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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.
Turning to airlines, spirit renewing discussions to merge with Frontier as a deep discount, airlines struggles to compete. I spoke with Jeff Blue CEO Joanna Garrity yesterday about the hurdles facing smaller airlines. Take a listen.
Smaller carriers really need to be given a fair shot to win in this environment, and that's not happening right now. So we're focus on what we can control. We're focus on a whole series of initiative under our Jet Foward program. We do need the government to kind of make that a more level playing fields so smaller carriers can more effectively compete. Twenty twenty six really is the year that we should reap the benefits of all these initiatives that we put into place in twenty twenty five.
Chili Kayalu of Jeffries joins us now for more And as we talk about mergers once again in the airline space, aside from the Big three, how difficult is it for companies that are not Delta United or American to survive in the current landscape of airlines.
Yeah, it seems this seems to be more defensive move on the part of the airlines right. Consolidation is driven by defensive tactics, and airlines in general are a very tough business. That's why they trade at sixty percent discount to the market. Airplanes are expensive. Boeing knows that costs are expensive. Thirty percent is jet fuel, thirty percent is
labor labor. And when your revenues are growing three percent because your pricing is down and your costs are up five it creates a very difficult environment for airlines to thrive in. Whether that's gate costs like Jet Blue mentioned or additional fees. It makes it hard for airlines, so they have to consolidate or they have to price down to take market share, or.
They have to become other industries like credit card companies or luxury experience providers. I mean, how much is that the saving grace, the idea that you could get some sort of additional premium customer that people are leaning into experiences.
Willing to pay for it.
How much is that, really, truthfully the model going forward?
That's always been the bookcase on airlines.
You value Delta sky miles on a credit card multiple. You value their MRO business on an aftermarket multiple of twenty five times. Ziebada a novel. All of a sudden, you're getting an airline for free, essentially. So that's been the bookcase. But the separation of those assets is likely hard, and we haven't seen that happen.
Che I know you and the team of Jeffries are bullish on United. But I'd like to talk about American Airlines and some of the management decisions which has put the company in place where it is today. I'm talking about Seattle, I'm talking about routing, I'm talking about choice of which airplanes to retire. You know, what will it take for American Airlines to write the ship here?
I think the airline set up into twenty six.
And I say this every January and then I regret it in February.
Because I say the setup is positive.
For airlines, and I retract those comments pretty quickly, and we've done that for America in the last two years. But I do think the setup is positive and that capacity going into twenty six is fairly tight. That goes across the board for the airlines, and American in particular has very easy comps. Recall a year and a half ago they had a snap foo with their corporate relationship, so their corporate is just getting back to twenty twenty
four levels, so they're about a year behind. And if that's where we've seen a lot of the premium growth is on that corporate so that could be a huge upside driver for them if they take back their share and then some, which they seem to do.
So they have the.
Easiest comp set, and airlines in general have an easy comp set with the shutdown with the tariff impact in Q one, so essentially Q one and Q four are easy comps for them twenty six, but we'll see. I think a rerating takes discipline, capacity in the market and pricing for the main cabin to really improve at least two flat.
Well, let's shift gears to the manufacturers. Let's talk about Airbus and Boeing. Right, let's talk about how the market's coping with these supply chain bottlenecks. I'm talking about forgings, Castings, Interiors.
Talk to us a.
Little bit about what your projections for those two companies are in the new year.
Sure, So, I actually had one of my favorite days of my career last week. I went up to Seattle by myself and got to spend ten hours in rent In and Ever and it was the most fun I've had in that I saw the Boeing rent In line, which creates the seven thirty seven that's about fifty percent of their sales of buzzing, for the first time. It was really neat to see the three lines cycling at
forty two. This is a manufacturer that was doing twenty five a month in twenty four so did double production at the end of this year, and the employment base was invigorated.
They were happy.
And I think the new CEO, Kelly Orperg who's been there for eighteen months, is certainly making that change happen. He's changed about forty percent of the leadership in order to do that. So really good news on the three seven front and that the production rate is actually going up. Airlines will have planes, and it's a matter of certification on large programs like the Triple seven X they have, which they took a big charge for in Q three.
So will that be certified at the end of next year.
It sounds like all of the airline and airplane related executives saying twenty twenty six will be our year. Twenty twenty five wasn't exactly it due to all of the machinations throughout the throughout this year. I do want to end with Frontier and Spirit. I know you can't talk to these specific names. I do want to get a general sense though, about whether the feeling right now in the c suite is that this administration will be more amenable to some of these tie ups and be more
open on a regulatory front than they have been. It's been a mess every single time that companies have been trying to that have tried to tie up.
Yeah, this is clearly a defensive move.
It'll take about five percent of capacity out of the market. It'll help remove capacity to strain markets where you're seeing pricing down, So you know, I think airline consolidation is something we haven't seen a lot.
Of in aerospace on the hand.
On the other hand, going back a dal a day, in aerospace and defense tech, it's been very prolific for transactions in that market, whether it's manufacturers or defense tech, with the administration really supporting growth in the industry.
So that's been a positive.
Stay with US multiple IMPEG Savanance coming up.
Off to this.
Joining us now for more.
I'm so pleased to say, as Republican Congressman French Hill of Arkansas congressman, thank you so much for being with us. I want to start with this disagreement in Congress about even being able to vote.
On these subsidies.
Have you ever seen Congress Republicans in general more divided over this issue than they are right now?
Well, Lisa, it's good to be with you.
Merry Christmas, Eppie, Hanika to all your viewers and everybody at Bloomberg. Well, first, let's be clear the tax credits for Obamacare policies are not expiring, the ones that were expanded by Joe Biden during the COVID nineteen pandemic. Are expiring, but that base tax credit that dates back to the beginning of Obamacare for moderate income families with children is still in place, So let's be clear about that. And I'm not sure I agree with the estimate that was cited.
What Republicans are trying to do are side with American families across the board and lower premiums across the board, and we consistently brought bills to the House floor to do that, and we've had Democrats reject them. Last week, the Senate could not find a consensus on this, and that's the definitive place. That was the commitment made during
the spending votes. So I think everybody, Democrats, independence, Republicans all are suffering from the cost of living burden to us by the nine percent inflation from the Biden administration.
That's coming down.
But there's much more work to do, and that includes on passing bills that will actually lower premiums for all Americans across the board.
Congressman Hile, I'm wondering if you could talk to us a little bit about the Housing for twenty first Century Act, the act that's expected to streamline housing development provide incentives for builders just exactly what is the act and how is it going to alleviate the lack of supplying the US housing market.
You bet, thanks David. It's such a big issue.
We have so many people and so many markets that have experienced a run up in house prices during the past five years and certainly a run up in mortgage rates due to the FED fighting the Biden inflation from twenty one and twenty two, and that's really caused a lot of people to not have access to the house that they want. So what we're doing today is we're marking up bills that will reduce regulatory costs to building new houses, improve zoning to encourage better density, more different
kinds of unit across different cities in the US. We're talking about improving opportunities for rural housing development, make it easier for a veteran to get a veteran's loan, and hold HUT accountable on what I think is a deplorable job that they've done over the past decade or so in managing public housing for our neediest citizens across the country who I think have poor many poor conditions, and HUT is not holding either private landlords or their own housing authorities accountable.
Congressman Hill us housing affordability as we know as at an all time loan. I'm wondering, what is the act or the bill, the proposal. How does it address home owner expenses, utilities, insurance. I mean, we know that you know op X has really risen over the past few years. Does it do anything to alleviate the stress on homeowners?
Well on homeowners again, eighty percent of the cost that goes into a house or local zoning, local code decisions, local development fees that are charged urged on building new houses.
If you want to bring down.
The cost of the mortgage or the cost of property and casualty insurance, you need to confront inflation. Which is why I believe the Fed's primary focus is price stability. And we've made progress from the nine percent we experienced under Joe Biden's fiscal mismanagement and the Fed's mismanagement coming out of the pandemic, and there's a sustained pressure there to bring down costs and that will in turn bring down property and casually insurances that will bring down the
cost of financing. This is a prime goal for the administration. But what this bill focuses on is lowering the cost to manage housing, lower the cost to build housing, and that's something I think will increase supply, and increase supply will lower prices. We've already seen a modest break in that five year high in price appreciation. About eleven top twenty five markets are seeing some easing off on pricing.
Congress Fan, one thing that we keep talking about is the affordability crisis. And you've talked about President Biden several times. At what point do you think the President Trump needs to also, though, take some responsibility for the idea that inflation still is above its two percent target. He's talking about keeping rates even lower at the same time that he's been talking about the affordability crisis as a hoax.
Well, look, the affordability crisis is not a hoax. I mean we see it in the grocery store when we shop. We've seen it in the price level that increased as a result. As I said of the Biden inflation, that will come down over time. There's work to be done. I think the President's put his attention on doing that by lowering long term energy prices, by increasing We're going to vote this week to increase permitting on federal lands, which will open up future development for oil on gas production.
That's good.
Encouraging production across the country will bring down gas prices over the next few years.
And patrollum goes into everything that we make.
So that will bring down prices as well as some of the things we're tackling on deregulation and financing. I've worked hard in my committee to bring down the cost of financing by making our banks of all sizes more competitive, to have more capital to lend to people who are building houses or wanting to have a mortgage on their first house.
It's been just about a minute left.
But how much will further FED rate cuts actually help with the affordability crisis? If price stability is you said, is their pre eminent mandate.
Well, look, this is why the FED has a tough job to determine what the right price level is, what the right level of ample reserves are. And prices have been coming down, they just have gotten sticky right above
the Fed's target. So I just simply say that the biggest tax on the American people is inflation, and we've witnessed a forty year high of it due to the mistakes made by the FED coming out of the pandemic, and Joe Biden's decision to spend six trillion dollars more borrowed in the markets that I think was not the right decision to take, and we got inflation as a result of too many dollars chasing too few goods for those two years.
Stay with us mulplindex Savana's coming up off to this.
One thing that has been really strong this year has been discussions around trade. The White House keeping on the pressure on China, Treasure Secretary Scott Best and telling media the country's one trillion dollar trade surplus is unsustainable. Joining us now as Elizabeth Economy Senior Fellow at the Hoover Institution and one of the stalwart experts and scholars of the Chinese economy. Elizabeth, thank you so much for being
with us. I want to start with your take on the trade war so far this year.
Is there a clear winner?
Has there been any progress? Has it reshaped the relationship between the US and China?
Sure?
Lots of questions wrapped up into that.
You know.
Look, I think the good news is the Bussan summit between Presidency and Trump really did establish a new equilibrium between the two countries that really you know, we took back some of the moves we'd made on export controls both sides. That was really important, especially for the United States because of China's hold on the you know, critical minerals and rare earth elements.
We took back.
The shipping port dot fees, you know, so, and we took off ten percent off the tariffs that we had on China, you know, so from fifty seven down to forty seven percent. So I think a new equilibrium. But that's not to say that there aren't going to be
perturbations to the system. And we've already seen just over the past week with the announcement out of the State Department of pax Silica this you know, new arrangement between the United States and eight other countries to try to develop really a trusted supply chain from you know, Ai for the AI semiconductor supply chain all the way from you know investments in Australia in rare earth elements and critical minerals all the way through the UAE, with you know,
providing financing. And then of course Taiwan is a special partner to the group because of course, you know, ninety percent of there are more of this advanced semiconductors that
certainly the US relies on come from Taiwan. So you know, we took that action, and then the Chinese, you know, put back on some export controls around gallium and germanium and graphite, and put some companies that are involved in this new pack silica on their Unreliable Entities list, and so you know they're going to be these kind of tit for tat moves. Clearly, you know, the administration is not stomping in terms of what it wants to see
in the tech competition space. It's going to do what it wants to do, and Shine is going to respond in kind.
You know, hopefully we don't.
Go into a free fall, we don't end up back at the you know, one hundred and fifty one hundred and seventy five percent caraff level. But I don't think it's going to be smooth sailing.
There has been this bigger question about which economy is strong and better to withstand some of this volatility. Over the past couple of days, we've gotten data out of China signifying that there has been an ongoing decline, weakening and consumer appetite this concern about prices that are falling too rapidly. Do you think that this is laying the groundwork for some sort of stimulus to support the economy during this prolonged tip for tag I.
Mean, look that Chinese you know playbook is basically, you know, more investment, and you know, over the past couple of years, that investment has moved away from the property sector, which has been in a prolonged slump, to the tech sector, you know, clean tech, legacy semiconductors, the whole array of made in China, twenty twenty five technologies, you know, where China wants to dominate, Chinese companies to dominate at home
and then become global champions. So that includes new materials and evs and AI, all these you know, important cutting edge technologies. That is the playbook, and that is what they've been doing. But I think that's running its course. Local governments have you been building up their you know debt. The property sector is still slumping, There's no consumer confidence.
The country has done very little to reshape the social welfare net to make people feel confident right that they're not going to have to spend their savings on some healthcare emergency or on their children's education. So the pension system is you know, basically broken in about a third of the provinces. So they have to do more to boost consumer confidence. They've been reluctant to do that and
people are not and that's why they're not buying. And you know, as an aside, you know, also the birth rate continues to fall, and birth rate tracks with consumer confidence. So if they want to begin to address their demographic challenges, which are also enormous, they need to do more to address their consumer confidence.
That's right, Elizabeth, demographic challenges, it's real estate crisis is entering it's fifth year in a row. Yet insiders are calling for a stronger you on despite the fact that it's an exportlet economy. I mean, I think sports rose above one trillion dollars for the first time on record last month. To talk to us about you know why, our insiders, why is China looking for the you want to appreciate in twenty twenty six, Well, I.
Think it reflects a policy debate within China, and you know, a strong view one would encourage you know, consumers to
buy more. It would give China greater credibility on the international stage in terms of you know, saying that It's currency should be the you know, should become a real reserve currency in the future as it pushes to dedollarize the global economy, and it would relieve some of the pressure that it's beginning to face from the international community now in terms of all those exports, right, because it's not just the United States that is calling out China
for its you know, export of its over capacity and all those you know, evs and batteries, et cetera. It's now it's Europe, it's Mexico for example. It's threatening I think,
fifty percent tariffs on Chinese goods. So I think China has a problem again not only with the United States and some of the advanced economies, but also with middle income and increasingly emerging economies that are seeing you know, their markets flooded with these Chinese goods, and their nascent industries are never going to be never going to have
a chance to compete. So I think that would be those would be some of the reasons that the Chinese government might make a move toward appreciating.
The Yan Yeah, I mean, Elizabeth, Chinese equities are up I think one point eight two percent overnight following that successful IPO of Meta X. I think the Chinese equity markets up sixteen seventeen.
Percent year to date.
Talk to us about foreign interest in Chinese equities. I mean, for me, I mean I look at the variable interest and toity structure as a putoff, right, I mean, you don't own anything really. You're owning a hold co in the Caymans. You're not really owning an op goo.
Talk to us about how.
An investor, a foreign investor here in the US, can get comfortable owning Chinese shares.
Okay, so you're pushing me past what I, you know, actually focus on.
So I don't want to be giving investment advice to of course, Well let me to say, I think, you know, the Chinese stark stock market, you know, has been compared to a casino you know, and gambling by you know.
Some of China's most prominent economists. So you know, I would always just say fire beware. But you know, I am not in a position to be giving advice in this space.
You are in a position to be getting advice to policymakers who'll be listening closely. Elizabeth Economy and for the Hoover institution. Thank you so much for being with us. This is one of the key stories that we've been focusing on, just how intertwined are these economies and who is going to win ultimately at a time when investors aren't sure yet, they're both voting with their feet on both fronts well.
Affordability issues in China, I mean, the real estate crisis. It's fifth year in a row China. Vanke, a state owned developer, is probably been the fault this week. I mean, it's just things run mess domestically, and the fact that they're going to make exports that much more competitive by trying to appreciate the you on just doesn't make.
Much sense to me.
This is the Bloomberg's Events podcast, bringing you the best in markets, economics, an gie policy. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.