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Coronavirus Business Challenges

Posted on March 18, 2020 in , by Jamie Leggett

The novel coronavirus (COVID-19) has begun its disruption of the United States and the world.  Scientific knowledge and public responses are changing day by day. Still, the fallout is already beginning to appear: a recent NPR/PBS NewsHour/Marist poll says that 18% of Americans report being let go or having their hours reduced.  A quick review of the news shows travel bans, mass quarantines, countrywide school closures (with about half of U.S. students at home), innumerable event cancellations, and the cessation of most social life in certain countries.  Social distancing and other withdrawals from communal activity may be necessary to slow down the virus’ spread so that medical systems can keep up, but it is having a massive economic impact across the country.  Here is a brief overview of some of the industry issues coming to light as of March 17, 2020:

  • Airlines.  Airlines around the world are facing what has been called a crisis worse than 9/11, with steep drops in revenues and bookings.  Various major U.S. carriers have cut capacity by as much as 50%, with American cutting many flights from its Miami hub.  They also have instituted hiring and training freezes, including Orlando-based JetBlue.  Norwegian has even made a “temporary layoff” of half of its employees.  The airline industry association has asked the U.S. government for more than $50 billion in aid.
  •  Restaurants/Bars.  Many people were already practicing social distancing by staying home as opposed to dining out. Still, more recently, several states and localities have directed the full or partial closure of bars and restaurants.  Florida has directed restaurants and bars to operate at 50% capacity while Miami-Dade and Fort Lauderdale have closed them except for takeout and delivery.  While necessary, these acts are acutely and immediately felt by the service workers as well as “mom and pop” operators.  Even for those restaurants located where operating is still permissible, many have spaced out their seating and lowered capacity to address public concerns.
  • Tourism/Events/Hotels.  The U.S. government has advised against gatherings of over ten people and discretionary travel, and various state and local governments have gone further to issue bans.  The hotel industry has sought a $150 billion bailout, with many hotels reportedly deciding whether to close and lay off staff in the next few days.  Innumerable conferences and events have been canceled or postponed, including ones anticipated to bring substantial revenues to South Florida like Ultra, the Miami Open, and – midway through – spring break.  Likewise, these directives have led to the closure of the theme parks across Florida, including Disney, Universal, Six Flags, Busch Gardens, and Sea World.  Tourism-dependent local economies, such as South Florida, will also be seriously impacted by the economic effects occurring at the beginning of the travel-heavy spring break season, which many restaurants, hotels, tours, and other seasonal operators depend on to round out their tourist season before heading into the warm weather, off-season months.
  • Cruise Lines.  At President Trump’s request, major cruise line operators Carnival, Royal Caribbean, Norwegian, and MSC – all of which have South Florida headquarters – agreed to cease all outbound sailings for a 30-day period.  Even before this moratorium, the cruise lines had lost at least $750 million according to company financial reports.  Also, those South Florida cruise lines have been forced to lay off hundreds of employees.  Before the crisis, the cruise lines had a solid financial position, but commentators expect that the industry will have a slow comeback.
  • Real Estate/Real Estate Development.  As of yet, the coronavirus has had a mixed impact on real estate and development.  On the one hand, mortgage interest rates have been driven to record lows, and real estate projects may have multi-year time horizons.  On the other hand, contractors are concerned about Chinese supply disruptions, and buyers/sellers may be concerned about travel and the safety of house showings.  A recent survey of homebuilders (taken half before March 3rd and half after) reflected decreasing sentiment for sale expectations and conditions, with the post-March 3rd data indicating that this is an emerging issue.  Anecdotally, various South Florida real estate players are reporting that many buyers have decided to “hit pause” on their property searches as have developers for their future plans.
  • Shale Oil.  The price of oil has dropped substantially because of the concurrent shocks of the novel coronavirus, Saudi Arabia’s decision to pump more oil as leverage against Russia, and the reduction in travel.  U.S. shale oil producers were already facing economic difficulties, given their higher costs than traditional oil producers.  The current oil market will force them to reconsider their options, particularly as their bonds are currently trading near junk levels.
  •  Chinese Supply Chains.  China is a key supplier of finished goods and parts, and experts estimate shifting to non-Chinese suppliers (if it can be done) takes about 2-6 months.  China halted much of its economic activity to stop the viral spread, resulting in its trucking capacity going down two-thirds, exports falling nearly 30%, and foreign plants reliant on Chinese component parts idling or flying in those parts from elsewhere.  China is now attempting to restart production, but these existing effects will have to percolate through supply chains.

Given the rapidly changing circumstances of this global pandemic, this list is preliminary but represents a set of issues that will likely present economic challenges and new business risks in the near term and beyond.

With attorneys collectively representing nearly a century of experience in insolvency matters, Bast Amron provides sound, well-reasoned, and time-tested advice to those businesses affected by, or facing, financial distress. We remain ready to help guide the business leaders of our community through these challenging times.  Please do not hesitate to contact us before making the critical decisions that may impact the future of your business.