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Coronavirus and its damage to the health of businesses

21 February 2020. Published by Chloe Scott, Trainee Solicitor

Coronavirus (nCoV) has dominated the headlines since the first case was confirmed on 19 January 2020. The virus has spread to every region in mainland China. Cases have also been reported in Australia, France, the US, the UK and Japan, among other countries. As the death toll continues to rise and scientists work under pressure to create a vaccine, it is evident that the world is facing a health crisis. But what about the impact it is having on business?

Coronavirus is spread through coughing, sneezing or touching an infected person. Consequently, the World Health Organisation has stated that the "immediate isolation of patients with suspected nCoV infection[1]" is necessary. As the virus is infectious even when the host has no symptoms, it is vital that travel restrictions are put in place to reduce the risk of the virus spreading to new areas.  

 

The effect of this is devastating for airlines. British Airways, Cathay Pacific Airways, and Lufthansa were among the first airlines to cancel flights to mainland China. Even for the airlines that are still running flights to the country, there is a significant drop in demand as governments warn against travelling to China. It is also likely that we will also see a general decrease in demand for international travel as fears rise. The uncertainty in the market is reflected in changes in share prices. IAG, the parent company of British Airways, suffered from a share price drop of over 10% in late-January and Air France-KLM experienced a 6% drop. The International Air Transport Association hopes that the airline industry can bounce back, stating that "[e]ven in the outbreak of SARS, monthly international passenger traffic returned to its pre-crisis level within nine months[2]". However, for the airlines' financials, nine months is still a considerable length of time and the impacts could last for longer.

 

It is just not airlines who are suffering from the decrease in travel. Hotels and the retail market are also severely affected. The Chinese Lunar New Year is normally the largest annual migration of people globally, but as cities have been put in lockdown, many people have had to cancel their planned holidays. Trip.com, which is China's largest travel agency, has been offering free cancellations on hotels, car rental and tourist tickets. Not only has this seen its profits dip, its share price has dropped by 18%. Chinese tourists offer a vast boost to retail figures in countries across the world. The luxury goods sector may particularly suffer from the drop in Chinese migration. The director of Bain's luxury practice has stated that "not only will Chinese people buy less domestically during the key New Year shopping season, they will also have to cancel trips abroad, during which they often buy luxury goods[3]”. It is no surprise that there is real worry in the market, as Chinese buyers accounted for 90% of growth in the luxury goods sector in 2018 and are responsible for over one third of the value of luxury good purchases.

 

Companies with bases in China have had to take precautionary measures to reduce the risk of the coronavirus spreading, but these are steps which are damaging for business. Starbucks have closed over half of its 4,300 cafes in China, Disneyland has closed its theme parks in Shanghai and Hong Kong, and Apple has closed stores and restricted travel for its staff. The Chinese market accounted for 16% ($43.6bn) of Apple's revenue last year, and so the negative effects of a lockdown and reduced demand are likely to be seen. 

 

For companies like Apple, China's position as the biggest manufacturer and trader has severe consequences for business as new supply lines may need to be sourced. This is of real concern in the car market, with manufacturers such as Honda, Nissan and Renault all having large plants in Wuhan, as well as being reliant on parts produced across China.  

 

The true impact of coronavirus on the world's businesses is yet to be fully seen, but with China being responsible for one sixth of global economic output and its people being some of the biggest consumers, the world's reliance on China will be tested.



[1] 'Infection prevention and control during health care when novel coronavirus (nCov) infection is suspected' World Health Organization, Interim Guidance, 25 January 2020