Sustaining Canada's Tourism Sector Through COVID-19

Sustaining Canada’s tourism sector through COVID-19

Analysis and options

March 27, 2020

Draft discussion document 24th August 2018

Last Modified 2020-04-14 2:35 PM Eastern Standard Time Printed

Context Last Modified 2020 Last Modified McKinsey & Company provided fact-based research and analysis to support the development of

the findings presented in this report, in collaboration with Destination Canada

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 The situation around COVID-19 is highly dynamic, evolving rapidly, and subject to significant uncertainty, a lack of reliable information and other events completely beyond McKinsey or Destination Canada’s control. McKinsey’s services are being provided on an expedited basis and may not have the benefit of certain detailed analyses in performing the services. This document does not constitute legal, medical, accounting, tax, or other regulated advice, such as professional advice normally provided by licensed or certified practitioners

This analysis is intended to complement two other elements of Destination Canada’s response Printed to COVID-19 that are under development in parallel: . An overall economic impact assessment of COVID-19 on Canadian tourism by Tourism Economics; and Analysis and and Analysisoptions presented here 27, are as2020 current of March . Destination Canada’s Phased Approach to Recovery

Analysis and options presented here are current as of March 27, 2020

2 Executive summary

As a result of COVID-19, and even with the benefit of government supports for businesses announced up to and including March 27th, 61,000 tourism businesses (57% of total) are projected to fail within the next 60 days, and 1.66 million tourism sector employees could be laid off (~83% of total). Pre-COVID-19, tourism was Canada’s 5th-largest sector, responsible for 10% of Canadians’ jobs and 2% of GDP The tourism sector is unlikely to quickly “bounce back” once the pandemic has ended. The disease has struck on the cusp of the busy summer season (June-August) that is 2020 Last Modified responsible for 36% of the tourism sector’s annual revenues and all of most tourism businesses’ profits. Should progression of the pandemic and consequent emergency orders continue past the July 1 holiday weekend, it is unlikely that tourism businesses will be able to profitably restart before the end of the summer season. Therefore, businesses that survive the next 60 days will

likely struggle to remain viable over the next 12-14 months until the 2021 summer season begins

04 - A two-stage approach to government intervention could address these structural issues, while positioning the sector for a rebound: Time PM Standard 2:35 Eastern 14 Stage 1: A sector-specific federal government intervention package worth ~$15B would sustain 51,000 businesses (60% of those that would otherwise fail if there is no Sustain summer season). At the low end, in the event of no summer season, support of $7B is projected to be sufficient to preserve ~18,000 businesses and ~87,000 jobs the tourism (respectively 21% of businesses and 22% of jobs that would otherwise disappear). At the high end, support of $20B is projected to be sufficient to preserve ~75,000 sector businesses and ~294,000 jobs (respectively 87% of businesses and 72% of jobs that would otherwise disappear). In order to quickly get funding to the tourism sector, and in order to ensure that it has the greatest benefit, an intervention package worth $15B could be composed of: ▪ $5.6B in loans and loan guarantees and a 10% wage subsidy for large businesses that act as “anchor tenants” for major tourism centres ▪ $3B in direct cash injections and loans for medium-sized businesses ▪ $6.2B in direct cash injections for small businesses The Government could also consider support for workers and communities, such as:

▪ Extended Employment Insurance benefits and training supports for laid-off tourism workers Printed ▪ Grants to communities and Indigenous communities that are particularly dependent on tourism Stage 2: A second phase of support (not costed) after the immediate threat of a pandemic has ended will be necessary to sustain and restart, or even rebuild, the tourism Prepare sector, once it is safe for tourism sector employees to return to work. In particular, anticipated reductions in visitor volumes could present an opportune time for for recovery infrastructure upgrades and upskilling programs. Canada’s entire tourism sector (businesses, workers, whole communities) could be seriously depleted, with critical gaps in the value chain, that will require substantial new investment to enable recovery.

Analysis and and Analysisoptions presented here 27, are as2020 current of March Existing and recently announced support programs are unlikely to meet the needs of the tourism sector: ▪ The 3-month 75% wage subsidy does not help tourism companies which are unlikely to yet have had seasonal workers on their payroll; it also does not help tourism companies with the 60- 65% of their expenses that are non-labour, and which are relatively fixed (such as utilities and rent/mortgages) ▪ Deferrals of GST/HST payments are not helpful when tourism operators are not generating any revenue on which they could pay tax ▪ The Small and Medium-Sized Enterprise Loan Guarantee program for $40B in funding through BDC and EDC is unlikely to be helpful to most tourism businesses, which have limited cash flow to support additional debt; also, in most cases, BDC and commercial lenders do not lend to tourism businesses because of their seasonal cashflows ▪ Canada Emergency Business Account offering $25B in interest-free loans is similarly unlikely to be helpful to tourism businesses because of their limited cash flow to pay debt

3 There are two phases for support that the tourism industry will likely require

1 2 Last Modified 2020 Last Modified Stage 1: Sustain the tourism sector Stage 2: Prepare for recovery

Estimated cost ~$15 billion to sustain ~60% of businesses projected to run out of cash in Not estimated – depends on duration of public health measures and desired

04 -

the event of no summer season scale of impact Time PM Standard 2:35 Eastern 14

Description Provide support to the tourism sector that addresses gaps in eligibility, Position the industry for a rebound and future growth by using the slowdown in amount and duration of already announced measures that are accessible to activity for long-term investments that would not otherwise be possible all businesses Replenish gaps in supply that emerge as a result of insolvencies Keep Canada top-of-mind as a place to visit while public health measures are in place, and reintroduce marketing ahead of demand returning Potential Small Direct cash transfer to businesses ranging from $5-75K Marketing promotions to keep Canada top-of-mind as a destination, and to

measures businesses per business depending on the duration of the pandemic encourage travel once it is safe to do so Printed Medium Total $ per business ranging from $50-700K depending on Temporary reductions in fees and taxes on travel (e.g., visa applications, businesses the scenario split out as: airport fees) . Cheque issued to business = 75% . New credit = 15% Backstop travel and health insurance to improve availability and . Re-finance debt = 10% accessibility

Large Loan as a share of revenue for businesses ranging from Training and upskilling to improve the knowledge and skills of employees in Analysis and and Analysisoptions presented here 27, are as2020 current of March businesses 5-25% the tourism sector Employees Expanded availability of support programs to workers in Community projects to sustain employment in communities dependent on the tourism sector who would not otherwise qualify tourism, and prepare them for the return of tourists Communities Grants to communities hard-hit by the pandemic Infrastructure and tourism product investments to improve tourism Indigenous Grants to communities hard-hit by the pandemic experiences once travel does resume communities

4 Scope of this analysis

Scope Pages

Potential Identify a range of potential stimulus levers that can be used to support the Canadian tourism 50-60 Last Modified 2020 Last Modified stimulus sector, based on past government stimulus packages (in Canada and in other developed countries) levers in response to other disease outbreaks (e.g., SARS, MERS, H1N1) and economic downturns (e.g.,

2001, 2008-2009). This would include identifying levers that:

04 - – have the most immediate stimulant effect (and which thus would be best for supporting the 51 Time PM Standard 2:35 Eastern 14 summer season); and – would best support small- and medium-sized tourism operators, who are likely not as well- 22-23 positioned to weather a downturn as larger operators Potential Develop a range of potential response packages that the government could pursue, depending 32-39 response on the amount of stimulus available. packages These recommendations would include:

– identifying which stimulus levers would be most effective, given the amount of stimulus; 33-36 Printed – projecting the impact of these packages in terms of revenue, tax receipts and employment; and 33-36 – proposing a range of potential levers that can be used to support the Canadian tourism sector, 4 including sequencing and timing for components of each package Response Assess the response to coronavirus of jurisdictions competing with Canada for foreign 86-90 from other visitors, and identify what Canada would need to do to effectively compete with those jurisdictions jurisdictions (e.g., level of marketing, degree of support, etc.) Dashboard Develop a dashboard of leading indicators that will aid the CTC and other government agencies in 91-98 of leading monitoring the progress of Coronavirus and its impacts on Canada’s tourism sector. indicators

5 Contents Section Page Tourism’s role in Canada’s economy 6

The potential impact of the crisis 12 2020 Last Modified Stage 1: Sustain the tourism sector 29

Options and support requirements 29 -

▪ 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 ▪ Mechanisms for delivering support 40 ▪ Assessment of levers available 49 ▪ Crisis governance 61 Stage 2: Prepare for recovery 67 ▪ Components of a post-crisis recovery plan 67

▪ Potential post-COVID-19 shifts in the tourism market 77 Printed ▪ Competing for international tourists 86 ▪ Leading indicators of recovery 91 Lessons learned from past tourism crises 99 Other countries’ responses to COVID-19 108 Appendices 118 ▪ Tourism-dependent communities by province 118 ▪ Projected impacts on specific sectors 131

6 Tourism is a major Canadian industry, accounting for ~2% of GDP, making it larger than telecommunications and mining; its GDP impact is felt in more regions than other major industries Percent of GDP

Share of Canadian GDP by industry, 2017 Provincial share of GDP by industry, 2017 Last Modified 2020 Last Modified Finance and insurance Oil and gas extraction

Finance and insurance 7.1 -

~80% in 90% in 04 - Oil and gas extraction 6.3 Ontario & Alberta Time PM Standard 2:35 Eastern 14 Quebec Retail trade 5.6

Residential construction 2.6

Tourism2 2.0

Telecommunications 1.8 Retail trade Tourism Printed

Federal gov’t1 1.7 ~60% in 20% in BC Ontario & 20% in AB Mining and quarrying 1.5 Quebec 30% in ON

Analysis and and Analysisoptions presented here 27, are as2020 current of March 20% in QC Food manufacturing 1.5

Auto industry 1.0

1. Excludes defence, based on Q3 2015 figures, annualized 2. Adjusted for Tourism GDP ratio, the share of GDP that is generated by tourism for tourism's major component sectors; Total tourism activities

SOURCE: Statistics Canada, “Canadian Tourism Satellite Account, 2015” (GDP calculation using basic prices); Moody’s Analytics; Ontario tourism 7 Tourism is an amalgamation of component sectors, all of which depend on it for survival and profitability

Tourism is not it’s own industry as The share of output and jobs attributable Tourism is composed of two core defined by the North American to tourism varies by industry: many elements: domestic and international 2020 Last Modified Classification System1, but instead a would not survive without tourism while

collection of sectors others require it as a critical part of sales

04 - Key sectors (in order of GDP contribution): Time PM Standard 2:35 Eastern 14 20% of jobs in Food services and drinking places are Domestic: spending by Canadians 40km outside Food services and drinking places directly attributable to tourism spending their normal, daily patterns Arts, entertainment and recreation 62% of jobs in Hotels are directly attributable to International: spending by international visitors Rail transportation tourism spending Tourism includes only visitors who stay at least 24 Hotels2 73% of jobs in Air transportation are directly hours and can involve: all business travel (business Air transportation attributable to tourism spending meetings, events, conferences), visiting friends and relatives, vacation / holiday travel, and education of Automotive equipment rental and leasing 85% of jobs in Travel arrangement and reservation less than 3 months

Travel arrangement and reservation services services are directly attributable to tourism spending Printed Tourism demand: domestic and international Water transportation These figures are often applied to tourism’s %, Q3 2019 RV (Recreational Vehicle) parks and recreational component sectors to reflect the size of the industry; camps However, our model considers the entire component Taxi and limousine service3 sector (e.g. 100% of Food services) to account for 2 Analysis and and Analysisoptions presented here 27, are as2020 current of March Motels the uniqueness of the current economic 78 Scenic and sightseeing transportation situation/shutdown and the nature of policy approaches (e.g. stimulus could help 100% of SME 22 4 Interurban and rural bus transportation Food service establishments, not just 20%) Domestic demand Foreign demand 1. North American Industry Classification System (NAICS) is used by Statistics Canada, the US Census, Bureau of Labor Statistics (BLS), and other North American agencies to report industry data 2. Traveller accommodations (NAICS 7211) is used elsewhere in this analysis and in the impact model 3. Not used in the impact model to lack of detailed financial data and high number of small operators without employees 4. Transit and ground passenger transportation (NAICS 485) used in model analysis due to data availability

SOURCE: Statistics Canada, “Canadian Tourism Satellite Account, 2015”; “Tourism demand in Canada,” table 36-10-0230-01; Destination Canada 8 Tourism is also an important economic contributor, responsible for more than $25 billion in tax revenues, and its component sectors employ a total of ~2M Canadians2

Tourism is an important contributor of … and a major source of employment for Canadians in every region of the country

Canadian government revenues… 2020 Last Modified Tourism contribution to government Territ- Natio-

revenue1 Ontario Quebec BC Alberta Atlantic Prairies ories nal

04 - $ billions Time PM Standard 2:35 Eastern 14 Provincial/ 100 2014 2015 2016 13 territorial 6 0 share of 6 24.7 25.5 24.1 Canadian 17 Domestic tourism 36 21 tourists 18.6 19.1 19.4 employment Foreign %, 2015 tourists 5.4 5.6 6.1 Printed 24.1 24.7 Provincial 25.5 1.3 1.4 employment 13.2 1.4 from 10.3 9.3 9.2 9.4 9.0 8.9 9.7

Analysis and and Analysisoptions presented here 27, are as2020 current of March Municipal/ 11.9 12.3 12.7 tourism Aboriginal %, 2015 Provincial 10.9 11.1 11.3 Federal

1. Government revenue covers receipts from taxes on incomes (i.e., on employment earnings, corporate profits, net income of unincorporated business and government business enterprises), contributions to social insurance plans (i.e., premiums for Canada/Quebec Pension Plan, Employment Insurance and workers compensation), taxes on production and products (such as sales and property taxes), and from sales of government goods and services 2. Total of tourism's major component sectors

SOURCE: Statistics Canada, "Government revenue attributable to tourism," table 36-10-0461-01; Statistics Canada, “Canadian Tourism Satellite Account, 2015” 9 ~85% of the GDP and employment impact of tourism is from small or large companies; combined they employ ~1.7M Canadians

Canada’s tourism sector broken down by company size1

Total GDP contribution Total employment Number of businesses 2020 Last Modified CAD millions (% of total), 20182 Jobs, thousands (% of total), 2018 Thousands (% of total), 2018 Air transportation

Arts, entertainment and recreation -

48.5 940 102.8 Automotive equipment rental and leasing 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 (47%) (47%) (96%) Food services and drinking places 39.5 765 7.9 87 Rail transportation (38%) (38%) 21.0 Recreational Vehicle (RV) parks and recreational campgrounds 5.9 9.0 Scenic and sightseeing transportation Transit and ground passenger transportation 275 Travel arrangement and reservation services 756 14.9 11.1 295 61.1 Traveller accommodation

24.9 Printed (14%) (15%) 100 Water transportation 8.4 6.6 204 146 3.0 0.8

75 (3%) (1%) Analysis and and Analysisoptions presented here 27, are as2020 current of March Small Medium Large Small Medium Large Small3 Medium3 Large4

1. Estimates due to lack of data segmenting industries by company size in Canada; small companies (annual revenue <$5M), medium companies (annual revenue $5-20M), large companies (annual revenue $20M+, or employee size greater than 200, assuming average revenue generated per employee of 100K); does not apply tourism GDP or employment ratios but instead uses all GDP and employment for tourism’s key contributing sectors, including: Air transportation (481), Arts; entertainment and recreation (71), Automotive equipment rental and leasing (5321), Food services and drinking places (722), Rail transportation (482), RV (Recreational Vehicle) Parks and Recreational Camps (7212), Scenic and sightseeing transportation (487), Transit and ground passenger transportation (485), Travel arrangement and reservation services (5615), Traveller accommodations (7211), and Water transportation (483) 2. Moody’s Analytics estimates using Statistics Canada data; in nominal CAD (current prices) 3. Incorporated businesses; figures from 2018 "Financial Performance Data" 4. Figures from 2019

SOURCE: Statistics Canada, “Canadian Business Counts, with employees, December 2019,” table 33-10-0222-01; Government of Canada, “Financial Performance Data”, Moody’s Analytics 10 Six sectors – hotels and motels, travel and arrangement services, scenic and sightseeing transport, air transport, and RV parks and camps – depend on tourism for more than ~60% of their jobs

GDP Tourism- Number of tourism- CAD billions, Employment dependent jobs dependent jobs Tourism sector 1 2018 Jobs, thousands % of sector, 2014 Thousands 2020 Last Modified Food services and drinking 32.7 1,060 20 215 75% of tourism-dependent places jobs are from 3 sectors:

Arts, entertainment and 16.6 388 22 85 -

recreation . Food services and 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 Rail transportation 11.2 49 8 4 drinking places . Arts, entertainment and Hotels2 10.4 144 62 80 recreation . Hotels Air transportation 9.0 76 73 55 Automotive equipment rental 4.3 21 17 3 and leasing 6 sectors are dependent on Travel arrangement and 3.0 42 85 35 tourism for ~60%+ of their reservation services employment:

Water transportation 2.2 15 6 1 . Hotels Printed RV (Recreational Vehicle) 2.1 15 59 9 . Air transportation parks and recreational camps . Travel arrangement and Taxi and limousine service 1.1 40 19 7 reservation services . RV parks and recreational Motels2 0.9 12 63 1

Analysis and and Analysisoptions presented here 27, are as2020 current of March campgrounds Scenic and sightseeing . Motels transportation 0.2 3 85 3 Interurban and rural bus . Scenic and sightseeing 0.1 3 7 0 transportation transportation

1. Moody’s Analytics estimates using Statistics Canada data; in nominal CAD (current prices) 2. GDP and employment data for hotels and motels calculated by applying their relative share (using Canadian Tourism Satellite Account) to Accommodation (NAICS 721) figures; due to data availability, Traveller accommodations (NAICS 7211) is used elsewhere in this analysis and in the impact model

SOURCE: Statistics Canada, “Canadian Tourism Satellite Account, 2015”; Moody’s Analytics 11 Contents Section Page Tourism’s role in Canada’s economy 6

The potential impact of the crisis 12 2020 Last Modified Stage 1: Sustain the tourism sector 29

Options and support requirements 29 -

▪ 04

12 Key findings in this section

▪ The tourism sector is dependent on the summer season (June-August) for at least 36% of volume, and likely most of its

profits for the year 2020 Last Modified

▪ In an optimistic scenario where businesses are able to re-open by July 1st, and demand bounces back to historical levels -

within 2 months, even tourism businesses that operate year-round are likely to lose money 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 ▪ Driven mostly by lack of cash on hand, and the continuation of relatively fixed expenses like rent/mortgages and utilities, COVID-19 could result in the closure of ~61,000 tourism businesses and ~1.7 million total layoffs in a scenario of 60 days with 100% revenue decline ▪ The type of support that tourism businesses most need is cash to continue to operate – Tax breaks are not helpful for companies that do not have any revenues

– Only the largest tourism companies are in a position to consider taking on loans; in their normal operations, most tourism Printed businesses do not generate enough cash flow to operate and repay the costs of operating for another season ▪ Employees in the tourism sector are seasonal; 31% are young, and 25% are immigrants. They are unlikely to be covered by

existing support programs Analysis and and Analysisoptions presented here 27, are as2020 current of March ▪ 388 municipalities depend on tourism for more than 15% of their local employment. These communities may need additional supports and services to see them through this recession

13 The tourism sector is dependent on the summer season; a closure of the sector until September 1 means that even with a quick rebound, businesses will lose ~58% of their annual revenue

Based on hotel occupancy and international arrivals levels, a conservative estimate1 … so if the COVID-19 crisis continues until September 1st ,

suggests tourism businesses earn ~36% of their revenue from June to August… tourism businesses will lose at least 58% of annual revenues 2020 Last Modified Industry seasonality Cumulative potential revenue loss based on when demand

Hotels International arrivals estimate, % share of resumes -

% share of occupancy % share of arrivals annual revenue % loss in annual revenue 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 January 6.5% 4.4% 5.4% June 1 -22% February 7.4% 4.4% 5.9% Scenario 1: March 7.8% 5.1% 6.4% summer July 1 -33% season is lost April 7.9% 6.1% 7.0% August 1 -45% May 8.6% 8.6% 8.6% June 9.4% 12.4% 10.9% September 1 -58% Printed July 9.6% 15.3% 12.4%

August 10.1% 15.0% 12.6% Scenario 2: October 1 -68% prolonged September 9.7% 9.9% 9.8% COVID-19

Analysis and and Analysisoptions presented here 27, are as2020 current of March November 1 -76% October 8.9% 7.4% 8.2% impact November 8.0% 4.9% 6.5% December -82% December 6.4% 6.6% 6.5%

1. This estimate is conservative because it is based solely on volume. Tourism companies likely charge more in the summer

Source: Statistics Canada; Ontario Ministry of Heritage, Sport, Tourism and Culture Industries 14 Projections of the required duration of public health measures suggest these will be in place until at least July 1st, meaning tourism businesses will lose at least half of their busy summer season

Epidemiological projections suggest that public health … which will limit tourism in the first half of the measures could be in place until the start of July… summer—the busiest, highest income period of the year 2020 Last Modified

Modeled impact of various public health measures, Great Britain Canadian hotel seasonality, average 2014-2019 -

Assumed duration of 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 300 public health measures Occupancy rate (%) Average daily rate ($) 100 Assumed duration of 200 250 public health measures 80 200 150 150 60 100 100 40

50 Printed

50 20 per 100,000 of of population 100,000per Critical care beds occupiedbeds careCritical 0 0 Mar Apr May June Jul Aug Sep Oct Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Summer season Analysis and and Analysisoptions presented here 27, are as2020 current of March Modeling of the impact of various public health If public health measures remain in place until measures in Great Britain suggests that these July 1, the tourism sector will lose half of its measures will need to be in place until the start of July; critical May-September summer season Canada put such measures in place two weeks earlier

Sources: CBRE Hotels’ Trends in the Hotel Industry National Market/Operations Report; Ontario Ministry of Heritage, Sport, Tourism and Culture Industries 15 Ferguson, N. et al (16 March 2020). “Impact of non-pharmaceutical interventions (NPI) to reduce COVID-19 mortality and healthcare demand” Imperial College COVID-19 Response Team. Year-round tourism businesses like hotels are barely profitable without the revenues of the summer season; even if there is a quick bounce-back from COVID-19, they are likely to lose money

Financial model of a typical 120-room hotel1 Revenues Expenses Net profit

$ thousands Last Modified 2020 Last Modified Annual net profit COVID-19 is affecting tourism Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec $ thousands (%)

Pre operators’ finances in 3 ways: -

COVID- 600 Losing some or all of the summer 04 - 19 season which is the greatest source Time PM Standard 2:35 Eastern 14 400 of revenue and profit 200 59 69 74 77 71 “Bookings are down from China by about 8 10 10 10 12 10 8 415 70 per cent between March and October, 0 so that’s obviously quite considerable” (10%) – Destination BC -200 No revenue to cover fixed costs -400 of properties, including skeleton Summer season staff, utilities, and property taxes while public health measures are in With Printed 600 force COVID-19 “If we have no revenue to cover our costs, Assumes 400 Assumed duration of we may be forced to close down. Closing a rapid public health measures down might mean we won’t be around until bounce- 200 71 summer 2021 – if at all” 10 12 10 back after 8 -42 8 -715 – Tourism business owner

Analysis and and Analysisoptions presented here 27, are as2020 current of March 0 the end -140 -149 -152 -178 -173 Having to pay back deposits of public (-28%) on travel that has been cancelled health -200 measures “Businesses count on these early bookings -400 as cash float to get by before summer. 1. A 120-room hotel was suggested by hotel industry experts as a “typical” hotel. Similar economics can be expected for smaller hotels; larger hotels may have additional revenue Returning many deposits is equivalent to a streams such as meetings and events that reduce the impact of seasonality. The model is based on CBRE average monthly hotel occupancy and average room rate for Canadian run on the banks but for tourism” hotels 2014-2019. Assumes 35% EBITDA margin in summer (May-September) and 25% EBITDA margin the rest of the year. The "With COVID-19" model assumes a 50% drop in – Tourism business owner revenues in March, a 100% drop in April-June, a 75% drop in July and a 25% drop in August; expenses are modeled as 50% of normal in April-June and 75% of normal in July

16 COVID-19 could result in the closure of ~61,000 tourism businesses and ~1.7 million total layoffs in a scenario of 60 days with 100% revenue decline

Layoffs due to decline in revenue Direct and indirect effects3 Sector details on

following page Projections (based on 100% revenue decline) Additional layoffs due to business closure Induced effects4 Last Modified 2020 Last Modified Length of shock to Tourism business Tourism employees Decline in Key takeaways tourism sector closures laid off1 Canadian jobs2 . Experts anticipate substantial business closures and employee

terminations across the industry if businesses are not provided with -

Month (# days) Thousands (% of total) Thousands (% of total) Thousands 04 - financial support to stay open and retain staff this summer and Time PM Standard 2:35 Eastern 14 beyond April (30) 28 26% 1,420 117 77% 2,011 2,373 . Significant increase in permanent business closures from 30 to 60 days, as many SMEs run out of cash after 30 days of low sales May (60) 61 57% 1,420 240 83% 2,172 2,562 Smaller restaurant owners have limited cash flow and their landlords won’t defer rents causing many to shutter June (90) 73 68% 1,420 290 86% 2,238 2,640 – Former Marketing Director, Canadian hotel chain

The most at risk are the family-owned businesses. They don’t July (120) 79 74% 1,420 318 87% 2,274 2,682 have a strong enough voice, preparation plan, and the

financial flexibility Printed

Scenario – Former Marketing Director, Canadian hotel chain August (150) 83 78% 1,420 338 88% 2,300 2,714 Hotels need to retain their staff to be successful, but doing so September (180) 86 80% 1,420 352 89% 2,318 2,735 is nearly impossible with limited revenue coming in

– Former Marketing Director, Canadian hotel chain Analysis and and Analysisoptions presented here 27, are as2020 current of March October (210) 88 82% 1,420 362 89% 2,331 2,750 Some individual operators are deciding to close and then maybe reopen, but no one has guidance on the long-term 84% 89% yet November (240) 89 1,420 369 2,341 2,762 – Former Director, Industry Association 1. Accounts for initial layoffs due to shock of 100% decline in revenue (calculated at ~70% of jobs), followed by additional layoffs due to permanent business closures over time; Percentage based on aggregate of sectors (~2M jobs) 2. Estimates job losses in overall Canadian economy due to initial layoffs and permanent tourism business closures (using multipliers); Calculated weighted average multipliers based on relative number of jobs of key tourism sectors 3. Supply chain effects (e.g. restaurants purchase from regional food wholesaler) 4. Effects of worker wages (e.g. restaurant worker shops at local retailer)

SOURCE: Statistics Canada, “Canadian Tourism Satellite Account, 2015,” “Canadian Business Counts, with employees, December 2019,” table 33-10-0222-01; Government of Canada, “Financial Performance Data”; Moody’s Analytics 17 Modeling the scenario of a 100% decline in tourism revenue over 60 days, the businesses most at risk of closure are food services & drinking places, arts & entertainment, and traveler accommodation Layoffs due to decline in revenue Direct and indirect effects3 Projections based on scenario of 100% revenue decline over 60 days Additional layoffs due to business closure Induced effects4 Tourism business Tourism employees laid Decline in closures off1 Canadian jobs2 2020 Last Modified

Tourism sector Thousands (% of total) Thousands (% of total) Thousands Rationale -

Food services and drinking places 42 66% 753 186 89% 1,168 166 Many restaurants are facing mandatory closures 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 Social gatherings in public spaces (e.g., recreational Arts, entertainment and recreation 12 54% 276 18 76% 360 63 venues) are restricted Travel bans limit foreign travel volume and Traveller accommodation 6 79% 116 92% 196 34 38 movement depressing occupancy rates

Recreational vehicle (RV) parks and recreational camps 2 61% 11 3 88% 17 3 Parks Canada is closing all visitor services

Canadian airlines have either reduced capacity or Air transportation 0 0% 54 71% 110 33 paused operations Sectors that 28 7 A call for self-isolation has reduced traffic on roads, Automotive equipment rental and leasing 0 do not 0% 15 71%

permanently commuting needs, and the volume of foreign visitors Printed close in 60 Train service has been reduced to help curb the Rail transportation 0 0% 35 71% days tend to 64 24 spread have more 3 1 Sightseeing is limited as individuals prefer to avoid Scenic and sightseeing transportation 0 0% 2 71% cash and large gatherings less 146 27 Travel bans limit foreign travel volume and Transit and ground passenger transportation 0 operational 0% 120 71% Analysis and and Analysisoptions presented here 27, are as2020 current of March expenses, movement but are still Few customers are booking new trips with a Travel arrangement and reservation services 0 0% 30 71% 40 9 at risk precarious regulatory and public safety climate Ferry service has been reduced, cruise routes Water transportation 0 0% 10 71% 9 26 suspended 1. Accounts for initial layoffs due to shock of 100% decline in revenue (calculated at ~70% of jobs), followed by additional layoffs due to permanent business closures over time 2. Estimates job losses in overall Canadian economy due to initial layoffs and permanent tourism business closures (using sector multipliers) 3. Supply chain effects (e.g. restaurants purchase from regional food wholesaler) 4. Effects of worker wages (e.g. restaurant worker shops at local retailer)

SOURCE: Statistics Canada, “Canadian Tourism Satellite Account, 2015”,” “Canadian Business Counts, with employees, December 2019,” table 33-10-0222-01; Government of Canada, “Financial Performance Data”; Moody’s Analytics 18 Past virus outbreaks have resulted in less severe drops in travel, yet recovery still took ~6 months

Impact of historical events on air travel Last Modified 2020 Last Modified Impact of virus outbreaks on aviation, revenue-passenger km1 Start of outbreak = 100 ▪ During the SARS and

All flights to, from and within South-East Asia Avian flu, 2005 Airlines based in Asia-Pacific Avian flu,2013 -

MERS cases, air travel 04 - All flights to, from and within South Korea MERS, 2015 Airlines based in Asia-pacific SARS, 2003 started to recover Time PM Standard 2:35 Eastern 14 110 shortly after the peak case count for each 105 virus 100 ▪ Domestic air travel in China may take ~4-6 95 months to return to 90 historical levels, 85 similar to SARS and

MERS Printed 80 ▪ While outbound and 75 inbound traffics may Start of take even longer (~6 70 outbreak to 12 months) as it 65 also depends on the

Analysis and and Analysisoptions presented here 27, are as2020 current of March 60 travel restrictions -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 around the world Months before and after outbreak

1. One revenue-passenger km equates to flying one paying passenger one kilometer

SOURCE: The Economist, IATA, WHO Situation Reports, Johns Hopkins CSSE, Reuters, CNBC, New York Times, OAG.com, EgyptAir 19 In the 2008 recession, volumes recovered faster than revenues in airlines and had a shallower dip than revenues in hotels

During and post-2008 financial crisis, airlines globally lowered prices to The financial crisis had a longer and stronger impact on hotel occupancy

prop up demand and accelerate recovery and revenues, taking 4+ years to recover 2020 Last Modified YoY % change vs. 12 months pre-recession (July 2007-June 2008) YoY % change vs. 12 months pre-recession (July 2007-June 2008) Passengers Yield Occupancy RevPAR

15 2

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 However, divergence of 0 Hotel revenues 10 yield and passenger -2 and occupancy volume continued for bottomed out another year -4 5 after 18 months -6 0 -8 Hotel revenues -10 dropped 2x

-5 Printed as much as Pre-crisis -12 occupancy, yield and and both took -10 -14 passenger 4+ years to volume -16 recover

-15 follow Analysis and and Analysisoptions presented here 27, are as2020 current of March similar -18 trends -20 -20 0 5 10 15 20 25 30 Months 0 6 12 18 24 30 36 42 48 54 Months since since event event 1 Average fare per passenger mile

SOURCE: PaxIS, OAG 20 Six categories of tourism businesses, individuals and communities are likely to be impacted in

different ways by COVID-19, requiring different types of support Last Modified 2020 Last Modified

Impacted businesses Impacted Canadians

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14

1: Small 2: Medium 3: Large 4: Laid off 5: 6:Indigenous

businesses businesses businesses employees Communities communities Printed Tourism Tourism Tourism Nearly 1M 300+ Nearly 2000 companies with companies with companies with employees in the municipalities rely entrepreneurs annual revenue annual revenue annual revenue in tourism sector are on tourism for and organizations <$5M $5-20M excess of $20M at risk of over 15% of participate in Analysis and and Analysisoptions presented here 27, are as2020 current of March temporary or employment Canada’s permanent layoffs share and Indigenous economic benefit tourism sector

21 1 Small businesses: Labour and taxes account for over half of small tourism companies’ annual expenses, suggesting these are high-potential areas to target support

Average annual expenses for tourism companies with annual revenues <$5M Share of operating and indirect expenses Percent of operating expenses, 20181

>20% 5-19% <5% Last Modified 2020 Last Modified

Tourism sector,

selected industries -

Implications for government support 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 Traveller Government can potentially support 596 32% 22% 11% 4% 7% 9% 4% 3% 7% 2% accommodation small tourism businesses with 4 categories of expenses covering

Air transportation 522 19% 17% 22% 9% 14% 6% 6% 1% 4% 3% >60% of their needs: . Labour and commissions2

Food services and 396 44% 15% 5% 17% 4% 5% 3% 4% 1% 1% . Taxes drinking places . Utilities and telecommunication Scenic and sightseeing 333 33% 21% 9% 8% 8% 5% 4% 6% 2% 4% . Interest and bank charges Printed transportation

Arts, entertainment 321 34% 25% 7% 12% 5% 4% 5% 4% 2% 2% Traveller accommodation companies and recreation are currently facing an additional expense, refunding deposits paid for

Analysis and and Analysisoptions presented here 27, are as2020 current of March Travel arrangement and reservation 241 48% 20% 3% 8% 1% 3% 7% 7% 1% 1% travel booked for summer 2020 services

Sector average 402 35% 20% 10% 9% 7% 5% 5% 4% 3% 2%

1. Incorporated businesses; figures from 2018 "Financial Performance Data" 2. Government of Canada announced 75% wage subsidy for qualifying SMEs (March 27)

SOURCE: Government of Canada, “Financial Performance Data”, 2018 22 2 Medium businesses: Labour and taxes also account for nearly two-thirds of medium-sized tourism companies’ annual expenses, suggesting these are high-potential areas to target support

Share of operating and indirect expenses Average annual expenses for tourism companies with annual revenues $5-20M

>20% 5-19% <5% Last Modified 2020 Last Modified

Tourism sector -

Implications for government support 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 Traveller Government can potentially support 5.8 37% 30% 5% 9% 4% 4% 3% 5% 2% 1% accommodation medium-sized tourism businesses with 3 categories of expenses covering

Air transportation 5.4 27% 28% 7% 10% 7% 3% 5% 5% 7% 1% >60% of their needs: . Labour and commissions

Food services and 4.7 25% 22% 14% 11% 11% 2% 6% 4% 3% 2% . Taxes drinking places . Utilities and telecommunication Scenic and sightseeing 4.6 33% 27% 16% 7% 7% 5% 5% 7% 3% 2% Printed transportation Traveller accommodation companies Arts, entertainment are currently facing an additional 4.1 42% 17% 5% 6% 4% 6% 4% 3% 1% 1% and recreation expense, refunding deposits paid for travel booked for summer 2020

Analysis and and Analysisoptions presented here 27, are as2020 current of March Travel arrangement and reservation 2.0 53% 23% 9% 3% 1% 9% 2% 3% 1% 1% services

Sector average 4.4 36% 24% 10% 8% 6% 5% 4% 4% 3% 1%

1. Proposed addition to the 10% wage subsidy announced by the Government of Canada on March 18, 2020 Note: # of jobs per company are estimated based on total labour and commission expenditures for each business divided by the average annual wage of an FTE in that industry

23 3 Large companies: needs and impact assessment Non-exhaustive - Illustrative only

The 800 largest tourism companies (>$20M in revenue) employ ~742K individuals and account for ~$48.5 Bn in GDP Jobs Total 2020 Last Modified Examples of players # of Revenue attributed Total impact 2019 data unless specified HQ location employees (USD, $M) to tourism2 multiplier3 (USD, $M)3 Considerations Traveller accommodations

Healthy economic multipliers -

04 - Four Seasons USA 34,000 3,270 6,343 ▪ Multipliers for the tourism sector Time PM Standard 2:35 Eastern 14 Temple Hotels1 Canada 545 127 62% 1.9 246 generate economic activity twice Coast Hotels Canada 900 87 168 as high as revenue ▪ Food services have the highest Air transportation multiplier due to strong regional Air Canada Canada 29,895 13,961 28,035 supply chains Air Inuit Canada 610 195 73% 2.0 391 Foreign-based brands but Central Mountain Air Canada 250 80 160 Canadian operators ▪ Many brands across these Food services and drinking places

industries (Marriott, IHG) are Printed Restaurant Brands International4 Canada 6,200 4,140 9,369 foreign-domiciled but their Recipe Unlimited4 Canada 11,000 921 20% 2.3 2,084 operators are mainly based in Big Rock Brewery Canada 120 42 94 Canada Anchors Arts; entertainment and recreation ▪ Many of these players operate as Analysis and and Analysisoptions presented here 27, are as2020 current of March Vail Resorts USA 6,600 2,200 4,611 cluster-builders / are destinations Casino Niagara Canada 3,700 322 22% 2.1 676 in and of themselves, creating a Stratford Shakespearean Festival Canada 650 98 205 ripple effect and thus sustaining other businesses 1. Operators of Hilton, Radisson, Days and others hotels 2. Employment generated by tourism, from Statistics Canada, “Canadian Tourism Satellite Account, 2015” 3. Total economic impact includes direct, indirect, and induced effects from revenue 4. Restaurant Brands International: Owners of Burger King, Tim Hortons, and Popeyes; Recipe Unlimited: Owners of Harvey's, Swiss Chalet, Montana's, Kelsey's, and Milestones Grill & Bar 5. Data from CapIQ

Source: D&B Hoover’s; CapIQ; Statistics Canada, “Canadian Tourism Satellite Account, 2015”; Company financial statements 24 3 Large companies: needs and impact assessment (detailed example) Non-exhaustive - Illustrative only

Selected balance sheet components for tourism companies with annual revenues >$20M

USD million, 2018 Last Modified 2020 Last Modified

Tourism firm Implications for government examples support 1 -

Revenue >$20M 04 - Government stimulus supporting large Time PM Standard 2:35 Eastern 14 Air Transportation A 13,913.6 13,885.0 10,795.9 1,961.5 1,327.0 411.2 697.9 28.6 3.03 tourism businesses should consider: Highly-leveraged sectors: 1,045.9 993.8 768.6 109.8 45.8 52.1 3.40 B . Air transportation companies and traveler accommodation companies Arts, Entertainment feature high debt-to-equity ratios, 133.4 126.3 17.6 104.1 12.5 7.1 0.38 and Recreation A meaning a large degree of existing debt and potentially higher risk 943.6 758.3 291.20 363 65 51.5 185.3 1.35

B Low profitability: Printed . Large players in food services and Food Services and A 37.7 37.4 21.6 15.4 0.4 0.3 0.3 0.16 traveler accommodation are (similar Drinking Places to smaller firms) susceptible to downturns in the economy due to 38.5 36.5 27.5 7.7 0.6 0.4 2.0 0.31 B small profit margins

Analysis and and Analysisoptions presented here 27, are as2020 current of March Traveller accommodation companies Traveler 11.3 10.5 5.0 4.8 0.4 0.7 0.8 8.87 are currently facing an additional Accommodation A expense, refunding deposits paid for B 13.2 24.3 1.0 13.2 1.5 4.8 (11.1) 3.492 travel booked for summer 2020

1. All Canadian-based companies; Based on real data pulled from D&B Hoover’s; 2018 figures (for consistency across companies – not all 2019 annual data was available) and in USD million; less available data than SME industry averages 2. Data from 2019 (2018 data not available) 3. Airline amortization and depletion often listed under cost of sales rather than operating expenses

Source: D&B Hoover’s 25 4 Employees: A younger workforce, large share of newcomers, and high seasonality may render many displaced tourism employees ineligible for government support announced to date

…are unlikely to be met if supports like the wage The needs of employees in Canada’s tourism sector… subsidy are not extended through the summer season 2020 Last Modified

Young labour force depends on tourism for summer jobs

04 - ▪ Youth (age 15-24) represent 31% of tourism employees vs. Time PM Standard 2:35 Eastern 14 13% of the overall labour force ▪ The 3-month Wage Subsidy does not last long enough ▪ 40% of Canadian youth employment is in tourism with many to support someone who makes most of their money in the students leveraging a summer job to pay for school summer (e.g., students)

High fluctuation and seasonality swings ▪ Seasonal tourism workers are not eligible for EI or work-sharing, and may not meet the income threshold for ▪ ~25% of sector employees work for part of the year the Canada Emergency Response Benefit (e.g., summer season) vs. 18% of Canadian Labour – “To qualify, an affected worker will have to reside in Printed Force who participate in seasonal work Canada and have earned $5,000 in the previous 12 months” Large source of employment for newcomers, and migrant workers ▪ Employers of migrant workers could only support these Analysis and and Analysisoptions presented here 27, are as2020 current of March ▪ ~25% of tourism employees are immigrants or non- employees this summer through an extended Wage permanent residents Subsidy ▪ Many employers rely on Temporary Foreign Workers due to the sector’s labour shortage

1. Maximum education level of high school diploma or equivalent

Source: Statistics Canada, Tourism HR Canada, Tourism Industry Association of Canada, Government of Canada 26 5 Communities: 388 municipalities depend on tourism for more than 15% of their local employment, and may need additional support; within these, 22 are more than 10% Indigenous Detailed breakdowns in Appendix

Top at-risk municipalities from decline in tourism revenue Tourism share of employment 15%+2

Municipalities by tourism employment share (>15%) and median household income1 Aboriginal share of population 10%+3 2020 Last Modified

Tourism employment share Median household income Number of communities by Share of

% of total employment in area, 2016 $ thousands share of tourism and tourism -

≤16 16-18 18-21 >21 ≤45 45-55 55-65 >65 Province aboriginal population employment 04

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 Alberta 31 3 34 28%

British Columbia 97 17 114 19%

Manitoba 12 1 13 19%

New Brunswick 17 4 21 19%

Newfoundland and Labrador 35 1 36 16% Wabamun Whitecap Northwest Territories 3 15%

Nova Scotia 6 18% Printed

Ontario 42 2 44 22%

Prince Edward Island 6 19%

Quebec 71 1 72 20%

Analysis and and Analysisoptions presented here 27, are as2020 current of March Brokenhead Saskatchewan 59 2 61 18% Waiwakum 9 Yukon 1 10 17% Communities called out on map are examples with employment share in tourism industries over >15% and Indigenous population >90% Total 388 420 1. Used Census Subdivisions (CSDs); filtered out CSDs with tourism employment less than 15%; employment 32 2. Tourism employment defined as Arts, Entertainment, and Recreation, and Accommodation and Food Services employment as a share of total (more granular industry data not available at CSD level) 3. Aboriginal definition used here: “Aboriginal ancestry (only)“ and "Aboriginal and non-Aboriginal ancestries“ as detailed in Census Profile

Source: Statistics Canada, “Census Profile,” table 98-401-X2016042; “Place of Work Status,” table 98-400-X2016321; “Household Income Statistics,” table 98-400-X2016099 27 6 Indigenous communities: Following the outbreak of COVID-19, Canada’s Indigenous tourism sector is forecasted to lose $800-900M in GDP contribution and at least 12,000 jobs in 20201

The COVID-19 crisis endangers the stability of Indigenous tourism in Canada with four key risks

Last Modified 2020 Last Modified

- 14 2:35 PM Eastern Standard Time PM Standard 2:35 Eastern 14 1: Indigenous tourism has 4: Indigenous tourism historically been supported by 2: The majority of revenue 3: The crisis endangers long- businesses are the driving force Indigenous funding channels comes from foreign visitors term trust in the sector’s viability for many local economies

▪ No business supports announced to ▪ ~70% of till revenues come from ▪ The success of the sector has ▪ Providers of authentic cultural date will be distributed through foreign visitors with greatest been built on the establishment experiences are typically not-for Indigenous funding channels earnings seen during the of an institutional framework and profits operated by Elders, potentially hindering the sector’s summer season earned trust of communities to knowledge-keepers, and

access to capital recognize tourism as a viable communities to provide a source Printed ▪ These operators will be career of economic development ▪ Without an immediate liquidity especially vulnerable to the near injection (e.g., grants) hundreds of halt of international travel and a ▪ The crisis could return the Indigenous tourism operators are shortened summer season industry to 2001 levels with forecasted to go out of business $800-900M less in GDP

Analysis and and Analysisoptions presented here 27, are as2020 current of March within weeks contribution predicted for this year

1 in 3 international visitors to Canada are interested in Indigenous tourism experiences (37%)2

1. Indigenous Tourism Association of Canada statement March 12, 2020 2. Destination Canada 2018

Source: Indigenous Tourism Association of Canada, Conference Board of Canada, Destination Canada 28 Contents Section Page Tourism’s role in Canada’s economy 6

The potential impact of the crisis 12 2020 Last Modified Stage 1: Sustain the tourism sector 29

Options and support requirements 29 -

▪ 04