Written by Juan Palenzuela, Associate
Edited by David Gaffney, Partner
Good morning, In the past, small demand shocks have been enough to decimate airlines. The political instability experienced by Turkey and Egypt in 2016 is often cited as one of the main culprits for Monarch’s collapse in 2017, for example.
This time around, the threat to airlines is much more serious, and it is of a completely different scale. Countries have banned previously busy routes altogether, and citizens have been instructed to stay at home and avoid unnecessary travel. British Airways’ chief executive Alex Cruz has called the pandemic “more serious than the 2008 financial crash, the 2003 SARS epidemic or 9/11”.
The first airline to fall victim to the pandemic was Flybe earlier this month, although the operator had some serious pre-existing health conditions. Norwegian Air finds itself in a very precarious position now too, offered a lifeline in the shape of a quarter-of-a-billion dollar government bailout, although it remains to be seen whether that is enough to secure its future under the current conditions.
Faced with the collapse of large carriers, governments will be forced to make hard decisions – not that there are many easy decisions facing policymakers currently. Either they let the struggling private airlines fall, they bail them out, or they nationalise them. None of those options are enticing.
Such is the magnitude of the crisis that the industry could be changed forever. Flying will remain an essential medium of transportation, there is no question about that, but the industry looks set to become much more concentrated, with the remaining operators able to charge higher fares.
In the aftermath, investors will probably factor in the risk of similar demand shocks much more than they did before, restricting access to liquidity for those with notably thin margins, such as Ryanair or Southwest.
Added to that is the long-term trend of travellers becoming much more conscious about their carbon footprints, while at the same time rail travel becomes easier, cheaper, and more fashionable. An industry is braced for turbulent times ahead.
Britain’s prime minister, Boris Johnson, warned the public that a complete lockdown may be necessary within 24 hours, after people gathered in large numbers at various outside locations over the weekend, ignoring the Government’s advice to stay at home. The government is said to have been shocked at the level of non-compliance, which may necessitate similar measures to those imposed in France, Italy and Spain, where the movement of people has been restricted by police and all stores, except food shops and pharmacies, have been shut.
Zagreb was hit on Sunday with a 5.3 magnitude earthquake that damaged several buildings in the historical centre. Nobody is thought to have died in the incident, which is the largest earthquake to hit the city in 140 years.
The Olympic committees of Canada and Australia have announced that they will not be sending any athletes to the Olympic and Paralympic Games scheduled in Tokyo this summer. The first countries to announce a boycott of the Games, which are coming under increasing pressure to be postponed until 2021.
Business and economy
Negotiations in the American senate floundered after Republicans and Democrats failed to agree on the terms of the nearly $2 trillion stimulus package. Democrat representatives argued that the proposed deal offered big companies an overly generous bailout with loose conditions and little oversight. They also argued that the deal would not release enough money to hospitals. Nonetheless, there were positive signs that a deal would be reached: “We’re getting closer and closer. And I’m very hopeful, is how I’d put it, that we can get a bill in the morning.” said Chuck Schumer, a top Senate Democrat.
Goldman Sachs reportedly spent more than $1bn to repurchase securities from two of its main funds to shore up liquidity after investors rushed to withdraw their money. It is the second instance of a big bank seizing on the new Federal Reserve measures to avoid a credit crunch.
WeWork is reportedly preparing to take all necessary actions after SoftBank announced its withdrawal from a $3bn purchase of stock from employees and shareholders. The fight has thrown questions over both the future of WeWork and of SoftBank itself.
Columns of note
Writing for theFinancial Times,Rana Foroohar argues that bailouts should be directed almost exclusively towards small companies. Those small businesses are the core of the economy, and yet many run incredibly tight margins and would not be able to survive an additional debt burden.
Things can get ugly when science and politics collide, argues Trevor Phillips inThe Times, but it has never been more important to base decisions on the former. It is a temptation, and sometimes a risk, not to do so; but it is the only way to build real and sustainable solutions to the crisis, he writes.
Source: the The Times
The week ahead
The sell-off in equities, commodities, and bonds last week was severe and historic but we can expect that to continue this week.
We will also likely see several of the first economic reports that reflect the impact of the pandemic on production, trade and manufacturing. They will be the first in a series of reports that indicate the likelihood of a global recession that will be characterised by large job losses and business closures around the world.
Today, Japan’s Preliminary Services Purchasing Managers' Index (PMI) will be published. Tomorrow, several PMIs from countries across Europe will follow for the current month. Expect ugly figures and grim headlines.
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