telecom was considering this move, and as you said, it's kind of back to the future with this mega merger. Here. Keep in mind, Deutsche Telecom is the parent of T Mobile. They own fifty three percent of the company and have
for a while. They have fifty six percent I think of the voting rights here, So what they're really after is Europe is a much more mature market than the US, 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 one hundred percent holding.
Is this something that regulators in Germany and here in the US would be okay with?
That is the big question mark scorelet. It's going to be really interesting to see how the current administration here
in the US reacts to it. I can't speak to Germany, but I do believe here in the US they may look at it and say, gee, do we really want a foreign entity holding one hundred percent of T Mobile which has US license spectrum licenses across a broad swath at different frequencies, and it's you know, they would have obviously control over the customer relationships, call it eighty five 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 US may even seek some sort of a deal with Deutsche Telecom 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. US congress and Jim Jordan, chairman of the House Judiciary Committee, said Tuesday that the US government would look at the details of any deal. Quote, A foreign company taking over TA Mobile will get our staff's attention end quote. He said, So there's certainly gonna be something from the congressional side here. Would do you think that would Deutsche Telecom's full ownership? Would that mean anything to Charlie Pellett, who's a Tea
Mobile customer? And are you a T Mobile customer?
Scarlett?
And Scarlett's a T Mobile customer and.
Scarlet, 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 capital. So from that standpoint, Paul, I think we could see real uplift in T mobiles network. They've been investing in it over the years and have done a very good job of building out five G coveraging capacity, but that's an ongoing process, right, so you would you know, 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.
Than the I like hearing that, John.
Where does that leave the number one player in the telecom space here in the US, which is AT and T. It just reported earnings. Wireless service revenue did come up short in the last quarter, it.
Did, Scarlet. I think investors should look beyond that. In two Q 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 and T has done, and I suspect for Rizing 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're going to see fewer price increases, although, as I said just a second ago, AT and T is implementing a price increase on some of the older plans starting in two Q 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.
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Earnings out again for a lot of companies this week. This is a big week. Philip Marsh International Alison better than expected numbers. The stocks up about six point six percent today, so a big move for that stock. It's up about two percent year today. Let's break down the numbers from Philip Marsh, Ken Sha Bloomberg Intelligence, Senior Consumer Products Analyst joints us here Ken. What's driving Philip marsh businesses these days?
Well? Philip Morris today a late any fears that some competitive activity with their oral nicotine products into the US is going to derail them hitting their numbers. They didn't. They beat their numbers handily. Top line up nine percent EPs up sixteen helped a bit by currency, but the
underlying business is healthy cigarettes. Unexpectedly, or I should say as expected, volumes are down as the long term secular decline continues, but pricing was up eight percent over the year of a year smoke free products top line was up strong. Gross margins are about seventy percent. 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 sixteen billion dollar 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 from younger folks. I'm not really sure because I think Zinfandel line, but that's not it.
No, this is Zyn 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 Worse want to do that?
So there's smoke free business I mentioned is powered most by Icos. That's their heated tobacco device which uses its Marlborough 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 or less harmful alternative. The two other legs of the stew of smoke free or it's evapor 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 viv 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 sixty percent share in the US, a big share you know, outside the US in selected markets. It's still prohibitive 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 Filla 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 smoke free is now forty percent of total sales there. That is just external talk to us about the competitive landscape for that smoke free products.
They Phillip 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 E cigarette products. They are way behind with Philip Moore to Philip Morris, so they have like a seventy five percent share of where they're 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 they're already coming out with second and third generation products. Whether 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 you know, transporting its products.
They said there was a small impact, namely the duty free you know shops you see in airports with less travel, they had a downturn there. They said they did site some input costs, you know, distribute, 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.
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