The Economist USA 03.21.2020

56 Business The EconomistMarch 21st 2020

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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 send-

ing 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, tran-

sport, 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 be-

sides 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 cine-

ma 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 lav-

ish that in France, Germany or Gulf sheikh-

doms. Art Basel Hong Kong was cancelled

last month. The main Art Basel fair in Swit-

zerland, which is due to open on June 18th,

may also not go ahead. Galleries that de-

pend 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, espe-

cially in conservative industries. On March

20th Art Basel Hong Kong will launch on-

line “viewing rooms” with more than 231

galleries—over 90% of the original exhibi-

tor line-up. They will offer over 2,000 art-

works 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. Dis-

ney 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 strug-

gling 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. Ear-

ly panic will inevitably die down. Other in-

dustries 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 ser-

vices 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

N

o industry hasbeenmorebattered

by covid-19 than air transport. With

people wary of confined spaces—and

country after country imposing travel

bans—passenger numbers have nose-

dived, and with them airline revenues.

The estimate of $113bn in lost sales,

which the International Air Transport

Association (iata) made on March 5th,

already looks rosy. The trade body says

that the world’s carriers may need

$200bn in state aid to stay aloft.

Plenty were stalling before the pan-

demic. Of the 120 airline companies

ranked by iata only around 30 made

money in 2017 and 2018. Last year the

biggest half-dozen in Europe earned the

bulk of the $7bn in profits there, calcu-

lates Citigroup, a bank. Many firms had

borrowed heavily to buy planes which

the virus has grounded. The 90-odd that

are in the red have on average six times as

much net debt (adjusted for aircraft

leases) as ebitdar (a measure of airline

profits). In January the typical carrier had

enough cash to cover between 50% and

80% of short-term liabilities and about

two months of revenues, iata says (see

chart). Three-quarters could not cover

costsbeyondthreemonths—if that.

Big companies have secured generous

credit lines from banks. iag, which owns

British Airways, can tap €1.9bn ($2.1bn) in

revolving credit. EasyJet, a British low-

cost carrier, has $500m available. Most

firms, especially in Europe and Asia,

nevertheless have no choice but to cut

flights and sack staff. Cancellations in

America are a bit less savage while planes

are still permitted to crisscross its air

space; Southwest has cut just one in five

flights. If revenues fall by 35% in 2020,

Delta, Southwest and United should end

the year with “adequate” liquidity, says

JPMorgan Chase, another bank—as long

as demand begins to bounce back.

China offers hope that it might. The

first to be infected, its airlines are lifting

off again. In mid-February capacity was

down by 71% compared with a year ago,

says oag, a data firm. In the first week of

March it was 43% lower, as people re-

turned to the skies lured by cheap fares

(see Graphic detail). Combined with

government handouts to carriers, which

are mostly state-owned, this may tide

them over. Airline bosses elsewhere are

banking on similar luck—and largesse.

Flight risk

Air transport

Most airlines are running on empty

Burning up

World airlines, December 2019 or latest

Source:IATA *Maynotberepresentativeduetosmallsamplesize

North America

Asia Pacific

Latin America*

Europe

Africa*

MiddleEast*

1086420

Cash coverage of annual revenues, months

Median Minimum Maximum

North America

Asia Pacific

Latin America*

Europe

Africa*

Middle East*

806040200

Cash as % of short-term debt