eResearch | As the pandemic keeps people in isolation for an extended period of time, industries associated with “crowds” are the most impacted and expected to recover the slowest – any industry that is linked to hot-spots for contagions, such as airports, stadiums, and casinos.
According to S&P Global’s Probability of Default Market Signals (“PDMS”) credit analytics model, the top three industries currently impacted the most by the pandemic, with the highest possibilities of default, are Airlines, Casinos & Gaming, and Leisure Facilities.
CHART 1 – TOP 3 Industries with Highest Potential for Default
Once shelter-in-place orders end, even if a vaccine is developed for the COVID-19 virus, this crisis set a strong precedent for the risks inherent to businesses that congregate large numbers of people from more than one continent.
See below for additional details on the effects of the pandemic on the Airline, Casino and Gaming, and Leisure Facilities industries.
Airlines
The travel and hospitality industry was hit the hardest when the World Health Organization declared the COVID-19 virus a pandemic, which led to countries around the world closing their borders.
Airlines for America, a trade association in the U.S., reported passenger traffic down more than 90%, which has forced the U.S. government to bail out airline companies with a US$25 billion fund.
In Q1/2020, Delta Air Lines, Inc. (NYSE: DAL) and Southwest Airlines Co. (NYSE: LUV), two major airlines in the U.S., reported net losses of US$2.2 billion and US$94 million, respectively.
Air Canada (TSX: AC), the largest airline in Canada, with a history of 27 consecutive quarters of revenue growth, reported in Q1/2020, a 16% decrease in revenue to C$3.6 billion and a 441% decrease in net income to a loss of C$1 billion.
In an internal email disclosed on May 15, it was reported that Air Canada would reduce its workforce by 60% and affect over 20,000 employees as the company is only flying at 5% capacity.
David Calhoun, CEO of Boeing co. (NYSE: BA), said in an interview that he believes a major airline will go out of business this year, and that the industry will take up to five years to recover to post-COVID-19 levels.
Amid concerns for the airline industry , General Electric Corp. (NYSE: GE) saw its stock price drop to 29-year low levels due to its GE Aviation subsidiary. GE Aviation is one of the largest makers of jet engines.
According to projections made by the International Air Transport Association, air traffic is expected to decrease by 33% to 40% next year, with previous forecasts for the global air travel industry to lag for an additional five years.
Last week, in an article “Market Pundits Speak – Warren Buffett, Leon Black, Bill Ackman, Tony DeSpirito and David Rosenberg”, we reported that Warren Buffett sold all of the airline stocks in his portfolio so that action also put some negative pressure on the sector.
Casino & Gaming
The casino industry, which relies on airline travel & tourists, was negatively affected by the lockdowns as casinos attract crowds in close proximity.
Caesars Entertainment Corporation (NASDAQ: CZR), the fourth largest gaming company in the world, was forced to close its casinos worldwide, resulting in the furloughing of 90% of its employees in North America.
In Q1/2020, Caesars’ reported a 14% decrease in casino revenue to US$1.8 billion and a 128% decrease in net income to a loss of US$66 million.
As the revenue and bottom line of casino companies get significantly impacted, Boyd Gaming Corp. (NYSE: BYD), an American gaming and hospitality company, raised US$500 million in a private placement to strengthen its balance sheet.
Unfortunately, the capital raise was poorly received by the markets as Boyd Gaming currently has US$4.4 billion in liabilities with only US$831 million in cash.
PlayAGS Inc. (NYSE: AGS), a designer and developer of casino game products, experienced significant disruptions to sales due to the closing of casinos, impacting lease revenues from its electronic gaming machines.
In Q1/2020, PlayAGS reported a year-over-year decrease of 26% in revenue to US$54 million and a swing from near breakeven to a net income loss of US$23 million.
Leisure Facilities
Live events for sports, music, and other entertainment have all been postponed or cancelled due to social distancing guidelines, and planning of any future events is currently not possible.
Live Nation (NYSE: LYV), the ticketing conglomerate which includes Ticketmaster, is already trying to figure out ways to adapt as it reported testing of live-streamed shows without crowds and drive-in concerts.
The new initiative’s announcements came after Live Nation reported in Q1/2020, a 21% decrease in revenue to US$1.4 billion from the same quarter last year. However, among the consumers who were offered refunds for cancelled concerts, more than 90% reported holding on to the tickets for rescheduled dates in the future. Live Nation currently has over US$2 billion in deferred revenue related to events.
As the closing of stadiums cease ticket and concession sales for most sports seasons, Maple Leaf Sports & Entertainment, owners of the Toronto Maple Leafs and the Toronto Raptors, announced a 50% pay reduction for executives.
Smaller organizations such as the Canadian Football League (“CFL”) were forced to request federal government support for funding of between C$30 million and C$150 million to stay afloat since its 2020 season stopped due to the pandemic.
The longer it takes to develop a vaccine for COVID19, the longer it will take for industries that serve crowds of consumers to go back to normal. As it is still uncertain when revenues for these industries will return to pre-COVID levels, there is concerns for the survivability of some companies.
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