Circuit Breaker of Hearts: UK Hospitality and Travel Shares Tumble After Hints of Second Lockdown
October 3, 2020
3 min read
What's going on here?
Prime Minister Boris Johnson is considering a two-week mini-lockdown – described as a “circuit breaker” – to curb surging UK infection rates. The news has caused shares in UK airlines, hotel groups and pubs chains to crash.
What does this mean?
Discussions are underway within the government about how best to tackle the sharp rise in coronavirus cases, which have been doubling every seven to eight days. The government has said that the short-term restrictions would not amount to a second national lockdown – which Mr Johnson calls a “nuclear option”. But the restrictions would mark a dramatic escalation of the government’s fight against the virus.
Jitters of a second wave of infections drove an eye-watering £52bn loss in value for the FTSE 100 on Monday 21 September 2020. The FTSE 100 (London’s leading share index) plunged by 3.4% or 203 points as part of a global sell-off that extended to European and US stocks. British Airways owner IAG was the biggest loser, down by 12%, while easyJet fell by 9% and the aircraft engine maker Rolls-Royce lost 5%. Among the other victims was pub and restaurant owner Mitchells & Butlers, which dropped by 15%.
The steep drop in share prices is expected to be sustained in the long-term as the rate of infection continues to rise. As a share price broadly reflects a company’s overall financial health, lower share prices will make it harder for companies to raise much-needed capital (either through issuing shares or securing loans). It will also leave them vulnerable to hostile takeovers.
What's the big picture effect?
The worry is that though these measures are unlikely to be as severe as lockdowns in March, they will nonetheless harm economic activity and could stifle the UK’s post-lockdown recovery. According to JP Morgan Chase, a two-week shutdown of the UK hospitality sector could knock off at least 2% of the country’s gross domestic product (GDP). After all, the current recovery has been largely driven by a pick up in consumer spending. By introducing new restrictions, the government risks sapping consumer confidence at a delicate time – and there’s no guarantee it will recover once the restrictions are lifted. Consequently, it is companies that rely on people being out and about that will suffer the most. In their current position, the hospitality and travel sectors can’t take more pain – both are on a knife-edge. The outlook for both sectors is, therefore, dark but companies that can innovate and rethink their business models are the most likely to survive the introduction of new restrictions (see our article on that here).
A mini lockdown could significantly increase both the unemployment and bankruptcy rates in the UK. Therefore, if restrictions are introduced, they would need to be formulated carefully. The British Beer and Pubs Association is calling for an extension of the furlough scheme for hospitality firms as well as a VAT cut to help safeguard the interests of the sector.
Law firms will be needed to advise struggling businesses on the rules of the furlough scheme and how to mitigate compensation packages to redundant workers. Restructuring & Insolvency teams will continue to see a boost in work helping hospitality firms renegotiate loan agreements. M&A teams will also benefit from the desire of businesses to sell assets to improve liquidity. Litigation practices may also see a spike in work if businesses decide to challenge government restrictions as UK airlines did in connection to the 14-day quarantine rules (see our article on that here).
Overall, the government is a tight spot. It has to balance the longer-term economic impact of more restrictions against the public’s safety. We’ll have to wait and see where its priorities lie.
Report written by Deniyi Coker
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