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tv   The David Rubenstein Show Peer to Peer Conversations  Bloomberg  December 13, 2019 6:00pm-6:31pm EST

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david: why is it that wall street doesn't value airlines as much as you think they should? ed: warren buffett said you guys are the chicago cubs of the business world. he is our largest investor. david: initially, you went to frito-lay? ed: i consider that my postgraduate work. david: what percentage of people lose their luggage? ed: we never lose. we call it mishandled. david: mishandled. [laughter] >> would you fix your tie, please? david: well, people wouldn't recognize me if my tie was fixed, but ok. just leave it this way. alright. ♪
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david: i don't consider myself a journalist. and nobody else would consider myself a journalist. i began to take on the life of being 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? ♪ david: people say running an airline is not an easy thing to do. you have weather to deal with, energy prices, employees and so forth, but you grew up in a family of nine children, so what is easier? a family of nine children or running an airline? [laughter] ed: running an airline, certainly. our family was great. i am the oldest of nine. when i was five years old, we had six kids in the house, nine kids sharing three bedrooms.
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1.5 baths. my dad was a dentist and had his practice inside our house. my mom worked for him. david: was he busy? ed: he must have had some gaps in his schedule. growing up, i didn't get on an airplane until i was 25. david: really? ed: we could not afford it. too many of us and it was not who we were. i always recall we went on one family trip a year. my dad would get us all in the station wagon. apologies to the safety regulators in the audience, but no seat belts, no car seats. there were nine of us in a station wagon all piled in. we were allowed to put whatever we could fit in our pillowcase. we brought it for two weeks. that was our family trip. i must've figured there has to be a better way to travel. [laughter] ed: i am still pursuing that mission today. david: your mother must be proud
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that her oldest son is the ceo of delta airlines, the largest u.s. air carrier. ed: the largest in the world. david: does she call you with ideas or complaints? ed: all the time. she gives me her ideas. i always ask her when she is traveling not to tell anybody who she is. that doesn't last. i have caught her, people have told me she applauds the end of the safety announcement that i do. david: you travel on delta yourself, so you fly coach? ed: often. i find it more interesting back there. david: what about the legroom? ed: the legroom is fine. [laughter] ed: what you find when you're flying coach is that it's more entertaining, and you don't
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worry about legroom. you see what else is going on. that is where the real people are. that is where the party is. david: let's talk about running an airline generally. to be honest, a lot of people say you want to run an airline or a big is this, go to a good business school or work your way up to be a management expert, but you were trained as an accountant. some people would say the best managers are not cpas. ed: one of the things about accountants that i think they get a bad rap is that they are all about the numbers, introverted, into their analysis. what you learn as an accountant is the numbers are actually the language and vocabulary of business. david: wall street does not value airline companies as you say they should. why is it that wall street does not 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.
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he now owns 11% of delta. after years of swearing off the industry, he said you guys are the chicago cubs of the business world. you not only had a bad decade, you had a bad century. [laughter] ed: we got our bad century out of the way. we are now in a place where we have really fixed the business. david: he changed his mind, because he used to say if a capitalist had been at kitty hawk seeing the wright brothers take off, he would've shot them down. because there were no profits made in the airline industry for 100 years versus the profits now. ed: it has changed. he wouldn't say that today. this year will be the fifth year in a row our profits have been in excess of $5 billion. david: your revenues are what percentage in the u.s., outside? ed: two thirds u.s., one third international. david: international, is that more profitable than u.s. because of all the flights? ed: it is the opposite. international is more difficult to get to. the fuel costs more, the service levels are higher.
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and ticket prices are more suppressed. we make 80% of our profits in the u.s. david: you make a lot of profits by owning your own refinery. why do you need your own refinery? you don't trust other people to get gasoline to you? ed: we do. we certainly use a lot of refineries. about six or seven years ago, as refineries up and down the east coast were being closed and crude prices were north of $100, we saw our cost of jet fuel was escalating. we were paying another $25 a barrel on top of the crude prices to get jet fuel. we are the most price insensitive consumers of that product. we don't decide each day whether we will fuel up planes or not. any of the costs are being pushed onto the airlines, so we needed to get more supply in the market. we have a great refinery outside of philadelphia. we opened it.
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it was closed for about a year. we put a whole community back to work. it was a great story. 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 then probably had 10 or 12 major domestic airlines. now, we have three or four. has deregulation really worked for the american people or not? ed: it has absolutely worked. one of the changes in the industry that caused problems was we were seen just as a commodity. price was the sole determinant of what airline you took. we changed that paradigm where we are now competing on quality, service and people. david: suppose i say i want a cheap price, but good food. is food a big deal to people who fly these days? ed: food is important.
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the industry wound up getting rid of food, basically anything, and charging fees galore. we have come full circle. we have reintroduced main cabin food services on our aircraft. and international improving the overall quality. david: suppose i say i don't care about food. can you bring your own food on? ed: you can bring your own food on. david: i just want to make sure my luggage is not lost. what percentage of people actually lose their luggage? ed: we never lose. we call it mishandled. david: mishandled. [laughter] ed: we know where it is. it just takes a little longer to get to sometimes. david: when you are an airline executive, you have two companies you can buy airplanes from. more or less. ed: two, not more or less. david: you have boeing and you have airbus.
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you fly a lot of boeings. your longest flight is from atlanta to johannesburg, 17 hours? that is a boeing 777? ed: that's right. david: you chose not to buy the 737 max. for reasons unrelated to what later became a problem. is that an advantage because you have the airbus 321 and you have more capacity than your competitors, and do you take credit for that decision or was that luck? ed: i put that solely in the rather be lucky than smart category. we are big fans of boeing and we are hoping to see the max fly quickly into the skies, but safety was never a part of the consideration in making that decision. david: while you are in bankruptcy, u.s. air wanted to take you over. was that a friendly offer? ed: everybody assumed that was going to be a foregone conclusion. the people of the company stood and said that is not going to happen. ♪
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david: you grew up in poughkeepsie? you went to college at? ed: saint bonaventure university. david: you got your accounting degree? so you were minding your own business, and you were an accountant at price waterhouse. what were you doing at frito-lay? ed: i was fortunate at
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waterhouse and i moved quickly through the ranks, made partner when i was already 32, 33 years old. that was the pinnacle of success. i said i need to go someplace to learn more and continue to develop. i got a call from a friend that said pepsi was hiring, and introduced me to a person in frito-lay. down in texas. i moved to dallas. i don't have a graduate degree. i went to an undergrad at saint bonaventure. i always consider my seven years at pepsico as my postgraduate, because it is a fascinating company. david: you are at frito-lay and then a headhunter called you and said how about delta airlines? ed: i was traveling 80% of my time, a lot of international. i already thought i knew how the airlines worked. i knew the things that needed to be fixed about the airlines to make it better. you get there and take a peek
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behind the curtain and see how complex it is. i never understood what actually went into it. it was an industry that was fascinating to me because i was a big consumer of it. david: so you became a senior vice president for finance, then you became the chief financial officer. then you became the president, then the ceo in may 2016, right? ed: that's correct. david: you had some problems before you became the ceo and ultimately delta filed for bankruptcy in 2005. why did you have to file for bankruptcy? ed: it was the aftermath of a series of events which 9/11 triggered. we lost our international business almost overnight. the competition was so competitive, so many airlines were pushing prices lower and lower. almost all the airlines wound up filing. david: while you are in bankruptcy, usair said they want to take you over. was that a friendly offer? ed: doug parker will never live that down. no, we had a pretty hostile
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takeover battle. i have an interesting story. we were bankrupt. we were not worth anything at the time. usair offered $10 billion to buy delta for a company that is not worth anything. everybody assumed that will be a foregone conclusion. the people of the company stood and said that is not going to happen. we have a better business plan. we convinced the creditors to stay with delta, and you see what we have been able to do. david: you said to the employees and colleagues we will give you 10% of the profits, is that right? ed: when we went through the restructuring, people took a lot of pay cuts. benefit losses, a lot of change. we made a commitment that once we became profitable, 15% of the profits would go back to the people, which we honor to this
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day. david: how much did that produce last year for employees? ed: last year, we paid $1.3 billion in profit sharing. david: does that mean your stock price would be higher if you did not pay it to them, or you would have happier employees? ed: i think our stock price would be lower. david: is internet available on all your planes? ed: our smaller regional jets do not have them but wi-fi is on all of them. david: you charge for it? ed: i do, but not for a good reason. i firmly believe we need to make wi-fi free. we are working towards that. [applause] david: you are the ceo. you presumably have some influence. ed: i do have influence. they've heard me hundreds of times, including gogo which is our service provider. i always tease them and call them no go. they had made some progress, and now they are slow go, but eventually they will get to gogo. one of the reasons, you don't pay for internet practically
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anywhere else is that planes do not have the technical capacity and capability that we made it for free, the system would crash. so once we get about 10% tick rate, performance starts to erode. if you test it, it is still not at the level it needs to be. we are investing heavily in the technical capacity in terms of the satellite spectrum. david: we can fly to the moon and back, and we can't have everybody using the internet on the plane at the same time? ed: you sound just like me. one of the things i tell people, we are closer to the satellites in the sky, but as they remind me, we are not traveling 500 miles per hour as we are sitting at home with our wi-fi broadband. david: there was a proposal to let people talk on their cell phones on airplanes, but that was voted down by the fcc. ed: that was voted down by me. i would never allow that. whether they allow it or not, we will not allow it.
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[applause] david: we haven't built a new airport in this country of any size since denver. now, laguardia is being redone and so forth. why is the airline industry -- are you responsible for helping to build the airports? ed: we are actually building airports ourselves. we got tired of waiting for the government partnerships out there, trying to crack that code. we have massively improved the flight experience, the onboard experience. the next thing is the airports themselves. the airports of the country were built for the 1960's. david: you are building airports where? ed: we are building airports everywhere. we are building the new laguardia airport. it will take a few years. airport construction is the most difficult construction because you have to build it, live it and operate it at the same time. we bought a new airport in salt lake city. we are building one in seattle. we modernized atlanta.
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david: you have been an advocate for not allowing airlines that have government subsidies to compete against you. is that a problem? ed: it is a big problem. i have to give the trump administration great credit for recognizing that and reaching agreements to try to draw attention to it and stop it. at least freezing where it is at. david: are they doing anything about it? what will happen? ed: they are being responsive to the administration. today in the persian gulf, 30 airplanes a day that fly between the persian gulf and the u.s., not one of them is a u.s. airline. they are all middle eastern airlines. if there was a fair playing field, there is no question that the u.s. airlines would be operating but we can't because the fares are subsidized. david: what about the air traffic control systems?
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some people say it was invented in the 1950's and 1960's and they have not modernized much. is it really out of date? ed: absolutely. it is absolutely safe, but unfortunately, it is radar based. many cars have better gps than what we access in our airplanes. the opportunities to improve the air traffic control system are not only speed for the customers, but it is the efficiency, sustainability of the environment, the opportunity to make a difference. government dysfunction has been one reason why, because you have the faa on a five-year leash. you cannot change out the air traffic control systems currently. that is why we have been advocating for some different models. most countries around the world have better air traffic control systems than the u.s. does. david: you have a pattern of meeting with employees fairly regularly called the velvet program. ed: when we went through hard times, we did not have a lot of cash. we decided the only way we would be successful again is we have to reconnect with our people.
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david: so today, 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. i don't get much time and i not very good at it but i do enjoy that. we do serious work. we do hard work. it is important to remind myself not to take myself too seriously. it is a reminder to stay light on my feet, to remember the
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importance of human interaction. i did also run the new york marathon last year. david: two hours and -- ed: that was the first few miles. david: but you did finish. ed: i finished. i wore my delta colors loud and proud. raised $2 million for cancer research. [applause] ed: thank you. i don't think i would be doing another one of those. i am still feeling the effects. david: i have not done a marathon. maybe i would fly a marathon. i would fly 26 miles. [laughter] david: you have a pattern of meeting with employees regularly. you call it the velvet program. can you explain what that is? ed: when we went through our hard times back in the bankruptcy era, we did not have a lot of cash. people were taking pay cuts. we decided the only way we would be successful again was that we would have to reconnect with our people and get something to catch their attention.
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our people were downtrodden. years of pay cuts, job losses, and all the difficult things we remember from almost 20 years ago. so in downtown atlanta, there was an abandoned macy's building and we decided to take out a couple of floors. i'm not sure we even paid for it. i think we just squatted. i don't even know if they knew we were in there. we brought all our employees, 600 to 700 at a time for a day, a day and half, an opportunity to talk about the airline. we had no powerpoints, no slides. we deliberately kept it as uncorporate as possible. they would come into our room and see people dancing around. no wonder they are bankrupt,
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they probably thought. we have a crisis on our hands and these people are dancing in an abandoned macy's building. what it did was it got their attention to focus on what was important. our people wanted to know it wasn't their fault that we went through the hard times. so often when companies go through difficult times, employees are made to feel they are the reason. that they are too expensive, not productive enough. that they are a cost even though they are the best asset. we do these meetings to this day. we can pay for our own space and do hotel lobbies and other venues, but we have a dozen of them a year all around the u.s. where we bring people of different disciplines together and talk about the future. i still lead every one of those, as i did 15 years ago because that engagement is so critical in 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? anything left to buy in this business? ed: the airlines are thought to be a mature industry. after all, there's not new places in the u.s. left to fly to.
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we are building bigger airports, bigger airplanes, but not new destinations. global expansion is important to us. we are doing that through our partnerships and delta flying many parts of the world. people are more aware of the world than ever before. people want to travel. they want to experience. we are living in as a divisive a time as we can recall for many years. you would think that would hurt airline travel, but technology and social media and instagram, people want to go and explore and see for themselves something they may have read about. now they feel that is affordable. opportunities not only for the millennials and young generation, but also baby boomers and others. david: i would focus on the baby boomers bucket list because they will have to do those sooner than millennials, right? [laughter] ed: we are investing in both. david: suppose the president of united states said i watch this interview, you are an impressive person.
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why don't you come in the government and help us in some way? what would you say? ed: i am happy to advise, but i got my work cut out for me. david: suppose i'm a young graduate or a young business school graduate, why what i want to work at an airline or delta? what is the advantage? ed: free travel. for not only themselves but their partner. if you love people, you are out in the public eye every single day. we do not have desk jobs. our desk job's in the sky. every day, you have different people coming through and you have to adapt. you think about why people travel. people travel for all reasons. for happy reasons, sad reasons, for business, to explore, to meet their grandchild for the first time, and there is all this emotion in this tube, roughly 200 people sitting within 40 yards of one another,
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so it is a social experience as well. people that want to actually make the world better get into travel. ♪ [ electrical buzzing ]
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[ dramatic music ] ahhhh! -ahhhh! elliott. you came back!
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scarlet: i'm scarlet fu, this is "etf iq," where we focus on access, risks and rewards offered by exchange traded funds. ♪ scarlet: should you stay or go? the s&p 500 is enjoying its best run in six years. that sets up a clash between investors and etf's and mutual funds looking to stay put or flee. exploring the ecosystem. role of authorized participants and how they grease the wheels of the etf industry.


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