The Wall Street Journal - 19.03.2020

B12| Thursday, March 19, 2020 THE WALL STREET JOURNAL.

Airline Bailouts Are Necessary Evil

Assistance is likely to cement everything investors hate about European aviation

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FINANCIAL ANALYSIS & COMMENTARY

Denny’s announced on Monday that it has pulled its forecast for 2020.

DAVID J. PHILLIP/ASSOCIATED PRESS

It is good that Chinese tech gi-

antTencent HoldingsLtd. sells

games when everyone is holed up

at home. But social distancing

won’t be as good for its other busi-

nesses.

As Tencent is the world’s largest

videogame company, its core busi-

ness will likely get a boost this

quarter from China’s measures to

contain the spread of the pandemic.

The company’s Peacekeeper Elite

and Honor of King are the country’s

two most popular mobile games,

and they may even attract some

new gamers who suddenly have

more free time at home. Games ac-

count for around a third of Ten-

cent’s revenue, based on quarterly

results released Wednesday, but

likely a much higher proportion of

its profit given their high margins.

Tencent’s other businesses may

still suffer from the effects of the

pandemic, though. Advertising,

which accounted for around a fifth

of total sales last quarter, will likely

get hit by a slowing economy. Cus-

tomers of its cloud division have de-

layed projects, hurting revenue. The

mobile-payments business has seen

a fall in transactions, but the com-

pany said volume was rebounding

quickly as people go back to work.

Longer term, the question is

whether Tencent can keep its gam-

ing business growing at full steam

after this short-term boost. The

company’s revenue from smart-

phone games last quarter grew

37% compared with the prior-year

period, the fastest growth in al-

most two years. That, however,

was against a low base in 2018,

when China imposed a nine-month

freeze on new-game approvals.

Part of the growth also came from

consolidating Supercell, a Finnish

gaming company with popular ti-

tles like Clash of Clans.

Tencent’s performance as the

coronavirus was spreading in China

may foreshadow the fate of Silicon

Valley as the virus sweeps across

Europe and the U.S. Some tech

businesses will benefit from more

home-working and home-playing—

but not all.

—Jacky Wong

Tencent

Is a Partial

Pandemic

Winner

Life at home helps some

lines but not others

For a sign of how the coronavi-

rus is hurting the ride-sharing busi-

ness, consider this: It took a global

pandemic to makeUber Technolo-

gies’ food-delivery business look

appetizing.

Shares of Uber and rivalLyft

have crashed over the past month.

The rapidly spreading novel corona-

virus has made governments across

the globe encourage and, in some

cases require, their citizens to stay

home. The latest shoe to drop came

Monday when the San Francisco

Bay Area issued shelter-in-place or-

ders for its residents, sharply curb-

ing both companies’ business in

their own hometown. Lyft has lost

nearly two-thirds of its market

value so far this year while Uber

shares are down by half.

The damage to Uber has been

less because the company also has a

food-delivery arm that now looks

like an important offset to its core

ride-sharing business. The same

government mandates requiring

residents to stay home also allow

restaurants to stay open for takeout

and delivery. That will likely spur

food delivery orders, at least for the

duration of the outbreak. Uber Eats

is estimated to have the second-

largest share of the U.S. food-deliv-

ery market after privately held

DoorDash, according to data from

Edison Trends. The company also

announced a new deal Wednesday

with fast-casual Mexican chainChi-

potle Mexican Grill.

But Uber Eats is also Uber’s great-

est source of losses and the likely or-

der boost from the current pandemic

may not change the profitability pic-

ture. The company announced Mon-

day that it has waived its delivery

fee for independent restaurants dur-

ing the current health crisis.

Ride-sharing still makes up more

than three-quarters of Uber’s revenue

and nearly all of Lyft’s. That business

is going to suffer greatly. New data

from Edison reported by The Wall

Street Journal Wednesday shows

that U.S. consumers spent 19% to 21%

less on rides with Lyft and Uber in

the seven-day period through Mon-

day compared with the week before.

The hit in key markets will likely

be worse. Uber CFO Nelson Chai

told CNBC on Monday that the com-

pany’s rides business in Seattle fell

“in the 40%-50% range” as a coro-

navirus outbreak hit that market

and forced residents indoors. The

Bay Area market is bigger for both

companies and is now under even

tighter restrictions. With Uber and

Lyft driving hard to get to profit-

ability, it is a lousy time for ride-

sharing to get ticketed.

—Dan Gallagher

Share-priceandindexperformance,

yeartodate

Source: FactSet

50

–75

–50

–25

0

25

%

JFM

Uber

Lyft

S&P500

This week’s talk of bailouts has benefited the shares of American Airlines and Norwegian Air Shuttle the most.

DANIEL SLIM/AGENCE FRANCE-PRESSE/GETTY IMAGES

Even in a crisis that could dwarf

9/11, airline bailouts are a bitter pill

for taxpayers to swallow. But they

are also depressing for financially

robust carriers dreaming of a more

profitable European market.

On Tuesday, the International Air

Transport Association said global

airlines would need $200 billion to

avoid mass bankruptcies, as coun-

tries close their borders to interna-

tional travelers due to the Covid-19

pandemic.

The U.S. “will be powerfully sup-

porting airlines,” President Trump

tweeted Monday, just after the in-

dustry asked for $50 billion in

loans, grants and tax relief—triple

what it got after the Sept. 11, 2001,

terrorist attacks. In Europe and

Australia, governments have explic-

itly said they would move to keep

their national carriers afloat.

Not all airlines will benefit

equally.

So far, this week’s talk of bailouts

has benefited the shares of Ameri-

can Airlines and Norwegian Air

Shuttle the most. Both are heavily

indebted carriers with uncertain fu-

ture profitability. By contrast, the

shares of European budget airline

Ryanair and British Airways-owner

IAG haven’t bounced back.

Neither of these airlines, unlike

direct competitors such as Luf-

thansa, Virgin Atlantic and Air

France-KLM, has voiced any de-

mand for government support. In

fact, their investment pitch to

shareholders includes the idea that

the European market is oversatu-

rated and that weaker players will

eventually be culled, releasing un-

tapped earnings potential.

IAG and Ryanair could join the

clamor for help if the crisis shows

signs of dragging out longer than a

few months. Nevertheless, the di-

vergence of interest between stron-

ger and weaker players shows how

bailouts could have a much more

profound long-term impact in Eu-

rope than in North America, where

the industry is already consolidated.

Airlines are low-margin, capital-

intensive businesses that don’t have

a lot of cash to hand. In the U.S.,

many that score highly on longer-

term measures of financial health

are low on liquidity. For them, tem-

porary government aid makes

sense. A back-of-the-envelope calcu-

lation assuming no revenue and

that all of 2020’s expected capital

expenditures will be deferred,

shows that, once debts are paid,

budget airline Southwest has

enough cash to last for only about

two months, for example. Both its

even-lower-cost competitor Spirit

Airlines and European peer EasyJet

could hold out for more than three

months.

In reality, many could likely make

it at least into the summer. The

most profitable companies, in par-

ticular, have other sources of

money. Southwest has already un-

veiled a $1 billion credit line and

Delta Air Lines could sell up to $20

billion in unencumbered assets.

But that is exactly the point: In

Europe, rescuing cash-poor carriers

broadly means rescuing unprofit-

able ones. Beyond sound companies

like Ryanair, EasyJet, IAG and Wiz-

zAir, much of the market is made

up of flagship national carriers like

Alitalia, Air France, Finnair and

Russia’s Aeroflot.

Bailing out airlines is probably a

necessary evil, as long as the money

is used to keep workers employed.

But the likely pattern of interven-

tion will also cement everything

that investors have always disliked

about the European aviation mar-

ket. The coronavirus crisis could

end up changing frustratingly little.

—Jon Sindreu

Tencent’squarterlysmartphone

gamerevenue,changefromayear

earlier

Source: company reports

100

0

20

40

60

80

%

2017 ’18 ’19

Restaurant Slump to Lead to Feast for Some

For America’s restaurant busi-

ness, overwhelming darkness today

might well lead to a brighter future.

It is hard to overstate the dam-

age that the novel coronavirus out-

break will inflict on the nation’s

eateries, even beyond the human

toll of the disease. To combat its

spread, several states have tempo-

rarily banned dining inside restau-

rants and bars.McDonald’shas

closed its dining rooms at stores it

owns nationwide and moved to an

all-takeout mode while asking its

franchisee-owned restaurants to

follow suit. Other major chains, in-

cluding Taco Bell andStarbucks,

have announced similar measures.

Higher-end eateries that have re-

mained open for business have

watched reservations plunge.

Denny’sannounced on Monday

that it has pulled its financial fore-

cast for 2020, drawn down on its

revolving line of credit and sus-

pended share repurchases. It seems

inevitable that similar closures and

negative announcements will con-

tinue since forecasting business ac-

tivity for the rest of the year is an

impossible exercise. Publicly traded

dining companies have endured a

severe stock selloff over the past

month. Shares ofDarden Restau-

rants, owner of Olive Garden and

other chains and which is slated to

report quarterly earnings on Thurs-

day, dived nearly 18% on Wednes-

day alone.

A wave of bankruptcies seems

possible, especially for smaller op-

erators in the event of a prolonged

shutdown. Absent government in-

tervention, the potential economic

hit is massive. Before the magni-

tude of the crisis became clear, to-

tal U.S. sales were projected to

reach nearly $900 billion this year,

according to data from the National

Restaurant Association. More than

15 million people work in the indus-

try and there are more than one

million locations nationwide.

But not everyone will go out of

business, and the pain should lead

to better opportunities for inves-

tors. Fewer dining options should

lead to a higher growth outlook.

Before the crisis, things moved

slowly: The U.S. limited-service res-

taurant count grew by an annual

average of just over 1% from 2013

to 2018, according to data from

market research provider Euromon-

itor International. Total spending

grew by about 4% annually over

that time, and total transactions

rose by about 2%.

In that sort of environment, it is

hard to generate sales growth with-

out taking market share from a ri-

val. The financial strains of the

pandemic will reduce intensity of

competition and lead to higher

growth rates.

Bigger companies such as

McDonald’s, with significant real-

estate assets and strong brands, are

well-equipped to bounce

back. Chains likeDomino’s Pizza,

which have already designed a

business model that doesn’t empha-

size dining rooms, should hold up

fairly well, too. Operators with

large stores based in shopping

malls, such asDave & Buster’s En-

tertainment, will likely struggle.

Even a likely recession and surge

in unemployment won’t perma-

nently alter consumer behavior. A

trip to the local restaurant will

start to seem very attractive to

Americans after a prolonged stay

indoors. —Charley Grant

Ride-Sharing Gets Locked Down by Virus

Following the September 2008 financial

crisis, the market didn’t hit its bottom until a

few months later, in March 2009. On March

6, the S&P 500 index hit what would be

its lowest intraday level: 666 points.

Analysts such as Nicholas Colas, co-

founder of DataTrek Research, have

long been referring to this for years

as “the Devil’s Low.” It was 57.7%

below the S&P’s intraday precrisis

high in October 2007. An equivalent

drop today would bring the S&P 500

from its intraday high in February to

1435. Currently the S&P is still well
      away from there, trading around 2400 on
      Wednesday morning.
      That bottom doesn’t have the same
      ring as “666.” But the digits do add up to


1436. 
      

      The market might well avoid having to
      name that number at all, if Congress can
      act quickly, Mr. Colas said, noting that the
      666 bottom came just after the 2009 U.S.
      stimulus bill was passed.
      “If, and it’s a big if, D.C. can pass stimulus
      faster this time, then we might not end up
      at the crossroads making another deal with
      the devil,” he said.

      
      

TWENTIETH CENTURY FOX/ALAMY

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