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26:59Carol Massar:You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. Well, let's talk oil. The Wall Street Journal reporting that, quote, European countries, and I'm reading right from the journal here, European countries are putting together a plan for a broad coalition of countries to help free up shipping through the Strait of Hormuz, including sending mine clearing and other military vessels. But the plan would only come after the war and may exclude one country in particular, the U.S.

27:35Meantime, a U.S.-sanctioned tanker linked to China sailed out of the strait and into the Gulf of Oman, testing President Trump's naval blockade. For more, we're joined by Bloomberg Economics Senior Geoeconomics Analyst for Asia Pacific, Adam Fair, joining us from the Bloomberg News, Washington, D.C. Bureau. Adam, one thing that's been at least puzzling to me is prices today. given that there's a blockade, that the U.S. is pushing forward this blockade, we're actually seeing oil prices fall and we're down to$91 a barrel on WTI. Why is that? So it's clear that optimism is reigning supreme right now, that the markets are kind of looking forward to a continuation of the ceasefire and potentially a long-term negotiated agreement between Iran and the United States.

28:20But just as you highlighted, I think we can't lose sight of of what is actually happening and the risks that remain. The blockade that is now in effect, obviously, is still relatively new. But if it maintains, removes potentially up to 2 million barrels a day of Iranian oil that was still exiting the Strait of Hormuz. And Bloomberg's own estimates put that at impacting prices at close to 7 % to 8%, which we did initially see a rise to that effect. But we've lost much of that today in optimism. And in addition to what's currently happening and the risk it poses to oil prices, the reality is that while everyone is optimistic today, there is the broader risk of re-escalation in this conflict and the potential of Iran seeking to retaliate against energy infrastructure in the region or potentially going after energy infrastructure in the Red Sea, particularly Saudi Arabia, that has been so important to escape valve for oil getting out of the Gulf.

29:17Carol Massar:You know, it's interesting, too. One of the things, Adam, we're increasingly talking and thinking about is the upcoming meeting between the United States and China. Javier Blas of Bloomberg Opinion has a really interesting column out, and he talks about his first line is, The black market for Iranian oil wouldn't exist without China. Before the war began, Beijing bought 95 percent of all the crude Tehran shipped via network of sanctioned tankers, mysterious traders and shadowy financial links. Hence, President Trump isn't just targeting Tehran with his blockade of the Strait of Hormuz. He's aiming at Beijing, too.

29:53Carol Massar:So I do think about sending a message to Beijing ahead of those talks, but also, you know, how that greases the wheels, perhaps, on those upcoming negotiations. We talk about these global choke points, right? What you need to exist as a country going forward for economic or national security reasons. And oil is certainly a choke point for China. So that's absolutely true. And I think he's keying in on an important aspect of the situation that even before the crisis, China relied on Iran for upwards of 13 percent of its imported seaborne oil. And the fact that you had two million barrels still getting out, much of it going to China was a welcome relief for Beijing as it's been heavily exposed to the closure of the strait.

30:41Because not only is it relying on Iranian oil, but also Gulf oil representing together close to 40 percent of its imports. But the reality right now, I think, you know, to be clear, the Trump administration's focus was very much on pressuring Iran. And I think their hope was actually that moving forward with this blockade would allow for some short-term pain to force Iran back to the table with the idea that while it might pressure others, the intent is to focus it on Tehran and hopefully not lead to retaliation from countries like China that do have significant leverage theoretically over the U.S.

31:12Is it working, Adam? I mean, I think we're going to have to wait and see, right? We're only a few hours into this initial blockade. Now, on one hand, I think we have seen initial signs from Tehran that they're a little reticent to try and push the blockade and test the United States. There's some conversation about whether or not they will refrain from exports in the short term as they push towards further negotiations. But the proof will be in whether that actually moves forward, right? Whether Vice President Vance gets on a plane and heads to Pakistan or any other location to continue those discussions.

31:46And again, the discussions are important, but it really is about whether they can find a way to reach a new agreement that goes to areas that neither side has so far been willing to go on compromise. You know, Adam, I'm just wondering about the blockade and what you and the team have been able to glean from the open source intelligence, what the U.S. government has said. What are the mechanics of this blockade? Like, how does it work? Where's the U.S. doing it? What are the assets that are required? What can you tell us? So I think the first important note is to understand that this is not physically stopping ships from transiting the Strait of Hormuz.

32:24The United States has set forward what they say is an inspection and potential seizure regime that takes place east of the strait in a much more open body of water in the Gulf of Oman and potentially into the Arabian Sea itself. And so they're pushing the U.S. military assets further away from the Strait of Hormuz choke point and hopefully limiting their exposure to Iranian weapons, although they are still at risk. Now, the first goal, though, and the first tool they have in this operation is actually just ship-borne communications, reaching out and telling ships that they shouldn't attempt to either enter an Iranian port or attempt to leave.

33:02And in fact, that's what U.S. Central Command said today was successful, is reaching out to these ships, warning them that if they do attempt to leave, they will be boarded and seized. And supposedly several of those vessels chose not to exit and actually return to port.

33:17Carol Massar:Yeah, it's just kind of fascinating to watch this happen and try to figure out, you know, whether this is all working and whether it leads to a different outcome. You know, one of the things, Adam, that we were thinking about just China in general, their draw on global commodities, be it oil or what have you. Right. We talk often about, you know, copper usage. If we see numbers down, we think about what's going on in China in terms of manufacturing. I mean, it is a great global economic indicator. And you do wonder for China alone, its economy, it needs to make sure that it has access. That's absolutely true.

33:54And I think, you know, so far in this conflict, what we've seen is that China has been relatively well insulated from the short term impacts. And that's because of a massive oil strategic oil reserve that they built up both from a government side and commercial side over the past several years with, you know, the risks of such a conflict in mind. and also very large moves on energy transition that they've made with a movement towards renewables and the electrification of their automobile industry, all of which has given them a lot more space to move and operate in this crisis. But over time, they will feel more pressure if this war continues, and particularly if the Strait of Hormuz remains completely blocked, including of Iranian oil.

34:37And that's when they may choose to start pressuring all sides further and start using their leverage, whether that be pressuring Tehran or pressuring the United States to try and at least get the flow of oil moving again. Adam, what would you say the status of the strait is as we speak? Currently, all signs point to it being virtually closed. As you mentioned at the top, we had one vessel, a sanctioned vessel, move through the strait itself and transit eastbound this morning. But that vessel then subsequently seems to have turned around and stopped outside of Amman. So it's unclear where it's going, but it certainly hasn't left the area.

35:12And it remains uncertain whether the U.S. actually already engaged that vessel. But considering we were used to see over 130 vessels a day of varying types moving through the strait, one vessel certainly doesn't count for much. You know, I was talking to some friends about this. And, you know, people who aren't even, like, you know, studying geoeconomics of the region are now understanding the effect of a closed strait of Hormuz. And I think one area that's also understanding the power of it is Iran right now. And this goes to show, one of my friends said, that Iran can actually wield this power that essentially was never tested in the past.

35:51So what's to stop if it does open up? What's to stop Iran from saying, wait a second, this worked so well for us in the past. We're going to go ahead and close it again. I think that's a major concern. is going to increase uncertainty for those who want to operate in the region moving forward, regardless of the outcome. And simultaneously, I think, despite the vice president Vance and the president emphasizing this question of uranium enrichment, the status of the strait as an outcome of negotiations is key and certainly essential for markets and Gulf countries. And right now, we don't have any sense for what Iran has or has not been willing to put on the table and what the United States position actually is in the room.

36:32And clearly, Iran, though, as you had stated, they understand the leverage they hold and the fact that the strait itself represents their greatest leverage over the international community. And so, you know, it seems less likely they'd be willing to give that up without substantial gives from the other side. But we're going to have to wait and see. But it really is the issue to watch.

36:51Carol Massar:Yeah, I do wonder, too, coming on the other side of this, what this means for China in terms of its access to energy. Does it create new alliances, perhaps with the United States, who's a net export. Like, I just wonder kind of where this all goes ahead of those meetings and those talks between the United States and China, Adam. So I think China is certainly going to work to further diversify its input of energy from all sources, not only its imports, but domestically. And in the short term, that may mean importing more from the United States to deal with any crisis. But the reality is they don't want to expose themselves to U.S.

37:24leverage either. And so the question really becomes how do they find a way to increase their energy independence and security. And that really looks towards renewables, nuclear energy, and, you know, even going back towards some of their coal-powered, excuse me, coal power plants. So I do think in the short run, you could see purchases towards the U.S., but they don't want that exposure either.

37:48Carol Massar:Yeah, that's true. It's just, I love the negotiating ahead of, you know, or how this all plays out. Adam, thanks so much for really kind of putting this in perspective, especially when it comes to China and energy, global energy. Adam Farer, he is senior geoeconomics analyst for Asia Pacific, part of our Bloomberg economics team. Adam, thank you. Thank you. He's out there in our Washington, D.C. Bureau. Stay with us. More from Bloomberg Business Week Daily coming up after this.

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40:56Carol Massar:You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. Maybe have a good segue. If you want to go to Venezuela, you've got to get on an airplane. But you could also take a boat. You could take a boat. People do that. But we're talking airlines. We want to talk airlines. Shares of American Airlines surging as much as 9.7 % earlier in the session. United shares up today, too, by as much as 5 % earlier. This is after Bloomberg reported that United CEO Scott Kirby has floated a possible combination with American Airlines.

41:33This is according to people familiar with the conversations. It's an audacious proposition that would face intense scrutiny, even under the business-friendly Trump administration.

41:42Carol Massar:Sid Phillip is here. He's Bloomberg News chief correspondent for Global Aviation, has a really cool job. And this is a great exclusive story that he has reported out. He's here in our Bloomberg Interactive Broker studio. Wait, what? Is this serious? So as far as we know, it is serious. The CEO of United Airlines pitched this to President Trump as a possible combination that would sort of allow United to scale up and also potentially buy his former employer. Yeah, OK. I'm glad you ended with former employer there, because to understand this, you've got to understand Scott Kirby's history in aviation.

42:19He was once seen as maybe he would be CEO of American Airlines. He left after it was clear that he would not become CEO. What has he done under United and why would this actually make sense? So he moved to United in 2016 and since then he's become CEO of United. And while he's sort of run United, United is focused really on premium passengers and sort of upgrading the travel experience. And that's really been a sweet spot for both United and Delta, which have also sort of focused on that customer. And that customer has really helped those airlines sort of maximize yields, be able to sort of tap into their credit card market.

42:55and also sort of be much more profitable than the rest of the industry. What has American done at that time? So American Airlines has sort of underperformed those rivals. I mean, that's partly due to sort of decisions that Scott Kirby says that the airline did not focus enough on premium travel. They also had a roll back now initiative to sort of get business travelers to book directly with the airline instead of using travel agents, which was really badly received by business travelers. And so Unite... Wait, what would that mean? Instead of us using sort of a travel service that your company uses, they want you to take your corporate card and just go right to United.

43:31Exactly. That was the plan. And that was sort of now it's been axed. But it did sort of lead to a lot of friction for customers. And so American has underperformed. And they've got a big pile of debt that they have at the moment. But they also have America's biggest domestic network. And that would be fairly attractive for United. They also combined Delta and Americans' combined revenue last year was about$110 billion. Delta Airlines would be significantly smaller. It would be about half of what they made. So there's potential for a massive combination. And even though it'll be just one third of the market share in the industry, it will still be huge for the industry.

44:19It will be the biggest airline on the planet.

44:21Carol Massar:You say only one third of the market. Seems like a lot, right? That seems like a lot. How can this possibly get through regulators? So that will be... But going back to how you started, that Kirby talked to President Trump about this. Exactly. And that will be the sort of question that, I mean, this deal's not going to go if this deal... We don't know if there's formal negotiations ongoing at the moment. We don't know if there's been a formal bid for it. At the same time, we don't know how this will be received by lawmakers. We don't know how this is going to be received by customers. We don't know how it's going to, and we don't know the competition is going to try.

44:59Carol Massar:I just want to mention for those who are watching, we've got, and for radio, just to lay it out for you, just talking about a United American combination with dwarf rivals, passengers carried in 2025. United American would be 405 million. American alone, we see just below that. And then you've got American and then we've got Ryanair. But it's just, it shows you how dominant, right, that they would ultimately be. Exactly. I mean, this would be a sort of massive step. I mean, they would have over 2 ,800 planes. They would have like over$100 billion in revenue. And that would be huge in terms of their rivals will not really take this sort of lying down.

45:41I mean, there's going to be significant uproar from their rivals if this was allowed to go through. But at the same time, we haven't really heard much from the government. But Sean Duffy spoke on CNBC a couple of days ago, and he said there was room for mergers in the aviation industry. Yeah, but maybe not with these two. So that remains to be seen. I mean, he did talk about if there was a merger between two larger airlines, they would have to peel off some assets. But at the same time, how much? What would United and American together peel off? They would have to peel off routes. They would have to sort of allow others to have airport gates and slots.

46:19Yeah, that's the big thing. I mean, I don't know. You've got to talk a little bit about the gate situation at airports because in some cases there are gate sharing deals with some airlines. And this is the stuff where the real supply demand comes in because if you can't get access to a gate, you're not getting those passengers and your route's not happening. Exactly. I mean, gates are, I mean, given the fact that a lot of airports are constrained in terms of capacity, in order to be able to fly in those flights, you need slots, you need gates. And those things are. And a gate is controlled by a single airline.

46:51Correct. In some airports. Yeah. I mean, some airports, gates are free for all. But in the airports that you want to be in, like Chicago and Dallas and others, that's where those gates are really significant, including New York's various airports.

47:04Carol Massar:I got to get 30 seconds on JetBlue because if you look at the S &P Supercomposite Airline Index, it is at the top of the pack today. All names are up, but it is up about 16%. We know this company, there's been reports about exploring selling itself to a competitor. They lost in that bidding war back in 2016 with Alaska Group to buy Virgin America. The Spirit deal collapsed. Is that an airline to also keep an eye on? Just real quickly, like 25 seconds. JetBlue is definitely an airline to keep an eye on. And they have a, I mean, they also have a partnership with United that's going to come in where they sort of have an...

47:38Yeah, why don't they just get together? I mean, we'll have to see how that goes. But at the same time, I mean, JetBlue is like looking, it's the most obvious candidate, if any, were to buy one.

47:47Carol Massar:Right? All right. Stay tuned, everybody. Watch what happens. Miles, like, converge. I mean, yeah, watch what the regulators do. That's the only thing. Sid Phillip, he is Bloomberg News Chief Correspondent for Global Aviation. This is the Bloomberg Business Week Daily podcast available on Apple, Spotify and anywhere else you get your podcasts. Listen live weekday afternoons from 2 to 5 p.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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