Wall Street Journal, October 9, 2001
Shock Waves Keep Spreading, Changing Outlook for Cars, Hotels -- Even for Cola
By Jon E. Hilsenrath
Four weeks after the horrific attacks of Sept. 11, aftershocks are rippling through nearly every sector of the American economy on a scale the terrorists probably never anticipated.
The estimated hit to the U.S. economy so far: at least $100 billion this year, on top of tens of billions in property damage and the staggering loss of human life.
That price tag reflects a shift in the outlook for the rest of this year. Before the attacks, economists were expecting gross domestic product to grow at an annual rate of slightly more than 1% in the 2001 second half. Now they expect the U.S.'s $10 trillion economy to shrink by nearly 1% instead. That estimate doesn't even encompass what's to come next year.
Unbuilt cars, idle airplanes, lost jobs -- all the work of a handful of suspected hijackers wielding box-cutters. About 1.9 million hotel rooms in America have stood empty, on average, each day since the attacks, compared with 1.3 million a year earlier. Airlines say they are cutting more than 80,000 jobs, and may cancel orders of new aircraft. Retailers saw sales of general merchandise drop by an estimated $6 billion from their early September pace -- an amount greater than the annual revenues of RadioShack Corp. or Viacom Inc.'s Blockbuster Inc.
Why has the economic toll been so severe? After all, immediately after Sept. 11, some economists predicted the effect would be more limited, perhaps on the order of a ferocious hurricane. But the damage has continued to spread partly because of timing. The attackers, perhaps unwittingly, caught the economy at a vulnerable moment.
Even before the assaults, aggressive Federal Reserve interest-rate cuts and $40 billion in tax cuts were showing little effect as the economy convalesced from a 18-month-old stock-market meltdown and an investment bust that left the technology sector and corporate profits in tatters. By September, a slowdown that had been confined mostly to manufacturers was poised to intensify and fan out to other sectors if shoved in that direction.
Like terrorism itself, the economic impact of the Sept. 11 attacks also knows no borders. In Switzerland, for example, Zurich Financial Services AG, one of Europe's largest insurance providers, said it expects up to $900 million in claims, while Swissair Group AG last week grounded its planes, saying it didn't have enough cash for fuel and landing fees. In Taiwan, United Microelectronics Corp. warned it will post a rare loss for the year, as chip makers abandoned hopes of a recovery in the fourth quarter.
The fallout for American industries is hardly uniform. American Greetings Corp., for instance, reports rising orders for sympathy cards. American flag sales are booming, even in Canada, according to Wal-Mart Stores Inc. But the losers far outnumber the winners. Here's a look at how the attacks are reverberating through
the U.S. economy nearly a month after the fact:
Airlines
The airline industry, already fighting a deep slump in business travel before the attacks, has been hit particularly hard. Job cuts so far have totaled about 80,000, and most air carriers have slashed their flight schedules by about 20%.
Planes were grounded for two days, and have limped back into the air with reduced schedules and many empty seats as travel has dropped sharply following the hijackings. Moody's has downgraded its credit ratings for 10 airlines.
Yet air carriers were able to rush an aid package through Congress offering $5 billion in cash to compensate them for terrorism-related losses through the end of the year, and $10 billion in government loan guarantees. Analysts expect the industry to run up $5 billion in losses following the Sept. 11 attacks. AMR Corp., parent of American Airlines, has already said it had losses of $1 billion in the month of September alone.
Traffic did pick up in late September, but is still down 30% for major airlines. -- Scott McCartney
Autos
With nervous consumers worried about the economy and their jobs, big-ticket items such as cars don't look attractive. The dip in confidence has presented auto makers with a hard choice: Cut production and scale back marketing to ride out the slump, or try to spur spending with big discounts and stepped up promotions.
Ford Motor Co. signaled it wanted to go the first route, saying it planned to cut third quarter production by 12%. But on Sept. 19, General Motors Corp. steered in the opposite direction, unrolling a "Keep America Rolling" campaign that featured 0% financing on most of its models. Ford and DaimlerChrysler AG's Chrysler unit then followed GM's lead.
The discount deals appear to have succeeded in pulling sales out of their September stall. Overall U.S. car and light truck sales declined about 8.7% from strong year-earlier results, better than most industry executives and analysts expected.
But the turnaround was costly. Ford officials said because of the 0% financing deals, marketing costs for the third quarter would be about 16% of revenue, up from 14.5% in the previous quarter and 11.1% in the third quarter of 2000. While Ford didn't disclose a specific dollar figure, some analysts estimate it could cost Ford as much as $300 million in additional marketing costs for the current quarter. -- Joseph B. White
Media and Entertainment
After the attacks, CBS, NBC, ABC and Fox went commercial-free for several days, costing them a combined $35 million to $40 million a day. Add in cable news networks and local television stations, and the cost of broadcasting the attacks and their immediate aftermath grew to over $700 million in canceled advertising for the television industry.
The television industry was already bracing for a bad fourth quarter before Sept. 11. During the summer, the networks' annual sale of commercial time for the fall television season was down $1 billion from the year
earlier.
Now the major broadcast and cable news operations face growing expenses to cover the war against terrorism. According to Sanford C. Bernstein & Co. media analyst Tom Wolzien, CBS, NBC and ABC each have annual news budgets of between $400 million and $500 million, while CNN's budget is about $700 million annually. Mr. Wolzien, a former NBC News executive, said each network probably will have to increase its budget 25% to 35% over the next few years. The costs, he said, will come from creating new bureaus abroad, boosting technology and
widening coverage.
The advertising industry has also been affected. Ed Kelly, chief executive of American Express Publishing, a venture of American Express and AOL Time Warner's Time Inc., estimates that ad pages for the December issue of his Travel & Leisure magazine could be 20% below forecasts. Last Friday, the Chicago office of Interpublic Group of Companies Inc.'s Campbell Mithun laid off nine people from its staff of about 100. "Clients are not willing to commit to their planned budgets," said Tom Handy, general manager at Campbell Mithun. "Everybody is
feeling the pinch." -- Joe Flint and Suzanne Vranica
Consumer Products
Even in a downturn, people still eat, drink and use soap. That's why the industry is usually considered safe. Yet it hasn't been completely untouched.
Sales of soft drinks, for example, were hurt in the immediate aftermath of the Sept. 11 terrorist attacks, as people avoided going out to restaurants, movie theaters, airports, and other places where they usually buy fizzy beverages.
Meanwhile, managers at Procter & Gamble Co. whose products are found in most U.S. households, say people continue to need toothpaste, paper towels and toilet paper and so they expect business to hold up. Still, P&G must watch prices: If times get really tough, shoppers may switch to inexpensive store brands or generic products.
-- Betsy McKay and Emily Nelson
Gambling and Hotels
Las Vegas occupancy rates, which usually run well over 90%, dipped to about 50% after the attacks, sparking thousands of layoffs at companies, including MGM Mirage, Mandalay Resort Group Inc. and Park Place Entertainment Corp. Park Place has delayed construction of a new $450 million hotel tower at its Caesar's
Palace. Mandalay has postponed construction of a new conference center at the Mandalay Bay resort. Both construction projects were key to the companies' future growth strategies. Outside of Las Vegas, riverboat casinos -- which depend on drive-in customers -- say business has held relatively steady, as do some Internet casino operators.
Many hotels around the nation are suffering, especially ones catering to customers who fly to nearby airports.
Occupancy rates have been gradually climbing, but only as hoteliers slice room prices -- and profits. The price-cutting is especially painful for hotel companies trying to repair bloated balance sheets while weathering the attacks. -- Christina Binkley
Energy
Oil demand is down, thanks to grounded airplanes and travelers sticking close to home. Crude-oil futures rose Monday in reaction to U.S. military action. But so far, it is shaping up to be a very tough year for the oil industry. Dan Pickering, an analyst with Simmons & Co. in Houston, predicts oil demand could contract by 0.2%, which would be the first annual decline in demand since 1983.
The number of rigs drilling for oil and gas in the U.S. has dropped by 10% to 1,168, since peaking at 1,293 in July. Analysts expect at least another 200 rigs to idle by the middle of next year. If international rig rates don't continue to inch up, oil-service firms with big international operations, such as Schlumberger Ltd. and Baker Hughes Inc., could have a tough time meeting current earnings estimates, Mr. Pickering says. -- Alexei Barrionuevo
Retailers
The attacks' impact on retailers was uneven. Apparel and general-merchandise stores suffered sharp declines, but some discounters and specialty stores thrived, effectively accelerating a long-term trend.
Michael Niemira, a Bank of Tokyo-Mitsubishi economist, estimates that overall sales at general-merchandise, apparel and furniture stores dropped by about $6 billion. For Federated Department Stores Inc., of Cincinnati, Ohio, sales at flagship Bloomingdale's and Macy's stores in New York City ran about 40% below plan in the two weeks following the attacks. Sales at Federated have revived somewhat since then, but the company still expects to report a 15% to 20% decline in same-store sales for September.
Interest in $700 handbags has also slowed considerably. Gucci Group NV, the owner of European luxury-apparel brands including Gucci and Yves Saint Laurent, and French luxury-goods conglomerate LVMH Moet Hennessy Louis Vuitton SA both cut profit forecasts.
But last month, Wal-Mart Stores Inc. met its plan for a 4% to 6% sales increase from a year earlier. And BlueNile.com, a jewelry e-tailer, says the company's diamond sales rose 10% from a year earlier in the three weeks after the attack, presumably because marital engagements jumped. Traffic was also heavy at
Blockbuster Inc. It has since returned to normal, but company executives believe a return to value consciousness bodes well for the video rental market.
Some industry executives worry that they could see the first outright declines in Christmas sales in decades. The National Retail Federation, the industry's trade group, cut its forecast for fourth-quarter retail sales growth to 2.2% from 4%, excluding autos and gasoline. That would be the worst quarter since the 1991 first quarter, during the recession of the early 1990s. Retail Forward Inc., a Columbus, Ohio, research and consulting firm, is predicting just 1.5% fourth-quarter holiday-season sales growth, excluding autos and gasoline. -- Erin White, Ann Zimmerman and Teri Agins
Telecommunications
The nation's long-distance providers saw call volumes surge on Sept. 11. AT&T Corp., which handles 300 million calls on most Tuesdays, saw traffic spike to 431 million calls. The increase could help an industry plagued by intense competition and ever-falling long-distance rates. Also helping is the fact that many businesses and
consumers are forgoing travel and relying on phone calls and video conferencing. AT&T Chairman C. Michael Armstrong says video conferencing spiked 20% after Sept. 11. But, he admits. "I have no idea whether that is sustainable."
It could be a seminal moment for the wireless sector. Wireless networks held up well, despite physical damage caused by the attacks. Reports of last-minute calls from loved ones via wireless phones prompted many Americans to upgrade their service or buy new phones. Traffic on the wireless networks, which hit record
levels on the day of the attacks, has stayed strong in the ensuing weeks. Verizon Wireless said volume in Manhattan is still running about 40% higher than before the attacks. AT&T Wireless says traffic is still 6% above normal.
But executives say the impact on the bottom line remains unclear. Some companies are forgiving bills in areas hit by the attack. AT&T is not sending disconnection notices to some customers now, fearing some could arrive at the homes of victims. Verizon Communications Inc. could be hit even harder. A key Verizon switching center was badly damaged when World Trade Center 7 collapsed, wiping out switches used to route millions of phone calls. Verizon says repairing the damage could impact its third and fourth quarter financial performance by a couple of cents per share. -- Rebecca Blumenstein
Finance
The attacks are expected to become the insurance industry's costliest event ever, with estimates of insured losses clustered around $40 billion but reaching as high as $70 billion. Nonetheless, many insurance stocks rose when investors concluded that some of the losses would be offset by steep premium increases across a broad range
of coverage areas.
Alice Schroeder, a Morgan Stanley property-casualty insurance analyst, expects premium increases "to be enough to affect earnings for a noticeable proportion of companies" buying insurance next year. In some cases, property insurance rates have jumped more than 100%, says Robert Howe, a managing director at Marsh &
McLennan Cos. The combination of higher prices and strong demand is also expected to benefit the big insurance brokerages, including Marsh and Aon Corp. But for those companies, any improvement in the bottom line comes at a steep personal price: Both were among the largest employers in the World Trade Centers and lost personnel and infrastructure.
The attacks have darkened the already cloudy outlook for the nation's securities firms. Such lucrative businesses as initial public offerings and merger deals have tumbled in the wake of Sept. 11. The pace of IPOs after the attack was down 88% from the average level for the first eight months of the year, estimates Jim Cowles, global head of stock capital markets at the Salomon Smith Barney unit of Citigroup Inc. The impact may cut Wall Street revenue 10% in the fourth quarter and slow the pace of any recovery in 2002, says Salomon analyst Guy Moszkowski.
Citigroup estimates the combined toll of insurance and securities losses will reduce after-tax earnings as much as $700 million. Initially, the human tragedy delayed staff cutbacks at securities firms. But then the dam started to break, with Morgan Stanley recently unveiling plans to cut as many as 200 highly paid investment bankers, or about 10% of the group. The cuts will be even deeper at the Credit Suisse First Boston unit of Credit Suisse Group, which plans to cut about 760 members, or 20%, of its world-wide investment-banking staff. -- Leslie Scism, Chris Oster and Randall Smith
Aerospace/Defense
Almost all of Boeing Co.'s U.S. airline customers have told the company they no longer need new airplanes, and some can't afford to take delivery on dozens of planes they've already ordered. The aviation company has responded by announcing it will lay off as many as 30,000 workers by the end of 2002, with the first 10% expected to go by year end.
"I've heard from people questioning our patriotism, but we have a fundamental responsibility to keep this company healthy," says Boeing Chairman Phil Condit. "If you are building $200 million airplanes that nobody wants to buy, you can get into financial trouble really fast."
Rockwell Collins Inc. says it will lay off 2,600 employees, or 15% of its work force, and United Technologies Corp. says it plans to lean on its Otis Elevator and Carrier air-conditioning units to offset the hits to its jet-engine operations.
The outlook is quite different in defense. Just a few months ago, the defense industry was bracing for severe cutbacks. The Bush administration's promise to turn the military into a 21st century fighting force threatened to eliminate some high-priced weapons programs.
Now, none of that looks likely. The Pentagon's big Quadrennial Defense Review provided to Congress last week didn't suggest any major cuts. Defense industry officials expect revenue to rise as their big programs are allowed to move forward and the U.S. and other countries increase spending in preparation for a potentially long battle against a faceless enemy. Even Oman, which has been seeking to buy U.S. fighters for about 15 years, got the green light this week to buy 12 of Lockheed Martin Corp.'s F-16 Falcon jets. -- J. Lynn Lunsford and Anne Marie Squeo
Raw Materials
The steel sector was reeling before Sept. 11. Now, key metal-consuming industries -- aerospace, automobiles, construction -- have announced layoffs and halted production.
For much of 2001, steel plants around the country had been operating at less than 75% capacity, the lowest levels since 1991. Prices for key basic steel products used in construction, automobiles, and heavy equipment are selling at decade-low prices and falling.
Fallout from the attacks has been especially difficult for Bethlehem Steel. The company, which has posted net losses for several consecutive quarters, recognizes a turnaround in the steel market isn't likely soon. Its board hastily demoted Chief Executive and Chairman Duane Dunham and turned to a turnaround expert, Robert
S. Miller, giving him a mandate to squeeze concessions out of the steelworkers union.
But even healthy companies are affected. Nucor Corp., the country's second largest steel maker, warned that third-quarter profit would be about half its earlier expectations because of slowing new construction and a market glut. -- Robert Guy Matthews
Computers, Semiconductors and Software
The effect on the technology industry has been difficult to assess because it was mired in a slowdown before Sept. 11. Intel Corp. and Advanced Micro Devices Inc. were embroiled in a fierce price war to claim market share prior to the attacks and had been counting on strong back-to-school sales for personal computers, which account for about 40% of their business. But they were stung when it didn't materialize. AMD said in late September that it was closing two plants and firing 15% of its workers as part of an effort to accelerate cost cutting.
In all, the stock market has wiped out nearly $75 billion in market value since Sept. 11 from the chip makers and equipment makers who make up the S&P 500. Expectations for a turnaround in the sector "got completely wiped out," says Tobias Levkovich, chief stock-market strategist for SalomonSmithBarney.
Dell Computer Corp., the thoroughbred of the computer makers, reported last week that it would meet its scaled-back third-quarter earnings and revenue targets, prompting a rally in its stock. But Compaq Computer Corp. and Gateway Inc. both said they would now miss profit estimates by wide margins. And Sun Microsystems just announced 3,900 layoffs -- the first in the company's history.
With everyone revising business plans in the wake of Sept. 11, software companies had a difficult time even reaching customers in the most important weeks of the quarter. With corporate technology chiefs in a cautious mode even before the attacks, the attacks and resulting economic uncertainty made software vendors unsure if the orders they didn't get in September will arrive in the current quarter -- or much later. -- Don Clark, Rebecca Buckman and Molly Williams
New York
The economy of New York City must shoulder the cost of cleaning up the World Trade Center site and countless hours of overtime for city workers. City officials and analysts are still struggling to total up the costs. Estimates so far put job losses at 108,500 by mid-October, according to the Fiscal Policy Institute. On an annual basis, those workers earn $6.7 billion, and generated revenues of $16.9 billion for their employers, the think tank reported. But the picture remains blurred.
The single largest category of lost jobs in New York City is in the financial services industry: some 12,200 in the securities industry, 5,400 banking jobs and another 2,500 in the insurance business, according to estimates from the Fiscal Policy Institute Survey. But many of those jobs haven't been lost, however, just relocated to New Jersey or Connecticut, and some may return. The FPI estimates another 12,200 jobs will be lost in the retail trade.
Meanwhile, restaurants that depended on tourist business or traffic in lower Manhattan will close or reduce staffing, costing another 11,900 jobs. Broadway and other entertainment business may see 7,800 jobs vanish, while the advertising business could lose 2,700 jobs. |
