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QUEST MEANS BUSINESS
American Airlines Orders 460 Planes From Boeing, Airbus; Debt Deal?
Aired July 20, 2011 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Simple, we'll take the lot. American Airlines buys planes by bulk.
Giving ground, President Obama seems ready to move. It is the 11th hour debt deal.
Act now or risk global fallout. Europe gets ready for another Greek rescue.
I'm Richard Quest. I mean business.
Tonight, Airbus is outdoing its rival Boeing. And it is happening in American airspace. The European plane maker has the lion's share of the biggest plane order in history. It is an American order from American Airlines. The parent company, AMR is replacing an aging fleet with a total of 460 jets; 260 come from Airbus, 200 more are coming from Boeing. And if you look at the options deal, they tell a similar story. American is reserving the right to 365 more Airbus A320s, and 100 more Boeing 737s.
Now, the reasons are simple. The new planes are far more fuel efficient than the existing fleet of MD 80s that the company currently has. They expect a cost saving of 35 percent on the two new aircraft. It is a bold move in a battle between the big three airlines in the United States.
If you join me in the library, you'll see what I mean. It is all about efficiency and the ability to do better. American Airlines, as you have heard, has one of the oldest fleets in the industry. It is about 14 and a half old, the average age of the aircraft. Those fuel inefficient planes made it difficult and continue to make it difficult for American to compete.
Also, American Airlines never went bankrupt to help cut the cost of labor and fix term contracts. It's competitors, like Delta Air Lines, Delta went bankrupt, if filed for a merger. It merged with Northwest. It has had a dramatic expansion, internationally, and now it lost a bit this time, because, obviously, things are difficult with fuel. But it has retired planes and Delta, too, will be looking for cheaper, newer, aircraft.
As for United, well, we know the old style United merged with Continental style. And that, of course, is the new United. Two have merged but United went through bankruptcy and also managed to cut its costs. It all meant that American Airlines is at a serious disadvantage, which is what has driven the need to buy these new planes.
And these are the planes that it has gone for. Let's start with the Boeing 737. This is in many ways the important jet. Because this is the one that they have basically forced, forced the Boeing company to redesign. Particularly, new engines, they are going to do things with the wing. It is all going to be a new aircraft, or a relatively re-engineered aircraft for better fuel efficiency. I spoke to the head of Boeing Commercial Airplane Division, Jim Albaugh, on the line a short while ago, and I asked him, he had thought about re-engineering the plane and now he was going to do it.
JIM ALBAUGH, EXECUTIVE VICE PRESIDENT, THE BOEING COMPANY: Well, I think it is an important factor, Richard. Over the last several months we knew that we had some issues relative to doing new airplane that would present risks to a new airplane program, in the event that we did it. And we also started to get more comfortable with the efficiencies we could gain from a re-engineered plane. And certainly, the American deal, you know, was a catalyst for some of our thinking.
QUEST: I've got to put it bluntly, Jim, was it a shock, perhaps, at the number of orders that Airbus have managed to hover up for the 320 NEO?
ALBAUGH: Actually if you look at the number of orders that they have, Richard, they are pretty close to what we would have predicted. They have gotten customers that they have done business with over the years, who want to get in line for this new airplane. So, really it does not come as much of a surprise to us.
QUEST: Should, do you think, a decision on the 737 re-engineering have been made sooner? Or are you comfortable with where you left it?
ALBAUGH: No, I think we are very comfortable with where we are. We have taken a very deliberate approach to this. We have looked at all the different factors, the advantages, and risks associated with a new airplane, or a re-engineered plane, I am confident we have made the right decision. I am very confident that we'll sell a lot of these airplanes.
QUEST: Now that is-
ALBAUGH: It will allow us to maintain, we think, the efficiency advantage that we have over the 320.
QUEST: You see now that-that's-now you've made the decision you can unleash the attack dogs, can't you? To go and sell it?
ALBAUGH: Well, we have one issue we have to work, of course, and that is board approval. And I'll be taking the board in August. But, yes, we are going to be out there talking to customers about this re-engineer plan. And I know there is a lot of interest.
QUEST: So, American was a big one. They split the order. To some extent you are opposition has now been allowed into American. Where does your tension now move, Jim. What is the next big order that you are going after?
ALBAUGH: Well, there are a lot of American domestic carriers that are operating old equipment. And we know there is going to be a flurry of potential orders, yet this year, with American carriers. And we are focused on them. I think you need to remember, also, though, Richard, you know, why they decided to take both of the proposals. And that was because neither Boeing nor Airbus had the capacity to deliver all the airplanes that they needed in the time frame that they put in place, to replace their fleet.
So we think it was a good decision. It was a bold decision, and a very bold move by Gerard Arpey and his team.
QUEST: That is the head of Boeing Airplane-Commercial Airplane Division. And that is the plane that he has sold, more than 200 of them.
But this is the competitor, the NEO, N-E-O. And the NEO bit stands for new engine option. They have re-engineered the 320 NEO. It has already received more than 1,000 orders, so far. But the important part is that they have managed to sell the NEO into a major U.S. carrier, American Airlines. American, which had until now, been only a purchaser of Boeing. So, I spoke to Airbus Chief Executive Tom Enders, that his new NEO is now in new markets.
(BEGIN VIDEO CLIP)
TOM ENDERS, CHIEF EXECUTIVE, AIRBUS: Well, I mean, they have to do something at some point in time. And this is certainly not the worst-case scenario for us. I think it makes a lot of sense with both come to the conclusion, and finally, also Boeing come to the conclusion that the technology is not there to go into an all new single-aisle aircraft, as we look into production. So, we should rather offer our airline customers a much more fuel efficient aircraft because of the new engines that are available from 2015 onwards.
QUEST: But what is fascinating about this order, is that in the olden days you would have expected for basically a short-haul, medium-range aircraft, you would have expected an airline to stick with one manufacturer, if only on cost efficiency and operational basis.
ENDERS: Let's not forget that Boeing was a very strong incumbent here, we had to cope with. As a matter of fact, American Airlines is the only one of the three major U.S. airlines that had no Airbus aircraft so far. And Boeing had a very strong position. If you order that many aircraft, sure enough, if you are talking about a few dozen of aircraft then it doesn't make much sense to order two different types. But if you are ordering hundreds, then this argument is much less relevant.
QUEST: The traveling circus moves on to the next-what is the next big one that you are going after?
ENDERS: We always have a few interesting big campaigns going on, in America, but also in other parts of the world. Our aircraft, right now, are selling extremely well. We are renting out, by the way, not just single-aisle production, the 330s, the 380s, and sure enough, in two years, also the 350.
ENDERS: And one of the big questions hanging over industry is can the supply chain deliver? Because the limit is the supply chain, really, that in many areas delivers also to our competitors, to Boeing, to other companies. So that needs to be carefully tracked and investigated.
QUEST: Tom, I'll buy you a drink if you tell me what the discount you gave American. What percentage discount did you give them?
ENDERS: That's classified, Richard, but I can assure you it is a very reasonable deal and we are making good money on that. As you know, the 320 aircraft is our bread and butter business and we are now sure it will remain that for many, many years to come.
QUEST: Tom Enders of Airbus. We have heard from Boeing, the chief of Boeing. You have heard from the chief of Airbus.
Maggie Lake spoke to Tom Horton from American Airlines, AMR, and asked him when you put all these new planes, 460, with 200 options more, what it means for American?
TOM HORTON, PRESIDENT, AMR CORPORATION: It is a big transformational deal for our company, as you can imagine. It is the biggest order in history. And our plans were so large and so aggressive here that we concluded that one manufacturer couldn't really do what we wanted to do, alone, in the time frame we wanted to do it. So we got proposals from both Boeing and Airbus. And the proposals were really quite extraordinary, so we decided rather than choose between one or the other, we took both.
MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT (On camera): How important was the financing in this? People are talking about the fact that it is very large. Some people talking about the fact that it could be 20 to 30 percent discount. How critical was it? And did that also influence the decision to go with both?
HORTON: It did. It was a big part. Obviously, the economics of the new airplanes are exceptional relative to current generation airplanes. For example, a new 737-800 is about 35 percent more fuel efficient, than an MB80 that it replaces, so that the economics on an operating basis are quite exceptional. But the manufacturers were so keen to do this deal with us, that they also kicked in $13 billion of financing. So for the first almost five years of this deal, all of the airplanes we take will come fully financed.
QUEST: That is all the very Is and Ts-dotted and crossed. We'll have more on the AMR performance later in the program. The share prices of those involved. EADS, the parent company of Airbus, gained more than 3.5 percent for obvious reasons. They have broken into a new market. Boeing share prices also up. They have taken a hard decision to re-engineer a plane that the bread and butter of their future growth, too. And of course, AMR up to percent, they are now perceived to be competitive, or will be, once these fuel efficient planes get into the air.
The markets, overall, which shows why those gains are quite good because the market is actually a little lackluster at the moment. Between you and me I would say unchanged. Zillow-anyone who owns Zillow shares, a real estate Web site, they jumped 120 percent, basically you doubled your money.
When we come back, in just a moment, it is the earnings season in the United States and it is time for us to put in the greens and the reds, and decide who gets what in the Q25.
QUEST: Welcome back. We continue today, it is the Q25, this program's exclusive quarterly index. It helps you make sense of the earnings season. And the earnings results of the 25 companies to rigorous tests that we go through each earnings quarter. So, if you want to know, you get a green chip or a red chip, according to a very firm criteria. The list of criteria is over here. It is actually, you have to have sales growth of 12 percent, that is year on year. Revenue growth of 5 percent, quarterly growth, earnings estimates by 5 cents beaten, and positive about the future.
Now, we then have a debate if you get, substantially, four or five, you get the automatic color. Otherwise, we have a debate.
Maggie Lake is in New York and joins me now.
Maggie, because of the Murdoch hearing yesterday, we didn't do the Q25, on air. But we do have a list of Q25ers, that we need to go through. They include Goldman Sachs, Bank of America, Coca-Cola, IBM, Johnson & Johnson, and Novartis. Of that list, that you can see on the screen, three reds, three greens, which ones do you find most interesting? While I put the color in.
MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: Yes, you have to mention IBM, because technology has just been doing so well. I mean, they have been beating everyone's expectations, so that one was an automatic. And then, of course, on the other side of the coin, where the trouble is with the market, financials; Goldman Sachs missed by a mile, terrible trading quarter for them, and Bank of America struggling, too.
The technology doing well financials, not so. Drugs doing well, didn't help J&J because they are still hurt by the recalls. But their drug area is doing better, even though they got a red.
QUEST: All right. That is the way we look at the moment. And as you can now see, those have been factored into our Q25. I haven't quite got the orders right.
Let's look at today's list, where we got-we start off with AMR. There is no debate on AMR, is there? Because AMR is a one-out-of-five, it is a straightforward, red, even though it has bought all those new planes, Maggie.
LAKE: That's right. We know why they need them, because they are loosing money. So, investors happy about that new order in the future, but that didn't help them in the quarter.
QUEST: I know, I mean, every number. We wanted to spend a little bit longer talking about Apple. Apple Computers, the great Apple, five out of five, sales growth of 12 percent, revenue growth more than 5 percent, Q-on- Q earnings, beat earnings by 5 cents, positive about future. Anything else you would like to add on that?
LAKE: I mean this is about as close to perfection. You have all criteria, 12 percent, beat by 5 cents. Listen to these numbers: 142 percent increase in the iPhone, 183 percent increase in the iPad. I mean they didn't just exceed expectations they blew them out of the water. I mean it was a tremendous quarter for Apple.
QUEST: Is there no downside?
LAKE: Hard to see one, Richard. Really, the other thing I want to point out, too. It is not just consumer. I mean, they have-we hear everyone say they have redefined the consumer segment, enterprise is buying the iPhones and the iPads, especially. That is really important. They don't market to enterprise. I keep bringing this point up, but it shouldn't be underestimated.
QUEST: All right. Finally, UTX, United Technologies, it got four out of five, which means it is an automatic green. There is no question about that. But you have been getting wonderfully hot under the collar about this company.
LAKE: It is hard to do.
QUEST: I mean it is a boring company. It's a boring company.
LAKE: That's right, it is boring. Because this is a trend we are seeing and it continues this quarter, Richard. Boring is making money. All their business segments are doing well. We have seen it with Honeywell, United Technologies, in that area. All six divisions, elevators, air conditioning, that sort of boring infrastructure stuff, (UNINTELLIGIBLE) it is hot, it is making money, and United Technologies gets a green.
QUEST: All right. So, as we come to a conclusion on this, because this is the first time we have really had a chance to talk Q25, at this stage-and it is very early on-we are actually even Stevens, seven green to seven red.
Maggie, what is it telling us? We know corporate profitability is good, but these reds are starting to creep up. We haven't seen so many reds-
QUEST: -at this stage in the proceedings.
LAKE: That is right. And you know what is interesting, too, Richard, a lot of them are automatic reds. So they are not on the fence, some things are well, they are across the board loosing on all the segments of our criteria. And that we haven't seen in a while. Not so many that we have to discuss. Again, where you sell, international doing well, and where your area is. If it is business to business it seems to be doing well. If it is any exposure to the consumer, it is struggling.
QUEST: All right, Maggie Lake, who is in New York. We will talk more Q25. This is where we stand, seven and seven.
With a short time to go, and a short-term solution to fix the U.S. debt problem, that might-might-might be on the cards. The president said he is willing to compromise. But how much compromise can he go with the gang of six? After the break.
QUEST: Ready to compromise, Barack Obama says he'll accept a short- term deal on the U.S. debt ceiling if politicians need more time to thrash out a deficit reduction plan. Mr. Obama has always said a short-term deal is not on the cords-or the cards. But according to Press Secretary Jay Carney now he's more willing than before to accept temporary solution.
(BEGIN VIDEO CLIP)
JAY CARNEY, WHITE HOUSE PRESS SECRETARY: If both sides agree to something significant we will support that measures needed to finalize details. But there is not extension with out an agreement on something big.
(END VIDEO CLIP)
QUEST: That is Jay Carney at the White House. Mr. Obama has been meeting with Democrat party leaders. He is going to meet them in around half an hour from now. And Washington has been taking sides between two long-term debt plans that are still on the table
In the library, I will show you what I mean.
It is called the "Gang of Six Plan". And it is basically three Democrat senators and three Republican senators. It comes with President Obama's approval. It would reduce the debt by $500 billion, in the short term. The critics say it doesn't have any long-term benefit in the proposal.
The "Cut, Cap and Balance Plan", "Cut, Cap, and Balance", now it has Tea Party support, including that of Michele Bachmann. It passed the House of Representatives last night. It doesn't mean much, it still has to go through the Senate. This would cut spending by $380 billion in the next fiscal year. Cap spending is 18 percent of the size of the economy. And it would amend the Constitution to ensure future budgets are balanced. Of course, that is probably one of the most difficult things to do. It is almost certainly not going to pass the Senate. And even if it does pass the Senate, he probably would veto it anyway. To say let alone, whether an amendment to the Constitution, which you could wait decades for it to be approved.
The former U.S. Labor Secretary is Robert Reich. He joins me now.
And it is always good to see you Doctor Reich, to talk about these matters.
ROBERT REICH, PROFESSOR OF PUBLIC POLICY, UNIV. OF CALIFORNIA Hello, Richard.
QUEST: And give us some good common sense perspective, thank you, on this.
How serious are we-are we now at deadline crunch moment time, do you think?
REICH: Well, we are 13 days before. If the debt limit is not raised the United States cannot pay the national debt's interest. It can't pay creditors. Can' pay-can't even send out checks for Social Security or Medicare. So we are I would say within the gravitational pull of crunch time, yes.
QUEST: OK, now within the gravitational pull, we have these plans on the table, long-term plans, but it seems as if they are going to arrange some sort of cobble together to just get them by. Doctor Reich, does that not just kick the can down the road?
REICH: It does kick the can down the road. The can does necessarily have to be kicked down the road for one simple reason, and that is that the recession, at least a jobs recession, in the United States continues. And we have 9.2 percent unemployment. We have 15 million people without jobs. If consumers, who are 70 percent of the American economy, are unwilling to spend, because they cannot spend, they don't have the money, business are not going to invest in more jobs, because there are not customers out there. Then the federal government, in the short term, has got to be the spender of last resort, has got to spend more.
QUEST: So, within these plans, and the confusion, "Cap and Balance" and the "Gang of Six" plan, and then this seemingly obscure plan to have a non resolution, which he then vetoes, which allows him to raise the debt ceiling. This-where do you stand on what is the preferred plan?
REICH: Well, this is all theater. You have to understand. Washington, 90 percent of Washington is theater, and every actor in this play has got to show his or her own constituents that he or she, as the case may be, is actually adhering to a particular script. So, the Tea Party adherents, and those Republicans who were put in place by the Tea Party, have to have enough to show the Tea Party, to say they are voting against raising the budget deficit limit, the debt limit, to show that they are on track toward a balanced budget amendment. To show and to prove to the Tea Partiers that this is real, even though it is, much of it is play acting, Richard.
One Congress cannot tie the hands of a future Congress, and there is not going to be any amendment to the Constitution. I don't think anybody in their right mind believes that the Constitution ought to be amended to shackle government and prevent government from taking any action the next time we have a severe economic downturn
QUEST: So, the Republicans say that it really has to be done through spending cuts and that any form of tax rises are simply not going to happen, even though they may fail on that thing, because they believe that will damage the economy. Tell me why they are wrong-if they are.
REICH: Well, they are wrong. Richard, they are very wrong, for a very simple reason. If you look back on America's past, you see that, for example, between 1950 and 1976, taxes on the very rich were never below-the marginal tax rate was never below 70 percent. And yet the American economy did better during those years, in terms of economic growth, than it has done since. And if you even look back to the George W. Bush tax cuts of 2001 and 2003, you see that actually that after George Bush cut taxes on the very wealthy, medium wages in the United States started to drop and the economy actually began to slow down.
QUEST: OK, OK, but I can hear some of my viewers, hearing my last question saying, come on Richard, you have shown your colors here and you have talked about raising taxes should happen. But now let me ask you, surely slashing bloated government, particularly non-discretionary spending, the health care spending, the defense spending, all these other areas, which are the sacred cows of the budget, has to happen, too.
REICH: Yes, absolutely. I would get rid of, oh, everything that could be corporate welfare. All the special subsidies and tax breaks to individual companies and industries, just because they have a powerful lobbies in Washington. I would trim the Defense budget. There is a lot of bloat there. And, indeed, there is a large question to be asked, Richard, about whether the United States really should be the sole and major financier of the entire defense of much of the rest of the world.
Number three, I would take a hard look at Medicare, Social Security, other so-called entitlement programs. Not in order to get rid of them, but to make sure they are working well. Underlying much of the budget problem in the United States is the rise in health care costs. It is not Medicare, it is not Medicaid. It is just that healthcare costs are rising so quickly, we need to find some answer to better quality health care at lower cost.
QUEST: Sir, thank you very much for joining us. The satellite is about to finish, and we say thank you Doctor Reich for joining us from the U.S., this morning, or this evening, for us. Many thanks, indeed.
So that put it all in perspective. Both sides of the argument, or at least the tax rises versus the spending cuts.
QUEST MEANS BUSINESS in a moment, a stark warning -- the global implications as the E.U. comes to grips with a desolating debt crisis.
We're in Brussels, after the break.
QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS.
This is CNN. And on this network, the news always comes first.
The United Nations is making an urgent appeal for nations to help Somalia. It has declared a famine in the southern part of the East African nation. It's suffering its worst drought in more than 50 years. Thousands of Somalis have fled to refugee camps in nearby Ethiopia and Kenya.
Authorities have captured the last fugitive from the Yugoslav war crimes suspects. Goran Hadzic is accused of war crimes and crimes against humanity for his role in the wars following the break-up of Yugoslavia nearly 20 years ago. Serbia's president announced the capture on Wednesday.
A committee of the British parliament is accusing News International of obstruction. The committee comes as Prime Minister David Cameron defends his government over the phone hacking scandal. The report said News International tried to block a probe of the phone hacking by the "News of the World".
The prime minister also faced criticism for his close relationship with the top News Corp executives. Mr. Cameron wouldn't deny he'd had conversations with them during the company's bid to take over BSkyB.
(BEGIN VIDEO CLIP)
DAVID CAMERON, BRITAIN PRIME MINISTER: I never had one inappropriate conversation. And let me be clear.
CAMERON: Let me be clear.
CAMERON: Let me be clear. I completely -- I completely took myself out of any decision-making about this bid. I had no role in it. I had no role in when the announcements were going to be made. That is the point.
(END VIDEO CLIP)
QUEST: David Cameron speaking in parliament.
And in the last few moments, we've learned Barack Obama will meet the top two House Republicans, Speaker John Boehner and the majority leader, Eric Cantor, at the White House at 5:00 on Wednesday. That's according to a Republican site, who -- an aide who spoke provided he wasn't identified. So that's in just over two-and-a-half hours, at 2:30 p.m., well, two-and-a- half hours from now.
On the other major crisis, find a convincing solution to Europe's debt crisis or the global economy will feel the fallout -- a warning from one of the top guns of the European Union. President Barroso, who heads The European Commission, has made this stark appeal as the leaders of France and Germany sat down in Berlin hammering out details for the main event for Thursday's summit in Brussels.
At the center is a debt saving crisis for Greece, to save Greece from default.
Let's go to Brussels.
Correspondent Jim Boulden is there for us tonight -- good evening, Jim.
The core question, I was reading Enda Kenny's views, the Irish Taoiseach, who says -- Enda Kenny says that this is a -- is -- is not make or break, there will be many more meetings, but this is a significant one.
JIM BOULDEN, CNN CORRESPONDENT: Yes, and I think Mrs. Merkel has made the same point, hasn't she?
She doesn't want anyone to think that everyone is going to gather here in the buildings behind me come tomorrow and come up with a magic plan and then all will be well come Thursday night. In fact, we don't even know if it can go into Friday. They have so much to hash out.
And as -- as you've just said, it is unlikely they would come up with a major decision here. But they've been meeting many times and this is an extraordinary meeting. This meeting was called because it's helped, I think, from some leaders in the European Commission and the European Union, that they could finally make enough progress to keep the analysts, to keep the analysts and investors happy, or at least not have them go after the -- the debts of Italy, go after the debts of Spain...
QUEST: Right, but...
BOULDEN: -- because that's really what's scared everyone last week and earlier, is when you saw the -- the yields rising so much on those debts and, you know, so if that -- if they can cool the markets down...
BOULDEN: -- as they work through this for the next couple of weeks, that would be seen, I think, as a bit of a victory.
QUEST: But what do they want?
What are they going to do?
I mean we know that they are looking at relaxing the stabilization from the terms of that.
QUEST: We know that they've got to look at a further bailout of recapitalizing for Greece. But there's still no agreement, is there not, on the question of a selective default, because the ECB won't accept Greek paper if that happens and it would be considered a default for CSC purposes.
BOULDEN: We begin...
QUEST: (INAUDIBLE) purposes.
BOULDEN: We -- we keep hearing the word, in the last week or so, the word -- the D word. We do start hearing that word default. Now, you're right, the ECB doesn't want to see a default. There's so much going on about what can they do to allow Greece to lower the threshold of the amount of debt that it would have to pay back over the next five to 10 years without it being called a default, without the rating agencies calling a default, giving a break to Greece.
So, yes, it seems like, actually, the second fund, the second bailout for Greece, would be an easier task here on Thursday. It's how do you set up the mechanism to allow this to happen, allow Greece to have...
QUEST: Right, OK...
BOULDEN: -- some of its debt actually...
QUEST: All right.
BOULDEN: -- wiped off without creating chaos?
QUEST: In a word, Jim, do we -- and we're -- we're out of time.
But in a word, do we end up with that tasty Belgian treat, euro fudge, at the end of this.
QUEST: I asked for a word and I got it.
Jim Boulden, who is in Brussels, and, hopefully, will have waffles and maybe more treat rather than some fudge before he's finished.
Ahead of that crucial meeting, Europe's major stock indices rose for a second session. It was the bank stocks that did the good. Barclay's and Credit Agricole got 5 percent. Well, they have been beating the bejeebies out in previous sessions, so it was a -- a bounce back.
The U.S. also may be able to solve its debt ceiling problem gave a certain amount of good cheer. Now, let's talk more about banking and the state, perhaps, of the Russian banking system.
I'm joined by the chairman of the VTB Bank, which is heavily involved in the biggest bank bailout in Russia's history.
Andrey Kostin joins me now from New York and from our studios.
Good to see you, as always, Andrey.
ANDREY KOSTIN, CHAIRMAN, VTB BANK: And I thank you.
QUEST: My word, you are up to your neck in the Bank of Moscow and the Russian bailout.
Do you think this is one thing you might live to regret?
KOSTIN: Not at all. I think the Bank of Moscow is a very good acquisition. This is a bank which is deeply penetrated in the economy of Moscow. And Moscow, of course, is a huge megapolis with now the prospect of enlargement, actually, as it plans to double the size of Moscow.
So after the decision had been taken, we are quite confident that that will be a very good development for...
KOSTIN: -- for the Bank of Moscow...
QUEST: Do you -- do you know...
KOSTIN: -- and this group.
QUEST: Sure. Do you know how deep Bank of Moscow's debts and, if you like, the dirt might be?
Are you at all afraid if you get -- as you get further into it?
We saw it, obviously, in the UK. We've seen it in the US. You buy a bank, you buy it in a haste or it's a shotgun marriage and then you realize just what nasties are in the vaults.
KOSTIN: No, we are now 100 percent sure what is the -- the exact picture and that we know that the support have been provided by the central bank in the form of a -- a 10 -year-old loan, absolutely adequate in order to have good economics and good results.
We expect that the Bank of Moscow will give a small profit this year, around $100 million. But next year already, we expect about 20 percent ROE on...
KOSTIN: -- the Bank of Moscow.
QUEST: Let's just take, if we may, about the -- the Greece, the European situation. You just maybe heard me talking to Jim Boulden in -- in Brussels. how worried are bankers like you and people I've seen from Russia that your closest, largest neighbor, the European -- the eurozone -- cannot get a handle on what's happening?
KOSTIN: Well, of course, we are not directly exposed to the, for example, Greek debt. We don't keep this debt on our -- our books. But, of course, when that happens in -- in Europe, it have a -- a very negative effect on the Russian -- the Russian economy.
So we are very much concerned. A lot of instabilities and uncertainties in the world. But, of course, Europe represents one of the most urgent.
So we're very much looking forward to the solution. We hope that, at the end of the day, the solution will be found.
QUEST: And, Andrey, before we finish, you and I have talked before on this program, Medvedev or Putin, Putin or Medvedev -- are -- where do we now stand on that?
Are you -- are you getting at all concerned about how this presidential play-out goes?
KOSTIN: No, I think there is not very much concern inside Russia about this. Of course, there is some political intrigue and Mr. Medvedev himself said that there's no politics without intrigue. He promised, in Germany, just two days ago, yesterday, that he would make public his intention.
I think we will have to wait a bit longer because we have parliamentary elections before presidential. But I hope we will know the intention of both gentlemen, well, in the next couple of months.
QUEST: We certainly will. thank you, as always.
Good to see you, Andrey.
KOSTIN: Thank you very much.
QUEST: Thank you for joining us. KOSTIN: Thank you, Richard.
QUEST: Talking about from New York and giving us some perspective.
QUEST MEANS BUSINESS, as we continue, breaking down the barriers -- the World Trade Organization is cautioning words. It's all to do with the dollar around. The WTO's chief, after the break.
QUEST: A cautionary word tonight from the World Trade Organization, which says an explosion of so-called preferential trade agreements between trade blocs won't help the flow of trade. And some WTO members are taking steps shielding their economies from competition. It's called creeping protectionism.
I spoke to the WTO's chief, Pascal Lamy, and asked him whether trade barriers are going up more quickly than, perhaps, how can bring them down.
PASCAL LAMY, DIRECTOR-GENERAL, WTO: Well, that's a good point. You're absolutely right, Richard. In the latest checkups we've made of -- of protectionism worldwide, we've detected a few at worrying spots now. It's not a wave of protectionism. I don't think we should over dramatize. But like a doctor, when we see something worrying, we should warn the patient.
QUEST: If we talk about the Doha Rounds as a patient, is it on life support?
And isn't it about time you switched off the machine?
LAMY: I see your analogy and how you want to stretch it. I -- I don't think I would agree with that, Richard. I mean, first, because international negotiations never die. They procrastinate. They stretch. They never die.
And for another reason, which is that if the rationale for deplugging and calling it a day is to restart the next day, which it is, the reality is that you will find the next day most of the questions that you were trying to deal with the day before.
Now, what is true is that there are new issues on top of old issues which are still not solved, like agricultural subsidies or big tariffs (ph), which probably would deserve attention. And the question is whether our members can, you know, walk the staircase...
QUEST: All right...
LAMY: -- and chew gum at the same time.
QUEST: Right. but when are you going to -- when do you expect to have a more modest round or series of proposals?
Let's put some hard facts and dates onto this, Mr. Lamy.
When can we expect a development that isn't people just saying, we're going to talk about developments?
LAMY: That is a perfectly legitimate question. What we are trying to do is we have a military gathering at the end of this year, which is a regular one we have every three years. And what we're trying is to extract from the dig (ph). The agenda, the 20 topic agenda, a mini agenda with two or three issues, including the ones that developing countries and mostly new developed countries care the most about, which is this duty-free, quota-free...
LAMY: -- regime...
QUEST: All right.
LAMY: -- for the least developed countries' exports.
QUEST: Can we expect to -- to throw another analogy onto the table -- if a clearly full-bodied Doha is not possible, can we expect Doha Lite by this time next year, do you think?
LAMY: I wouldn't call it Doha Lite. What I think is doable is a sort of early harvest that would, again, book it now things which are doable, not lowering the level of ambition of the round, but early harvesting a few of these topics in order to be the ones that are the most pro-development.
I don't think WTO members, at this stage, are ready to lower the level of ambition which they have agreed at the beginning of the round, just for the sake of completing it.
(END VIDEO TAPE)
QUEST: Lots of analogies there, but the gist of it is that it's an early harvest, perhaps from Doha, but the Doha Round is not dead.
We've been telling you about a crisis across East Africa that's affecting more than 10 million men, women and children who don't have access to food and water. And the weather has played a large role.
Pedram is at the World Weather Center to bring us up to date and to explain, please.
PEDRAM JAVAHERI, CNN METEOROLOGIST: Yes, Richard. You know, these conditions have continued on for so many years now. But the United Nations declaring now a famine circumstance over portions of Eastern Africa.
But I just want to show you the drought monitor, because look for the color brown here onto the orange colors. That is the case where the severe to extreme drought is across portions of Africa.
Now, when you go in for a closer look, notice that Sudan and portions of Ethiopia and Uganda, Kenya, getting some of the extreme drought to severe drought.
But around Somalia, where they have the areas where the famine is a concern across Southern Somalia, we have weak to moderate drought.
So the concern is, how did we get to this point?
Well, you've got to keep in mind, many factors go into play across the portions of Southern Somalia. But the definition of famine by the United Nations means at least 20 percent of families in this area have to lack access to food -- basically no food in the house, no food on the way. And malnutrition has to exceed 30 percent.
The death rates in this area, about two per 10,000. That's the minimum criteria to get you underneath the famine zone there.
And the last time we had a concern like this was back in the early to mid-1980s across portions of Ethiopia.
Now, keep in mind, we've had no only below average rainfall for one season, but now going on the third season in a row below average rainfall.
Someone of the highest maltru -- malnutrition zones coming right around the areas highlighted in yellow there, where the rates now, again, 20 percent gets you in this zone. Up to 50 percent of the area underneath a malnutrition zone and then get up to 20 people per 10,000 are -- are losing their lives every single day.
And that may not sound like that much to, if you're looking at these numbers. But keep in mind, some 10 million people call this area home. So quick math tells you a couple thousand people every single day lose their lives because of the lack of food and, of course, the lack of rainfall. The la nina pattern we've seen in the past several seasons there inhibiting the little rainfall that they do see. And that's the concern.
How about the forecast, going, say, from July on into September?
Notice that you have portions of Sudan going to remain dry, but actually around Somalia and portions of Uganda, the southern areas of Ethiopia, about average to above average readings are expected.
But by that point, it's going to be a little too late. That's the concern as large portions of portions of Africa has rain -- does not look like it's going to fall, at least in large doses out there.
Now, across Europe, we do have some rainfall on the way. A couple of storm systems in place. One of them across the east, another weaker one across portions of Central and Western Europe that is producing some rain showers. And, actually, London, a cruel, cruel, dreary afternoon setting up there, as we have showers with the second storm system in line that's pushing in. The initial one actually you have the chance of severe weather across portions of Eastern and Southeastern Europe, Richard.
So keep that in mind. But I think curse of Quest, I think is what you were calling it last time, and certainly still in place across portions of London today.
QUEST: No, no, no, no. This is curse of Quest, curse of Quest. And the curse of Quest is very specific. It's when I go on a plane and go somewhere for a holiday...
QUEST: -- the weather will follow. The rain stays mainly with me on the plane.
QUEST: Many thanks.
QUEST: An A plus for effort -- Google's social network is growing faster than any other. What Eric Schmidt's got planned, in a moment.
QUEST: It's now been three weeks since Google launched its new social networking site, Google Plus. The company won't say how many people have signed up. But Paul Allen, the co-founder of Ancestry.com, shows us -- gives us a rough idea of what the growth rate has been.
This shows you back in June there was absolutely nothing. G+ was unknown. By the time we move on, it is officially announced and it is really making a lot of buzz. It comes off slightly a bit with the tech reviews. This is, by the way, the number of searches that there are on Google for G+.
Carry on and it goes back up again. And that's the way Google continues -- the new G+ continues.
What it shows us, they estimate, judging by the number of searches, that there are roughly 10 million users of this at the moment.
So what are the key features of G+ that everybody is looking toward?
It really comes down to these major features.
First of all, you could have circles. Never mind lists and groups, you drag people into your ski, your sandiago (ph), your family. You can basically get people to be where you want. It has video phone calls, video conferencing, video chat. Facebook has immediately countered with something of -- something similar, with Skype.
And, of course, it allows you to send group texts to your circle.
So these are the three things that really make it very different. And it's these things that perhaps have given the 10 million users the interest that they've come alone with.
Eric Schmidt admits Google should have got into this a lot sooner, as he told us.
ERIC SCHMIDT, EXECUTIVE CHAIRMAN, GOOGLE: The revolution that is mobile has just begun. You know, all of these countries, especially in Asia, the mobile concentration is very, very high and, in fact, growing even faster. And the new generation of phones are so much more capable.
So we're going from a situation where the average citizen didn't have that much power to a point where they can know everything and they can organize very quickly. And that may bring down a government, as in the case of the Arab spring, but it may also just challenge vested interests and so forth in a democracy.
UNIDENTIFIED FEMALE: So does that mean the PC is dead?
SCHMIDT: Well, the PC will be used for things where you need to do a lot of typing, because it's hard to type on that glass screen. But for everything else, you're going to be using a mobile device, a tablet or a mobile phone or some kind of mobile small thing that you'll carry around.
They're inherently better. They're more personal. They -- with your permission, they know who you are, they can make suggestions to you, that kind of thing.
UNIDENTIFIED FEMALE: The consumer group, Consumer Watchdog, has sort of had a little fun with it, you know. They've turned you into the poster boy for privacy infringement. There's one particular satirical video that caught my eye, the one where it -- I don't know if you've seen it, the evil ice cream men, avatar.
SCHMIDT: That was interesting because it had nothing to do with any of the things Google was doing.
UNIDENTIFIED FEMALE: What do you think about your image and who you are being used that way?
SCHMIDT: As a general comment, we would like constructive and informed criticism.
UNIDENTIFIED FEMALE: You are, though, going to be appearing before the Senate Judiciary Subcommittee's Anti-Trust Subcommittee.
SCHMIDT: From my perspective, we don't know what to think about what they're doing, because they haven't made any comments yet.
UNIDENTIFIED FEMALE: it's just part of -- of the many things that come with being a large company?
SCHMIDT: Well, if you're in the information business, and especially if you're disruptive with respect to information incumbencies, it makes sense that people would be upset with you.
UNIDENTIFIED FEMALE: Do you see Facebook as a major challenger to Google?
SCHMIDT: Fundamentally, what Facebook has done is built a way for you to figure out who people are. That system is missing in the Internet as a whole. Google should have worked on this earlier.
We now have a part called Google+, which has been in development for more than a -- more than a year and-a-half, which is a partial answer to that.
But I think that's the area where I would have put more resources.
(END VIDEO TAPE)
QUEST: Eric Schmidt.
And I'll have a Profitable Moment in a moment.
QUEST: Tonight's Profitable Moment.
American Airlines' decision to spend billions of dollars of new jets is a turning point. For Boeing, it's a watershed. The manufacturer is going to reengineering the 737, a decision that probably should have been taken months ago.
Airbus now has a foothold with new customers in the United States. Until now, American was all Boeing.
But there's more. The aviation world is changing, with entrants like COMAC of China fighting for these orders in the future. Boeing and Airbus have accepted each other's presence in the American deal. And that speaks volumes in a wish to positive a duopoly as long as possible.
Well, guess what, guys?
And that's QUEST MEANS BUSINESS for tonight.
I'm Richard Quest in London.
Whatever you're up to in the hours ahead,
I hope it's profitable.
"WORLD ONE" is next.