An open market valuation of the effects of COVID-19 on the travel and tourism industry

Abstract

In only a few weeks since the first reported COVID-19 case in the United States, the pandemic has spread quickly across the country, and in the process plunged the economy into a severe economic crisis. While much of the government's response has focused on mitigation and containment measures such as shelter-in-place and stay-at-home directives, mounting pressure from the various parties bearing the financial fallout – including households and businesses – has prompted policymakers to also draft initial economic recovery plans. In this research, we use an open market valuation approach to assess the expected fallout in four major subsectors within the travel industry – airlines, hotels, cruise lines and rental cars - as a path to gauge how pandemic related bailout funds may be prioritized in the travel industry. The approach used here is advantageous because it is forward-looking and therefore it permits an assessment of impacts before possible irreversible damage has occurred. Moreover, the open-market method does not involve accounting measures, and is therefore more robust against possible managerial overstatement of needed governmental aid. Of course, at the household level, some assistance has come in the form of stimulus checks, whereas for a number small business, the paycheck protection program has provided temporary but nonetheless welcome relief. But for larger corporations there have been calls for increased governmental interventions and welfare in the form of corporate bailouts reminiscent in many ways of the economic crisis of 2008 which struck the financial industry particularly severely. Despite the seemingly omnipresent financial duress, one might quite justifiably reckon that the effect of the current crisis has also been disproportionate across the various economic sectors. The atypical nature of this particular financial crisis – one resulting from a pandemic precipitated by a highly transmissible pathogen – has obliterated the demand for travel and generated much uncertainty about people's future travel behaviors (Li et al., 2020), leaving the travel and tourism sector especially vulnerable (Reddy et al., 2020). The government's role is critical to these sectors' recovery (Assaf & Scuderi, 2020; Fong et al., 2020), and as these authorities deliberate the allocation of bailout monies, an understanding of the impact of the pandemic on the specific subsectors that constitute the travel sector might provide some guidance on how bailout funds might be distributed within this sector. Our goal is not to debate the merits of such interventions from the point of view of economic efficiency – we recognize that the issue of whether corporate bailouts are warranted can be highly contentious, and has extensively been debated in the academic scholarship. We are instead concerned simply with investigating the extent to which the airline, hotel, cruise line and rental car industries, despite collectively comprising the general travel sector, might be disparately impacted by the pandemic, such that available bailout funds might be prioritized accordingly. While some economic aid might already have been distributed to companies in distress at the time the present study becomes publicly available, we anticipate that the enormity of crisis might necessitate additional assistance in the weeks and months coming in order to keep certain segments of the industry from collapse.