Coronavirus has already brought about a lot of disruption in our world, and sadly it isn’t ‘the winter of our discontent’ yet. Economists expect the economic recession entailing it would be far worse than the 2008 financial crisis.

We can see the steep impact of COVID on the Nifty Index Chart

It is but natural then, that Coronavirus is often called ‘The Black Swan of the Decade’, since the genesis of the term Black Swan, it has been a buzzword to talk about all bad events that surprised us. But is it right to call it so? The question will be addressed soon.

In light of the current pandemic, most of the companies are operating in a stressed scenario both in financial and managerial terms. Some of them are expected to succumb under the pressure, some already did. 

Only the fittest of the companies will survive.

A similar scenario was seen during the 2008 financial crisis, when Bear Stearns and Lehman Brothers failed, but Goldman Sachs and Morgan Stanley did not. Washington Mutual and Wachovia failed, but Wells Fargo and Bank of America did not. AIG required a massive government bailout, Travelers did not.

Will COVID too cleanse the economic systems by removing rigid and outdated institutions, eventually evolving the economy?

This is the question we are trying to answer here. For that, we need to –

  1. Prove companies which failed were rigid and with poor controls.
  2. Companies which survived were the ones with better controls and adaptability

Let’s address the Black Swan first.

What is a black swan event?

As explained by the man who coined the term in his 2007 book Black Swan, Nassim Taleb, an event can come to be named a black swan if it satisfies all the three conditions:

  • It has to be an outlier – something outside the realm of regular expectations
  • It should have an extreme impact.
  • It is explainable only after the occurrence of the event.

So Black Swan event are by definition astronomically rare, unpredictable and catastrophic.

The Pandemic that the world is facing right now is no doubt catastrophic, but is COVID a black swan event?

Is Coronavirus a Black Swan?

AttributeDoes COVID Suffice?Reasoning
OutlierNo.Pandemics have always been a matter of when and not if.
Governments have conducted exercises to prepare for a pandemic worldwide.
Extreme ImpactYes.Demand reduction; Industry disruption; Behavioural shifts; Unemployment rise.
Explainable after the event.Maybe.This element is very vague, and eventually evidence is collected to provide explanation, so as to normalise the event. In case of COVID some evidences do point towards such a pandemic in hindsight. But we cannot be too sure.

Is COVID a black swan event?

The lockdowns that were imposed by the governments of countries amounting to more than 50% of world GDP have affected adversely a lot of industries. The exit path from lockdowns are seen to be precarious, with the threat of a second wave always lurking around the corner.

All this has deeply affected the normal business cycle. 

How does the business cycle operate?

A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around its long-term natural growth rate. It explains the expansion and contraction in economic activity that an economy experiences over time.

Let’s see an example for the banking industry in a free economy, (Exhibit 2)

For manufacturing firms, they over/under stock accordingly and similarly, for service firms their revenues fluctuate with the cycle.

How does COVID affect it?

A disruption usually affects a business cycle in three ways –

  • Depth of disruption – How steep is the fall?
  • Length of disruption – How wide will be the fall?
  • Shape of recovery – How will we recover from the fall?

In light of COVID the impact of the above-mentioned factors are as follows –

Depth of Disruption

COVID has caused the implementation of lockdown which has brought the economy to a standstill causing a steep cut in demand. The steep fall in oil prices of around 33% highlights the halt in economic activities due to COVID.

Length of Disruption

COVID has caused a behavioural shift in consumers and this shift will exist for a prolonged time regardless of lockdown being lifted or not.

Moreover, COVID has caused a temporary increase in unemployment (Exhibit 4) which caused a steep drop in savings followed by curbs on spending to replenish lost savings. This will increase the length of COVID’s impact on the economy.

Shape of recovery

Different economists have different views on the shape of recovery.

Overall, by causing a prolonged recession for the economy the virus will act as a stress test for organisations and ensure only those which have appropriate controls in place will come through.

For example,

Banks will see a steep rise in the default rates and at the same time a fall in the recovery rates.

Before we dwell into our analysis of industries let us first understand the limitations of this study.

Fall in oil prices due to COVID
Unemployment % India

Limitations of the study.

The study primarily has a possibility of two errors, Type 1 and Type 2.

Type 1 Error – False Positives – Good companies which failed:

There will be certain industries which have experienced unprecedented stress causing even the best of the companies to fail. Such instances will contradict our study which states only companies with weak practices will fail.

Type 2 Error – False Negatives – Bad companies which survived:

There may be some companies with weak governance and outdated technology which will survive COVID. This may be due to less stress on the relevant industry or bailouts by investors or governments. Such instances also constitute outliers which have not been covered in our study.

Method of study.

For our analysis is drawn using the following process –

  • Identify 4 industries worst-hit due to the pandemic.
  • Within each industry find bankrupt companies and survivors. Since they both are from the same industry, they have similar stress scenarios.
  •  Identify financial and managerial reasons for bankruptcies.
  • Compare with survivors.

Our objective is to establish that the companies which failed were the ones who had outdated practices and weak governance.

By eliminating companies with bad practices COVID would have helped cleanse the economy.


We have selected the following industries for our study –

  •  Oil and gas.
  •  Aviation.
  •  Retail.
  • Automative

Oil and Gas

Industry Overview (See Exhibit 5: A) –

  • Price war and low demand due to COVID caused 33% slump in price.
  • Steep production cuts across the world reduced economies of scale.
Oil and Gas (A)
Bankruptcies AnalysisSurvivor Analysis
Diamond OffshoreH&P
Financial issues – Q1’20 EBITDA margin: -73%Current Ratio: 0.31 Management issues – Poor controls to absorb impact of price war.Low reserves. Financial overview – Q1’20 EBITDA Margin: -2.86%Current ratio: 2.97 Management controls – Quick to cut down operations and exp.High cash reserves to sustain outflows.
Extraction oil and GasAvg. Industry
Financial issues
D/E: 4.41
Gross Margin: 17.7%
Management issues –  Poor capital structure with huge debt obligations.
High executive compensations.
Financial overview –  
D/E: 0.71
Gross Margin: 36.6%
Management controls –  Lower debt levels compared to bankrupt firms.
Stringent board oversight.
Comparison of company stock returns within industry


Industry Overview (See Exhibit 5: B) –

  • 80% Flight movements restricted.
  • Business aviation ¯70% w.r.t 2019.


Industry Overview (See Exhibit 5: C) –

  • Global sales ¯33% for PV’s and trucks.
  • 2lakh+ Jobs lost in India alone.


Industry Overview (See Exhibit 5: D) –

  • Behavioural shift towards e-commerce.
  • Brick and mortar store usage ¯58%.
Aviation (B)
Bankruptcies AnalysisSurvivor Analysis
Virgin Australia                          Lufthansa
Financial issues:
D/E Ratio: 5.08
Interest Cov.: 0.66
Management issues – Poor revenue and cost management.
Annual loss for 7years.
Financial Overview:
 D/E Ratio: 0.70
Interest Cov.: 6.98
Management issues – Quick retrenchments and resource usage.
Better reserves to sustain outflows.
LATAM Airlines                          Cathay Pacific
Financial issues –
D/E Ratio: 1.74
Quick Ratio: 0.43
Management issues – Inflexible decision making.Poor governance.
Financial overview – D/E Ratio: 0.9
Quick Ratio: 1.8
Management controls – Quick adaptability to the routes available.Strong board oversight.
Exhibit 5: B
Retail (D) 
Bankruptcies AnalysisSurvivor Analysis 
J. CrewAmerican Eagle Outfit 
Financial issues
-ve Equity Value
Rev. growth 2.3%
Management issues – Poor loyalty programmes.
Poor brand positioning and decision making.
Financial overview
Financial Lev: 1.4
Rev. Growth 6.8%
Management controls – Higher customer retention.
Better positioning of brands.
Financial issues – ROE 5yr Avg: -83%
-ve Equity value
Management issues
Huge debt obligations taken up by GNC.
Falling sales due to increasing competition and COVID.
Financial overview – ROE Q1’20 19.97%D/E: 5.0 Management controls – Better capital structuring than industry.Robust online presence and quick decision making. 
Exhibit 5: D
Automotive (C)
Bankruptcies AnalysisSurvivor Analysis
Hertz Global                   Avis Budget
Financial issues
Op Exp./Rev: 56.1%
Revenue per day, per vehicle – $43 Management issues – Vehicle utilization rate – 69%
Large vehicles, ­depreciation.
Financial overview
Op Exp/Rev: 48%
Revenue per day, per vehicle- $58.21 Management controls
Vehicle utilization rate – 76%Vehicles as per demand.
Less Ideal.
APC Auto-Parts               Denso
Financial issues
Cash flow ¯ by $5.6M. since Oct’19.
O/S loan -$431.2mn. Management issues – Disastrous Capital StructuringIneffective liquidity management.
Financial overview – Cash flow from Op. ­13% since Dec’19.
D/E ratio: 0.165.
Management controls – Effective Cash Flow management.
Sufficient Liquidity maintained.
Exhibit 5: C


As we can see that the bankrupt companies have either high degrees of financial leverage (High D/E, Negative Equity and Low Interest Coverage Ratios) or poor decision-making capabilities (Poor ROE/ High expense ratios/ Low growth and Low CF) compared to the survivors.


Therefore, based on our study, keeping in mind the limitations of our study, we have come to the conclusion that COVID has indeed helped cleanse the economy by removing companies with poor controls and rigidity.