It has been just over a year since the coronavirus pandemic began to wreak havoc across the globe, devastating businesses, in particular, the travel industry. Both airlines and cruise lines experienced the true severity of the financial implications that followed when their entire businesses came to a dramatic halt. Since then, airlines have managed to restart flights fairly quickly, albeit, at a much smaller capacity and with new regulations, but nonetheless starting to make progress on their road to recovery. However, the same cannot be said about cruise lines. Cruise lines have remained shut and will continue to do so until the pandemic is over. Now, with vaccinations finally starting to be rolled out, one vital question remains for cruise lines, can they bounce back, but crucially can they survive?
Current Financial Situation
It is beyond dispute that cruise lines have been amongst the worst-hit financially by the pandemic crisis. The three biggest cruise lines in the world are Carnival (LSE: CCL) (NYSE: CUK), Royal Caribbean Cruises (NYSE: RCL) and Norwegian Cruise Line (NYSE: NCLH). The largest of the three, Carnival Corporation, is currently burning through a staggering $650 million per month, along with Royal Caribbean Cruises burning through around $290 million and Norwegian Cruise Line burning through around $160 million. Taking a closer look at cruise lines’ financial condition makes the crippling effects that Covid-19 has had on the industry even clearer. Take, for example, Norwegian Cruise Line (NCLH), the third largest cruise line with 8% market share. Their TTM revenue for the was $2.751 billion, a 56.77% decline Y-o-Y. For the third quarter, it was only $7 million, representing a 99.66% decline Y-o-Y, with their net profit margin diminished to -114.59%. Assessing their balance sheet was even more frightening as NCLH’s long term debt stood at $10.465 billion, an 84.48% increase Y-o-Y and their liabilities for the third quarter was $13.314 billion, a 37.75% increase Y-o-Y. NCLH’s unprecedented drops in revenue and increase in liabilities are much similar to those by Carnival and Royal Caribbean Cruises, making a strong recovery difficult to envision.
Cruise lines’ only option for survival was to borrow. As a consequence, they have all had to raise huge amounts of capital, nearly $20 billion between all three, just to survive the cash burn. This enormous amount of capital raised has secured their future, enabling their businesses to stay afloat until at least the end of 2021 with all operations continuing to be postponed. However, this has come at a great cost, considering the capital was raised partly through share dilution and giving out equity at a huge discount, therefore it has significantly reduced the companies ownership and earnings per share. In addition to this, other capital raised through loans will incur substantially higher interest expenses making pre-pandemic profit margins even harder to attain.
With such a heavy financial burden, can they really bounce back?
Although the current financial situation of these cruise lines points towards a less profitable future, there is ample room for recovery. Firstly, before determining their future prospects, it is important to recognise the success that the three largest cruise lines have consistently demonstrated in the past, through both good and bad times. Going into the crisis, all three of the big cruise lines were in great financial condition with steady growth in profits and lots of valuable assets, such as their ships which ended up being a lifeline for using as collateral. For example, before the pandemic crisis hit, NCLH and RCL demonstrated the ability to manage and grow their businesses successfully. NCLH demonstrated prudent business management as their total debt increased only from $6.4 billion to $6.8 billion between 2016 and 2019. Over a 5 year trend from 2015 to 2019, NCLH increased revenue by 48% from $4.4 billion to $6.5 billion and in the same time period their net profit grew from $340 million to $930 million. Similarly, RCL’s revenue grew 32% from 2015 to 2019 from $8.3 billion to $10.95 billion, along with net income growing from $666 million to $1.9 billion. Therefore, both NCLH and RCL demonstrated their ability to grow and increase their profitability.
The coronavirus pandemic has by far been the most financially impacting disaster to have affected the cruise line industry but it certainly has not been the first. In 2012, a cruise ship capsized off the coast of Italy leaving 32 passengers dead, which sent tidal waves through the cruise lines industry as the tragedy was later known as the Concordia disaster. The financial aftermath of the event was felt all across the industry. For example, Carnival’s net income was down 30% in 2012, and a year later its net income dropped even further by 20% as bookings slowed and passengers were reluctant to take a cruise. There have been many more times in the past where the cruise line industry has been rocked such as the 2008 crisis also leaving financial scars, however, in all instances the common trend that repeated itself is that demand returned and at an even higher level. This has been another test, proving how prudent and shrewd management has helped these cruise lines survive and will help them prosper in the long term. Furthermore, with 6 cruise line companies, such as Jalesh Cruises, already going bankrupt this will enable the big three to emerge with less competition gaining more market share.
Most if not the entire recovery of the cruise ship industry is reliant on significant Covid-19 infections and deaths dropping, combined with a successful inoculation of the population. Last year this may have seemed completely unrealistic, however, with vaccinations already taking place, it is becoming a reality. According to data collected by Bloomberg, more than 37.9 million doses of vaccines in 49 countries have been administered. The latest rate was roughly 2.41 million doses a day, on average. Even though it is still hard to say when travel restrictions will end and the pandemic will be over, it is reasonable to expect that by July a significant portion of the population will have been vaccinated and by year’s end we will be coming out the other end. Therefore, provided passengers return in large numbers, a strong recovery is very achievable. An early sign already indicating strong demand will return was seen in November, when RCL put out a call for volunteer passengers for a simulated voyage to test out safety protocols set out by the CDC. More than 100,000 people signed up. Furthermore, according to a recent Cruise Critic reader survey, 81% of U.S. cruisers will book a future cruise, and nearly half of respondents are already looking to book one.
Overall, the travel industry, cruise lines, in particular, were faced with the biggest challenge in their entire history. Carnival, Royal Caribbean Cruises and Norwegian Cruise Line have managed to weather through the storm prudently like in the past. Currently, with enough capital to last another few uncertain months ahead, and strong indicators showing demand will return, it is justified to say that eventually, the big 3 will be able to return to pre-covid levels of revenue which will be reflected in their share price.
The Sweeney Club 