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tv   The David Rubenstein Show Peer to Peer Conversations  Bloomberg  January 4, 2020 1:00pm-1:30pm EST

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david: why is it wall street doesn't value airlines as much as you think they should? ed: our largest investor, warren buffett, said you guys are the chicago cubs of the business world. you not only had a bad decade, you had a bad century. david: you went to frito-lay, right? always considered my seven years there as my postgraduate degree. david what percentage of people : lose their luggage? ed: we never lose it. it is mishandled. >> can you fix your tie please? david: people would not recognize me if my tie was fixed. just leave it this way. alright.
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♪ david: i do not consider myself a journalist. nobody else would consider myself a journalist. i began to take on a life of an interviewer, even though i have a day job of running a private equity firm. how do you define leadership? what is it that makes somebody tick? people say running an airline is not an easy thing to do, whether -- weather to deal with energy , prices, lots of employees and so forth, but you grew up in a family of nine children. so what is easier, growing up in a family of nine children or running an airline? ed: running an airline. certainly. [laughter] our family was great. i'm the oldest of nine and i was sharing earlier that when i was five years old, we already had six kids in the house, nine kids sharing three bedrooms and one
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and a half baths. my dad had a dental practice inside our house. my mom worked for him. avid: wasn't that busy of practice at times, i'm guessing? ed: growing up, i didn't board an airplane until i was 25 years old. we couldn't afford it. there were too many of us ended -- and it wasn't too we were. i recall one of the stark visuals of my childhood. we went on one family trip a year. my dad would get us all in the station wagon. apologies to our safety regulators in the audience, no safety belts, car seats, nine of us, my mom, my dad, my grandmother in a station wagon. all piled in. we were allowed to put whatever could fit in our pillowcase for two weeks and that was our family trip. i figured in my subconscious, there has to be a better way to travel. [laughter]
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i am still pursuing that mission to this day. david: your mother must be proud that her first child is the ceo of delta, the largest carrier in the world. she call you with ideas or complaints? ed: all the time. all the time. she gives me her ideas. i always ask her when she is traveling not to tell people who she is. that never lasts. applaudsve told me she at the end of the safety announcement i do at the beginning of the flight. david: you travel on delta yourself. you fly coach? ed: i often fly coach. i find it more interesting back there. david: what about the legroom? ed: the legroom is fine. [laughter] what you find when you fly in coach is it is more entertaining so you don't worry about legroom, you see what is going on. that is where the real people
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are. that is where the party is. david: let's talk about running an airline generally. to be honest, a lot of people say if you want to run an airline or a big business, go to a good business school or work your way up to be a management expert and so forth, but you were trained as an accountant, which is a great profession, but some people would say the best managers are not cpas. ed: one think about accountants, i think they get a bad rap because they are all about the numbers, very introverted and into analysis, is that what you learn as an accountant is the numbers are actually the language and vocabulary of business. david: for some reason wall street doesn't value airline companies as much as you say they should. why is it wall street doesn't value airlines as much as you think they should? ed: we are moving in that direction. we are still not there. our largest investor is warren buffett. he now owns 11% of the company. warrne after years of
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, swearing off the industry he had a saying i love. he says you guys are the chicago cubs of the business world. you not only had a bad decade, you had a bad century. [laughter] so we got our bad century out of the way and we are now in a place where we have fixed the business. david: he changed his mind. he used to say if it capitalist had been at kitty hawk seeing the wright brothers take off he would've shot them down. there were no profits in the airline industry for 100 years. when you compare the profits versus the losses. but that has changed. ed: it has changed and he wouldn't say that today if you were to ask him. this year is the fifth year in a row our profits will be in excess of the $5 billion. david: your revenues are what percentage in the u.s. and outside? ed: two thirds u.s., one third international. david: is international more profitable? longer flights? ed: just the opposite. international is more difficult, the planes are bigger, fuel costs more, service levels are substantially higher, and ticket prices because there is a lot of
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competition internationally are more suppressed. we have to make about 80% of our profits in the u.s. david: you make a lot of profits, some say, by owning your own refinery. why do you need your own refinery? you don't trust other people for gasoline? ed: we use a lot of refineries but six or seven years ago, as refineries up and down the east coast were being closed as crude prices were north of $100, we saw that our cost of jet school -- fuel was escalating rapidly. we are paying $25 a barrel on top of crude price just to get jet fuel because we are the most price insensitive consumers of the product. we don't decide each day whether we fuel our planes are not. we tell them six months out we are coming. any cost refiners have are going to be pushed onto airlines. so we needed to break that curve and get more supply into the market. we have a great refinery outside philadelphia, trainer, that we acquired. it was closed for about a year and we put a whole community
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back to work. it was a great story and to this day it has been very profitable. we have earned our returns on that many fold. david: in the 1970's there was a big push for airline deregulation. prices had been set by the icc. we had probably 10 or 12 major domestic airlines and now we have three or four. has deregulation really worked for the american people? has it not worked? ed: it has absolutely worked. one of the changes in the industry that caused problems for years was that we were seen as nothing but a commodity. price was the sole determinant of what airline you took. we have changed that paradigm where we are now competing on quality and service and people. david: suppose i say i want to cheap price but i want good food. is food a big deal? ed: food is important and we have brought a lot of food back. the industry 15 years ago wound up getting rid of food and
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basically getting rid of everything and wondered up charging fees galore. we have come full circle. we reintroduced main cabin food service on a significant number of our aircraft, and in international really improving the overall quality. david: suppose i say i want a cheap fare, i will bring my own food on -- can you bring your own food on? ed: you can bring your food on. david i just want to make sure : my luggage isn't lost. what percentage of people lose their luggage? ed: we never lose. we mishandle. david: mishandle. [applause] ed: we always know where it is. it just takes us a little longer to get to sometimes. david: when you're an airline executive has basically two companies to buy airplanes from, more or less. ed: two. david: more or less, trying to
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be polite, but more or less, you have boeing or airbus. you fly a lot of boeings and your longest flight is from atlanta to johannesburg, 17 hours. a boeing 777. you chose not to buy the 737 max for reasons that were unrelated to what would later be a problem. is that an advantage now because you have the airbus 321 and are picking up more capacity than your competitors? you have the airbus 321, are you picking up more capacity than your competitors? ed: we are big fans of boeing and we hope to see the max fly but that was never part of the consideration when making that decision. david: when you were in bankruptcy, u.s. said they wanted to take you over. was that considered a friendly offer? ed: people assumed it was a foregone conclusion. the people of the company students at it is not going to happen. ♪
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david: you grew up in poughkeepsie. ed: poughkeepsie, new york. david: you are an accountant at price waterhouse. ed: i was fortunate at price waterhouse. i moved quickly through the
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ranks, made partner at too early in age, 33 years old and at that point that was the pinnacle of success. and i said, if i am in a company where the pinnacle of success is 32, i need to learn more and continue to develop. i got a call and a friend said pepsi was hiring. introduced me to a person at frito-lay down in texas. i went to dallas, and i have always considered my training at pepsico my postgraduate work, because it is a fascinating company. david: you are at frito-lay and a headhunter called you and said, how about delta airlines? ed: yeah. i was an active business traveler. 80% ofraveling probably my time, a lot of it internationally. so i already knew how the airlines worked and what needed to fix to make the airlines to make it better. i get there and you actually
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take a peek behind the curtains and see how complex it is. i never understood what actually went into it but it was an industry that was fascinating to me because i was a big consumer. david: you became senior vice for finance -- vice president for finance eventually and then became chief financial officer. then you became the president and then you became the ceo in may 2016. ed: that is correct. david: but you had problems before you became ceo and delta filed for bankruptcy in 2005. why did you file for bankruptcy? ed: it was the aftermath of a series of events which 9/11 triggered. we lost our international business almost overnight. competition in the u.s. was so competitive with so many airlines trying to take each --er's share that it capped kept pushing prices lower and lower. almost all the airlines ended up filing. david: while you were in
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bankruptcy, usair said they wanted to take you over. was that a friendly offer? never liverker will that down. a pretty hostile takeover battle with them. its interesting. we were bankrupt at the time at usair offered $10 billion to buy delta, for a company that is not worth anything. everyone assumed it is going to be a foregone conclusion, and the people of the company stood and said it is not going to happen. we have a better business plan and we were able to convince creditors to stay with delta, and as a result you have seen what we have been able to do. david: you said to the employees in your colleagues, we will give you 10% of the profits. is that right? ed: when we went through restructuring, people took a lot of pay cuts, a lot of change, and we made a commitment to the employees then that once we became profitable, 15% of profits would go back to the people, which we honor to this day. david: how much did that produce last year?
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ed: last year we paid $1.3 billion to our people. david: does that mean stock price would be higher if you didn't pay it to them? or do you have happier employees? ed: our stock price would be lower if we didn't pay it. david: is internet available on all your plans? ed: almost all our plans. our smallest regional jets don't have it but wi-fi is on those. david: did charge for it or not? ed: we do charge for it, not for good reason. i'm a believer we need to make wi-fi free across all our services and i'm working towards that. [applause] david: you the ceo. you presumably you have influence. ed: i do have influence. they have heard me 100 times. our service provider, i call them no go, they have made a lot of progress to get this logo and eventually they will get to go go. but one reason is that planes do not have the technical capacity,
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the capability yet that if we made it free, the system would crash. once it gets above a 10% take rate on board performance starts to erode. and if you turn it on free, which we tested many times, it is still not at the level it needs to be. we are investing heavily in technical capacity in terms of the satellite spectrum. david: you mean we can fly to the moon and back and can't have everybody using internet on the plane at the same time? ed: exactly. you sound like me, david. one thing i tell people, we are closer to the satellites in the sky. why shouldn't they work? but as they remind me we are not , traveling 500 miles an hour as we send it home on our wi-fi via broadband access. david: there was a proposal to let people talk on their cell phones on the airplanes, but that was voted down i think by the fcc. ed: that was voted down by me. i will never allow it on delta. whether they are allow it or not, we will never allow it on delta. [applause]
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david: we haven't built a new airport in this country of any size since i think 23 years, in denver. laguardia is being redone and so forth, but why is the airline -- you are responsible for building airports are not? ed: we were building regional airports ourselves. we got tired of waiting for the government. partnerships are out there trying to crack that code. we have massively improved the flight experience the onboard , experience on the next thing is the airport themselves. the airports in our country were built for the 1960's. david: you were building airports where? ed we are building airports : everywhere, the new laguardia airport, its going to take a few years. airport construction is the most difficult construction because you have to build it and operate it all at the same time. building a new airport at lax. building a new airport at salt lake city,.
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a new airport in seattle. we modernized atlanta. david: speaking of government support. you have been an advocate of not allowing airlines to have government subsidies to compete against you. is that a big problem? ed: it is a problem. i have to give the trump administration great credit for realizing that and reaching agreements with the uae and qatar the draw attention to it and to stop it. he is freezing where it is at. david: what is going to happen? ed: they are being responsive to the administration. today in the persian gulf, 30 airplanes a day fly between the persian gulf and the u.s., not one of those is by a u.s. airline. they are all middle eastern airlines. if there was a fair playing field, which is what open sky agreements require, but we can't because those fares are subsidized. those costs are being paid for by the government.
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david: the air traffic control system, we have not really modernized it. is it out of date? ed: absolutely, but unfortunately it is radar based. many cars have better gps in the car than we do in terms of what we are able to access in our planes. and opportunities to improve air traffic control system are not only speed for customers but the efficiency, sustainability of the environment an opportunity to make a difference. government dysfunction has been one of the reasons why the air traffic control system, because we have the faa on a five-year leash. you can't change air traffic control systems with our current funding model. that is why we have been advocating for different models to go after a long project. most countries around the world have better air traffic control systems than the u.s. david: you have a pattern of meeting with employees fairly regularly. you call it the velvet program. ed: when we went through hard times we didn't have a lot of cash and decided that the only
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way we were going to be successful again is to reconnect with our people. ♪
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david: what do you do for outside activities? this is a full-time job obviously but do you have time for anything else? ed: i love to golf, not much time and i'm not very good at it but i do enjoy that. we do serious work. we do hard work. i think it is important to remind myself when i do serious things, not to take myself too seriously. it is kind of a reminder to stay light, feet to remember the , importance of human
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interaction. i did also run the new york marathon last year. david: two hours and? ed: that was the first few miles. [laughter] david: you finished? ed: i finished. i am here. delta ceo you have a shirt on? ed i wore delta colors loud and : proud and raised $2 million for cancer research for children. [applause] i don't think i'm going to be doing another one of those. i'm still feeling the effects. david: i haven't done a marathon. i would fly a marathon. i would fly 26 miles. you have a pattern of meeting with employees fairly regularly, you call it the velvet program. can you explain what that is? ed: when we went through hard times in the bankruptcy era, we didn't have a lot of cash. we didn't have anything, people were taking pay cuts. we decided the only way we are going to be successful again was that we were going to have to reconnect with our people and
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get something to cash their -- catch their attention. our people were downtrodden, years of pay cuts and job losses and all the difficult things we remember from almost 20 years ago. in downtown atlanta there was an abandoned macy's, and we decided to take out a couple of floors. i'm not sure we ever even paid for it, maybe we just squatted, i don't even know if they knew we were in there. we brought all of our employees, 600 or 700 at a time for a day, day and a half, an opportunity to talk about the airline. we had no power points, no slides. we deliberately kept it as on un-corporate as possible. we had couches, chairs, curtains, low lights, people would come in the room and see people dancing around and trying to lighten up. no wonder we were bankrupt, they probably thought. we have a crisis and people are dancing in this abandoned macy's building.
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but it got their attention and focus on what was important. and our people wanted to know it wasn't their fault that we went through the hard times. i think so often when companies go through difficult times, employees are made to feel like they are the reason, they are too expensive, they are not productive enough, that they are a cost when they are really the very best asset you have. and we do the meetings to this day. we can afford to pay for our own space and do nice hotel lobbies and other venues, but we have a dozen a year around the u.s., we bring people from different disciplines together and talk about the future. i still lead every one of those as i did 15 years ago because that engagement was so critical to what we do. david: how do you grow the value of your airline? you just make it more profitable by flying more miles? more acquisitions, is there anything left to buy in this business? ed: the airlines are a mature industry. there are not new places left in the u.s. to fly. we are building bigger airports
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bigger planes but not new , destinations, so global expansion is very important to us at delta and we are doing that through our partnerships in delta flying many parts of the world. i think people are more aware of the world than ever before. people want to travel. they want to experience. and it is interesting because we are living in probably as divisive a time as we can recall for many years. you would think that would hurt airline travel, but technology and social media, instagram and pictures, people want to explore and see for themselves something that they may have read about. now they feel it is affordable. opportunities not only for millennials and young generation, but also baby boomers and all people. david: i would focus on the baby boomers bucket list, because they are going to have to do those sooner than the millennials bucket list, right? [laughter] ed: we are investing in both. david suppose the president : said you are in impressive
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person, you have done a great job, come to the government and help us. what would you say? ed: i would say i'm happy to advise, but i'm not sure -- i've got my work cut out for me here. david: suppose i'm a graduate, a young business will graduate. why should i want to work at an airline, or at delta? what is the advantage of it for me? ed: free travel. anybody that likes free travel, not only for themselves, but their partner. it's a great business because you are out in the public eye every day. we don't have desk jobs. our desk job is in the sky. every day your work environment is different. you have different people coming through, and you have to adapt. you think about why people travel. people travel for all reasons on an airplane. happy reasons, sad reasons, business, pleasure, to explore, to meet their grandchild for the first time, and there is all this emotion and this tube of roughly 200 people sitting within 40 yards of each other.
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it is a social experience as well, and people that want to make the world better. -- better get into traveling. ♪
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erik: how do you feel going into 2020? stanley: about the markets or my health? erik: the markets, the economy, we can talk about your health, if you'd like. stanley: let's not. well, you have very low unemployment here. fiscal stimulus in japan. fiscal stimulus and confidence coming to britain. we are running a trillion dollar deficit at full employment. apparently we will have some sort of green stimulus in europe. we have negative real rates everywhere, and negative absolute rates a lot of places.

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