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How business fared in its coronavirus quarter

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Via Financial Times

You may have mastered the present: calling colleagues on Zoom, homeschooling children, taking state-sanctioned exercise, mainlining live news and foraging for food.

You may even have a grip on the future, as one of the new breed of amateur epidemiologists who confidently predict the path of coronavirus.

But for me, and I suspect others, it is difficult enough just to digest the recent past. The flood of news — together with reordering our lives at work and home — has made it hard to keep track.

So this is an attempt to recap a bruising three months in business.

Airlines

Rescue deals for airlines may involve governments taking equity stakes: diluting or wiping out existing shareholders © REUTERS

It started in January with a few flights to China being cancelled. Weeks later, many countries have banned travel from overseas cities and airlines have grounded most of their fleets. Shares in Boeing, Airbus, Qantas, United Airlines and British Airways-owner IAG are all down more than 50 per cent this year. 

The industry is lobbying for state bailouts. But there is public anger at elevated investor rewards that have left many too thinly capitalised to withstand this crisis. Rescue deals may ultimately involve governments taking equity stakes: diluting or wiping out existing shareholders.

Line chart of Flights per day (7-day moving average) showing Global flight numbers have dropped

It is not all bleak. While Virgin Atlantic is struggling, shares in its sister company Virgin Galactic are up a third this year. If earthbound destinations are off-limits, there is always space?

Hospitality

It will be harder for cruise operators to bounce back © AP

The travel slump has also hit hotels. Marriott International reported last week that its hotels in China had occupancy rates of below 15 per cent. In North America and Europe, where lockdowns are only widening, occupancy rates are below 25 per cent.

At least hotels should bounce back when the virus is controlled. It will be harder for cruise operators, which have subjected passengers to some horrific voyages. Carnival Corporation operated the Diamond Princess, which was stuck off the coast of Japan, trapping 3,700 passengers as sickness spread and claimed at least 11 lives. The Westerdam bounced across the South China Sea after being denied entry at port after port and the Grand Princess was left floating off California.

Line chart of Share prices rebased  showing Cruise operators hit by Coronavirus

The cruise lines want a bailout but they are not at the front of the queue. Part of their problem is that although much of their operations are in the US, their domicile is not: Carnival’s is Panama, Royal Caribbean’s is Liberia and Norwegian’s is Bermuda.

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Energy

The shale boom has turned to bust, which is dire news for Occidental Petroleum, which acquired Anadarko last year © REUTERS

Performing even worse so far this year is the energy sector. Saudi Arabia’s decision to increase oil production even as coronavirus caused a slump in demand has had a huge effect on prices, sending benchmark crude below $30 a barrel.

The bottom end of the stock market is littered with US producers with cool names and cold hard declines: Targa, Apache, Diamondback, all down more than 70 per cent.

At these oil prices, a lot of US production is uneconomic: the shale boom has turned to bust. That is dire news for Occidental Petroleum, which last year outbid Chevron to acquire Anadarko in a $38bn deal, a major bet on shale. Now Occidental is on a cost-cutting spree to try to redeem itself in the eyes of shareholders including veteran corporate raider Carl Icahn, and lenders, including Warren Buffett.

GM260307_20X Some of shale’s big spenders are cutting back hard

The rest of the industry is also embracing austerity. The problem is that the oil producers’ only remaining attraction was a fat dividend. That is now under threat. Among companies worth more than $100bn, ExxonMobil is the worst performing stock this year. Even Saudi Aramco, the kingdom’s newly-listed oil champion, has been hit by the low price. But it remains the biggest company in the world by market value, at $1.5tn.

Retail

It is a boom time for supermarkets, as panicked consumers stockpile toilet roll © AFP via Getty Images

As shops pull the shutters down, there are questions of which ones will reopen. Take Kohl’s, one of the worst performing of the large retailers this year. Before the crisis, revenues were flatlining and profits were weak. It has now had to shut more than 1,100 department stores in the US, withdraw profit guidance, warn on the dividend and draw on a $1bn credit line.

In theory, retailers with large online operations can stay in business but in practice there is pressure to close even these. Next, one of the UK’s largest fashion chains, said this week that it would stop taking online orders because warehouse workers “increasingly feel they should be at home”.

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It is, though, boom time for supermarkets, as panicked consumers stockpile toilet roll. Walmart is looking to hire 150,000 staff. UK supermarket chain Tesco is trying to hire 20,000.

Bar chart of Announced hiring plans ('000) showing Some relief for US labour market

It should be the time to shine for Ocado, the online-only grocer that has licensed its technology around the world to supermarkets such as Kroger in the US and Casino in France. But like many online retailers, it cannot move fast enough to meet the surge in demand. An alternative model, US-based Instacart, which allows shoppers to tap up a gig worker to do their shopping in a store, seems to have a more resilient model: it is looking to hire 300,000 shoppers. 

Tech

Office refugees are turning to online communications tools © REUTERS

This is the moment for communications tools to spread beyond their early adopters. It is a boom time for instant messaging service Slack — “concurrent” users have surged 25 per cent in two weeks to more than 12.5m, it said.

A lot of office refugees have turned to video chat site Zoom, whose shares have doubled this year, making it the best performing among companies worth more than $1bn. The runner-up is Teladoc Health, which provides online medical consultations, useful when doctors’ surgeries are closed and hospitals are full of coronavirus patients.

Facebook and Alphabet are benefiting from higher traffic but bracing for a drop in advertising revenues. Amazon has had a sharp increase in demand but even its vast logistics network cannot wholly handle the growth: it started restricting shipments to its warehouses of anything apart from medical supplies and household staples.

Column chart of Millions showing Slack benefits from sudden surge in home working

For another batch of companies, uncertainty reigns. The private “unicorns” backed by SoftBank, such as property group WeWork, cannot keep burning cash forever in this environment. SoftBank itself is looking shaky. Moody’s has cut is credit rating, prompting the Japanese group to complain about its “biased and mistaken views”. Meanwhile, the FT revealed that SoftBank has held talks about going private with Elliott Management and Abu Dhabi sovereign wealth fund Mubadala.

Media and entertainment

It is good timing for Disney to launch its streaming service in Europe when children are stuck at home © Bloomberg

Cinemas, casinos and sports stadiums are shut. But for media companies specialising in home entertainment there has never been such a captive audience.

Capitalising on it is not easy though. If you are cable company whose main selling point is live sport: tough luck. Same problem, if you are heavily reliant on advertising. As the crisis rolls on and TV production is disrupted, it will even be hard to attract viewers with new series.

Column chart of Operating income ($bn) showing Disney's earnings by business unit

Many big media groups are making hay in one part of their business while struggling in others. It is good timing for Disney to launch its streaming service in Europe when children are stuck at home, but that does not outweigh the closure of theme parks and movie studios.

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Industrials

Cars are not selling, or even being driven © AFP via Getty Images

It was quite an act of bravado. With markets already diving because of worries about the spread of coronavirus, private equity firms Advent and Cinven signed one of Europe’s biggest ever buyouts, the €17.2bn acquisition of Thyssenkrupp’s lifts business.

They seem to think the ups and downs are manageable.

Top 10 European leveraged buyouts

The automotive industry has suspended production across much of the world and is trying to preserve cash. Cars are not selling, or even being driven. Ford has tapped a $15.4bn credit line, General Motors’ executives are taking pay cuts and Volkswagen has called on the European Central Bank to buy its short-term debt.

Banks

© AP

Lenders’ share prices have been hammered. The yield curve has spent most of the quarter flat or negative, providing them with little prospect of net interest income.

But they are in a better position now than they were in the financial crisis and those in the top tier give off an air of insouciance. Perhaps it is all an act but it is done with panache. A particularly gilded age moment was Goldman Sachs interrupting the pandemic programming to announce a big pay rise for chief executive David Solomon.

Bar chart of Common equity tier one ratio (%) showing Banks are in a better position now than they were in the financial crisis

Market volatility means trading revenues are expected to be up about 20 to 30 per cent. There are exceptions: ABN Amro managed to lose $200m when a client went bust. And while it is true that banks, especially in the US, have strong balance sheets relative to the 2008 crisis, they cannot endure a depression. Governments, though, are using them to pipe cash to consumers. They will not be allowed to fail.

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