As the 2019 Novel Coronavirus (COVID-19) continues to spread across the world, the challenges for companies operating in the industrials, manufacturing & transportation (IMT) sector are increasing. Companies across all industry sub-sectors from aviation, mobility, transportation and logistics, to industrial conglomerates, chemicals & plastics, agribusiness, and construction ¾ are facing a number of significant business and legal issues. Here is a checklist of emerging risks and possible solutions aimed at helping IMT companies navigate the rapidly evolving situation.
The aviation subsector has been impacted more significantly than any other IMT subsector. Plummeting demand due to government lockdowns, travel restrictions, constricted business travel, and general passenger concerns has had myriad consequences for airlines and aviation-related businesses. Moreover, the issues for aviation have both cause and effect roles for virtually every other sector of the global economy. Noteworthy impacts of COVID-19 to this subsector include:
- Reduced revenue and significant financial stress, with airline insolvencies likely due to the outbreak.
- Hiring freezes and workforce reductions.
- Uncertainty over airport slot allocations and usage requirements; some jurisdictions and airports have temporarily waived these rules that require an airline to maintain a certain level of operations, but there is inconsistency globally, and this relief may need to be extended.
- Compensation and other obligations to passengers for flight cancellations and disruption, such as under European Union Regulation 261.
- Decrease in orders and deliveries for aircraft OEMs, which will in turn impact parts manufacturers.
- Reduced airfreight capacity due to fewer passenger flights, causing supply chain and logistics disruption with repercussions beyond the aviation industry.
- Potential nationalization scenarios, state aid legislation, bailouts, and other government intervention for airlines.
2. Supply Chain
IMT companies have some of the most complex supply chains of any sector and thus are particularly hard hit by quarantines, travel restrictions, and other disruptions caused by the COVID-19 outbreak. Further, the IMT sector also includes companies that provide the transportation and services necessary for an effective supply chain, such as airfreight, rail, shipping, and logistics. Significant issues IMT companies are wrestling with include the following:
- IMT companies source from and have operations in multiple jurisdictions and, due to the global nature of the COVID-19 outbreak, may have difficulty reacting to and minimizing supply chain impacts. Actions to close borders and restrict movements affect not only people, but also transportation of goods, both between and within countries. Companies will experience delays and shortages, making it difficult to resume and maintain operations even after the virus has waned in some countries.
- Complex supply chains make it more difficult to identify where the “pinch” points are, in particular given the dynamic nature of the impacts of COVID-19 as it moves across the globe. To get ahead of this impact, IMT companies will need to continually update their supply chain risk assessment with new information.
- Changing manufacturing locations or suppliers quickly raises additional risks, especially because of time constraints on properly vetting such supply chain shifts to ensure technical product compliance. Risks include sourcing from regions with slave or child labor, additional customs and import/export compliance, increased risk of liability for bribery and improper influence such as under the U.S. Foreign Corrupt Practices Act (FCPA) or Turkish Criminal Code No. 5237, and other issues with disreputable parties and unreliable operations.
Steps to alleviate pressure on supply chains include:
- Conduct a full risk assessment on the impact of the outbreak on business activities.
- Evaluate options when core supply chains are disrupted.
- Consider whether there are alternative ways of performing the contractual obligations.
- Consider whether there are ways of mitigating the effects.
- If entering into new contracts, draft provisions clearly and comprehensively to cover eventualities such as the present outbreak, and understand implications of the law governing the contract.
- Consider the possibility of invoking force majeure clauses.
- Monitor the announcement of any new governmental or regulatory policies.
The impact of COVID-19 on business continuity, supply chains and travel needs may lead to significant losses. It is important to assess and understand whether these losses may be covered by insurance policies. Companies should:
- Determine whether the insurance policies provide the right types and levels of coverage for crisis situations and are responsive to any changes in the business.
- Understand the losses they are seeking to guard against (e.g. pandemics). Determine whether these losses are covered.
- Assess the impact of force majeure on insurance arrangements.
Many IMT businesses will experience disruption in their ability to delivery services and products to customers as well as reduced customer demand for those services and products, and should consider measures to maintain and protect customer relationships.
- Protect the health and safety of customers in vehicles, aircraft, or other customer premises by adopting recommended hygiene practices and communicating those practices with customers.
- Monitor government health alerts and restrictions as they may apply to customer premises and ensure compliance.
- Ensure all customer communications show empathy. Communications and responses to customer social media commentary can impact customer loyalty and endure long after the containment of an outbreak.
- Maintain customer loyalty: review existing loyalty programs, and consider amending cancellation policies and offering more flexible terms.