July 29, 2025 • 20 mins
Watch Paul LIVE every day on YouTube: http://bit.ly/3vTiACF.
Bloomberg Intelligence hosted by Paul Sweeney and Isabelle Lee
-Michael Shah, Bloomberg Intelligence Senior Pharma-Biotech Analyst, discusses Novo Nordisk shares falling by a record. The company named Maziar Mike Doustdar as chief executive officer after a profit warning due to slumping weight-loss drug sales.
-Lee Klaskow, Bloomberg Intelligence Senior Transport, Logistics and Shipping Analyst, discusses Union Pacific agreeing to acquire Norfolk Southern in a $72 billion cash-and-stock transaction, forming the only US transcontinental railroad.
-George Ferguson, Bloomberg Intelligence Senior Aerospace, Defense, & Airlines Analyst, discusses earnings from Boeing and JetBlue. Boeing almost halted its cash burn in the second quarter, generating cash from operations for the first time since 2023 and consuming just $200 million in free cash flow. JetBlue Airways shares climbed after the carrier posted a smaller-than-expected loss in the second quarter as demand rebounded and efforts to turn around the struggling carrier gained traction.
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Episode Transcript
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Speaker 1 (00:02):
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Speaker 2 (00:23):
His friends call him Mikey, and I'm his friend. I'm
calling him Mikey. Mikey Shaw. Michael Shaw, senior Pharmer, biotechanaists
Bloomberg Intelligence spased in London. Mike, you got to talk
to me about what's going on with no vote Nordest.
I thought these obesity drugs were the bomb here. What's
going on with their guidance? That was a huge miss
for them.
Speaker 3 (00:40):
Yeah, two pieces in use today versus the guidance cut,
so second guidance cut of the year. So reported guidance
now is calling for some percent sales grows, six percent
operating profit growth after adjusting for currency, and that compares
to fourteen and fifteen percent respectively previously. Now a lot
of that is related to the US market. There, they're
(01:02):
still seeing headwinds from compound and GLP one, which seems
to be the main driver that's affecting wegov growth and
there's a lack of visibility here. So all of that
creates uncertain z for investors and also kind of questions
around not only only twenty twenty five numbers, but the
exit rate into twenty six. So there's concerns about you know,
mid to long term growth given how concentrated or how
(01:25):
reliant sorry Novo is on WE'REGOVI for growth. The other
headwind is competition to a zepic, so that's the GP
one for diabetes and that's another you know, key growth
driver for the for the company. Second piece of news
new CEO appointment. So they went with an internal candidate.
I think the market was perhaps expecting them to go
(01:48):
for an external candidate, so you know, perhaps a bit
of disappointment there. But that said, you know he's been
at the company. So this is Mike Dudster. He's been
at the company since ninety two. He's been heading up
international operations since twenty sixteen, and over that time, you know,
we've seen international operations sales double to around eighteen billion dollars.
(02:10):
So you know, he's an internal higher, he's familiar with
the company culture. I think it's a bit too early
to you know, to write him off before he's even started. Now,
his focus is going to be on reget gaining ground
to Lily in the obesite space, maintaining leadership in the
diabetes space, and then improving execution. And that's something that's
going to be key ahead of the Cagary semma launch
(02:32):
as well as the launch for its oral JP one
A in obesity, particularly given you know, Cagary Summer perhaps
isn't as differentiated as we had hoped for, and then
the oral JLP one profile perhaps trails that of Lily's
in a car with journalists.
Speaker 4 (02:49):
Though the new CEO said he's planning to review the
company's cost base with outsetting specific targets and metrics. So
could this indicate indicate that Novo is preparing for a
period of silver growth after the initial surge and demand,
especially the blockbuster we Go V drug.
Speaker 3 (03:07):
I mean, I think it will be hard to slash
R and D to be honest, So I mean, and
they would need to you know, continue marketing, continue to
do DTC in order to you know, in order to
compete with Lily. They're obviously healy heavily investing into Capex
at the moment, but there is probably some operating leverage
(03:29):
in there, you know, to provide some sort of relief.
I mean, the company's got a margin of about forty
five percent, which is at the top end for large farmer.
Speaker 2 (03:38):
Hey, Mike, is there any reasons to believe that maybe
the marketplace has been over estimating the size of this
OBC drug market?
Speaker 3 (03:47):
I think, I mean, yeah, I think there's always a
risk with it with an indication this size when you
look at the market potential. You know, in the US alone,
it's one hundred and thirty one hundred and forty million patients,
which is a target population. There is a population then yeah,
I mean there is a risk that you know, perhaps
consensus did get ahead of itself. But the difficulty here is,
(04:11):
you know, you have you know, huge runway of patients.
There's obviously limited supply, so it's difficult to know kind
of you know, how quickly that supply can come on board. Now,
you know, Nova gives guidance around you know, their growth prospects.
You know where they think sales et cetera. Are going
to go, but they keep they don't necessarily quantify, you know,
(04:36):
the cadence supply and how that how quickly that's going
to come online. So that kind of makes forecasting quite difficult.
And obviously they don't want to give that information because
it's competitive information and they want, you know, Lily to
know about it.
Speaker 2 (04:48):
Wait, back in my analyst days, I would have slammed
at this management team because that guidance was brutal. They
were nowhere close to hitting it in they're big reduction
the guidance and we see the stock down twenty two
percent today, down thirty seven percent year to date, fifty
two week low. So they're paying the price for Miikey
Shaw Folks is one of the best healthcare pharmat analysts
in the city of London. Every institutional investor wants to
talk to them. We appreciate getting a few minutes of
(05:09):
his time. Miikei Shaw, Senior Pharma biotech analysts Bloomberg Intelligence
over there in our London studios.
Speaker 1 (05:17):
You're listening to the Bloomberg Intelligence podcast. Catch us live
weekdays at ten am Eastern on Apple, Cocklay and Android
Auto with the Bloomberg Business App. Listen on demand wherever
you get your podcasts, or watch us live on YouTube.
Speaker 2 (05:30):
One of my very first jobs on Wall Street back
in the late eighties, I was a research assistant in
the equity research department of paynmall recovering the railroad and
trucking industry. So I love the railroads. And today's a big,
big deal. Union Pacific agrees to acquire Norfolk Southern for
seventy two billion dollars. Now, the per share it's cash
and stock, works out to like three hundred and twenty bucks.
(05:51):
The Norfolk Southern is trading at a thirteen percent discount
two hundred and seventy nine dollars in works trading today.
It's actually down seven dollars today. I don't know what's
going on out there. I'm not doing this stuff for
a living anymore. But Lee Klaska, he is a senior
transport logistics and chipping alys for Bloomberg Intelligence. Lee, I
look at the stock price of Norfolk Southern and it
tells me a hefty level of skepticism out there in
(06:12):
the marketplace that this just mega deal can actually get done.
Speaker 3 (06:16):
How do you view it?
Speaker 5 (06:18):
Yeah, I think the whole speculation before the deal was
formally announced about possible consolidation, you know, really fueled shares
of Norfolk Southern previously. And I think people are just
trying to take maybe a breather right now because there
are some execution risks.
Speaker 6 (06:33):
Right this deal is not going to close.
Speaker 5 (06:35):
If it does close until early twenty twenty seven, it
needs regulatory approval, which is not an easy thing to do.
There were certain rules that we created at the Surface
Transportation Board to make it very difficult for a large
class monrail mergers to happen. That was BECAUST at one
(06:56):
time in the eighties and nineties. Those sorts of deals
resulted in terrible service. I think that the rails today
are much more cognizant of service as it relates to integration.
Speaker 1 (07:09):
Uh.
Speaker 5 (07:09):
And I don't really think you know, either company once once,
assuming a merger does happen, are going scorch earth in
terms of, you know, what they're going to do to
their networks. You know, they mentioned on the call that
they had earlier today that they're really not going to
lay off any uh, you know, frontline workers. Most of
the probably layoffs are going to happen, uh you know
(07:31):
in in in in the offices.
Speaker 2 (07:34):
Uh.
Speaker 5 (07:35):
So you know that would just mean that services uh
would uh prevail. And one of the reasons why they
are doing this, you know, from an outsider looking in,
you know, it does make complete sense. You're going to
reduce interchanges. They mentioned on their call this morning that
between the two of them they interchange around a million
(07:55):
car loads a day, and if they're just able to
if that's that car load is able to be on
the same network, it's not only going to improve network fluidity,
it will actually lower the railroads their costs. Let's hope
they pass on some of that cost savings to their shippers.
Speaker 6 (08:12):
I think that's what shippers might be concerned about.
Speaker 5 (08:15):
And it'll it'll provide probably a better service product that
they can go out and compete against other modes such
as trucks.
Speaker 6 (08:23):
And you know that's you.
Speaker 5 (08:25):
Know, also a good thing because you know, from an
environmental standpoint, railroads are less fuel efficient. You know, trucking
kind of deals with you know, turnover issues and trucker
availability issues. Right now, that's not an issue, but at
times it can be. And so you know, it is
definitely a very interesting deal. It will create the first
(08:47):
trans continental railroad, but you know, they do have their
work cut out for them to get that regulatory approval.
Speaker 4 (08:55):
So the deal is worth eighty five billion dollars. How
do they plan to make money back? What are finential
wins so to speak? To justify that happy price tid.
Speaker 5 (09:03):
Yeah, they laid out two point seven five billion in synergies,
about one point seven five and that two point seventy
five is going to be from revenue.
Speaker 6 (09:11):
So what they're saying is that, you know, we.
Speaker 5 (09:13):
Can probably get more volume onto the network because it
all of a sudden becomes a much more compelling service offering.
And then about a billion dollars in cost savings and
some of that. Again, you don't need to CEOs, you
don't need two CFOs, you don't need two corporate headquarters.
You know, the dimension They are going to have their
(09:35):
headquarter in Omaha where Union Pacific is located, and keep
a I think they word at a major presence in
Atlanta where Norfolk is currently.
Speaker 6 (09:47):
So but you know, obviously they're not going to need
as much space as they once have.
Speaker 5 (09:51):
And then there's technology benefits, you know, so you're only
investing you know, money in technology once, not twice to
get those productivity improvements.
Speaker 6 (10:01):
So I think those are the major aspects of it.
Speaker 5 (10:05):
And you know they mentioned that you know, they could
be you know EPs a creative after year or two.
Speaker 2 (10:12):
Well, he mentioned a lot of regulatory agencies are going
to weigh in here on this deal. I also think
President Trump is likely to weigh in. Do we know
anything about how he might view this deal or just
consolidation in general? What's the views as to the Trump administration?
Speaker 6 (10:30):
I mean, we don't.
Speaker 5 (10:31):
The language that management noted on the call is like
they wouldn't have moved forward with this transaction if they
felt that it was impossible to get regulatory approval. So
whether that means they were talking to the administration, whether
that means they were talking to the STB or the
DOJ or everybody in between, that's kind of you know,
(10:53):
if you read between the lines, is what they were saying.
The fact that they're not going to lay off any
union foe is probably a net positive for a Donald
president Donald Trump to say, you.
Speaker 6 (11:06):
Know, this is okay with me. You know.
Speaker 5 (11:09):
So there's a lot of unknown still and again this
is this is going to take a long time.
Speaker 6 (11:14):
So we have a deal.
Speaker 5 (11:16):
It has to get Surface Transportation Board approval, which you
know won't happen at least for a year and a half.
Speaker 4 (11:24):
Could this park more railroad mergers in the US, and
if it goes through, what will shipping look like in
fivet to ten years? You said, absolutely, please elaborate.
Speaker 6 (11:33):
Yeah.
Speaker 5 (11:33):
So, so the other railroads in the US are Burlington Northern,
which is you know, owned by Berkshire Hathway. They may
make their own bid for Norfolk Southern, or decide, you know,
we're just going to go after CSX because if they
do not merge, then they're going to be at a
competitive disadvantage. Why would you want to send your freight
(11:57):
across two railroads when you can send it across one.
Speaker 6 (12:01):
So it just would make sense.
Speaker 5 (12:04):
And if there is regulatory appetite for this kind of
a transaction, you know, you could see a Berkshire hacked
the Way and CSX coming and you know, if their
competitors were able to get a deal, there's no reason
why you wouldn't get a deal done between the two.
A lot of ifs and butts and candies and nuts,
but we'll see what happens.
Speaker 2 (12:25):
For an old real estate anamals like myself, today's a
big day. I got to speak to two of my
favorite railroad anamals on Wall Street, first Tony Hatch this
morning and now leak Glasgow Senior Transport Logistics and Shipping
annals for Bloomberg Intelligence. Again the big M and A
trade of the year so far and certainly the biggest one,
well personally one. I never thought i'd see a transatlantic
(12:47):
a trans continental railroad. Union Pacific Regied acquired Norfolk Southern
seventy two billion dollars. That's about three and twenty dollars
a share that's in cash and stock would create North America.
The US is first transcontinental railroad.
Speaker 6 (13:04):
That's a pretty cool thing.
Speaker 1 (13:07):
You're listening to the Bloomberg Intelligence podcast. Catch us live
weekdays at ten am Eastern on Apple Coarcklay and Android
Auto with the Bloomberg Business app. Listen on demand wherever
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Speaker 2 (13:21):
Isabell Lee, Paul Sweet. We're live here in our Bloomberg
Director Broker Studio, streaming live on YouTube as well. So
check us out there. Aerospace Airlines a lot of earnings
going on in that part of the world. Boeing in
jet Blue today. Let's check out with George Ferguson s
in your Aerospace, Defense and Airlines analys for Bloomberg Intelligence.
Safely asconsin don there in Princeton, New Jersey. Hey, George,
(13:41):
let's start with Boeing. I know, you know, for analyst investors,
for Boeing, it's all about cash flow and free cash
flow and stemming the free cash flow bleed here. How
did the company do this quarter?
Speaker 7 (13:54):
Yeah, I mean, so the free cash flow is still
a little bit negative, not much. Operations positive a little
bit two hundred million. I think it was roughly on
two hundred negative free cash flow to a positive and
cash flow I think roughly. So we're seeing an inflection
point here in cash flow. So cashlow had been negative
for the last I think it was six quarters before this,
(14:17):
and I think that's just the sign of they're getting
more aircraft delivered. They're gonna you know, they've got a
lot of inventory still, they'll pull off the shelf to
build aircraft going forward, to pull a bigger report proportion
of stuff off the shelf than they would during normal times,
which should juice that cash flow up. Uh, you know
pretty well. So I think it it's you know, the
(14:40):
turnaround is still in u is underway. It looks like
it's uh, you know, well in uh you know, in
swing in the results we saw on the way you know,
company management commented on the end of the year and so, uh,
you know, I think it was a pretty good results
quarter for Boeing again, turn around intact.
Speaker 4 (15:01):
How are they addressing quality in safety issues, especially when
it comes to the seven three seven MAX program.
Speaker 7 (15:07):
Yeah, I mean there it's you know, as Kelly Oprok said,
it's a process. I think just the sign of seeing
increased deliveries is showing us that the quality improvement at Spirit,
you know, has has seen success. And they're talking about
you know, they're at thirty eight seven thirty sevens a
(15:29):
month now. Kelly Orperk says he's going to approach the
FA in a short period of time and work on
the forty two seven thirty sevens a month. So again,
he must have some level of confidence that his quality
and his engineering is good in order to in order
to go further. It's it's not perfect. They've been slowed
down a little bit in the certification of seven three
(15:52):
seven DASH ten and DASH seven. They've pushed them into
twenty twenty six. I think it's okay, it's not a
big move. You know, we'd like to see them come
faster because seven thirty seven to ten is a large
competitor to the Airbus A three twenty, which is very
successful and one of the reasons they saw United place
a big order with Airbus. But again, I think that
(16:13):
you can't expect this stuff to go on a straight line.
And the fact that they think twenty twenty six is
when they could get certification, it doesn't tell me anything's broke.
It just tells me the process is nonlinear, and I
think to be expected in aerospace.
Speaker 6 (16:27):
All right.
Speaker 2 (16:27):
Also, Jet Blue posted a smaller than expected loss. Here,
what's going on with Jet Blue and an airline businesses
as because I think the last quarter, Boy, these airline
companies are really reticent to give any kind of guidance.
Speaker 7 (16:40):
Yeah, I mean a lot of them have come back
with guidance and a lot of cases lower a lot.
You know, the airline business right now is really counting
on less capacity in the second half of twenty twenty five,
and we'll see how that goes. Last time I looked
at domestic capacity plans for three Q it's kind of
about zero growth. I mean, I think they need to
(17:01):
cut capacity in the marketplace. If you look at Jet
Blues results, load factor fell by. I think it was
around three hundred basis points down to the low eighties
from mid eighties, and they held fares pretty much flat.
Yields were kind of just up a little bit. So
that just tells me that there's too much capacity in
(17:21):
this market. They just can't fill airplanes at the right price.
Jet Blue has other problems, like you know, the gear
turbo fan keeps them from expanding. That means costs are
ballooning on them. But I don't see how they'd want
to expand right now because again, what I see as
a market that has can't fill airplanes at the price
that's going to keep them very profitable, and so someone's
(17:44):
got to cut. And the question is who the full
service carriers are saying, Hey, we got premium to subsidize us.
We don't care the low costs are going to have
to jet Blue will cut in three Q but every
time they cut, their costs go high or per seat,
so they're a bit of a challenging position.
Speaker 4 (18:00):
It does seem like the issues just compound for the
companies in this space from aircraft shortages, delivery delays, pilot shortages,
wage inflation, labor and negotiation and so on. Are there
differences in how Boeing and Jet Blue addressing the issues
or is really an industry wide consensus and problem.
Speaker 7 (18:19):
Well, I mean if you talk to Boeing, everybody wants
an airplane, right and they're sold out in the seven
thirty seven and seventy eight seven to the end of
the decade. Everybody wants the newest. And I think what
needs to happen is again the airlines are just putting
too much capacity in the marketplace, especially in the US,
and someone has to cry uncle and say, hey, you know,
we can't take the profitability at these levels. Park some airplanes,
(18:42):
get them out of the business so they can write
size capacity. And I think nobody wants to do it.
You have some competitors that are in a situation where
they they you know, some of them are declared Chapter eleven.
It's like Spirit and then and then refashioned themselves and
got back out in the marketplace. But it's either someone's
going to have to go away or the market's going
(19:04):
to have to get negative enough and profitability that people
start to park airplanes. As we get into laid end
of this year, four Q and one Q, those are
weak quarters for the US airline industry. If something doesn't improve,
if you've got a Jet Blue that's barely positive positive
and profitability in two q without a change in this market,
(19:24):
that's that's a strong negative. Near the end of the year,
people will start to cut capacity and try to boost fars.
Speaker 2 (19:29):
So, George, who does that? Is it one of the
big three? I mean, Jet Blue can't drive capacity in
this industry. It's got to be one of the big three, right, Yeah.
Speaker 7 (19:38):
Look, I don't think it's. The big three are in
a game of chicken with the low cost right they
think that they've got pole position here and that they
just keep capacity and someone's going to fail on the
low cost side because the low cost doesn't have this,
you know, premium seating. They might be right right right now,
it looks like their profitability is hanging in there. Low
(20:00):
cost carriers are the ones taking it on the chin.
Speaker 2 (20:03):
Yep. We saw Southbuth Airlines actually now kind of start
charging for bags and you can do seat reservations and
all this stuff on that premium Yep. They didn't do before,
which was part of their cachet. One could argue their brand,
but they're saying, heck, we need the revenue. George, thanks
so much for joining us.
Speaker 6 (20:17):
We appreciate that.
Speaker 2 (20:18):
George Ferguson, Senior Aerospace, Defense and Airlines Analyst. If it flies,
he knows what's going on there.
Speaker 1 (20:25):
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Listen on demand wherever you get your podcasts, or watch
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Speaker 2 (00:23):
His friends call him Mikey, and I'm his friend. I'm
calling him Mikey. Mikey Shaw. Michael Shaw, senior Pharmer, biotechanaists
Bloomberg Intelligence spased in London. Mike, you got to talk
to me about what's going on with no vote Nordest.
I thought these obesity drugs were the bomb here. What's
going on with their guidance? That was a huge miss
for them.
Speaker 3 (00:40):
Yeah, two pieces in use today versus the guidance cut,
so second guidance cut of the year. So reported guidance
now is calling for some percent sales grows, six percent
operating profit growth after adjusting for currency, and that compares
to fourteen and fifteen percent respectively previously. Now a lot
of that is related to the US market. There, they're
(01:02):
still seeing headwinds from compound and GLP one, which seems
to be the main driver that's affecting wegov growth and
there's a lack of visibility here. So all of that
creates uncertain z for investors and also kind of questions
around not only only twenty twenty five numbers, but the
exit rate into twenty six. So there's concerns about you know,
mid to long term growth given how concentrated or how
(01:25):
reliant sorry Novo is on WE'REGOVI for growth. The other
headwind is competition to a zepic, so that's the GP
one for diabetes and that's another you know, key growth
driver for the for the company. Second piece of news
new CEO appointment. So they went with an internal candidate.
I think the market was perhaps expecting them to go
(01:48):
for an external candidate, so you know, perhaps a bit
of disappointment there. But that said, you know he's been
at the company. So this is Mike Dudster. He's been
at the company since ninety two. He's been heading up
international operations since twenty sixteen, and over that time, you know,
we've seen international operations sales double to around eighteen billion dollars.
(02:10):
So you know, he's an internal higher, he's familiar with
the company culture. I think it's a bit too early
to you know, to write him off before he's even started. Now,
his focus is going to be on reget gaining ground
to Lily in the obesite space, maintaining leadership in the
diabetes space, and then improving execution. And that's something that's
going to be key ahead of the Cagary semma launch
(02:32):
as well as the launch for its oral JP one
A in obesity, particularly given you know, Cagary Summer perhaps
isn't as differentiated as we had hoped for, and then
the oral JLP one profile perhaps trails that of Lily's
in a car with journalists.
Speaker 4 (02:49):
Though the new CEO said he's planning to review the
company's cost base with outsetting specific targets and metrics. So
could this indicate indicate that Novo is preparing for a
period of silver growth after the initial surge and demand,
especially the blockbuster we Go V drug.
Speaker 3 (03:07):
I mean, I think it will be hard to slash
R and D to be honest, So I mean, and
they would need to you know, continue marketing, continue to
do DTC in order to you know, in order to
compete with Lily. They're obviously healy heavily investing into Capex
at the moment, but there is probably some operating leverage
(03:29):
in there, you know, to provide some sort of relief.
I mean, the company's got a margin of about forty
five percent, which is at the top end for large farmer.
Speaker 2 (03:38):
Hey, Mike, is there any reasons to believe that maybe
the marketplace has been over estimating the size of this
OBC drug market?
Speaker 3 (03:47):
I think, I mean, yeah, I think there's always a
risk with it with an indication this size when you
look at the market potential. You know, in the US alone,
it's one hundred and thirty one hundred and forty million patients,
which is a target population. There is a population then yeah,
I mean there is a risk that you know, perhaps
consensus did get ahead of itself. But the difficulty here is,
(04:11):
you know, you have you know, huge runway of patients.
There's obviously limited supply, so it's difficult to know kind
of you know, how quickly that supply can come on board. Now,
you know, Nova gives guidance around you know, their growth prospects.
You know where they think sales et cetera. Are going
to go, but they keep they don't necessarily quantify, you know,
(04:36):
the cadence supply and how that how quickly that's going
to come online. So that kind of makes forecasting quite difficult.
And obviously they don't want to give that information because
it's competitive information and they want, you know, Lily to
know about it.
Speaker 2 (04:48):
Wait, back in my analyst days, I would have slammed
at this management team because that guidance was brutal. They
were nowhere close to hitting it in they're big reduction
the guidance and we see the stock down twenty two
percent today, down thirty seven percent year to date, fifty
two week low. So they're paying the price for Miikey
Shaw Folks is one of the best healthcare pharmat analysts
in the city of London. Every institutional investor wants to
talk to them. We appreciate getting a few minutes of
(05:09):
his time. Miikei Shaw, Senior Pharma biotech analysts Bloomberg Intelligence
over there in our London studios.
Speaker 1 (05:17):
You're listening to the Bloomberg Intelligence podcast. Catch us live
weekdays at ten am Eastern on Apple, Cocklay and Android
Auto with the Bloomberg Business App. Listen on demand wherever
you get your podcasts, or watch us live on YouTube.
Speaker 2 (05:30):
One of my very first jobs on Wall Street back
in the late eighties, I was a research assistant in
the equity research department of paynmall recovering the railroad and
trucking industry. So I love the railroads. And today's a big,
big deal. Union Pacific agrees to acquire Norfolk Southern for
seventy two billion dollars. Now, the per share it's cash
and stock, works out to like three hundred and twenty bucks.
(05:51):
The Norfolk Southern is trading at a thirteen percent discount
two hundred and seventy nine dollars in works trading today.
It's actually down seven dollars today. I don't know what's
going on out there. I'm not doing this stuff for
a living anymore. But Lee Klaska, he is a senior
transport logistics and chipping alys for Bloomberg Intelligence. Lee, I
look at the stock price of Norfolk Southern and it
tells me a hefty level of skepticism out there in
(06:12):
the marketplace that this just mega deal can actually get done.
Speaker 3 (06:16):
How do you view it?
Speaker 5 (06:18):
Yeah, I think the whole speculation before the deal was
formally announced about possible consolidation, you know, really fueled shares
of Norfolk Southern previously. And I think people are just
trying to take maybe a breather right now because there
are some execution risks.
Speaker 6 (06:33):
Right this deal is not going to close.
Speaker 5 (06:35):
If it does close until early twenty twenty seven, it
needs regulatory approval, which is not an easy thing to do.
There were certain rules that we created at the Surface
Transportation Board to make it very difficult for a large
class monrail mergers to happen. That was BECAUST at one
(06:56):
time in the eighties and nineties. Those sorts of deals
resulted in terrible service. I think that the rails today
are much more cognizant of service as it relates to integration.
Speaker 1 (07:09):
Uh.
Speaker 5 (07:09):
And I don't really think you know, either company once once,
assuming a merger does happen, are going scorch earth in
terms of, you know, what they're going to do to
their networks. You know, they mentioned on the call that
they had earlier today that they're really not going to
lay off any uh, you know, frontline workers. Most of
the probably layoffs are going to happen, uh you know
(07:31):
in in in in the offices.
Speaker 2 (07:34):
Uh.
Speaker 5 (07:35):
So you know that would just mean that services uh
would uh prevail. And one of the reasons why they
are doing this, you know, from an outsider looking in,
you know, it does make complete sense. You're going to
reduce interchanges. They mentioned on their call this morning that
between the two of them they interchange around a million
(07:55):
car loads a day, and if they're just able to
if that's that car load is able to be on
the same network, it's not only going to improve network fluidity,
it will actually lower the railroads their costs. Let's hope
they pass on some of that cost savings to their shippers.
Speaker 6 (08:12):
I think that's what shippers might be concerned about.
Speaker 5 (08:15):
And it'll it'll provide probably a better service product that
they can go out and compete against other modes such
as trucks.
Speaker 6 (08:23):
And you know that's you.
Speaker 5 (08:25):
Know, also a good thing because you know, from an
environmental standpoint, railroads are less fuel efficient. You know, trucking
kind of deals with you know, turnover issues and trucker
availability issues. Right now, that's not an issue, but at
times it can be. And so you know, it is
definitely a very interesting deal. It will create the first
(08:47):
trans continental railroad, but you know, they do have their
work cut out for them to get that regulatory approval.
Speaker 4 (08:55):
So the deal is worth eighty five billion dollars. How
do they plan to make money back? What are finential
wins so to speak? To justify that happy price tid.
Speaker 5 (09:03):
Yeah, they laid out two point seven five billion in synergies,
about one point seven five and that two point seventy
five is going to be from revenue.
Speaker 6 (09:11):
So what they're saying is that, you know, we.
Speaker 5 (09:13):
Can probably get more volume onto the network because it
all of a sudden becomes a much more compelling service offering.
And then about a billion dollars in cost savings and
some of that. Again, you don't need to CEOs, you
don't need two CFOs, you don't need two corporate headquarters.
You know, the dimension They are going to have their
(09:35):
headquarter in Omaha where Union Pacific is located, and keep
a I think they word at a major presence in
Atlanta where Norfolk is currently.
Speaker 6 (09:47):
So but you know, obviously they're not going to need
as much space as they once have.
Speaker 5 (09:51):
And then there's technology benefits, you know, so you're only
investing you know, money in technology once, not twice to
get those productivity improvements.
Speaker 6 (10:01):
So I think those are the major aspects of it.
Speaker 5 (10:05):
And you know they mentioned that you know, they could
be you know EPs a creative after year or two.
Speaker 2 (10:12):
Well, he mentioned a lot of regulatory agencies are going
to weigh in here on this deal. I also think
President Trump is likely to weigh in. Do we know
anything about how he might view this deal or just
consolidation in general? What's the views as to the Trump administration?
Speaker 6 (10:30):
I mean, we don't.
Speaker 5 (10:31):
The language that management noted on the call is like
they wouldn't have moved forward with this transaction if they
felt that it was impossible to get regulatory approval. So
whether that means they were talking to the administration, whether
that means they were talking to the STB or the
DOJ or everybody in between, that's kind of you know,
(10:53):
if you read between the lines, is what they were saying.
The fact that they're not going to lay off any
union foe is probably a net positive for a Donald
president Donald Trump to say, you.
Speaker 6 (11:06):
Know, this is okay with me. You know.
Speaker 5 (11:09):
So there's a lot of unknown still and again this
is this is going to take a long time.
Speaker 6 (11:14):
So we have a deal.
Speaker 5 (11:16):
It has to get Surface Transportation Board approval, which you
know won't happen at least for a year and a half.
Speaker 4 (11:24):
Could this park more railroad mergers in the US, and
if it goes through, what will shipping look like in
fivet to ten years? You said, absolutely, please elaborate.
Speaker 6 (11:33):
Yeah.
Speaker 5 (11:33):
So, so the other railroads in the US are Burlington Northern,
which is you know, owned by Berkshire Hathway. They may
make their own bid for Norfolk Southern, or decide, you know,
we're just going to go after CSX because if they
do not merge, then they're going to be at a
competitive disadvantage. Why would you want to send your freight
(11:57):
across two railroads when you can send it across one.
Speaker 6 (12:01):
So it just would make sense.
Speaker 5 (12:04):
And if there is regulatory appetite for this kind of
a transaction, you know, you could see a Berkshire hacked
the Way and CSX coming and you know, if their
competitors were able to get a deal, there's no reason
why you wouldn't get a deal done between the two.
A lot of ifs and butts and candies and nuts,
but we'll see what happens.
Speaker 2 (12:25):
For an old real estate anamals like myself, today's a
big day. I got to speak to two of my
favorite railroad anamals on Wall Street, first Tony Hatch this
morning and now leak Glasgow Senior Transport Logistics and Shipping
annals for Bloomberg Intelligence. Again the big M and A
trade of the year so far and certainly the biggest one,
well personally one. I never thought i'd see a transatlantic
(12:47):
a trans continental railroad. Union Pacific Regied acquired Norfolk Southern
seventy two billion dollars. That's about three and twenty dollars
a share that's in cash and stock would create North America.
The US is first transcontinental railroad.
Speaker 6 (13:04):
That's a pretty cool thing.
Speaker 1 (13:07):
You're listening to the Bloomberg Intelligence podcast. Catch us live
weekdays at ten am Eastern on Apple Coarcklay and Android
Auto with the Bloomberg Business app. Listen on demand wherever
you get your podcasts, or watch us live on YouTube.
Speaker 2 (13:21):
Isabell Lee, Paul Sweet. We're live here in our Bloomberg
Director Broker Studio, streaming live on YouTube as well. So
check us out there. Aerospace Airlines a lot of earnings
going on in that part of the world. Boeing in
jet Blue today. Let's check out with George Ferguson s
in your Aerospace, Defense and Airlines analys for Bloomberg Intelligence.
Safely asconsin don there in Princeton, New Jersey. Hey, George,
(13:41):
let's start with Boeing. I know, you know, for analyst investors,
for Boeing, it's all about cash flow and free cash
flow and stemming the free cash flow bleed here. How
did the company do this quarter?
Speaker 7 (13:54):
Yeah, I mean, so the free cash flow is still
a little bit negative, not much. Operations positive a little
bit two hundred million. I think it was roughly on
two hundred negative free cash flow to a positive and
cash flow I think roughly. So we're seeing an inflection
point here in cash flow. So cashlow had been negative
for the last I think it was six quarters before this,
(14:17):
and I think that's just the sign of they're getting
more aircraft delivered. They're gonna you know, they've got a
lot of inventory still, they'll pull off the shelf to
build aircraft going forward, to pull a bigger report proportion
of stuff off the shelf than they would during normal times,
which should juice that cash flow up. Uh, you know
pretty well. So I think it it's you know, the
(14:40):
turnaround is still in u is underway. It looks like
it's uh, you know, well in uh you know, in
swing in the results we saw on the way you know,
company management commented on the end of the year and so, uh,
you know, I think it was a pretty good results
quarter for Boeing again, turn around intact.
Speaker 4 (15:01):
How are they addressing quality in safety issues, especially when
it comes to the seven three seven MAX program.
Speaker 7 (15:07):
Yeah, I mean there it's you know, as Kelly Oprok said,
it's a process. I think just the sign of seeing
increased deliveries is showing us that the quality improvement at Spirit,
you know, has has seen success. And they're talking about
you know, they're at thirty eight seven thirty sevens a
(15:29):
month now. Kelly Orperk says he's going to approach the
FA in a short period of time and work on
the forty two seven thirty sevens a month. So again,
he must have some level of confidence that his quality
and his engineering is good in order to in order
to go further. It's it's not perfect. They've been slowed
down a little bit in the certification of seven three
(15:52):
seven DASH ten and DASH seven. They've pushed them into
twenty twenty six. I think it's okay, it's not a
big move. You know, we'd like to see them come
faster because seven thirty seven to ten is a large
competitor to the Airbus A three twenty, which is very
successful and one of the reasons they saw United place
a big order with Airbus. But again, I think that
(16:13):
you can't expect this stuff to go on a straight line.
And the fact that they think twenty twenty six is
when they could get certification, it doesn't tell me anything's broke.
It just tells me the process is nonlinear, and I
think to be expected in aerospace.
Speaker 6 (16:27):
All right.
Speaker 2 (16:27):
Also, Jet Blue posted a smaller than expected loss. Here,
what's going on with Jet Blue and an airline businesses
as because I think the last quarter, Boy, these airline
companies are really reticent to give any kind of guidance.
Speaker 7 (16:40):
Yeah, I mean a lot of them have come back
with guidance and a lot of cases lower a lot.
You know, the airline business right now is really counting
on less capacity in the second half of twenty twenty five,
and we'll see how that goes. Last time I looked
at domestic capacity plans for three Q it's kind of
about zero growth. I mean, I think they need to
(17:01):
cut capacity in the marketplace. If you look at Jet
Blues results, load factor fell by. I think it was
around three hundred basis points down to the low eighties
from mid eighties, and they held fares pretty much flat.
Yields were kind of just up a little bit. So
that just tells me that there's too much capacity in
(17:21):
this market. They just can't fill airplanes at the right price.
Jet Blue has other problems, like you know, the gear
turbo fan keeps them from expanding. That means costs are
ballooning on them. But I don't see how they'd want
to expand right now because again, what I see as
a market that has can't fill airplanes at the price
that's going to keep them very profitable, and so someone's
(17:44):
got to cut. And the question is who the full
service carriers are saying, Hey, we got premium to subsidize us.
We don't care the low costs are going to have
to jet Blue will cut in three Q but every
time they cut, their costs go high or per seat,
so they're a bit of a challenging position.
Speaker 4 (18:00):
It does seem like the issues just compound for the
companies in this space from aircraft shortages, delivery delays, pilot shortages,
wage inflation, labor and negotiation and so on. Are there
differences in how Boeing and Jet Blue addressing the issues
or is really an industry wide consensus and problem.
Speaker 7 (18:19):
Well, I mean if you talk to Boeing, everybody wants
an airplane, right and they're sold out in the seven
thirty seven and seventy eight seven to the end of
the decade. Everybody wants the newest. And I think what
needs to happen is again the airlines are just putting
too much capacity in the marketplace, especially in the US,
and someone has to cry uncle and say, hey, you know,
we can't take the profitability at these levels. Park some airplanes,
(18:42):
get them out of the business so they can write
size capacity. And I think nobody wants to do it.
You have some competitors that are in a situation where
they they you know, some of them are declared Chapter eleven.
It's like Spirit and then and then refashioned themselves and
got back out in the marketplace. But it's either someone's
going to have to go away or the market's going
(19:04):
to have to get negative enough and profitability that people
start to park airplanes. As we get into laid end
of this year, four Q and one Q, those are
weak quarters for the US airline industry. If something doesn't improve,
if you've got a Jet Blue that's barely positive positive
and profitability in two q without a change in this market,
(19:24):
that's that's a strong negative. Near the end of the year,
people will start to cut capacity and try to boost fars.
Speaker 2 (19:29):
So, George, who does that? Is it one of the
big three? I mean, Jet Blue can't drive capacity in
this industry. It's got to be one of the big three, right, Yeah.
Speaker 7 (19:38):
Look, I don't think it's. The big three are in
a game of chicken with the low cost right they
think that they've got pole position here and that they
just keep capacity and someone's going to fail on the
low cost side because the low cost doesn't have this,
you know, premium seating. They might be right right right now,
it looks like their profitability is hanging in there. Low
(20:00):
cost carriers are the ones taking it on the chin.
Speaker 2 (20:03):
Yep. We saw Southbuth Airlines actually now kind of start
charging for bags and you can do seat reservations and
all this stuff on that premium Yep. They didn't do before,
which was part of their cachet. One could argue their brand,
but they're saying, heck, we need the revenue. George, thanks
so much for joining us.
Speaker 6 (20:17):
We appreciate that.
Speaker 2 (20:18):
George Ferguson, Senior Aerospace, Defense and Airlines Analyst. If it flies,
he knows what's going on there.
Speaker 1 (20:25):
This is the Bloomberg Intelligence Podcast, available on Apple, Spotify,
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ten am to noon Eastern on Bloomberg dot com, the
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