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COVID-19 Business Impact Update COVID-19 Business Impact Update

COVID-19 Business Impact Update

An overview of industries most affected by the novel coronavirus and strategies for businesses to weather the storm.
Three months ago, news of a novel coronavirus afflicting people in China seemed distant at best to most Americans. But now it is a global crisis and quite possibly the single biggest threat to the lives and livelihoods of the people of the United States since the 1918 flu pandemic. Governments have taken drastic steps to slow the virus’s spread and keep health care systems from being overwhelmed. And in some places, it seems to be working. In response to the outbreak, China instituted some of the strictest measures in the world and recently reported its first day of no new infections since the outbreak began. But, at what cost?

There appears to be a fundamental tension in this crisis between public health and the economy. The health and well-being of people around the world must be our number one priority. Unfortunately, the same measures that are currently most effective at reducing the spread of the virus—federal restrictions on travel; orders by state and local governments to shut down shops, restaurants, and bars; and mandates to avoid social contact and shelter in place—have started to ravage the economies of countries around the world. Until the virus is eradicated or an effective vaccine or treatment is available, these measures could become the new normal.

Analysts now believe nearly every sector of the U.S. economy will be negatively impacted by the novel coronavirus. The following industries are broadly anticipated to be some of the hardest hit:

Air Travel
Travel bans issued by countries around the world have wrought havoc on the aviation industry. On February 20, the International Air Transportation Association (IATA) estimated that the airline industry could suffer roughly $30 billion in lost revenue due to the coronavirus outbreak.  By March 5, that estimate increased to approximately $113 billion. By comparison, the IATA previously estimated that the 2002 to 2003 SARS epidemic cost global airlines only $7 billion. Due to the drastic decrease in demand the outbreak has caused, industry analyst CAPA – Centre for Aviation now predicts that many of the world’s airlines will be bankrupt by May.
With people no longer travelling, America’s hotels are seeing an unprecedented decline in occupancy, and cancellations are beginning to outpace reservations. As of March 17, the American Hotel & Lodging Association estimated that four million jobs had already been or would likely be eliminated within the next few weeks. For perspective, an Oxford study estimates the hotel industry touches 1 in every 25 American jobs. A 30% decline in hotel guest occupancy could result in the loss of $180 billion of wages and a $300 billion hit to GDP. Marriott International Inc., the world’s largest hotel company, said it is already starting to furlough thousands of employees. That company alone employs 130,000 people in the United States.

The restaurant industry is likewise facing enormous headwinds. People not staying in hotels and not travelling would alone be enough to cause financial distress to the notoriously low-margin industry. Many cities, however, have completely closed restaurants and bars or have restricted them to carry-out and delivery only. And to make matters worse, California, New York, and Illinois, home to our country’s three largest cities, and now even Ohio and Indiana, have all issued “stay at home” or “shelter in place” orders. The restaurant industry employs approximately 15.6 million workers, and the National Restaurant Association projects a $225 billion decline in sales over the next three months, which translates to five to seven million lost jobs.
Manufacturing/Supply Chain
Manufacturing is bracing for a large scale shift due to the coronavirus. In a recent survey, 78% of respondents indicated that the outbreak would likely have a financial impact on their businesses, 53% anticipated a change in their operations in the coming months, and 35% had already seen an impact. But even before the coronavirus came to the United States, American companies were feeling its effects. Approximately 51,000 companies globally have tier one suppliers located in China. The pharmaceutical supply chain alone is extremely dependent on China, which is home to 15% of the world’s active pharmaceutical ingredient manufacturers. Any impact on China necessarily affects American businesses.
With the coronavirus now in the United States, domestic manufacturers have had to face the challenges that come from meshing social distancing with large and often specialized labor forces. While many factories are trying their best to keep operating despite the virus, others have temporarily closed their doors. The effects of such shutdowns will no doubt ripple through these companies’ various supply chains and the economy as a whole.

The automotive industry includes more than 10 million workers and is a critical part of the nation’s manufacturing sector. China, in turn, is the world’s largest suppliers of auto parts, with exports totaling more than $34 billion in 2018. In fact, Wuhan, the origin of the coronavirus outbreak, is often referred to as “China’s Motor City.” Shortages of supplies from China have stalled production around the world, and companies throughout the auto supply chain are suffering due to their reliance on China for auto parts. The coronavirus caused car sales to drop 92% in February, and March sales are forecasted to drop 41% year over year. Automakers, including General Motors, Fiat Chrysler, Ford, Toyota, Honda, and Nissan, have shut their North American manufacturing plants as both demand for vehicles weakens and workers are being told to stay home. The coronavirus has already done significant damage to a large portion of the automobile supply chain. Government intervention—on federal, state, and local levels—will undoubtedly be necessary to help the industry survive.

Movie Theaters
With people hesitant to or prohibited from gathering in large groups, America’s movie theaters have never been emptier. According to the National Association of Theatre Owners, the movie theatre industry employs more than 150,000 workers nationwide. In light of this decreased attendance, some motion picture studios have announced plans to make movies available to stream earlier than scheduled or, in some cases, the same day they are released in theaters. These types of fundamental changes in content delivery could have lasting effects long after the coronavirus pandemic has subsided.

Given the rise of online shopping in recent years, the retail industry is no stranger to economic pressures. With its heavy reliance on manufacturing and global supply chains, retail has already seen extreme pressure from the coronavirus outbreak. The growing number of coronavirus cases in the United States, though, presents new challenges for brick and mortar. According to a letter from the National Retail Federation, the retail industry is the nation’s largest private-sector employer, supporting one in four jobs and employing approximately 52 million people. As a result of people being told to stay away from public places, many stores have already responded by closing up shop and sending workers home. A prolonged crisis will no doubt have a profound effect on retail businesses and their landlords in the short and medium term. As one pundit predicts, this might further accelerate the “Amazonification” of the global economy.

Fitness Centers and Gyms
According to a letter from the International Health, Racquet & Sportsclub Association, there are nearly 40,000 health and fitness centers in the United States. Apart from contributing to the health and wellbeing of people across the country, these businesses generate more than $32 billion in annual revenue and employ 425,000 workers. In response to government mitigation efforts, many gyms and fitness centers have been forced to close. For an industry that has long faced backlash over the spread of germs, surviving the coronavirus outbreak could be an uphill climb.

Know that if your business is facing challenges, you have options. The approaches worth considering will ultimately depend upon each business’s particular circumstances, as well as federal, state, and local laws. The following are some examples of strategies that businesses impacted by the coronavirus may be able to utilize:
  • In the face of state orders to “shelter in place” and alter or suspend operations, it is important for businesses to understand the parameters of such orders and determine whether there is any ability to be deemed “essential” or otherwise continue to partially operate.
  • For those businesses that are experiencing liquidity issues, emergency loans or grants are being made available through the federal government, and the administration is currently in the process of rolling out more than $1 trillion in financial relief
  • For businesses that are at risk of defaulting on obligations to creditors or business partners, consideration should be given to immediately contacting contract counterparties to inform them of and to discuss the situation. Some options to consider include:
    • A forbearance agreement (an agreement where a business and its lender agree to delay, reduce or suspend payments on a loan, or collection and enforcement of other remedies);
    • An accommodation agreement (an agreement where a company helps to keep an essential supplier from failing); or
    • A workout (an arrangement between a debtor and a creditor to voluntarily restructure their obligations, which can involve a number of different approaches, including but not limited to restructuring loans, giving equity interests to creditors, etc.).
  • Businesses with insurance in place should determine whether any policies provide coverage for business interruption, trade disruption, or civil authority coverage.
  • Businesses should carefully examine their existing contracts for “force majeure” or similar provisions that might temporarily or permanently excuse performance.
While many businesses can benefit from the strategies above, many will not. In those cases, a formal court-supervised restructuring or liquidation, such as a bankruptcy or receivership, could be the most advantageous and responsible approach.
Ice Miller’s Bankruptcy, Restructuring, and Creditors’ Rights Group represents clients in a broad array of industries and can help evaluate what options might be available.  If you have customers or suppliers in distress or need advice on how to deal with your business’s own financial difficulties, the attorneys at Ice Miller can be a resource for you.

This publication is intended for general informational purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstance.

Chelsea Abramowitz is a law clerk in Ice Miller’s business group (admission to the New York state bar pending). Chelsea earned her juris doctor from Fordham University School of Law and has a degree in public health from Tulane University.

John Cannizzaro is of counsel in Ice Miller’s Bankruptcy, Restructuring, and Creditors’ Rights Group, where he helps clients who aren't getting paid or who find themselves in financial distress to solve problems. He focuses primarily on debtor/creditor issues, commercial and bankruptcy litigation, and insolvency matters. John also advises clients on UCC issues, loans and workouts, and other financial transactions.

Tyson Crist is a partner in Ice Miller’s Bankruptcy, Restructuring, and Creditors’ Rights Group. He has a broad base of experience in bankruptcy, receivership and debtor-creditor matters, which have been the focus of his 20‑year legal career. He represents both private and public clients, creditors, creditors’ committees, trustees and debtors to navigate the complexities of these areas, in both an advisory role and in litigation.
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