Conservation of Pressure:
How Select Industries & Companies Have Reacted to the COVID Crisis

By: Nathan Johnson
Boaz Salik

It seems unlikely that many areas of life will emerge from the COVID crisis untouched – if indeed any do at all. Though not everyone will sustain heavy losses, the gradation will be more of how severe the losses were, not whether there were any losses at all. In other words, the question will likely be less “who wasn’t hit?” and more “who was hit the least?”

On the other end of that spectrum is the question of who was hit the most? Any number of possible answers can be found in countries, governments, populations, and communities that disproportionately suffered under COVID. But what of the markets? Amid countless disruptions to the regular workings of the world of commerce, a handful of industries have taken heavy fire from the pandemic.

Some marketing teams have employed a variant of the reminder that “no playbook exists” for how to respond during a pandemic. Hopefully after COVID, that playbook will be written. The circumstances that led businesses in 2020 to toss their strategy documents into the trash could be the proving ground for real-world examples of what worked and what didn’t for industry responses in a time of unprecedented crisis. That was the premise of our research within this shifting landscape – which industries have been impacted the most by COVID, and how have they reacted?

Conservation of Pressure – A Framework

In business as in life, no two entities will respond to the exact same circumstances in the exact same way. To account for this natural dissimilarity, we needed to create a common language of comparison – a framework that would accommodate disparate business models and customer bases while also structuring data to create a holistic picture of an organization’s response to the pressure of the pandemic. For a company in crisis, maintaining stability will depend on five crucial components, five potential outlets for the tremendous pressure of staying afloat through and past a global catastrophe.

1. Workforce Pressure – company engages in workforce layoffs, furloughs, storefront closures, or reduction of hours.

2. Shareholder/Bondholder Pressure – company reduces or eliminates dividend payouts, share buybacks, or restructures debt

3. Government Intervention – company receives federal aid via capital injection, increased revenue, or other government assistance.

4. Customer Indifference – company cannot respond to customer needs because of internal pressure.

5. Community Indifference – company cannot give back to communities or charity organizations because of internal pressure.

These five dimensions became the basis of comparison for what we identified as some of the industries impacted most by COVID – airlines, banking & finance, energy, hotels, automotive (GM and Ford), manufacturing, and aerospace. Top companies within each industry were assessed based on a numerical scale derived from the above criteria (Fig. 1). 

Fig. 1 – Main Pressure Dynamics for Corporations in Crisis
* Emphasis on employee layoffs
** Emphasis on suspended dividends/buybacks

Each company assessed was assigned a number within each category, with the composite score for each company determining their net pressure index. Net pressure indices were created at both company and industry levels, with the industry composite representing an average of numbers from each company.

The net pressure index shows its true value when plotted against an industry’s stock performance. This comparison revealed the key finding of this experiment: in general, the more pressure an industry is experiencing as exhibited by their stock price, the more pressure they’ve been exerting outward in one or more of the dimensions above (Fig. 2).

Fig.2 – YTD Stock Performance vs. Pressure Index for Affected Industries

Some of the findings from this distribution of industries are unsurprising – for instance it makes intuitive sense that the beleaguered airline industry would be exerting the highest pressure of industries surveyed. For the purposes of this article, we will take a closer look at the pressure dynamics of four industries exerting high (airline & hotel), low (banking & finance), and medium pressure (manufacturing) relative to stock impact.

Airline Response

Stock performance (YTD 7/2/2020): -50.01%
Pressure index (out of 10): 5.8

Airlines assessed: Southwest (LUV) [Stock= -36.79%, Pressure Index = 6] Delta (DAL) [Stock= 52.60%, Pressure Index = 6], United (UAL), JetBlue (JBLU), and American Airlines (AAL)

The travel industry has of course shouldered a heavy burden from the pandemic. With substantial percentages of airline fleets grounded due to closed borders and close-quarters contagion fears, airlines are all but on life support. Airlines in general are exerting more shareholder than workforce pressure; every airline assessed moved to suspend shareholder dividends and stock buybacks, while also taking significant government aid. This is likely what enabled them to mostly avoid directing the pressure to the workforce via layoffs, though this does vary by company. Compare, for instance, the reactions from Southwest vs. Delta.

Despite a consistently high distribution of pressure to shareholders and government aid, these airlines responded well to customers and communities with benefits like extension of change fees and comped flights for first responders to high-impact regions. Additionally, Delta saw a furlough of 1000 employees (1) while Southwest publicly stated their intentions to avoid involuntary furloughs (2).

Hotel Response

Stock performance (YTD 7/2/20): -39.11%
Pressure index (out of 10): 5.67

Hotels assessed: Marriott (MAR), Hilton (HLT), Hyatt (H)

Hotels are experiencing similar stock pressure as airlines, with a similar exertion level in kind, but the two industries are not exerting it in identical directions. The key difference between the two is observing which conditions surrounded workforce pressure. In this case, hotels took the lead – every hotel assessed saw furloughs of varying severity either planned or implemented, as well as company-wide pay cuts including executive salaries. Notably absent is any indication of government assistance to the hotel industry. Though representatives from these companies were present at a White House briefing with the tourism industry (1), it appears that hotels will be passed over for federal assistance – at least for the time being. This makes for an intriguing contrast with the airlines, featuring the inverse scenario – high government aid, low workforce pressure. This could be owed in part to the highly unionized nature of the airline industry, but may also indicate strings attached to government funding limiting workforce pressure.

Banking & Finance Response

Stock performance: -39.30%
Pressure index (out of 10): 3

Banks assessed: JP Morgan Chase (JPM), Bank of America (BAC), Citigroup ( C ), US Bank (USB) [Stock = -39.47%, Pressure Index=4], Wells Fargo (WFC) [Stock=-52.90%, Pressure Index = 2]

Banks overall are managing well, likely thanks to the early action from the federal government to avoid total economic collapse. Though it is difficult to find specific numbers for these companies relative to federal stimulus receipts, the indirect effect of the injection into central banks is born out in the rest of their response profile. Bondholders are only seeing a reduction of buybacks, and thanks to online flexibility of a lot of retail bank positions, many were able to offer employees minimally reduced hours or remote work options instead of resorting to layoffs. Customer responses have centered around payment relief like extended payment grace periods, assistance measures, and fee waivers. Banks have primarily responded to communities via financial donations to humanitarian organizations; US Bank’s mid-line score on their community dimension doesn’t indicate a total lack of charitable activity – they committed $30m to humanitarian aid and nonprofit organizations (1). However, this is simply not on the same scale as the $175 million from the Wells Fargo Foundation toward a variety of aid efforts (2). Wells Fargo’s greater response to community could certainly be attributed to its size in the market, but this response is strategically sound given recent instances of brand erosion for the company. 

Manufacturing Response

Stock performance (YTD 07/02/2020): -18.06%
Pressure index (out of 10): 3.8

Companies assessed: 3M (MMM), Honeywell (HON) [Stock=-18.07%, Pressure Index=5] General Electric (GE) [Stock=-38.89%, Pressure Index=4] Caterpillar INC (CAT), John Deere (DE)

The manufacturing industry is in a unique position, consistent with its position in most any crisis: even when supply chains are strained, there is an increased demand for critical products which many manufacturers possess the infrastructure to create. This is reflected in the overall low score for community and customer indifference – crucial operations are either powered or supplied by these companies; keeping the world supplied remains a priority for manufacturers. Shareholders saw either limited buybacks or dividends, but none of the companies assessed had eliminated both. The two spikes toward government aid and workforce impact are mostly owed to the outliers of Honeywell and General Electric. Both companies oversaw workforce reductions within their aerospace or aviation divisions (1, 2). Potential government intervention for the industry is reflected in two main facets: the National Association of Manufacturers (NAM) submitted a letter calling for legislative action including “providing economic stability” in the event of future public health crises (3), and GE’s received two separate contracts amounting to $400m from the U.S. government in exchange for ventilator production (4). GE also was less indifferent to community and customers, as opposed to Honeywell.

Putting The Info to Use

Assuming the “Conservation of Pressure” principle applies across a broader range of industries and companies, the ramifications for planning and policy setting may be significant.  Since the pressure a given company or industry experiences may be difficult to control in the near-term, its corresponding Pressure Index can be taken as fixed over that time frame.  For example, a company experiencing a 20% decline in its stock price can be expected to exhibit a Pressure Index of about 3.5. However, how that pressure is distributed across Employees, Shareholders, Government, Customers, and Community is to a large degree controllable, and can have significant micro- and macro-economic ramifications when taken in aggregate.  Similarly, the terms of any government assistance can significantly affect which stakeholders are impacted and by how much.

There is room for further discussion with these findings. Introducing the principle of conservation of pressure may enable a more detailed examination of the mechanisms – explicit or implicit – by which companies make their “wartime” decisions. For instance, should they be furloughing employees before cutting dividends or buybacks? What are the constellations of factors influencing why – and how – a company takes government money? Is it reasonable to assume a brand awareness tie-in for community awareness – i.e., the extent to which companies are giving back to communities is the extent to which they care about their brand? If so, under what circumstances would an organization curtail or ignore community benefits altogether in times of crisis?  

Time may tell the longer-term implications of these pressure readings – whether government involvement comes with strings attached, whether companies will draw ire for customer and community indifference and face an uphill PR battle. What remains to be seen is whether the conservation of pressure law remains innate to an industry’s ecosystem – with potential new spikes in different directions once the world begins to stabilize once again. 

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