5/28/2020                                                Container lines learning from crises past: CEOs



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Home > Container lines learning from crises past: CEOs
Greg Knowler, Senior Europe Editor | May 21, 2020 12:41PM EDT










An orderbook that is just 10 percent of the global fleet has left carriers in a better position to handle
the weak demand brought on by the coronavirus. Photo credit: Shutterstock.com.
Container shipping line executives say they're confident the industry will be able to withstand a
double-digit volume decrease this year brought on by demand-limiting measures introduced around
the world to tackle the coronavirus disease 2019 (COVID-19).
The heads of CMA CGM, Hapag-Lloyd, and Maersk Line believe the small industry order book is
suited to a low-growth environment, and their ability to quickly match capacity with demand and
avoid price wars has left the industry in a better position to shrug off the volume declines of the
second quarter and build on recovering demand through the rest of the year.
Rodolphe Saad, CEO of CMA CGM, said in an interview with JOC Uncharted this week the
industry has learned the harsh lessons of the 2008-09 global financial crisis, when carriers had
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5/28/2020                                                Container lines learning from crises past: CEOs
huge amounts of capacity in service and on order, but limited volume to fill the ships. That
overcapacity persisted through the industry downturn of 2011 and the unprecedented wave of
carrier consolidation that culminated with the collapse of Hanjin Shipping in 2016.
"We learned the hard way," Saad told JOC Uncharted. "This year as an industry we have decided
to take a different look at the situation and reduce capacity to match supply and demand. CMA
CGM has seen a drop of 10 percent in our volume up to now, and we expect some catching up to
happen in the third and fourth quarter. But there is no point in offering too much capacity when you
have no cargo to carry."
When the global financial crisis began in 2008, the orderbook stood at 1.16 million TEU, or close to
60 percent of the existing fleet. While few vessels were ordered in 2009 as demand plunged, the
deliveries kept carriers oversupplied for the next two years. When demand fell in 2011, the
orderbook had risen to 1.8 million TEU, or 25 percent of the existing fleet, and in 2015 the capacity
on order was just short of 3 million TEU, 21.5 percent of the fleet, according to IHS Markit data.
The current order book as of March 2020 was 2.3 million TEU, or about 10 percent of the container
shipping fleet, which Rolf Habben Jansen, CEO of Hapag-Lloyd, said has left the industry better
positioned to handle the weak demand.
"We have very few orders for new ships, and that will remain as no one wants a huge capex [capital
expenditure] program right now," Habben Jansen said during the carrier's first quarter earnings call
last week. "Most liner companies also have stronger balance sheets and much smaller investment
plans than some years ago."
Hapag-Lloyd is expecting a double-digit decline in volume in the second quarter, and Habben
Jansen said the carrier would withdraw additional capacity if necessary.
Low orders, consolidation paying off
Maersk Group CEO Sren Skou said the new ship construction discipline shown by the industry in
recent years would now pay dividends. "The low industry orderbook is geared to a low-growth
scenario, which was not the case in 2008-09 when the orderbook was massive and a lot of carriers
had big blocks of capacity coming to them that they had to fill," he said in the carrier's first-quarter
results announcement.





Click to enlarge
But Skou said there were other changes in the competitive dynamics of the industry that left it better
prepared to handle severe volume disruption, most notably, an avoidance of "brutal price wars."
These have often been an industry response to falling demand and excess capacity, but instead of
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5/28/2020                                                Container lines learning from crises past: CEOs
slashing rates, carriers over the past few months have blanked huge amounts of capacity on the
major east-west trades.
By restricting capacity, carriers have managed to keep spot rates above last year's levels despite
declining demand. Rates on China-North Europe routes were 14 percent higher last week year over
year at $831 per TEU, and China-Mediterranean rates were 25 percent higher at $875 per TEU,
data from the Shanghai Containerized Freight Index (SCFI) show. The SCFI also shows China-US
West Coast rates on May 15 were $1,686 per FEU, 25 percent above the levels during the same
week last year. The only outlier was the China-US East Coast trade, where rates fell 2.1 percent to
$2,542 per FEU, the lowest it has been all year, according to the JOC Shipping & Logistics Pricing
Hub.
"We are not pursuing market share. We plan to grow slightly less than the market and will do what
we can to preserve profitability, and I think a lot of other carriers are doing the same," Skou said in
the earnings call.
But he added that the consolidation of carriers into three alliances has also improved their ability to
respond jointly to shifting market dynamics.
"One of the most important things to understand is that the three large alliances make it much
simpler to adjust capacity in an agile way," Skou said. "The alliances are structured to use the best
ship for the best position. It is not us operating a string and MSC operating another string and then
we swap capacity. We are operating one network, and each pay our own share, so taking a decision
to adjust capacity is very simple and quickly done."
The blank sailings have reached or just passed their apex, depending on the trade, according to
data from Sea-Intelligence Maritime Consulting. By mid-May, the capacity withdrawn on the Asia-
North Europe trade peaked at 25 percent, on Asia-Mediterranean 30 percent, and 15 to 20 percent
on Asia-North America routes.
The canceled sailings, and to a lesser extent scrubber retrofitting, has led to a huge increase in the
number of idle vessels, pulling a record 2.65 million TEU from global trades by mid-May, or 11.3
percent of the total container shipping fleet, Alphaliner noted. The analyst said in its latest
newsletter that the idle ship capacity is likely to rise even further.
With carriers expecting a recovery to begin from the third quarter, some are starting to make the first
slight adjustments to their mid-June networks on certain trades to match uneven demand patterns
as countries and regions emerge from coronavirus lockdowns at different times.
Rahul Kapoor, head of research and analytics, Maritime and Trade, at IHS Markit, parent company
of JOC.com, said carriers have shown that, in addition to curbing new ship orders, they won't
hesitate in slashing capacity by blanking sailings when demand plummets.
"This is a very strong indication [of] how carriers came together and took a very strong measure of
capacity discipline and showed the resolve that they have," Kapoor said earlier this year.
Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.
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Strategy & Corporate Finance Practice
Crushing coronavirus 
uncertainty: The big 
'unlock' for our economies
To safeguard lives and livelihoods, we must restore confidence.









Viaframe/Getty Images
May 2020

This article was a collaborative, global effort by Sven Smit and Martin Hirt, with Penny Dash, Audrey Lucas,
Tom Latkovic, Matt Wilson, Ezra Greenberg, Kevin Buehler, and Klemens Hjartar, representing views from The
McKinsey Global Institute, and Strategy and Corporate Finance, Healthcare Systems and Services, Public
and Social Sector, and Risk practices.
Only eight weeks ago, we published "Safeguarding our lives and our livelihoods: The imperative of our
time." Back then, we worried about the supply of ventilators and critical-care capacity, the world's ability
to suppress the coronavirus, and how governments would respond to the pandemic's economic fallout. So
what has the world learned since?
We now know that we can curb the spread of the virus, can rapidly expand critical care, and are on our way
to scaling the availability of testing. We have seen most governments and central banks rapidly move to
implement stimulus and liquidity measures to cushion the economic impact. Unfortunately, we have also
confirmed that lockdowns cause deep economic shocks: peak to trough, developed economies are likely to
see GDPs decline by between 8 and 13 percent in the second quarter of 2020 (Exhibit 1). By the end of April,
more than 20.5 million jobs have been lost in the United States since the start of the pandemic. Clearly, some
of the initial uncertainty associated with the coronavirus has been reducedbut it remains high.
GES 2020When we asked global executives how long they believe their economies will take to return to precrisis
COVID Crushing Uncertaintylevels, their scenario choices indicated estimates ranging between three quarters and more than five years
Exhibit 1 of 6(Exhibit 2). Similarly, when we polled consumers about when they expect their lives to return to some level of
normality, answers ranged from months to years.


Exhibit 1
What we have learned.
'Timeboxing' the virus and the economic shock                     Reality      In motion      Not close
Imperative 1
Safeguard                        1                                   1   Suppress the virus as fast
lives                                                                      as possible
2  Expand treatment and testing
capacity
2
3         3  Find better treatment, drugs,
Case count                                                                vaccines

Imperative 2
Safeguard
livelihoods                                                             1   Support people and businesses
a ected by lockdowns
GDP                                 3              2  Prepare to get back to work
safely when the virus abates
1
3  Prepare to accelerate a recovery
2                                        from an estimated 8% to 13%
8% to 13%                                                       trough
economic shock


2                     Crushing coronavirus uncertainty: The big 'unlock' for our economies

GES 2020
COVID Crushing Uncertainty
Exhibit 2 of 6


Exhibit 2
Executive uncertainty about the COVID-19 crisis.
GDP impact of COVID-19 spread, public-health response, and economic policies
Better                             Virus contained but
Virus contained;        Virus contained; strong
sector damage; lower
Rapid and e ective                                  growth returns            growth rebound
long-term trend growth
control of virus spread
Strong public-health
response succeeds in
controlling spread in     GDP
each country within
23 months                     Time
B1                    A3                   A4
E ective response,       Virus recurrence; slow      Virus recurrence; slow     Virus recurrence; return
Virus spread
and public-  but (regional) virus     long-term growth insucient     long-term growth;          to trend growth;
health    recurrence              to deliver full recovery      muted world recovery      strong world rebound
response   Initial response
succeeds but is
Eectiveness insucient to prevent
of the     localized recurrences;
public-health  local physical-distancing
response   restrictions are
periodically reintroduced B2                      A1                      A2
Pandemic escalation;      Pandemic escalation;       Pandemic escalation;
Broad failure of           prolonged downturn     slow progression toward    delayed but full economic
public-health          without economic recovery     economic recovery             recovery
interventions
Public-health response
fails to control the
spread of the virus for
an extended period of
time (eg, until vaccines
are available)
Worse                         B3                     B4                    B5
Ine ective            Partially e ective          Highly e ective
interventions             interventions             interventions
Self-reinforcing recession       Policy responses        Strong policy responses
dynamics kick in;       partially oset economic       prevent structural
widespread bankruptcies     damage; banking crisis       damage; recovery to
and credit defaults;         is avoided; recovery       precrisis fundamentals
potential banking crisis          levels muted             and momentum
Worse          Knock-on e ects and economic-policy response          Better
Speed and strength of recovery depend on whether policy moves can mitigate
self-reinforcing recessionary dynamics (eg, corporate defaults, credit crunch)

Most likely scenario, % of respondents
A1               A2        A3        A4        B1          B2   B3   B4   B5
April                 31                6          16         6         15            11     3     9    2

May               36               5        17       4       15          14     2   7  1

100%
Note: Figures may not sum to 100%, because of rounding.
Source: McKinsey survey of global executives, n = 2,079




Crushing coronavirus uncertainty: The big 'unlock' for our economies                                                   3

Uncertainty about the continuing spread of the coronavirus makes people fear for their health and their lives.
Uncertainty about their livelihoods makes them cautious about spending. Under high uncertainty, business
leaders find it impossible to make reliable plans for investment.
This uncertainty is toxic for our economic recovery.
The objective now must be to crush uncertainty as soon as possible. As we have seen in previous crises,
when uncertainty subsides, confidence returns and economic recovery unlocksand the COVID-19 crisis
has created the highest level of uncertainty in 35 years (Exhibit 3).
In many countries today, the uncertainty still starts with the virus. The path societies choose to control its
spread as they strive to bring their economies back on line matters, and the stakes are high. We estimate
that from now to the end of 2023, the differencein lost global GDPbetween economic scenarios with
only partial virus-spread control and those in "near-zero virus" situations will be as much as $15 trillion.
There are three main paths forward that leaders around the world are exploring:
Balancing act. This path involves a staged reopening of the economy, controlling the 
virus spread within the capacity of the healthcare system.
Near-zero virus. This path means opening the economy while imposing virus-control measures that stop
GES 2020
short of a lockdown; these appear to be effective in preventing virus spread.
COVID Crushing Uncertainty
Exhibit 3 of 6  Transition act. This path involves switching from a balancing-act path to a near-zero-virus path by
implementing elements of near-zero-virus packages as soon as they are ready.

Exhibit 3
As uncertainty goes, economic growth returns.
US Economic Policy                                                                 Monthly year-over-year
Uncertainty Index, 100 = 2000                                                            real GDP growth, %
350                                                                                        6
4
300
2
250
0
200                                                                                     2
150                                                                                                   4
6
100
8
50
US recession                 US recession         US recession                   10
0                                                                                  12
1985         1990         1995         2000        2005        2010         2015         2020
Note: Policy-uncertainty index available through April 2020; AprilJune year-over-year real GDP growth estimated based on 10.3%
contraction in McKinsey A1 scenario projections.
Source: Scott R. Baker, Nicholas Bloom, and Steven J. Davis, "Measuring economic policy uncertainty," Economic Policy Uncertainty,
policyuncertainty.com; IHS Markit/Macroeconomic Advisors; McKinsey analysis in partnership with Oxford Economics

4                     Crushing coronavirus uncertainty: The big 'unlock' for our economies

Each path implies very different outcomes for lives and livelihoods because each path's trajectory
determines the spread of the virus, the pace of economic recovery, and the speed at which it can help 
crush uncertainty.

Possible paths out of the crisis
Geographies that have already achieved near-zero-virus conditions without strict lockdowns will likely try 
to continue on that course. So far, this method appears to be working for Hong Kong, Malta, South Korea,
and Taiwan, among others. These countries experienced much lower initial declines in GDP (in the range of 
1 to 2 percent, in contrast to the likely 8 to 13 percent), and they now have much lower uncertainty levels
about the virus, which is accelerating their economic recoveries.
Most other geographies, having used lockdowns to suppress the initial spread of COVID-19, are now
exploring one of the three paths previously mentioned (Exhibit 4):
Balancing act. The goal often articulated by government leaders who have chosen this path is to lift
lockdowns gradually while keeping the number of patients with COVID-19 within the capacity of their
healthcare systems. If the public-health measures
supporting the release of the lockdowns turn out
to be sufficient to keep the virus spread at bay,               Elements of a 'near-zero 
this path could prove effective. But that is not
assured. The virus could recur locally or regionally.          virus' package
After lockdown measures were recently eased in
Measures implemented by countries that
Germany, for instance, infection rates started to
have controlled the coronavirus spread
creep up again, and authorities are now discussing
either from the start or after an initial surge
the risks of a second wave and even a new peak 
of caseswithout strict lockdowns include
of infections.
the following:
Critically, the viability of this path to economic
banning large-scale public events
recovery is uncharted territory. Even if a specific
("superspreading")
version of the balancing-act path turns out to be
successful, uncertainty and risk will remain high
using masks
for an extended period. People may only feel
fully confident about their safety when they see
testing
conclusive proof that this path does not cause a
virus recurrencean assurance that may not come
tracking and tracing
until much later in 2020.
quarantining infected individuals and
Near-zero virus. When releasing lockdowns
their contacts
on this path, the goal is to crush uncertainty by
implementing a collection of measures that have
physical distancing
been observed to control the virus and are realistic
in a given context (see sidebar, "Elements of a 'near-
controlling borders
zero virus' package"). By effectively communicating
the scope of these measures and presenting a
implementing work protocols
clear road map to economic recovery, uncertainty
would be crushed faster. With the confidence of
modifying public-transportation
consumers and business leaders restored, the
frameworks
recovery process would accelerate.


Crushing coronavirus uncertainty: The big 'unlock' for our economies                                                   5

Importantly, once a geography achieves a stable near-zero-virus situationwhich implies its 
near-zero-virus package is workingsome of these measures could be gradually eased. Of course,
uncertainty about a government's ability to implement such protocols will vary among locations.
Transition act. The goal of governments on this path may likewise be to reach near-zero-virus status, but
the steps they take would reflect the time required to put the right package of measures in place. Obstacles
might include a lack of testing capacity, personal protective equipment (PPE), or "intelligent border controls,"
all of which may have to be procured and implemented.
Recognizing that only a few places are close to having a near-zero-virus package ready, there are
several key questions to answer. When can such a package be put in place? How soon after that could
you transition to the near-zero-virus path? And what implications would that hold for your road map to
reopening the economy? As answers to these questions become clear, the future would grow more
predictable and uncertainty would be reduced. At the point of transition to the near-zero-virus path,
uncertainty would be crushed.
It should be noted that for many emerging markets, a near-zero-virus package may not be realistic for
financial and other reasons. Additionally, in many developed countries, some measures may be socially or
politically unacceptable. We also observe big differences in the level of intensity and quality of execution
today. However, given the benefits of paths that drastically reduce uncertainty, even countries facing
significant obstacles would benefit from exploring the viability of such packages.
Other epidemiological outcomes may yet materialize. The development of COVID-19 herd immunity (onGES 2020
which scientific evidence is so far inconclusive) could emerge as a side effect of the balancing-act path. TheCOVID Crushing Uncertainty
discovery of effective treatments or vaccines would, of course, crush uncertainty instantly. Unfortunately,Exhibit 4 of 6
it's not clear whether and when such solutions may become available.


Exhibit 4
Possible paths forward?
Balancing act

1

2
3

'Near-zero virus'               Tran sition act
3
1
2
8% to 13%
economic shock


6                     Crushing coronavirus uncertainty: The big 'unlock' for our economies

Which path? A 'trillion dollar' difference
The reason for putting uncertainty squarely on the table in any discussion about the best path forward is 
that the stakes are high. No matter which scenario ultimately emerges, the economic cost of the coronavirus
crisis will be unprecedented. In our earlier article, we laid out nine potential economic outcomes of the 
COVID-19 pandemic based on healthcare systems' and policy makers' responses (see Exhibit 2, above). 
Even a moderately favorable scenario (A3) could result in a global GDP decline from 2019 of $4 trillion to 
$5 trillion. The toll on individuals, in lost jobs and income, will be equally grave.
Importantly, the difference between ending up in a first-row scenario versus a second-row scenario
(for example, A3 versus A1) is material. The reason is that in scenario A1, in which the virus recurs, more
businesses will go bankrupt, more supply-chain bottlenecks will appear, and structural or even systemic
damage to the economy is more likely to occur. The result would be a deeper drop in GDP and a different
recovery trajectory. Scenario A3 would produce a recovery to precrisis levels in late 2020 or early 2021;
scenario A1 would produce a muted recovery only after two to three years.
The cumulative difference in lost global GDP between scenarios A1 and A3 could be as high as $15 trillion
to $20 trillion, with more than $5 trillion lost in the United States (equivalent to ten times the country's
annual military expenditure) (Exhibit 5) and more than 4 trillion in Europe (including the United Kingdom).
Additionally, scenario A1 could produce approximately ten million to 15 million more unemployed people
in the United States and seven million to ten million more jobs lost in Europe throughout the period of
economic recovery than scenario A3 would.
Geographies pursuing a balancing-act path could end up in a second-row scenario on the matrix (A1, for
GES 2020
example). Those on a near-zero-virus path are likely to emerge in one of the first-row scenarios (A3, for
COVID Crushing Uncertainty
example), with those on a transition-act path landing somewhere in between.
Exhibit 5 of 6
One of the most important implications is that the financial cost of a near-zero-virus package of publichealth
interventionsaimed at changing the economic outcome from the second to the first row of the

Exhibit 5
The di erence between outcomes is material.
US real GDP, indexed, Q4 2019 = 100
Pre-COVID19     Scenario A3        Scenario A1
110                                                                     Cumulative loss in real GDP,
$ trillion, 2012 dollars
105                                                                    A3  0.7

100                                                                 A1                            5.7

95                                                                            $5.0
trillion
90
Dierence in cumulative
GDP loss between
A3 and A1 scenarios
85
Q4  Q1  Q2  Q3  Q4  Q1  Q2  Q3  Q4  Q1  Q2  Q3  Q4  Q1
2019       2020             2021             2022       2023
Source: McKinsey analysis in partnership with Oxford Economics
Crushing coronavirus uncertainty: The big 'unlock' for our economies                                                   7

We now know that stay-at-home lockdowns
work to control the spread of the virus. We
also know that lockdowns kill the economy.
The consequences are not just financial:
there is also a direct human toll.
scenario matrixis dwarfed by the heavy economic price of ending up in the second row. After all, consider
how many test kits $5 trillion could buy. Accordingly, the financial cost of a near-zero-virus package could
be irrelevant.

Is near-zero virus even possible without a lockdown?
We now know that stay-at-home lockdowns, with physical distancing in supermarkets and other public
spaces, work to control the spread of the virus. We also know that lockdowns kill the economy. The
consequences are not just financial: there is also a direct human toll. The silent victims of the coronavirus
include people dying from other diseases because they are unable to access urgent care, individuals with
mental-health issues, victims of domestic violence, people suffering from intensifying poverty, and the
millions of newly unemployed.
Lockdowns also cause uncertainty to remain high, as the extent of the structural damage to the economy
becomes less predictable the longer lockdowns stay in place. This uncertainty is paralyzing. Government
leaders lack reliable data on which to base their decisions about safely relaxing lockdowns. Bankers
don't extend credit, because they don't know when their clients' businesses will be back in operation.
Manufacturers reshape capital-investment programs because they don't know how much cash they
will need on their balance sheets to survive the crisis. Shopkeepers and restauranteurs are forced into
bankruptcy because they don't know when (and under what conditions) customers will return. And
consumers continue to defer discretionary spending, as they are unsure when their lives will be back to
some level of normality.
Fortunately, we have observed near-zero-virus outcomes in places that chose not to lock down their
economies. For example, Hong Kong, Iceland, Malta, Shanghai, South Korea, and Taiwan all implemented
locally adapted versions of near-zero-virus packages (Exhibit 6).
It does seem that near-zero-virus outcomes are possible even without running a depression-level economy.
With virus spread under control, life can come back. In Hong Kong, for example, restaurants are open again.
Yes, they require everyone to wear masks, limit seating to four per table, and maintain a distance between
tables of two meters. Yes, there are clear rulesbut just thinking about the possibility makes people long
for a more normal life. That is exactly how it feels when uncertainty is crushed and confidence returns. But
people will only resume their lives when they believe they are safe, not when they merely hope so.
Similarly, the economy cannot be forced to return to normal. People concerned about their safety will not
go into their workplaces or flock to their favorite coffee shops and retail stores. We have seen many worker
protests demanding PPE before employees would return to their jobs.

8                     Crushing coronavirus uncertainty: The big 'unlock' for our economies

GES 2020
COVID Crushing Uncertainty
Exhibit 6 of 6


Exhibit 6
Is 'near-zero virus' a possibility?
Number of new COVID-19 cases per week in selected geographies
'Near-zero virus'                      Near-zero virus                    Still-high infection levels
without lockdowns                 after initial lockdowns                using various strategies
South Korea                          Switzerland                            US
4,000                               8,000                              250,000
200,000
3,000                               6,000
150,000
2,000                               4,000
100,000
1,000                                2,000
50,000
0                             0                              0
Jan 6                Apr 27           Jan 6                Apr 27            Jan 6                Apr 27

Malta                                Austria                                UK
200                           6,000                           40,000
150                                                                     30,000
4,000
100                                                                  20,000
2,000
50                                                            10,000
0                             0                              0
Jan 6                Apr 27           Jan 6                Apr 27            Jan 6                Apr 27

Taiwan                               New Zealand                           Sweden
150                                 500                                 5,000
400                            4,000
100
300                            3,000
200                            2,000
50
100                                1,000
0                             0                              0
Jan 6                Apr 27           Jan 6                Apr 27            Jan 6                Apr 27
Source: COVID-19 data set, Our World in Data
In a way, we are saying that lower virus levels are good for protecting lives (for example, you need fewer tests
or can detect more with the same number of tests) and good for protecting livelihoods, as it is easier to feel
safe "returning to normal." Of course, there are many potential complications (for example, herd immunity
may become the only alternative if a vaccine or better treatments fail to materialize).
The greatest difference achieving a near-zero-virus condition makes, relative to scenarios in which the 
virus is not fully under control, is that uncertainty is drastically lowered. Near-zero-virus packages and 
clear communication about the restrictions they require, along with fact-based justifications for them,
encourage citizens and leaders alike to make decisions with more confidence. This, in turn, helps unlock
economic recovery.

Crushing coronavirus uncertainty: The big 'unlock' for our economies                                                   9

The choice of path depends on local context
We acknowledge that moving from high infection rates to a near-zero-virus situation is very hard and may be
impossible in some geographies. National and local authorities are in the best position to judge how realistic
it is to implement effective near-zero-virus packages short of lockdowns. But they can lean on the examples
of some that have done it.
In January 2020, for instance, Taiwan launched its version of a near-zero-virus package. It included 124
distinct measures and successfully blocked even the initial spread of the virus without a lockdown. As of
early May, it has recorded fewer than 100 cases of community transmission, fewer than 450 infections, and
only six deaths. Similarly, South Korea successfully controlled its initial outbreak through its version of a
near-zero-virus package, which relied heavily on testing and quarantines but avoided full lockdowns. The
country is currently tracking fewer than 20 new infections per day and has had a total of 250 deaths in a
population of 52 million.
You might say, "124 measuresthat's complex. How can that be the answer?" A general involved in the New
York City coronavirus-relief effort recently said, "When uncertainty is high, answers need to be simple. If the
answer is not simple and executable, it is not an answer."
The simplicity inherent in near-zero-virus packages lies in their use of known measuresones that have
been observed to be effective in reducing the probability of virus transmission in a number of geographies
and contexts. Nobody knows exactly how much each element of such a package contributes to slowing virus
spread, but in combination, the measures push the transmission rate to a basic reproduction number (R0) of
less than one.
The reason the packages work is rooted in one of the characteristics of the epidemic. Given that the
coronavirus is very contagious (even before symptoms appear), each improvement in the infection chain
makes a big difference. If physical distancing, for example, reduces viral spread by just 10 percent, then it
cuts the total chain by 20 to 25 percent. This is a "convex" problem: every little bit helps, and the more things
we do, the betterespecially if the cost of those things is very low.
In the absence of both lockdowns and packages of measures, the risk of virus recurrence is just as high as
when the COVID-19 pandemic arrived earlier this year. An 80 percent solution is no solution.
What does this mean for your organization or your country? That probably depends.
There are many reasons that implementing a near-zero-virus package in your context may be near to
impossible. They might include a lack of testing capacity or PPE availability, legal challenges on civil rights,
privacy concerns related to contact tracing, and other societal issues. It is evident that social acceptability
of near-zero-virus packages is greater in some Asian countries. A high degree of physical distancing might
already be culturally common, and there might be fewer sensitivities to accepting certain social measures in
the interest of public health. It has been common for years, for example, for people in Asia with respiratory
infections to wear surgical masks to avoid infecting others.
We don't pretend to know what is legally, socially, or financially best suited to your specific circumstances.
But we believe it is worth at least including the goal of reaching a near-zero-virus objective as one of the
alternatives you consider. In strategy, you need to debate alternatives in order to avoid being led astray 
by biases.
The stakes are high and speed is of the essenceand we would argue that everybody can pitch in.


10                    Crushing coronavirus uncertainty: The big 'unlock' for our economies

Governments
It has been a challenging time for governments and their citizens alike. Fighting off the initial spread of
the virus, passing huge stimulus packages to support people and businesses, and navigating a complex
situation have heavily taxed the public sector's resources, both financial and human.
Now that we have learned moreand, in many places, infection curves have at least started to flatten
governments should start focusing on crushing uncertainty. Which path is the right one? Should you push for
the near-zero-virus goal? You will know best. Whichever path you choose, however, you should try to provide
as much clarity and certainty as possible. Restoring confidence must 
be a priority.
Businesses and other institutions
You will know best how many elements of a near-zero-virus package you can afford and can execute on your
premises. We see many companies already calculating this and moving forward. Physical-distancing and
PPE-wearing measures are widespread, and some companies are building on-site testing capabilities to try
to ensure safe work environments for their employees.
All those elements can also play an important role in keeping communities safe. In many countries, business
leaders are collaborating on government-led efforts by joining advisory councils and coordinating the corporate
portions of public-health responses to ensure consistencyand thereby accelerate progress toward near-zerovirus
conditions.

Speed and clarity: The only known 'vaccines' against the coronavirus crisis
In January 2020, hardly anybody took notice of COVID-19. Back then, most of those outside China who did
notice shrugged their shoulders. Then, all of a sudden, the pandemic was upon us. Humans have innate
difficulty in processing exponential events. That may explain why so many organizations are lagging behind
in their preparations for getting people back to work safely. It is hard to blame anyone for not anticipating the
full extent of the economic issues coming toward usfew of us have ever experienced an economic shock of 
this proportion.
We now know that speed is of the essence. It was for controlling the initial spread of the virus; it is for
stopping its spread now; and it will be for decisively moving onto the path to recovery. Ultimately, speed
helps reduce uncertainty, which, in turn, will revive economic growth and lessen human suffering.
Communicating clearly to citizens and employees about actions, timelines, and expected outcomes is
another critical factor. The more factual and forward looking your messages are, the faster confidence will
returnand the faster economic recovery can begin.

We slowed the virus. Now we need to crush uncertainty and rebuild confidence to avert structural damage
to the economyand do it fast. Lives and livelihoods will depend on it.

Sven Smit is a senior partner in McKinsey's Amsterdam office and cochair of The McKinsey Global Institute. Martin Hirt is
a senior partner in the Greater China office. Penny Dash is a senior partner in the London office. Audrey Lucas is a senior
partner in the Minneapolis office. Tom Latkovic is a senior partner in the Cleveland office. Matt Wilson is a senior partner in
the New York office. Ezra Greenberg is an expert associate partner in the Stamford office. Kevin Buehler is a senior partner 
in the New York office. Klemens Hjartar is a senior partner in the Copenhagen office.
Designed by Global Editorial Services
Copyright  2020 McKinsey & Company. All rights reserved.


Crushing coronavirus uncertainty: The big 'unlock' for our economies                                                   11





5/20/2020                                       Fixed-payment leases help ports weather COVID-19 crisis: Moody's



Published on JOC.com (https://www.joc.com)
Home > Fixed-payment leases help ports weather COVID-19 crisis: Moody's
Bill Mongelluzzo, Senior Editor | May 14, 2020 4:21PM EDT










The fixed-payment leases ports have with their tenants could financially stress terminal operators
and carriers if the current economic downturn is prolonged. Photo credit: Shutterstock.com.
Most US ports have sufficient liquidity and cash on hand to weather what is expected to be a 20
percent decline in cargo volumes during the COVID-19 pandemic, according to an analysis of the
ports' financial health by Moody's Investors Service.
However, the ports' financial resilience  derived from fixed payment requirements from terminal
operators, stevedores, shipping and cruise lines  could pressure the investors that back those
private-sector interests to ramp up their support if the trade disruptions from COVID-19 are
prolonged.
Whether terminals and carriers are able to make their multi-million-dollar annual lease payments will
depend upon the financial support they receive from the investors that back them. "Tenants
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5/20/2020                                       Fixed-payment leases help ports weather COVID-19 crisis: Moody's
associated with global shipping lines, cruise lines and major industrial or energy companies, or
tenants owned by institutional investors, usually have the financial capacity and operational
incentive to sustain the tenant's operations in periods of economic stress," Moody's said in its
report, released Wednesday. Investors have generally supported their clients during times of stress,
such as the 2008-09 financial crisis, it added.
Moody's also compared the different strengths and challenges of landlord ports such as Los
Angeles, Long Beach, and New York-New Jersey, with the operating ports in the Southeast.
Landlord ports benefit from high levels of guaranteed annual payments from tenants known as
minimum annual guarantees (MAGs). Under those arrangements, terminal operators guarantee the
port authority an annual amount of revenue. At container ports, the MAG is quantified in annual TEU
volume; the terminal operator is responsible for paying the MAG whether or not it generates the
stipulated volume.
Landlord ports receive 40 to 70 percent of their revenue in the form of the guaranteed payments
under long-term leases. "The landlord model has historically proven to stabilize revenues in periods
of volume declines," Moody's said.
Operating ports more exposed to cargo declines
Operating ports, by contrast, retain operating responsibilities and receive most of their revenue from
cargo throughput or customer use, leaving them more directly exposed to declining volumes. But
operating ports, in times of economic stress, can address their largest cost factor  labor  by
adjusting staffing levels and work hours in line with lower activity, Moody's notes.
"Port operators exhibit greater revenue volatility through volume cycles  in growth and contraction
and generally have lower margins because of the more labor-intensive scope of their operations
than landlords, which amplifies the challenge of high-revenue volatility in periods of stress," the
analyst said.
However, most US ports have entered the current period of instability with enough cash on hand to
cover 12 months of debt service and operating expenses during the anticipated period of declining
cargo volumes.
"All US ports that we rate have at least 12 months of liquidity coverage under a severe stress
scenario, and most ports are even stronger, with the median ports having over 25 months of
coverage," Moody's said. "Most rated ports had a debt-service coverage ratio (DSCR) of at least
2.0x  and more than half had a DSCR over 2.5x  which provides a strong position from which to
absorb and manage revenue pressures."
In fact, about half of the ports that Moody's rated have lower debt-service requirements today than
they had in 2007-08 at the dawn of the economic recession. "Current debt service expenses for
these entities remain modest at less than 20 percent of revenue," Moody's said.
US ports and their tenants, on top of weathering the decline in cargo volumes, face additional
expenses during the COVID-19 crisis tied to cleaning their facilities and procuring personal
protective equipment. Organizations representing both landlord and operating ports, as well as
marine terminal operators and stevedores, are seeking federal help to assist in meeting those
unanticipated costs. The scale of federal help needed isn't clear yet, but proposals so far are for a
seaport grant program up to $1.5 billion, and another $400 million for PPE and cleaning supplies.
In a May 4 letter to Congress, Federal Maritime Commission members Carl Bentzel and Louis Sola
urged that legislators consider "a means to help alleviate and bridge the financial gaps that could
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5/20/2020                                       Fixed-payment leases help ports weather COVID-19 crisis: Moody's
jeopardize continued healthy operation of our domestic marine terminal industry and of our maritime
transportation systems."
As for port authorities, most ports' strong positions in regard to debt service coverage, combined
with their healthy level of liquidity, should shield them from severe financial stress during the
COVID-19 crisis.
"Coverage and liquidity are key factors in an environment like this because they provide financial
flexibility for ports to manage unanticipated revenue disruptions, force majeure claims, requests for
rent deferrals, or extraordinary expenses," Moody's said.
Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on
Twitter: @billmongelluzzo.
Port News ' US Ports
North America ' United States
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5/29/2020                                        Why Chatter About An American Airlines Bankruptcy Is Nonsense


EDITORS' PICK | 106,709 views | May 24, 2020, 09:17am EDT
Why Chatter About An American
Airlines Bankruptcy Is Nonsense
Ted Reed Senior Contributor
Aerospace & Defense














American Airlines aircraft at Miami International Airport in March. (Photo by DANIEL SLIM/AFP via ...
[+] AFP VIA GETTY IMAGES
Let's review some recent airline news. First, Boeing's gaffe-prone CEO
speculated that a major airline could go out of business this year. Then he
talked to two key airline customers, trying to smooth things over. But it was
too late. The tea leaf readers scrutinized an arcane financial instrument

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5/29/2020                                        Why Chatter About An American Airlines Bankruptcy Is Nonsense
called "credit default swaps." They concluded that American Airlines will
seek bankruptcy protection. This became a hot topic online.
Maybe it was just another week in the airline business. Or maybe it was an
example of the cresting of fallacious herd thinking.
Not a single valid indicator anywhere says American is close to filing for
bankruptcy. American has no imminent large debt payments; nobody, not
even competitors, wants it to file, and it would gain nothing if it did file.
Airlines face a revenue problem. Bankruptcy addresses a debt problem.
In fact, American is probably little closer to bankruptcy than are its two
peers, from which it differs in one key regard: It has newer airplanes.
The average age of the American fleet is 11 years. At the end of 2020, it will
be 10 years. The advantages include better fuel efficiency, more product
harmony and passenger preference, some of which American squanders by
putting seats too close together. Delta and United fleets are at least two to
three years older, although they too are getting younger.
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Of course, American's newer fleet also means higher debt than peers.
Besides the credit default swap phenomenon ( swaps are intended to enable
bondholders to pay extra to insure against defaults), this is the principal
contributor to bankruptcy chatter.
American debt totals about $34 billion, compared with $23 billion at Delta
and United. Of American's debt, about $24.4 billion is for aircraft, including
about $12 billion for enhanced equipment trust certificates, known as

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5/29/2020                                        Why Chatter About An American Airlines Bankruptcy Is Nonsense
EETCs, debt instruments once used to finance railroad box cars. Those
lenders are protected in bankruptcy.
The remaining aircraft debt, theoretically, could be subject to a negotiation
that begins: "Take my older aircraft. Please." The reality is that no one wants
to take aircraft from American, because almost no one has more capability
than American to utilize aircraft.
In the past, airlines have used bankruptcy to escape expensive labor
contracts. But for now, airline industry contracts are by and large
equivalent. Moreover, one surprising and little noticed development during
the coronavirus crisis is that labor relations at American have been less
contentious than at peers.
"At American we are the industry model for pilot voluntary leaves and earlyouts
which preserve cash and keep our pilots current and ready to return
swiftly as passengers return to flying," said Dennis Tajer, spokesman for the
Allied Pilots Association, which represents American pilots.
"Every major airline investor we consult with is modeling that American and
other airlines have sufficient liquidity and ability to raise funds to weather
the worst of this storm, assuming a conservative return of demand," Tajer
added.
Last week, on Tuesday Boeing CEO Dave Calhoun, appearing on the Today
Show, was asked whether the coronavirus crisis would force a major airline
out of business. He responded: "I don't want to get too predictive on that
subject, but yes, most likely. Something will happen when September comes
around." On Thursday, the Wall Street Journal reported that management
at American and United, both major Boeing customers, were not pleased,
while CNBC reported that Calhoun "has spoken with some airline CEOs in
recent days to try to smooth over tensions."

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5/29/2020                                        Why Chatter About An American Airlines Bankruptcy Is Nonsense
Meanwhile, the two arcane fields  tasseography (reading tea leaves, coffee
grounds and wine sediment) and reading credit default swaps  produced
headlines, including "American Airlines: The First to Go Under," "Is
American Airlines Really Bound for Bankruptcy?" and "American Airlines:
The Possible Path to Bankruptcy."
Let's acknowledge that the airline industry's recent history has been built in
bankruptcy. This century, the three global U.S. carriers have all benefitted
from restructuring in bankruptcy court. Top executives at all three nurtured
leadership and management skills there.
In particular, America West Airlines management  including Derek Kerr,
Scott Kirby and Doug Parker  used the bankruptcy process to lead the final
round of airline industry consolidation, taking over US Airways in 2005,
mounting a flawed but instructive bid to take over Delta in 2006, and taking
over American in 2013.
The point here is that few people in the world know more about bankruptcy
than Kerr and Parker and this time they want to avoid it.
Ted Reed
Follow
I began covering airlines in 1989. I was a reporter for six newspapers -- Miami Herald,
Charlotte Observer, Sacramento Bee, Fresno Bee, Toledo Blade and Aberdeen (Wash.)
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