The Coronavirus And The (Uneven) Ripple Effect Across Verticals

Not all black swan events are created equally, at least when it comes to certain business verticals.

Amid the plunging stock markets, and speculation about whether and when central banks might cut rates (or not), the blanket statement that the spreading coronavirus will crimp economic growth covers a few wrinkles.

Namely, that some verticals may recover more quickly than others.

We already know that Apple is feeling the pinch of supply chain disruption, and has reduced its forecasts for the March quarter. Alibaba has called the epidemic a “black swan event” and Amazon has been stockpiling goods.

Anecdotes add up to trendlines, of course, and it’s worth looking at a few broader statements from, say, industry alliances, that give a broader view on what might happen. To get a sense of the ripple effect: Consider the fact that the International Air Transport Association (IATA) has said that as a group, global airlines could see lost revenue to the tune of $29 billion. A big driver of that loss will come from the 13 percent decline in air travel demand for Asian air carriers, which in turn helps cut global air traffic by 4.7 percent this year.

This is the first decline in a decade, the first since the financial crisis.

According to IATA, there’s a sharp recovery in the cards, which has been likened to a “V shape.” The impact to those companies is immediate; when seats are empty on flights: The same cost structure must be spread out over fewer revenue producing seats. Air traffic control costs, we note, don’t go away.

But.

We note that the V-shape rebound in air travel may not do much to lift a few sectors that are dependent, in turn on air travel. Anything less than a V shaped recovery would be, to put it mildly, a drag on results for the sector — which in turn might breed a vicious cycle: Cheaper flights to spur travel, but, again, onerous costs (even with cheaper fuel inputs).

Tourism is of course connected with flights, and hotels are connected with tourism … and retailers, particularly high-end retailers, are connected with both.

Due to the coronavirus, Hilton Hotels last week shuttered 150 locations in China, representing about 30,000 rooms and about 2.5 percent of the total properties worldwide, as Forbes reported. That’s not a huge hit, at least in terms of headline numbers. Even assuming a total loss of 2.5 percent of top line from China (which would hit EBITDA by the same amount), there are steps Hilton Hotels could take to, say, raise prices a bit at relatively “unscathed” properties in other countries. The impact is recoverable, in other words, even as individual rooms or guest stays per unit are not recoverable.

Retailers to Feel the Pinch

The luxury retail sector is likely the vertical that will not see a V-shaped recovery, a shaking off of the impact of the virus. Jefferies, a Wall Street investment bank, has estimated that Chinese consumers were responsible for roughly 40 percent of the $300 billion plus spent of luxury goods across the globe last year, and were responsible for roughly 80 percent of the sales growth.

The New York Times has noted that Burberry gets about 40 percent of its sales from Chinese consumers. Assume that gets cut in half, and that means, of course that a net 20 percent in sales gets shaved — and like other sectors, the operating costs are a bit tough to trim back in tandem with lack of demand. That’s because inventory still lingers on shelves, stores and their operating costs (such as keeping the lights on, the heat on, the insurance in place) still must be paid.

It’s too soon to tell if the coronavirus impacts will prove to be short lived, or give rise to a “new normal” of caution, of closed wallets, empty airports and empty rooms — and the black swan may just be taking flight.