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Southwest’s Kelly Sees Proportion of Larger Aircraft In Fleet Growing · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg pim L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:14
  Speaker 1: you and your money, whether at the grocery store or
• 0:16
  Speaker 1: the trading floor. Find the Bloomberg pi L Podcast on iTunes,
• 0:20
  Speaker 1: SoundCloud and at Bloomberg dot com. Well, his stock is down,
• 0:30
  Speaker 1: but he's ready to get up and fly, and he's
• 0:33
  Speaker 1: here to give us a little bit of Oh come on,
• 0:35
  Speaker 1: love is Gary Kelly. He's the chief executive of Southwest.
• 0:39
  Speaker 1: They are great to have you with Hi, Mr Kelly,
• 0:42
  Speaker 1: It is great to be with you. I was able
• 0:44
  Speaker 1: to get all three of these things together in one
• 0:48
  Speaker 1: It was not even an I am so all right,
• 0:51
  Speaker 1: So let's let's go with that water, talk about what's down,
• 0:54
  Speaker 1: talk about what's up, and then tell us about you know,
• 1:00
  Speaker 1: what's next. You know, it was a great quarter. Let's
• 1:04
  Speaker 1: start with the second quarter. Our unit revenues were up
• 1:07
  Speaker 1: right in the range that we had anticipated, and that
• 1:11
  Speaker 1: was a nice improvement. And we saw some increase, uh,
• 1:15
  Speaker 1: we saw some growth in in our average fairs. And
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  Speaker 1: hold on, I mean I make your pardon, I don't
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  Speaker 1: mean I'm interrupted, but I mean, if if if they
• 1:23
  Speaker 1: all what you're saying is accurate, and I and I
• 1:25
  Speaker 1: got that from your perspective, then why would the stock
• 1:29
  Speaker 1: be reacting the way it is? And also, um, in
• 1:33
  Speaker 1: your mind, does that mean that you're somehow you weren't
• 1:36
  Speaker 1: able to telegraph whatever has upset the market. You haven't
• 1:39
  Speaker 1: been able to telegraph that information to them. Question cut
• 1:44
  Speaker 1: out there a little bit, But I think I got
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  Speaker 1: the gist of your question. Well you know, um, I
• 1:50
  Speaker 1: know you cut me off, and I'm gonna go ahead
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  Speaker 1: and finish. Anyway. We we had a very strong quarter.
• 1:55
  Speaker 1: We beat consensus by fourth cents. We were right in
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  Speaker 1: line with our revel new UH expectation, even with some
• 2:05
  Speaker 1: drag from our new reservation system. Our expectation according to history,
• 2:11
  Speaker 1: given the timing of when Easter falls in second quarter,
• 2:16
  Speaker 1: the timing of fourth of July holiday, is that we
• 2:19
  Speaker 1: would see a little bit less growth year over year
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  Speaker 1: in the third quarter. And that's exactly where we end up.
• 2:26
  Speaker 1: So we will have less cost pressure year over year
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  Speaker 1: in the third quarter. It's a strong earnings outlook and UH,
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  Speaker 1: you know, in terms of our plans for this year,
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  Speaker 1: we're actually on our head of plan and looking forward
• 2:41
  Speaker 1: to UH I think a really strong year again. I
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  Speaker 1: think that. I'm looking at the share price and it
• 2:48
  Speaker 1: is down almost four percent. And based on some of
• 2:52
  Speaker 1: the commentary that I was reading this morning, people are saying, well,
• 2:55
  Speaker 1: you know, UH, the revenue for each seat flown a
• 2:59
  Speaker 1: mile climb only one percent in the current quarter, and
• 3:03
  Speaker 1: that was below expectations. And there continues to be a
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  Speaker 1: pretty high cost for UH just running the business, including gas.
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  Speaker 1: Is there any plan to lower those costs? Well, on
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  Speaker 1: the ladder that that's not true, but I'll speak to that.
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  Speaker 1: But again, we were up one and a half percent
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  Speaker 1: UH in the second quarter, so I would expect this
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  Speaker 1: the third quarter year over year according to history, if
• 3:29
  Speaker 1: everything else is equal, to be up something less than that.
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  Speaker 1: So those expectations were just unrealistic. If that's what the
• 3:36
  Speaker 1: disappointment is now. The other thing to to remind you
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  Speaker 1: of is that there is a drag of almost a
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  Speaker 1: percent in the second quarter and again in the third quarter.
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  Speaker 1: UH So if you adjust from our new reservation system,
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  Speaker 1: adjusting for that, we would be up more in the
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  Speaker 1: two and a half percent range and the two percent
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  Speaker 1: range a year over year for second and third quarter.
• 3:59
  Speaker 1: On the cost I had. Fuel prices are up some
• 4:04
  Speaker 1: what year over year in the second quarter, but we
• 4:07
  Speaker 1: would expect them to be down comparatively and down yet again.
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  Speaker 1: In so fuel is actually a huge contributor to the
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  Speaker 1: strong earnings and very strong cash flow. We have some
• 4:20
  Speaker 1: cost pressure this year because we were finally able to
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  Speaker 1: conclude some labor contracts after many years of negotiations fourth
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  Speaker 1: quarter a year ago, and so you're seeing sort of
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  Speaker 1: the unusual comparison year over year if you adjust for that,
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  Speaker 1: um we we have actually very solid earnings growth in
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  Speaker 1: the second quarter, and again I would expect that for
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  Speaker 1: the balance of the year. Are you looking into getting
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  Speaker 1: even bigger airplanes? Because there's this feeling that, you know,
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  Speaker 1: people are looking really just to get from one place
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  Speaker 1: to another for the cheapest possible price. Uh, and it's
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  Speaker 1: getting harder and harder to lower prices further. So is
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  Speaker 1: there a way to more people in You know, I
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  Speaker 1: think there's different you're I think you're asking a couple
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  Speaker 1: of different questions there. But the the answer, the straight
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  Speaker 1: answer to your question is yes. I think over time,
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  Speaker 1: we would expect that the average number of seats per airplane,
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  Speaker 1: and our fleet will continue to grow, but that will
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  Speaker 1: be within the existing fleet that we operate. So, in
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  Speaker 1: other words, are our our future will be the Boeing
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  Speaker 1: seven thirty seven Max eight, which has one seventy five seats,
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  Speaker 1: or the Boeing uh UH seven Max seven, which is
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  Speaker 1: a future deliverable and it will have a hundred and
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  Speaker 1: fifty seats. So I would see a larger proportion of
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  Speaker 1: our fleet UH in the higher seating category going forward.
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  Speaker 1: Today we have about of our fleet in the larger
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  Speaker 1: aircraft and I think that proportion will grow in the future.
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  Speaker 1: If you could speak a little bit about the capacity
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  Speaker 1: issue in typical in many cases airlines increased capacity and
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  Speaker 1: variety of markets UH, and then they bump up against
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  Speaker 1: UH further UH, you know, lack of lack of demand.
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  Speaker 1: Where are you seeing the capacity increases coming and where
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  Speaker 1: have you held off? Well, our capacity this year was
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  Speaker 1: expected to grow in the three and a half percent range,
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  Speaker 1: UH was our early forecast, and we'll be coming in
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  Speaker 1: somewhere between three and a half and four percent, probably
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  Speaker 1: in the higher end of that range. That's you know,
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  Speaker 1: low single digits. That is very much in line with
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  Speaker 1: nominal GDP growth uh and we we have record load
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  Speaker 1: factors um and at this point the term in the
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  Speaker 1: industry is that we're spilling demand, meaning that we're not
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  Speaker 1: able to carry all the travelers who would like to fly.
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  Speaker 1: So for us, just speak for Southwest, our capacity is
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  Speaker 1: very much in line with demand and the thing that
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  Speaker 1: we're gonna unfortunately, and Gary, I'm so sorry to cut
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  Speaker 1: you off. We're gonna have to leave it there, but
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  Speaker 1: thank you so much for joining us. We truly appreciated
• 7:12
  Speaker 1: Gary Kelly as president chief executive officer of Southwest Airlines.
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  Speaker 1: Up right now, we want to take a look at
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  Speaker 1: the corporate debt markets. We have seen the extra yield
• 7:35
  Speaker 1: that investors are demanding to own, the dead over benchmarks
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  Speaker 1: shrinked near the lowest in the post crisis era, and
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  Speaker 1: there are a lot of concerns that we are in
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  Speaker 1: a bubble. Joining us now is Cliff Marine, Deputy chief
• 7:48
  Speaker 1: investment officer at Mass Mutual Financial Group, overseeing about a
• 7:52
  Speaker 1: hundred and sixty billion dollars and his goal is to
• 7:55
  Speaker 1: make sure they don't lose money. Cliff, in an environment
• 7:59
  Speaker 1: like this, how do you view corporate debt at a
• 8:03
  Speaker 1: time when spreads look incredibly rich. And we are in
• 8:08
  Speaker 1: a you know, sort of slowly growing world, but also
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  Speaker 1: one that is rife with political risk. Where where do
• 8:16
  Speaker 1: we go and are we in a bubble? Well, we
• 8:18
  Speaker 1: think that we're in this very low growth environment with
• 8:21
  Speaker 1: low economic growth, low interest rates, low inflation. We have
• 8:25
  Speaker 1: very strong corporate profits, which is very good for corporate bonds,
• 8:28
  Speaker 1: and that is actually accelerated and fueled the stock markets.
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  Speaker 1: So we're in this environment where we're in a perfect
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  Speaker 1: world for the stock market and for commercial real estate.
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  Speaker 1: Now back to corporate bonds. What is good is there
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  Speaker 1: there are very low defaults. There are some industries that
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  Speaker 1: are in a in a risk position today, like retail,
• 8:46
  Speaker 1: like real estate associated with retail, like commercial malls. And
• 8:51
  Speaker 1: then the auto industry is under a bit of stress
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  Speaker 1: with a excess of used car which has put price
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  Speaker 1: pressure on used cars and on new cars. But that
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  Speaker 1: we're watching that. There may be some downgrades, but we're
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  Speaker 1: really not overly concerned with the auto sector. The retail
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  Speaker 1: sector is a very much concerned. We don't have much
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  Speaker 1: exposure there, but that sector is going through undo stress
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  Speaker 1: from Amazon and from online sales of products in the
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  Speaker 1: traditional brick and mortar retail stores are really in trouble,
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  Speaker 1: So you don't think that we're in a bubble. Well,
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  Speaker 1: the corporate spreads are very tight, the fundamentals are strong.
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  Speaker 1: The question is how long will this continue? And the
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  Speaker 1: stock market is going to trade very similarly. When we
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  Speaker 1: see a break in the stock market, will probably see
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  Speaker 1: a break in corporate bonds. The market that hit first
• 9:36
  Speaker 1: is most likely the high yield market, which has the
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  Speaker 1: most risk, which is similar to the stock market cliff.
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  Speaker 1: One of the things that I've most recently read has
• 9:45
  Speaker 1: to do with foreign credit traders, people from outside the
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  Speaker 1: United States who want to buy lots of US debt
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  Speaker 1: and they can't seem to get enough of it. Is
• 9:55
  Speaker 1: there still a nice, ready willing buyer out there that
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  Speaker 1: you know, American companies can can sell them some more debt.
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  Speaker 1: The technical backdrop of the corporate bond market is the
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  Speaker 1: strongest I've ever seen. There's unsatiable demand from unsatiable so
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  Speaker 1: that the corporate corporate buyers from foreign countries are also buying.
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  Speaker 1: Our yields are higher than they are in Europe, higher
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  Speaker 1: than they are in Japan, so our bond market looks
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  Speaker 1: pretty attractive. When you're getting a spread over treasury. Now,
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  Speaker 1: the spread, as Lisa said, is very low. Investment grades
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  Speaker 1: around a hundred basis points high yield is three seventy
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  Speaker 1: five basis points approximately. That's very low when you compare
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  Speaker 1: that to historical basis. But the fundamental backdrop is also
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  Speaker 1: strong right now, So you were saying that this is
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  Speaker 1: supportive for both stocks and commercial real estate, and if
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  Speaker 1: there is a blip in the stock market, you will
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  Speaker 1: see a commensurate blip in corporate bonds. I'm wondering, as
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  Speaker 1: somebody who is trying to avoid losses, how do you
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  Speaker 1: maneuver in this type of market where you're seeing positive
• 11:01
  Speaker 1: correlations between stocks and bonds, And I should add treasuries,
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  Speaker 1: while they often move opposite to risk, markets, have often
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  Speaker 1: moved in tandem with them in the central banking era.
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  Speaker 1: So are you changing your allocations in order to prevent
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  Speaker 1: this type of kind of double OFSS scenario. We're viewing
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  Speaker 1: this market as an issuer's market. This is a great
• 11:23
  Speaker 1: time to issue debt. If you're a company or corporation
• 11:27
  Speaker 1: and you want to issue debt, now is the time
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  Speaker 1: to do it. You're gonna get very low interest rates,
• 11:31
  Speaker 1: very low spread over the treasury right, so it's a
• 11:33
  Speaker 1: great time to do it. We are a long term investor.
• 11:35
  Speaker 1: We invest mass mutual for decades, not for quarters. So
• 11:39
  Speaker 1: when we buy a bond, we're doing work on it
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  Speaker 1: such that we're not depending on the secondary markets to
• 11:44
  Speaker 1: trade it. We're planning to hold it to maturity. So
• 11:46
  Speaker 1: we have a lot of our portfolio in illiquid private
• 11:50
  Speaker 1: placement debt, infrastructure debt, commercial real estone, commercial real estate
• 11:55
  Speaker 1: loans on buildings like this that are secured by buildings.
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  Speaker 1: So these are ill liquid investments. They get spread premium
• 12:01
  Speaker 1: of basis points. If interest rates go up, the value
• 12:04
  Speaker 1: of the bond may go down, but we're playing to
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  Speaker 1: hold these for a very long time. I'm wondering, though,
• 12:09
  Speaker 1: I'm hearing this same refrain from a lot of investors
• 12:13
  Speaker 1: that have buy and hold capital. Our valuation is getting
• 12:16
  Speaker 1: too stretched. In the private markets as well, they are
• 12:20
  Speaker 1: getting stretched. Companies are lending or borrowing more on a
• 12:23
  Speaker 1: debt to EBA da A a leverage basis um. There
• 12:26
  Speaker 1: are covenants that we get in the private dep markets
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  Speaker 1: you don't get in public bonds. When you buy a
• 12:30
  Speaker 1: public investment grade bond, it's just a promise to pay
• 12:32
  Speaker 1: from the company and there are virtually no covenants with it.
• 12:36
  Speaker 1: In the private dep market, you do get a package
• 12:38
  Speaker 1: of financial covenants which give you a lot more protection
• 12:40
  Speaker 1: than you think, and we think there's substantial value to those.
• 12:44
  Speaker 1: I like that idea of protection, and I'm wondering if
• 12:46
  Speaker 1: you could just speak to that a little bit, because
• 12:50
  Speaker 1: you know, it's everything is great when everybody's making money,
• 12:53
  Speaker 1: but then when all of a sudden, you know, we've
• 12:54
  Speaker 1: gone through bond market declines, and people who have lived
• 12:58
  Speaker 1: in the ups and downs of the volatility, maybe you
• 13:01
  Speaker 1: could just talk a little bit about what do you
• 13:03
  Speaker 1: think is going to happen next, it's going to upset
• 13:05
  Speaker 1: the system and how people are are they ready to
• 13:08
  Speaker 1: deal with it. We're overdue for correction, and we don't
• 13:12
  Speaker 1: have as much liquidity in the markets as we did
• 13:13
  Speaker 1: before because the banks have pulled back their trading capital
• 13:16
  Speaker 1: because of regulatory legal reasons, So we are overdue for correction.
• 13:20
  Speaker 1: The liquidity is being provided more by the buy side
• 13:23
  Speaker 1: than the cell side today, so we are actually welcoming correction.
• 13:27
  Speaker 1: We welcome a correction to more normalized spread levels and
• 13:30
  Speaker 1: yield levels. We will be able to buy assets at
• 13:32
  Speaker 1: higher yields. And as long as you do your fundamental
• 13:35
  Speaker 1: credit work on investing, you're gonna you're gonna be fine
• 13:39
  Speaker 1: if you just buy things for a trade. But what's
• 13:41
  Speaker 1: going to cause it at this point, Well, we have
• 13:43
  Speaker 1: geopolitical issues and risks. We have great risks. Um, we
• 13:48
  Speaker 1: have political risks in our country. But the fundamentals are
• 13:50
  Speaker 1: still very strong. I mean, you look at second quarter
• 13:52
  Speaker 1: earnings coming out right in the middle of this, up
• 13:55
  Speaker 1: nine percent for the most part, seeing some very strong
• 13:59
  Speaker 1: stock response from companies that perform well and some very
• 14:01
  Speaker 1: poor performance of companies that don't. So what's good is
• 14:05
  Speaker 1: the market is trading on fundamentals of companies and that's rational. Rational, Okay,
• 14:11
  Speaker 1: that makes sense, I mean rational. You know what's rationalists?
• 14:15
  Speaker 1: You can actually it's like a little bit of art
• 14:17
  Speaker 1: and science to estimate the future value and a little
• 14:21
  Speaker 1: less so it's more just math when you're trying to
• 14:23
  Speaker 1: estimate future debt because you know you're always going to
• 14:26
  Speaker 1: have debt, right, that will always be with us. Thanks
• 14:28
  Speaker 1: very much, Cliff Marine. He is the Deputy Chief Investment
• 14:32
  Speaker 1: Officer for Mass Mutual Financial Group, helping to manage more
• 14:35
  Speaker 1: than a hundred and sixty billion dollars of assets. Well,
• 14:57
  Speaker 1: I want to turn our focus now to corporate bonds,
• 15:00
  Speaker 1: the electronic trading of them. We have seen a growing
• 15:03
  Speaker 1: prepared proportion of this. Traditionally over the counter market gravitate
• 15:08
  Speaker 1: towards these electronic trading systems. And here in the house
• 15:12
  Speaker 1: with us as Rick McVeigh, his chairman and chief executive
• 15:15
  Speaker 1: officer of Market Access, which is really the dominant in
• 15:19
  Speaker 1: investment grade corporate debt trading in the US electronically. And Rick,
• 15:24
  Speaker 1: I want to just talk about your company just reported earnings,
• 15:27
  Speaker 1: and one big question in the market right now is
• 15:29
  Speaker 1: the high yield bond market. Uh, this is a one
• 15:32
  Speaker 1: point three trillion dollar market in the US, and there's
• 15:35
  Speaker 1: a question of you know, how much can electronic systems
• 15:40
  Speaker 1: move into this area. There hasn't been as much penetration there,
• 15:43
  Speaker 1: So what's your plan and what's your view on that? Sure?
• 15:45
  Speaker 1: Thank you, Lisa. And the high yield market has been
• 15:48
  Speaker 1: slower to move electronic, but we have seen very good
• 15:51
  Speaker 1: growth over the last two or three years. So like
• 15:55
  Speaker 1: investment grade credit, there is an increasing trend toward more
• 15:58
  Speaker 1: electronic trading and yield. Can you give us a sense
• 16:01
  Speaker 1: of just the numbers with respect to how much of
• 16:04
  Speaker 1: the investment grade corporate debt market has traded electronically versus
• 16:07
  Speaker 1: the high yield market right now. Sure, I think if
• 16:09
  Speaker 1: you look at institutional investor trading, a little over twenty
• 16:14
  Speaker 1: of the US high grade market trades electronically and probably
• 16:18
  Speaker 1: a little less than ten percent of the high yield
• 16:21
  Speaker 1: market trades electronically. So it is earlier days in high yield.
• 16:26
  Speaker 1: But we are optimistic about growth in high yield for
• 16:29
  Speaker 1: two reasons. One, as we have moved towards all to
• 16:32
  Speaker 1: all trading, we're finding more connections that create matching opportunities
• 16:36
  Speaker 1: in high yield. And when we do the transaction cost
• 16:40
  Speaker 1: savings average about a quarter point in those trades, So
• 16:44
  Speaker 1: as investors experience those savings, they're trading more high yield
• 16:48
  Speaker 1: on the platform. Just to be clear, all too all
• 16:51
  Speaker 1: is opening up the system to anyone on either side,
• 16:55
  Speaker 1: So it could be an investment investment firm or a
• 16:58
  Speaker 1: dealer that is making an offer and creating that liquidity
• 17:02
  Speaker 1: and looking to buy on the other side. So um
• 17:06
  Speaker 1: with respect to those numbers of US investment grade corporate
• 17:10
  Speaker 1: bonds traded electronically in less than temper cent and HIG yield.
• 17:13
  Speaker 1: Where do you expect that proportion to go, say, in
• 17:16
  Speaker 1: the next five years. I think the growth and electronic
• 17:19
  Speaker 1: trading will continue. And if we are at the beginning
• 17:24
  Speaker 1: of a movement by central banks to reduce monetary stimulus
• 17:29
  Speaker 1: around the world and rates start to rise, I would
• 17:32
  Speaker 1: be even more optimistic about the growth and electronic trading. Uh.
• 17:37
  Speaker 1: There are many benefits for both dealers and investors, especially
• 17:40
  Speaker 1: as we are connecting global institutional participants into one central
• 17:46
  Speaker 1: electronic marketplace. Investors and dealers are seeing more trading opportunities
• 17:51
  Speaker 1: than ever before, transaction costs are coming down, and importantly,
• 17:57
  Speaker 1: liquidity risk in the system is being reduced. And I
• 18:00
  Speaker 1: think those three key drivers will continue their growth rate
• 18:04
  Speaker 1: in electronic trading and we will see a material increase
• 18:07
  Speaker 1: over the next five years. So you're not going to
• 18:09
  Speaker 1: put a number on it, well it uh, you know
• 18:12
  Speaker 1: they I think the direction of travel is very clear.
• 18:15
  Speaker 1: It's hard to know exactly what the adoption rates will be,
• 18:18
  Speaker 1: but I do think that if the market direction reverses
• 18:22
  Speaker 1: and we are seeing higher rates and mutual funds are
• 18:26
  Speaker 1: experiencing outflows, that is the time where our trading system
• 18:30
  Speaker 1: and other central marketplaces will show the most value, because
• 18:34
  Speaker 1: that's the time when the secondary market really becomes the
• 18:37
  Speaker 1: focus and people need liquidity from a variety of different
• 18:41
  Speaker 1: sources to manage those outflows. Just uh, you remember, of course,
• 18:45
  Speaker 1: the high yield uh, the collateralized more real estate, collateralized
• 18:50
  Speaker 1: loan obligations, all the debacle of the housing crisis, uh,
• 18:55
  Speaker 1: much of which was funded by loans that seemingly have
• 19:00
  Speaker 1: been written in the first place. And wondering if you
• 19:02
  Speaker 1: could tell us what's what's the bond market equivalent of
• 19:07
  Speaker 1: a collapse today and what is the equivalent of what
• 19:12
  Speaker 1: would that do if it was the stock market? And
• 19:14
  Speaker 1: we know what happens when the stock market crashes. Shareholders
• 19:17
  Speaker 1: lose their money. But when bond holders lose their money,
• 19:19
  Speaker 1: the first thing they do is they call the lawyer.
• 19:22
  Speaker 1: And and well, I mean, and it's and this is
• 19:24
  Speaker 1: the way the game is played. Yes, So I'm wondering
• 19:27
  Speaker 1: if you could just comment on that. Sure, Well, I
• 19:28
  Speaker 1: think we're in a totally different environment today than we
• 19:31
  Speaker 1: were in oh seven, where uh there clearly had been
• 19:35
  Speaker 1: an excess of leverage built up in the credit markets
• 19:38
  Speaker 1: and structuring UH had grown beyond UH any normal level
• 19:45
  Speaker 1: that really led to the collapse afterwards. Student debt doesn't
• 19:48
  Speaker 1: count well. Student debt is is an issue, right, And
• 19:53
  Speaker 1: what has happened as central banks have pushed rates closer
• 19:55
  Speaker 1: and closer to zero is investors have been reaching for
• 19:59
  Speaker 1: yield and taking on more. But what's going the other way? Right? Well,
• 20:02
  Speaker 1: I think it's we are in the early days of
• 20:04
  Speaker 1: potentially going the other way. You're seeing central banks talking
• 20:08
  Speaker 1: about reducing their balance sheet holdings of bonds, but we're
• 20:11
  Speaker 1: raising interest rates. That's I mean, we we just got
• 20:14
  Speaker 1: the FED. I mean, that's clear that they're going to
• 20:16
  Speaker 1: raise well. And and actually, Rick the point that you're
• 20:19
  Speaker 1: making earlier about how if there is an increase in
• 20:22
  Speaker 1: interest rates, or if there is a dislocation, albeit perhaps
• 20:25
  Speaker 1: not as severe as in the credit crisis, that there
• 20:28
  Speaker 1: will be more electronic adoption, which I thought was a
• 20:32
  Speaker 1: fascinating point. And I'm wondering. You know, some people would
• 20:35
  Speaker 1: argue that right now we're already seeing an electronic revolution
• 20:40
  Speaker 1: through e t f s, and that people are simply
• 20:42
  Speaker 1: trading e t F shares shares of UH, these exchange
• 20:46
  Speaker 1: traded funds that own baskets of debt instead of trading
• 20:49
  Speaker 1: the underlying debt. How has the adoption of e t
• 20:53
  Speaker 1: F s and the trading and their shares affected the
• 20:56
  Speaker 1: business of actually trading the underlying debt on electronic systems. Well,
• 21:00
  Speaker 1: it's it's kind of interesting, right, because the e t
• 21:04
  Speaker 1: F business has grown UH significantly as you point out,
• 21:07
  Speaker 1: and is becoming a more and more important part of
• 21:10
  Speaker 1: the overall market as it's a highly efficient way for
• 21:14
  Speaker 1: people to invest in fixed income. So along with that
• 21:17
  Speaker 1: growth in credit, we are also seeing the highest levels
• 21:21
  Speaker 1: of trace volume ever UH and the traces the bond
• 21:24
  Speaker 1: pricing reporting system that is kept by FINRA, so it
• 21:27
  Speaker 1: sort of shows the volumes secondary market volume. So there
• 21:30
  Speaker 1: are two things going on there. One is that is
• 21:33
  Speaker 1: the direction to travel with the e t F business
• 21:35
  Speaker 1: that you point out. Secondly, low rates have led to
• 21:39
  Speaker 1: a a significant increase in corporate debt outstanding in the
• 21:44
  Speaker 1: in the US markets and in fact the global markets,
• 21:47
  Speaker 1: so we're seeing market volume in corporate bonds and e
• 21:50
  Speaker 1: t F growth go hand in hand. It's also been
• 21:54
  Speaker 1: an important component of our growth because et F trading
• 21:58
  Speaker 1: is all about efficiency in scale and so most of
• 22:01
  Speaker 1: that business gets done electronically, so it's been a good
• 22:05
  Speaker 1: thing for market Access and electronic trading, not just with
• 22:08
  Speaker 1: the e t F fund managers, but also with the
• 22:10
  Speaker 1: community of market makers and a p S that's surround
• 22:14
  Speaker 1: the the e t F business. I want to thank
• 22:17
  Speaker 1: you very much for coming in and spending time with us.
• 22:19
  Speaker 1: So Rick McVeigh, thank you. Thank you for having a
• 22:21
  Speaker 1: chairman and the chief executive of market Access. One stock.
• 22:34
  Speaker 1: I am watching today Verizon biggest gain in eight years
• 22:39
  Speaker 1: and this shares up almost six percent after reporting earnings
• 22:43
  Speaker 1: that blew estimates out of the water. To get a
• 22:45
  Speaker 1: sense of just how good they were and how long
• 22:48
  Speaker 1: this can last, I want to bring in our own
• 22:50
  Speaker 1: John Butler, senior Telecom Services and Equipment analyst for Bloomberg Intelligence. John,
• 22:57
  Speaker 1: what stood out to the most about THESA earning? The
• 23:01
  Speaker 1: thing that hit me the most were subscriber editions. Um.
• 23:05
  Speaker 1: You know, this is a company that quarter and in
• 23:08
  Speaker 1: quarter out for I'm going to say the last six quarters,
• 23:10
  Speaker 1: they've been bleeding subscribers, and UM, I think if you
• 23:15
  Speaker 1: look at the rise in their whole tack, their whole
• 23:18
  Speaker 1: approach to the market has been and kind of remains
• 23:22
  Speaker 1: the same. They're sort of the premium price provider in
• 23:26
  Speaker 1: a market that is very price competitive. In other words,
• 23:29
  Speaker 1: they charge more, They charge more than everybody else. They say,
• 23:32
  Speaker 1: all right, we offer you something better, but we're going
• 23:34
  Speaker 1: to charge you more, and everybody says, forget you right.
• 23:36
  Speaker 1: And so the big change for Verizon came in February.
• 23:40
  Speaker 1: They came out with an unlimited plan and it made
• 23:43
  Speaker 1: all the difference in the world. But interestingly, and I'll
• 23:46
  Speaker 1: let you continue, I'll stop interrupting you, but I thought
• 23:48
  Speaker 1: it was super interesting how much revenue are they giving
• 23:51
  Speaker 1: up by lowering their price because their their actual income
• 23:55
  Speaker 1: was in line with expectations, even though they blew the
• 23:57
  Speaker 1: subscriber increase out of the water. Yeah, there is a ice.
• 24:00
  Speaker 1: And speaking of prices, you could see it in their
• 24:02
  Speaker 1: average prices, which where you know, they declined more year
• 24:07
  Speaker 1: on year than they did in the first quarter, and
• 24:10
  Speaker 1: so suddenly you're seeing that immediate pressure on price. Um.
• 24:14
  Speaker 1: But you know, in their mind, do you continue to
• 24:18
  Speaker 1: give up subscribers that potentially could have a very long
• 24:21
  Speaker 1: life to them? Where do you want to give up
• 24:23
  Speaker 1: a little bit on price? And then focus on where
• 24:27
  Speaker 1: you're headed in the future for them, as we know
• 24:31
  Speaker 1: the future lies in A O L, Yahoo and five G.
• 24:35
  Speaker 1: John Lowell McAdam is the chairman of the chief chief executive.
• 24:42
  Speaker 1: What's his strategy because and I don't mean for the company,
• 24:46
  Speaker 1: I mean for him for himself, because I mean, you know,
• 24:50
  Speaker 1: his compensation is tied to performance of not only the
• 24:54
  Speaker 1: company but the stock. And as to Lisa's point, I
• 24:58
  Speaker 1: can sell you everything. If I'm losing money or if
• 25:02
  Speaker 1: I'm undercutting my competitors, are they taking a page out
• 25:05
  Speaker 1: of the airline industry book? Now? I don't think so, Pam.
• 25:09
  Speaker 1: I think they really had to make this move to
• 25:11
  Speaker 1: unlimited or ultimately you're just standing alone in the market
• 25:16
  Speaker 1: as a shared donor quarter and in quarter out, and
• 25:19
  Speaker 1: that can't go on. You know, particularly with Verizon, they
• 25:23
  Speaker 1: really needed to protect that subscriber base. So in terms
• 25:27
  Speaker 1: of what law is doing in the short term, the
• 25:29
  Speaker 1: move to unlimited, building out the network, getting it ready
• 25:34
  Speaker 1: for five G, I think he's making the right moves there.
• 25:38
  Speaker 1: In terms of a true long term strategy moving into
• 25:41
  Speaker 1: adjacent markets, I think A T and T has a
• 25:45
  Speaker 1: better bet and we've talked about that in prior prior
• 25:49
  Speaker 1: discussions how a T and T is really looked at
• 25:53
  Speaker 1: the core market and wireless, it's commoditized, but content hasn't.
• 25:58
  Speaker 1: And so if you move into that market and you
• 26:01
  Speaker 1: begin to pull it into the wireless world, you really
• 26:04
  Speaker 1: add value and ultimately you regain control over pricing. I
• 26:08
  Speaker 1: think I was interested in the fact that they also
• 26:12
  Speaker 1: lost fewer subscribers in the landline side on the cable side,
• 26:16
  Speaker 1: and I'm wondering how they managed that. Were they also
• 26:19
  Speaker 1: lowering prices there? They didn't. It didn't really come up.
• 26:23
  Speaker 1: So I don't have a good answer. That's fine, It's
• 26:26
  Speaker 1: just I'm just interested in how they all around what
• 26:29
  Speaker 1: they got asked about there, which was a good question,
• 26:32
  Speaker 1: is what are you going to do longer term about
• 26:35
  Speaker 1: um over the top media? So a lot of people
• 26:38
  Speaker 1: are snipping their cord or cutting out cable altogether and
• 26:43
  Speaker 1: just relying on Netflix and Hulu. And do you know
• 26:47
  Speaker 1: anyone under the age of I don't know, pick something
• 26:50
  Speaker 1: that's younger than me, which is everything, thank you. You know,
• 26:54
  Speaker 1: anybody that is going out and getting the cable company
• 26:58
  Speaker 1: to come out and install cable pay the full freight
• 27:02
  Speaker 1: for all of that. I did Pim but thank you.
• 27:05
  Speaker 1: You fall into the same category. I did too, but
• 27:08
  Speaker 1: this was a couple of years. But my point, my
• 27:10
  Speaker 1: point is who's no is anybo? Is there any growth
• 27:13
  Speaker 1: in people getting came? No? Right, there isn't, And you're
• 27:16
  Speaker 1: on the right track there, And I think A T
• 27:19
  Speaker 1: and T is too. They have direct TV now, which
• 27:22
  Speaker 1: is basically a cable package that can get delivered over
• 27:26
  Speaker 1: your phone, so they're sort of applying to that younger
• 27:28
  Speaker 1: demographic with that while protecting that pay TV business for Verizon. Um. Again, Leasa,
• 27:37
  Speaker 1: I haven't looked closely at the five US numbers. I
• 27:39
  Speaker 1: believe they lost or TV declined year on your while
• 27:43
  Speaker 1: the broadband internet side of wireline grew, so net net
• 27:47
  Speaker 1: you have growth in that division, um, and really you
• 27:51
  Speaker 1: see that trend across the whole sector. Broadband is growing,
• 27:55
  Speaker 1: people are trading up to faster connections and paying more
• 27:59
  Speaker 1: for it, but the TV is sort of ailing at
• 28:02
  Speaker 1: the hands of the internet. Well, but that's what's driving
• 28:04
  Speaker 1: the growth in subscribers at Verizon is because they want
• 28:09
  Speaker 1: to watch video on their phone, right, So they've got
• 28:12
  Speaker 1: the great network and you know, they pump it out,
• 28:14
  Speaker 1: so it's sort of an intra segment trade if you will.
• 28:17
  Speaker 1: So people are migrating I believe a bit from TV
• 28:20
  Speaker 1: to internet, but also again separate from that, you do
• 28:24
  Speaker 1: get a trade up effect to higher speed. I want
• 28:27
  Speaker 1: to offer up a mad culpa because I've been really
• 28:29
  Speaker 1: skeptical about Verizon in my role as a debt columnist,
• 28:33
  Speaker 1: and they have a hundred and ten billion dollars of debt.
• 28:36
  Speaker 1: They've been packing it on and uh there's been almost
• 28:40
  Speaker 1: five percent of it in well, and so it's been
• 28:42
  Speaker 1: a big concern if they can't, if they keep bleeding customers,
• 28:45
  Speaker 1: how are they going to be able to pay this back?
• 28:47
  Speaker 1: So you know, I'm watching the bonds closely today and
• 28:49
  Speaker 1: they're not showing the same kind of pop, but I
• 28:51
  Speaker 1: think it's kind of interesting area to watch. And just
• 28:53
  Speaker 1: to put it into a well that goes back to
• 28:56
  Speaker 1: protecting this subscriber base, really is if you suffered too
• 29:01
  Speaker 1: much attrition, suddenly perhaps the dividend becomes at least something
• 29:06
  Speaker 1: you talk about on a conference call. Yeah, just to
• 29:09
  Speaker 1: tell you that the shares of Horizon are up six
• 29:12
  Speaker 1: percent right now, though they're down eleven percent so far
• 29:15
  Speaker 1: this year. Thanks for listening to the Bloomberg pien L Podcast.
• 29:24
  Speaker 1: You can subscribe and listen to interviews at iTunes, SoundCloud,
• 29:28
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 29:32
  Speaker 1: out there on Twitter at pim Fox. I'm out there
• 29:35
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 29:39
  Speaker 1: You can always catch us worldwide on Bloomberg Radio