When will I fly again? Or why we need to understand pulp machines.

I asked myself a simple question a couple of weeks ago: when will I get on a plane again? I spend most of my time fundraising for Spring Lane, which makes planes and airports my natural habitat, despite the fact that I don’t like traveling. So I wanted to understand when I would need to start flying again, but figuring this out took me down a number of rabbit holes, many many zoom calls with fellow fund managers and investors, and some weird interviews (including a psychologist!). For those who want to jump to the answer, the short answer is September. The longer answer is ‘September, probably’.

My first engagement at McKinsey was to turn around a pulp and paper plant in northern Quebec. I had never even thought about how paper was made (I thought trees could be involved, to be fair). I was shocked to see how gigantic a pulp machine was: it's hundreds of meters long, bigger than an office block, is worked 24/7 and it is loud. When the operators guided me around, they showed me the Big Red Switch, a giant switch that could turn off the entire machine in a safety emergency. My machinist tour guide warned me: "Only use in a real emergency. It can shut down the whole machine in less than 20 seconds. But it takes at least two weeks to start it up again, because each part is connected to the others and you can't run one without switching on the others at the right time in the right order."

I've been thinking a lot about that machine while considering what a post-Covid 19 world looks like. In our second bi-weekly update to investors, we highlighted that, given the poor and uncoordinated response to the virus in the US, we are likely to see a very deep recession following an April filled with bad news. My partner Rob summarized some of our firm's thinking in a recent Forbes column. We know April will be a month in which all states will eventually be forced into lockdowns, and when the numbers of deaths climb steadily before they start to flatten at the end of the month, as they have in Italy and British Columbia already. But then?

Well, then, things will get messy…

To truly eliminate the virus, medical best practices dictate repeated and lengthy lockdowns coupled with tools such as rapid, extensive testing and broad use of masks. These measures are unlikely to happen for a number of reasons, I believe: first, we haven't seen many governments capable of reacting in real time in anything close to an effective way (other than South Korea and Taiwan maybe?). Second, psychological fatigue as well as truly frightening unemployment numbers will become salient issues relatively soon. In the US, this probably means that at the end of April we will see growing pressure by some states to “re-open”, regardless of medical advice.

But ultimately, for the giant machine to restart, the different parts have to start in the right sequence. Governments can shut businesses down, but they can't force them to reopen. A flat curve may save lives and reduce hospital overcrowding, but it still means some transmission. How much risk will everyone tolerate? To ask the question in another way, if the government removed social distancing guidelines today, would you, personally, go out?

For some, the answer is purely a function of needs. The stimulus that was announced in the US will last about a month for most, maybe a bit longer if companies keep their end of the bargain and reduce layoffs as much as possible. But by the end of April, some people will need to go back to work to put food on the table, regardless of risk.

For many more, though, work from home could continue. One surprise from this pandemic has been how relatively easily it has been to transition millions of worker to remote working. People can work from home and keep the lights on, but, generally, people working from home only really keeps the economy on life support. For example, as a fund, if we cannot visit companies, do our diligence, travel to build relationships, we will continue to operate but our economic activity will be a fraction of what it could be. For the economy to recover, eventually most of those who socially isolated will need to be coaxed back into offices and live meetings and delivery of things other than toilet paper. 

I considered my own case. What would I need to see to get on a plane, regardless of what the government is saying? Well, I first need to know my real risk. No one knows what the odds of being exposed to the virus is right now, or the risk of being infected if exposed. What we do know is what happens if you are infected: the latest research shows that 0.16% of people infected in my age group will die. I could live with those odds, frankly. Hospitalization rates for my age group, however, are much higher: 4.3%. Is a five percent chance of ending up in a likely overcrowded hospital worth getting on a plane or attending a meeting? Let alone the worry of infecting those more vulnerable than myself - people with a much higher odds of dying? And even if I were willing to take those risks, who am I going to meet? Who is going to welcome me into their offices if I come with a 5% chance of sending them or a family member to a hospital?

So, bottom line, to decide whether it’s safe to venture out, my only proxy is my odds of coming across an infected person. If there are a lot of infected people out there, I will stay home as long as I can, washing my hands rather than going out and stimulating the economy. For me to start traveling, my odds of coming across infected people need to be low. If, for example, I am willing to wander about when my odds of encountering the virus is less than 0.5%, something that seems reasonable to me, this should take place roughly three to four weeks after peak infection or seven to eight weeks after the beginning of a lockdown. Eight weeks after peak lockdown would take us around the end of June, at least locally, since most of the US really only shut down this week. And it will likely be longer than that, since the US response has been so uncoordinated (Florida still has not issued a lockdown, but to be fair they have very few older people in the state).

It gets worse – I can get local numbers for Boston or Montreal fairly easily, and estimate my odds. But airports are full of people who come from places like Turkmenistan, where they are trying the novel approach of fighting coronavirus by banning the use of the word. How do I get on a plane knowing this?

This is probably why we will see a five-phase recovery:

Phase 1 - End of April / May: Peaks of infection and deaths occur in April across Canada and the US and then start to slowly decline, although nowhere near zero. Nevertheless, politicians, eager to rescue the economy, push for some things to reopen, and many of those who live paycheque to paycheque brave the outside to return to work. Almost anyone who can still work from home does, however, so there are no new deals, no meeting friends at restaurants, no major initiatives taking place: the economy is still on life support.

Phase 2 - June / July: Infection rates in places that implemented solid lockdowns decline to the rate where folks with financial flexibility start to emerge (the counterpart to exponential growth is logarithmic decline). Face-to-face interactions at the local level start to pick up. Politicians push for 'normality' and most activities at the local level reopen. Large gatherings are probably still banned, and since countries that have made progress have no interest in reinfection, borders remain largely closed.

Phase 3 - August / September / October: Most Western and Asian countries have normalized activities, but this is a new “normal.” Schools are open, and economic activity returns. As countries have differed so much in their approach, travellers stay away from airports, and many borders are still closed: no one wants to take a plane with travellers from Brazil or other places that started their lockdown much too late. Progressively some countries agree to reciprocally accept each other's business and leisure travelers, and some international business returns to normal.

Phase 4 - November / January 2021: If Coronavirus is seasonal, the combination of colder weather and the recovery of international travel in some places creates new hotspots, which depresses activity, spooks investors, and returns entire industries to a standstill. We might even see some shorter lockdowns in civic-minded countries.

 Phase 5 - February 2021+: The timeline to develop and roll out a corona vaccine is, at best, a year. From now. And while we've never made a vaccine for a coronavirus, we have also never thrown as much money and resources at anything since the AIDS crisis, nor had governments ever been so willing to accept a vaccine, even if it comes with side effects or is marginally successful, so we will likely have some sort of a vaccine by then, and with a vaccine the developed economies recover fully and we then can wait for the next pandemic.

This is what starting a massive machine might look like. It’s not fun. There are lots of lessons to be learned here by all, but one specific lesson that the operators of the pulp and paper machine told me about resonates with me today. They said that the switch had only been thrown twice: the first time, they had rushed to restart the machine, and they did it in 7 days (a week without revenues is a LOT for a pulp and paper plant). The machine ran for a couple of days, poorly, but then the conveyor system broke, which required a new one and took them 5 weeks to replace. Since then, they had learned and created a two-week startup sequence that was slower but that didn’t break parts. The second time the switch was thrown, they used the longer explicit sequence, and the plant was up and running in two weeks – with nothing breaking.

So hopefully, even though this is our first go-around as a post-pandemic global economy, we can try and get it right without a second pandemic. And, if we do, I will be on a plane in the fall!