Washington, DC, September 22, 2020 --  

Travel industry executives are making rosy predictions to keep hope alive. Investors would be fools to believe them.

Things have got to get better. This overriding sentiment has dominated business strategies for travel and entertainment companies since the start of the pandemic. The devastating blow of lockdowns in the spring of 2020 was followed by tentative re-openings over the summer. Those re-openings offered a glimmer of hope to hard-hit industries like cruise lines, airlines, hotels, restaurants, shopping centers and night clubs.

Just as in normal times, shareholders expect updates on their investments. Executives have had to deliver some bad news of late and with collapsing revenues, cutting costs through furloughs, layoffs and property sales has generally been the best they can do. Carnival announced plans last week to sell 18 cruise ships.¹ Lufthansa announced plans yesterday to retire 150 Airbus planes and increased the specter of layoffs by declaring over 22,000 employees "surplus"². In the last two weeks, Hilton, Marriott and Omni Berkshire have announced plans to permanently close Manhattan hotels.³

Yet the companies still burn money. Even skeleton crews require salaries, and some real estate and vehicles must be maintained for the inevitable recovery. It will get better, right? It's got to.

But the wishful thinking underpinning recovery plans is what is so dangerous. In the business world, plans announced by the CEO are akin to orders from a military general. Employees execute business plans based on a vision of the future, and repeat them like a mantra. Trouble is, the CEO's vision of the future may never come to pass. It's often based on wishful thinking, and when it comes to a global pandemic, reality can contradict the wishful thinking in ways that are completely beyond corporate control.

Major cruise lines including Carnival, Norwegian, and Royal Caribbean had announced plans to restart voyages in September earlier this summer. In early August, that date slipped to October 31.⁴ Then at the end of the month, Princess Cruises said they would delay further to early 2021.⁵

It's hardly uncommon in business for schedule dates to slip. But when they repeatedly slip, they have a tendency to continue slipping. This is a warning sign that projections have nothing to do with facts and everything to do with wishful thinking.

The impetus behind such wishful thinking is that the alternative is "unthinkable." If things don't get better, the company might not survive. In the United States, Chapter 11 bankruptcy means that investors lose all their investments, while the company soldiers on. This is the best case scenario. Chapter 7 bankruptcy, with the company liquidating all its assets and all employees losing their jobs is the worst case scenario. No CEO desiring to keep his job can give either plan to shareholders. They must propose alternatives no mater how unrealistic they may be.

The most draconian option, which could be summarized as a "cut your losses" plan might mean shutting down the company before it is too late, liquidating all assets and paying out any remaining value to shareholders. But in an era where most companies are highly leveraged, there often would be no residual value after all debts were paid. And even if there were, corporate investors (and lending banks) would be loathe to admit that they should lock in a huge loss to salvage a small amount of money.

This is the corporate application of the sunk cost fallacy, the phenomenon where people are so reluctant to admin their investments have gone bad that they continue to believe unrealistic fantasies about ways the investments can be saved and often keep throwing even more good money after bad in an effort to support these fantasies.

Of course, sometimes fantasies do come true. Things will eventually get better. The day will absolutely come when the pandemic ends, or at least lessens, and when that happens travel and entertainment industries will begin a recovery. But nobody knows when this will happen, and many companies won't survive long enough to see it. The overwhelming incentive for industry leaders is to paint a rosy picture. Only a fool would believe them.

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Notes:

1. Cruise Critic, Carnival Corporation to Sell More Cruise Ships, September 15, 2020

2. One Mile at a Time, Official: Lufthansa Retiring Entire A380 & A340-600 Fleet... Probably, September 21, 2020

3. New York Times, Pandemic Puts N.Y.C. Hotels on the Brink: ‘A Complete Washout’, September 21, 2020

4. Tampa Bay Times, The Cruise Industry is Staying Shuttered Through October, August 5, 2020

5. Washington Post, Cruise Lines are Already Canceling Sailings Into 2021, August 25, 2020