Some companies will never restart
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“THE COVID-19
pandemic is having a significant impact around the world,” warned Fred
Smith, boss of FedEx, at his firm’s earnings conference on March 17th.
That is putting it mildly. The express-delivery giant announced that it
was slashing its delivery capacity and, for the first time ever, refused
to give earnings guidance. While economists debate whether this
recession will be short-lived or sustained (see Briefing), bosses the world over already see mayhem. The virus has destroyed $23trn in global market value since mid-February.
As
governments curb citizens’ activities—including much of commerce—in an
effort to save lives, the ranks of corporate casualties are swelling.
Fewer people are taking planes (see article),
hailing rides, eating out, staying in hotels, going to cinemas or
gathering just about anywhere. Most American and European sports leagues
have been suspended. Formula 1 motor-racing has ground to a standstill.
Apple and Nike have closed most of their stores outside of China.
Carmakers including Ford, Toyota and Volkswagen are shutting factories
in Europe and America.
The bloodletting
will continue. Scott Stringer, New York’s finance chief, predicts that
the city’s hotels will be two-thirds empty until the end of June. Its
restaurants and bars, ordered shut, could see sales drop by 80%. The
American Hotel and Lodging Association fears a blow exceeding the impact
of September 11th 2001 and the “Great Recession” of 2008 combined.
Morgan Stanley, a bank, reckons retail foot traffic may plunge by 60% in
coming weeks, as more American cities follow many European ones into
lockdown.
Many companies will pull
through. Governments are rushing in to ensure as many as possible do.
Britain this week unveiled a £330bn ($382bn) package of loan guarantees
and other support for businesses. America’s Federal Reserve earlier said
it would create a new funding facility to provide liquidity to American
issuers of commercial paper. President Donald Trump has called for
$1trn in economic stimulus.
Even so,
some firms will not make it. It is too early to say for sure who the
corporate fatalities will be. To get a sense of which are most at risk,
liquidity and business model are a good place to start.
Take
liquidity first. American firms account for 55% of global non-financial
debt maturing until the end of 2024, and 62% of debt rated junk,
according to S&P Global, a rating
agency. Non-financial firms in America will see $394bn in
investment-grade debt and $87bn in junk debt fall due this year; the
figures for next year are $461bn and $195bn. Potential trouble spots
include construction (with nearly $30bn in junk debt due by the end of
2021), media and entertainment ($35bn), and energy and utilities
($56bn).
Oil companies in particular
have been clobbered by the steep fall in the price of crude, which sank
to $25 a barrel on March 18th, the lowest level in nearly two decades.
Morgan Stanley calculates that the median exploration and production
firm needs an oil price of $51 a barrel to break even. Saudi Aramco, the
world’s mightiest oil colossus, said it might cut capital spending by
up to a quarter this year. America’s ExxonMobil echoed that it will make
“significant” cuts.
Oilmen are not the
only ones trying to preserve cash. Many companies are sending workers
on leave or worse. Norwegian Air Shuttle, an airline, is temporarily
laying off 90% of its 10,000 employees. Marriott International, the
world’s largest hotel chain, said on March 17th that it will have to let
go of tens of thousands of workers.
Companies are rushing to tap credit lines secured with their bankers. AB
InBev, the world’s biggest brewer, is drawing down its $9bn revolving
credit. Boeing, a troubled aerospace giant, has accessed $13.8bn.
Carnival Cruise Line hopes to stay afloat thanks to a $3bn lifeline.
Bloomberg, a financial-data firm, reckons that if firms in five big
sectors (health care, energy, transport, leisure and mining) drew down
70% of their credit lines, and the rest tapped 30% of theirs, America’s
biggest banks would be on the hook for $700bn.
Companies’
second vulnerability besides a liquidity crunch arises from their
business models. Some tried and tested ones suddenly look rather fragile
in the age of pandemic. If Apple does not sell a new iPhone it may
still convince consumers to buy one later. Revenues from a restaurant
meal not eaten or a forgone trip to the cinema are lost for ever.
That
is bad news for industries like the arts, which depend on a few big,
one-off events—at least in countries like Britain, where state-funding
of the arts is less lavish that in France, Germany or Gulf sheikhdoms.
Art Basel Hong Kong was cancelled last month. The main Art Basel fair in
Switzerland, which is due to open on June 18th, may also not go ahead.
Galleries that depend on such fairs, as many do, could see as much as
80% of their sales evaporate.
No
surprise, then, that the coronavirus is provoking some soul-searching,
especially in conservative industries. On March 20th Art Basel Hong Kong
will launch online “viewing rooms” with more than 231 galleries—over
90% of the original exhibitor line-up. They will offer over 2,000
artworks worth a total of $270m. The crisis is also breaking down
Hollywood bosses’ stubborn attachment to the old-fashioned model of
distributing films in theatres. Universal Pictures is making some movies
available at home on the same day as their theatrical release. “The
Invisible Man” and “Emma” can now be streamed online. Disney has
released its popular “Frozen 2” on its newish Disney+ streaming service
well ahead of schedule.
Some companies
may not only survive the pandemic but thrive, either now or once it
recedes. Supermarkets are struggling to keep up with demand from panic
buying. Kimberly Clark and other peddlers of toilet paper, which many
people are frantically stockpiling, are riding high, too. So are
purveyors of cleaning products such as Clorox and Purell.
This
boomlet will probably not last. Early panic will inevitably die down.
Other industries may prosper for longer. By forcing many people to work,
shop and amuse themselves at home, the crisis may give a permanent
boost to online companies. Zoom, Microsoft Teams, Slack, WeChat Work and
other corporate-messaging services are experiencing a surge in demand.
Data from Sensor Tower, an analytics firm, suggests that weekly new
users of such apps leapt from 1.4m in early January to 6.7m in early
March. A survey in Britain for Barclaycard, a payments firm, points to
year-on-year growth of 12% in subscription entertainment services like
Netflix in the four weeks to February 21st, and of nearly 9% growth in
food takeaway and delivery spending. Amazon is hiring 100,000 new
distribution workers in America to meet demand for internet shopping.
Bricks-and-mortar
firms that have invested in online offerings are also cashing in. A
survey of American shoppers conducted on March 13th by Gordon Haskett, a
research firm, found that one in three bought food online in the
previous week. Among the 41% doing so for the first time, over half
chose Walmart, with its convenient grocery pickup and delivery service.
In Britain Tesco and Sainsbury may be outpacing Aldi and Lidl, European
discount chains that have invested less online.
And,
of course, any firm that comes up with a vaccine or treatment for
covid-19 can expect a bonanza. Amid the market meltdown the share price
of Gilead, a biotechnology firm working on a coronavirus drug, is up by
20% this year.
One lasting consequence
of the pandemic will almost certainly be further concentration of
corporate power in the hands of a few superstar firms. The current
airline carnage may leave skies everywhere resembling the uncompetitive
ones above North America. JPMorgan Chase, a bank, observes that American
carriers generate two-thirds of global airline profits with barely a
fifth of worldwide capacity (not to mention shabby service). Similar
consolidation now looks all too probable in Europe and Asia.
Companies
with the most resilient businesses, deepest pockets and longest
investment horizons may grow more super still through cut-price
acquisitions. Rumours swirl that Apple, with a gross cash pile of over
$200bn and Tinseltown ambitions, may swoop in to buy Disney, whose share
price has nearly halved since January. Warren Buffett of Berkshire
Hathaway, who is sitting on $128bn and has long grumbled about
overpriced equities, may at last find a bargain or two. Having raised a
record $888bn last year, private-equity firms are on the prowl. Steve
Schwartzman declared earlier this month that the dislocation and fear
caused by the coronavirus has created “a substantial opportunity” for
Blackstone, the buy-out powerhouse he leads.
The
Depression wreaked economic havoc but also produced radical new
business models from carmaking and entertainment to beauty products. In
time, today’s crisis, too, may lead to some corporate resurrections—and
plenty of new births. Comparisons to that agonising time in world
history must not be made lightly. That they look apt is a sign of just
how bad things are looking right now. ■
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This article appeared in the Business section of the print edition under the headline "Covid carnage"
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