Now playing at a theatre near you — Pandemica

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Cineplex, Air Canada and Great Canadian Gaming haven’t enjoyed the latest run, but hope the future paints a better picture

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The pandemic and subsequent economic restrictions and lockdowns have clearly hurt certain industries more than others. Grocery stores, in particular, have had a great year, as people stayed and ate at home more often, while restaurants and bars suffered for the same reason. Revenue at the big three grocers grew 5.8% to 9.7% last year and profits on average grew even faster, while revenue at Restaurant Brands International Inc., the parent company of Tim Hortons, dropped 10.4% and profit fell by more than twice that.

But those drops don’t compare to the pummelling taken by Cineplex Inc., Air Canada and Great Canadian Gaming Corp., which experienced the three biggest revenue decreases on the FP500 as COVID-19 either restricted or completely prevented their normal operations for big chunks of time. Theatre chain Cineplex’s revenues fell 74.9% to $418.3 million and it almost fell out of the FP500, falling 242 spots to land at No. 487. Air Canada’s revenue fell 69.5% to $5.8 billion and it now sits at No. 87 this year, down 60 spots from a year ago. Great Canadian Gaming’s revenue dropped 67.4% to $442.3 million, putting it at No. 474 — 190 spots lower than last year.

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Cineplex, Air Canada and Great Canadian Gaming suffered the three biggest revenue decreases on the FP500

All three companies are heavily dependent on consumers being allowed to move about wherever they like, but they also depend on people being willing to spend a fair amount of time in an enclosed space with no guarantee that everyone sitting nearby doesn’t have COVID-19. Governments will eventually reopen the economy to the fullest extent, thereby allowing everyone to return to their pre-pandemic habits. But what if people don’t? Going to the movies, sitting at a blackjack table and flying somewhere exotic for a holiday are all nice things, but they aren’t essential.

Cineplex may have the toughest challenge of the three given the rise of Netflix and home entertainment options. Until recently, any big-time movie worth its cost debuted in theatres, but streaming has changed all that. For example, Mulan, a live-action reboot of a classic Disney animated film, skipped theatres due to the pandemic. But the time from movie theatre to home theatre was already shrinking to weeks, compared to months when video tapes first made their appearance. Some movie fans have even set up their giant televisions in their backyards and invited friends over, somewhat recreating the social experience of going out.

At some point, these temporary behaviour changes can become permanent, a process scholars call habit formation. But we were already changing our movie-going behaviour well before COVID-19. Though overall industry revenues have been increasing, U.S. ticket sales have been declining for 17 years, something that surprised Tanjim Hossain, a professor of marketing at the University of Toronto. “The other thing is that there are a lot of alternatives in the sense that our home TV and technology have been improving, and because of streaming, the library we can access has become so much larger,” he says.

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Cinema owners have been changing their models to offer a VIP experience, something you can’t readily recreate at home and Hossain believes that will continue, with the business model becoming even more specialized. Ellis Jacob, CEO and president of Cineplex, says the company is ready to play after managing costs and raising funds in the first quarter of the year, including $57 million from the sale-leaseback of its head office in midtown Toronto and an oversubscribed debt raise of $250 million, which he called “a testament to the market’s faith in our business and our recovery.”

But the pandemic continues to weigh heavy. Attendance dropped to 415,000 people during the first quarter, compared to 10.7 million a year ago — a 96.1% drop — while revenue fell to $41.4 million from 282.8 million. Box office revenues were a paltry $3.8 million. On the plus side, there are now two million registered users of the Cineplex Store, a 33% jump from the same period a year ago. Of course, those users are buying popcorn and drinks from the grocery store and not Cineplex.

Still, Jacob is optimistic people will come back, maybe even more so than pre-pandemic, noting that Demon Slayer: Mugen Train in December became Japan’s highest-grossing film to date, taking in the equivalent of US$362 million. “We have been in business for over 100 years, and we’ve been through a number of changes, with the television, with the VCR, with DVDs, now with streaming,” he says. “To me, the bottom line is that a streaming experience doesn’t compare to a theatrical experience. And the studios now recognize that and movie-goers feel the same way.”

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A movie, Jacob says, is an escape and he believes a safer experience than going to a shop in a mall or a restaurant. Cineplex has also started what it calls private movie nights, allowing a family or a group of related people to rent a theatre for themselves. And it’s also branching out into other areas, introducing in February The Rec Room in Dartmouth, N.S., Atlantic Canada’s first Playdium location, which is 30,000 square feet of gaming fun and various food options.

“Safety is our No. 1 priority,” Jacob says, pointing out that there are more opportunities for contact-less buying of tickets and concessions, as well as entering and exiting an auditorium. “I think there is such a desire to actually get out that I think you’ll see a strong uplift in the number of individuals who feel safe coming back to the movie theatre, and that’s something I personally long to do.” And if people don’t feel comfortable going to the movies just yet, he says they can keep using the Cineplex Store to rent a movie.

Key to getting customers back will be trust. Trust that Cineplex — or any company for that matter — is doing the necessary things to protect both customers and employees. That was lacking at the beginning of the pandemic when Cineplex argued for looser restrictions so that more people would be allowed to go to the movies. “They just wanted everybody in there and that was not a good feeling,” says Saul Klein, dean of the University of Victoria’s Peter B. Gustavson School of Business. “And then, over time, as the pandemic continued, they changed their tune. They started to realize that in order to bring people back into cinemas, they have to change the environment, make it more customer-friendly, in that sense.”

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Klein says Cineplex has since regained some of that trust as it made less of a public fuss about closing theatres when required to do so. The 2021 Gustavson Brand Trust Index, released in May, pegged the Canadian Automobile Association, Dyson and Lego as Canadians’ top three trusted brands. Cirque du Soleil was the most trusted in the entertainment category in the survey of almost 9,000 people. Many brands experienced an initial decrease in trust as the pandemic put public and economic health at odds with each other, but most have rebounded.

The pandemic has been a bumpy ride for Air Canada.
The pandemic has been a bumpy ride for Air Canada. Photo by Peter J. Thompson/National Post, FPM photo illustration

Air Canada, however, has experienced the opposite. “Although they experienced a rise in trust in early 2020, their failure to issue customer refunds and them promoting travel during the pandemic saw a decline in trust overall,” Klein says. That early rise in trust was due to the perception that the airline was “responding to the crisis in a positive way by protecting its employees,” he adds. But that was not sustained as refunds were held up. “From the consumer perspective, that violates all kinds of norms or expectations,” he says. It was also revealed that the airline had hired social media influencers to promote travelling during the pandemic, which didn’t help. (Air Canada did not respond to requests for comment.)

But the federal government has finally come to the rescue, offering a package worth up to $5.9 billion, contingent on Air Canada refunding customers’ cancelled tickets. Yet the company on its first-quarter earnings call said customers have been slower than expected in taking up the offer. The airline ended March with almost $6.6 billion in liquidity, not including the government aid, so it has enough cash to weather the current pandemic, even though it burned through almost $14 million per day in the first three months of the year, a rate it roughly expects to continue through the second quarter. “We have built a resilient airline,” CEO and president Michael Rousseau said on the earnings call. “I assure (our employees), the analyst community as well as our investors and other stakeholders that brighter skies are ahead of us in the near future.”

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Revenues continued to decline in the first quarter, dropping 80%, or almost $3 billion, from a year ago to $729 million. It also reported a loss of a bit more than $1 billion, though executives are confident that both leisure and business travel will return once restrictions are lifted and most people are vaccinated. Lucie Guillemette, executive vice-president and chief commercial officer, on the earnings call said they are expecting both leisure travel to Europe and business travel to pick up after Labour Day, and that there is already customer interest in sun destinations such as Mexico, Dominican Republic and Florida.

“People are getting used to not going anywhere, but it’s also very clear that people are tired of not going anywhere,” says the U of T’s Hossain. “It is true that business travel probably will go down, but it’s hard to say, because there are still benefits of doing things in person.” He also points out that some people have been able to save more money during the pandemic since there are fewer places to spend it, so they’ll have the means to travel once they feel comfortable flying.

In other parts of the world, people have resumed flying fairly quickly once restrictions eased. Airlines in the U.S. reported an increase in bookings starting around mid-February, and almost 1.7 million people were screened at U.S. airport checkpoints on May 3, according to the Transportation Security Administration, the highest since March 12, 2020, but still 35% below a typical Sunday in 2019.

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In the meantime, Air Canada has downsized its fleet, preferring to lease or buy more planes as they are needed, boosted its cargo efforts and is rebuilding its Aeroplan loyalty program. It also plans to launch a non-stop Montreal-to-Cairo flight in June, and then build on a partnership with EgyptAir to serve other markets it currently doesn’t, similar to the way its partnership with Qatar Airways provides connections through the latter’s Doha hub.

Great Canadian Gaming could be facing a long recovery.
Great Canadian Gaming could be facing a long recovery. Photo by NW Group/Great Canadian Gaming Corporation – Media Relations, FPM photo illustration

In some ways, Great Canadian Gaming has the clearest path forward since it’s being bought by private-equity interests that presumably are betting they have the deep pockets to ride out this and any future downturn. Apollo Global Management Inc. in November made a $39-per-share offer and later bumped it to $45 after facing stiff shareholder opposition, valuing the deal at US$1.9 billion.

Those deep pockets will likely be needed since Altus Group Ltd., a Toronto-based real estate software maker, pegs the casino industry’s projected time to recovery at two to three years. “Notwithstanding the vaccine rollout underway, there will be a significant lag time before full operation is restored for most markets,” it said in May. One factor is the older demographic that casinos attract, with the average age of customers being in the mid-60s, and there will be some stigma around re-engaging with others as well as with all the gaming touch points.

But after the deal closes, Great Canadian will be led by a Canadian management team, have Canadian board members and remain headquartered in Toronto. Apollo also said it expects that Canadian institutions may co-invest in the gaming company after the acquisition closes. But as a private company, it won’t be required to divulge its financials so this may be the last time Great Canadian Gaming appears on the FP500. It’s more likely that Cineplex and Air Canada will stay and even bounce back up in next year’s edition. FPM

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In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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