How Will Covid-19 Reshape the Economy? No One Knows
Covid-19 crisis will greatly reshape the world’s economy in ways no one yet
knows. But it’s already moving financial markets in profound ways. Stock prices
are way down. So are prices for commodities, including oil. Interest rates are
falling again too. Even traditional safe-haven assets like U.S. government
bonds and gold are seeing price declines as people everywhere sell, sell, sell
for cash, cash, cash. On the other hand, the value of the U.S. dollar — already
elevated pre-crisis — is surging to new highs.
For most airlines outside of the U.S., that’s just as troubling as the oil price decline is comforting. In countries with heavy dependence on oil exports by the way, the depreciation has been enormous, chief among them Norway and Russia. Latin American currencies too, have experienced extreme declines since the start of the crisis. So has another familiar source of currency distress: Turkey.
markets, pretty strong in most major economies, pre-crisis, at least measured
in unemployment terms, are now poised to shatter as companies lose much of
their revenue. The Economist provides interesting data on the U.S.
economy and its ability to withstand extended periods of frozen revenues.
The country’s 500 largest non-bank firms, as captured by the S&P 500 index, had aggregate operating costs of $2.6t last year. And they held $1.7t in cash, which implies about seven months of cost coverage before running dry. Be careful though, The Economist warns. Some companies like Apple had six years of cost coverage. Some wouldn’t last a week.
Where do U.S. airlines fit on this spectrum? See our coverage above but let’s here take a look at Southwest, known for its ironclad balance sheet. At the end of 2019, it held $4.1b in cash and other liquid assets. Its operating costs for the year were $19.5b. So that’s less than three months of coverage. Of course, this assumes zero revenues which is not quite the case for Southwest. It also ignores new sums of cash the airline is now raising, and other sources of cash it could tap if necessary. But you can see the gravity of the situation all the same.
big area to watch going forward is sovereign, or government, debt. After the
global financial crisis, many governments reacted by shifting debt from the
private sector (both businesses and households) to their own balance sheets. By
2020, the U.S., Europe, China, and Japan, the world’s largest economies, all
had giant levels of debt.
Now they’re about to add a whole lot more as they rescue the economy from Covid-19. The U.S. is better positioned to borrow than most because the rest of the world wants its currency to hold as reserves. So even with $23t in debt, the U.S. can keep on borrowing at extremely low interest rates.
For countries like Argentina or Greece, lending from abroad can dry up quickly. Japan actually has the highest debt of any country in the world, relative to its total economic production (GDP). But it borrows much of it from its own citizens, mitigating risk. Italy, which spends more public money on retirement pensions than education, has an enormous debt-to-GDP ratio too. And that won’t improve as it re-nationalizes Alitalia.
matter how economically distressed a situation gets, there are always some
winners. And not just companies that make toilet paper. Airlines, perhaps the
biggest losers in the current crisis, have their eyes on companies that produce
videoconferencing. With everyone working from home now, times for these firms
are flush (pardon the pun).
But will companies continue to rely more on videoconferencing after the crisis? After seemingly every downturn, people wonder the same thing: Will companies use video to save money on air travel? The answer is usually no, or at least not in any way that structurally reduces demand for air travel (some once thought email would spell the end of business travel). Videoconferencing technology keeps getting better though, and workers will have lots of time to get more comfortable with it while stuck at home in the coming weeks and months.
Neeleman Outlines Customer-Service Ideas
- On Feb 24, just before U.S. airlines understood
the enormity of the crisis on their doorstep, David Neeleman delivered a speech
to a technology sector conference in Utah. He spoke about his new airline Breeze,
which will try to emulate the customer service practices of companies like
Amazon, Lyft, and Airbnb.
By that he means shielding customers from having to interact with people when booking their flights or managing anything else they might need. He plans to create a super app that can handle just about any request. He complimented Delta’s app, which has a lot of functionality. But Breeze will strive to do even better. In fact, Neeleman says it will be a “technology company that happens to fly airplanes.”
Of course, everything is now thrown into doubt. But the intention was to fly two types of planes, each operating with distinct business models. Breeze’s 122-seat E195s would fly between cities with no competition — Neeleman mentioned smaller places in the midwest connecting to places in the south. Interestingly, he wants to combine air travel with real estate, imagining a person who buys a home in another city for the purpose of operating an Airbnb-type business, renting to vacationers. Breeze would presumably provide a platform for doing that and offer free flights to those who use the platform for buying, selling, and renting homes.
And the other business model? That’s less exotic, involving A220s with a range of 4,000 miles. It’s currently looking at more than 150 airports. Neeleman hasn’t subsequently said how the current crisis will delay his U.S. planes. But he did appear on Fox Business last week, expressing optimism that the pandemic might not be as bad as feared, based on new scientific data he’s seen.
TransStates Ends Flying
- The end is coming sooner than expected for St. Louis-based TransStates, a U.S. regional carrier that planned on shutting down after helping United get through the peak summer season. Now that summer demand appears all but wiped out, the company will instead close on April 1. What’s more, TransStates is now closing its Minneapolis-based Compass unit too — it flies for Delta. Another regional affiliate, GoJet, continues to fly for United.