Can The Cruise Lines Outlast Coronavirus?
As we press on into yet another week of quarantine and social distancing to combat the invisible enemy that is coronavirus (COVID-19), it continues to become more and more apparent that this sudden and startling contraction to our economy may not be followed by the V-Shaped recovery for which many optimists were hoping. Companies from almost every industry are being brought to the brink, some seemingly overnight. Restaurants are closing their doors, air travel has been heavily limited, and the very supply chains that drive logistics for the largest tech companies in the world are, at least for now, grinding to a halt as they seek ways to adapt to this “black swan event”. Fortunately, the $2 trillion stimulus bill passed just over 3 weeks ago, in tandem with aggressive monetary policy from the Federal Reserve, has offered some degree of relief for large and small businesses, as well as individuals alike. However, there is an industry, one with over $100 billion in total estimated economic impact, that has largely been overlooked by these fiscal and monetary policies, while also being positioned as perhaps the most vulnerable of all to coronavirus impacts: The Cruise Industry.
Not Like Other Consumer Discretionary Companies
Cruises, like all consumer discretionary purchases, are, by definition, non-essentials. These are companies that historically suffer when a recession rears its ugly head, as their goods and services are some of the first things consumers ditch when they are strapped for cash (no matter how good it is, you are going to give up that chai latte from Starbucks before you give up electricity or toilet paper). However, the coronavirus pandemic is unlike any market-altering force we have seen before, and some consumer discretionary companies have only felt marginal impacts, or have even been helped, at least in the short run, by the changes we have seen.
Take entertainment companies like Disney. While the world-renown business has had to close its parks amid efforts to reduce the spread of the virus, it is still maintaining several other highly diversified revenue sources, such as its new streaming service Disney+. People are spending more time indoors, suggesting increased subscriptions to Disney’s services, as well as Netflix, Hulu, and other competitors, over the coming weeks. Even restaurants and other eateries, whose business models are threatened directly by the coronavirus, have the saving grace of 3rd-party delivery services. Despite the loss of over $25 million in potential revenue from the restaurant industry during the first three weeks of the nation stay-at-home order, companies like Grubhub, Doordash, and Uber Eats, who did not exist anywhere near their current size just a few years ago, have made it possible for many restaurants in the country to keep their kitchens open and maintain at least a fraction of their usual revenue streams. While more conventional economic declines have historically led to more people shopping at grocery stores and not dining out, the need to stay at home and maintain social distancing has prompted many households to pay the extra fees and support their local eateries, now with new “zero contact” drop-off methods for increased viral protection.
The cruise industry has no such saving grace or contingency method of operations. They make money from offering cruises and selling items on those cruises, but there are no cruises to offer! Almost overnight, the very foundation of what made the cruise industry profitable—or even functional—was upended for what is still an unknown amount of time. As you might have guessed, investors took note of this issue, with the three largest cruise lines, Carnival, Royal Caribbean, and Norwegian Cruise Lines, falling 77%, 75%, and 81% YTD, respectively. These cruise stocks are at 10+ year lows, and the correlation of their price behavior, even within their extremely short-term, intraday trading patterns, is astounding. Along with the obvious loss of revenue wearing on these cruise lines, the companies have also been hit with PR nightmares. There had been occasional instances of illness outbreaks on cruise ships in the past (these ships are, after all, full of people stuck closely together for many days), but the severity of the coronavirus pandemic has brought back these concerns tenfold. On March 27th, CNBC reported that 4 passengers had died of coronavirus on a Carnival-owned vessel, and numerous ships from various cruise lines have been denied access to ports for fear of inviting the infected into their country. Within a week of this report, Carnival hit its 52-week low of $7.80/share, compared to a price of $50.83 on December 31st, 2019. In short, the operations and the image of all major cruise lines have been “capsized” by this pandemic. While initial reports suggest that cruise bookings for 2021 are strong, it is still unclear as to just how long social distancing and other preventative measures will remain implemented. A recent Harris Poll reported that less than ⅓ of Americans suspect they will be comfortable traveling or flying within 3 months of “flattening the curve” of total coronavirus cases, so the longer the pandemic lasts, the more likely these early cruise signups will be canceled or deferred. The question, therefore, is if the cruise lines will be able to outlast the COVID-19 storm, which, so far, has shown no sign of slowing.
A Highly Leveraged Industry.
There is no debate that the world will rise from coronavirus, and much of our daily routines will return to how they were just a few weeks ago. There is also no debate, however, that many companies from all sizes and sectors will not survive long enough to see the light at the end of this diseased tunnel. When I was a freshman in college, a professor told my class “good companies manage for cash flow”. This is especially true now, as companies are relying on cash reserves to survive this time of reduced consumption and logistical slowdowns. The cruise lines, unfortunately, are not in very liquid positions, and their revenue stream is now all but nonexistent. Carnival, Royal Caribbean, and Norwegian Cruise Lines last reported current ratios of 0.27, 0.15, and 0.20, respectively, suggesting they are not equipped to pay off short-term debt with the current cash and assets they have on hand. The companies can fall back on additional lines of credit they have, as well as issue additional equity issuances, to raise funds, but refinancing current liabilities weakens long-term fundamentals like debt-to-asset ratios, and issuing more stock will dilute value for current shareholders.
Carnival has already undergone efforts to secure over $6 billion by drawing its remaining credit lines, issuing more stock, and selling close to $4 billion in bonds with an eye-popping 11.5% coupon rate. The cruise line, which services almost 50% of the industry by itself, is also suspending its dividend and making all possible efforts to minimize operating costs while its ships are docked. These efforts will ensure security for Carnival over the coming months, and its competitors are likely to follow similar strategies. Nevertheless, the company will still be faced with significantly higher interest expenses for the coming years, as well as increased uncertainty in long-term customer loyalty, given the chaos and apparent dangers surrounding cruises throughout this pandemic.
It is still anyone’s guess for how long the coronavirus pandemic will last, and even after the infection rate is reduced there will still be the fear of a resurgence until a vaccine is developed and distributed. The largest player in the cruise industry has already called in almost every fail-safe it has, and even these are not without their drawbacks.
Things will have to stay bad for a long time before we start seeing any of these companies declaring bankruptcy. Nevertheless, it is now safe to say that, unless scientists can develop a coronavirus vaccine soon, these cruise lines will be facing the financial ramifications of this pandemic for years to come.
Citations
“Carnival Boosts Bond Sale After 12% Yield Attracts $17 Billion.” Yahoo! Finance, Yahoo!, 1 Apr. 2020, finance.yahoo.com/news/carnival-boosts-bond-sale-12-163536929.html.
“Poll: ⅔ of Americans Won’t Travel For At Least Three Months After COVID-19 Subsides”, Suzanne Kelleher, Forbes, 8 April 2020, https://www.forbes.com/sites/suzannerowankelleher/2020/04/08/poll-2-of-3-americans-wont-travel-for-at-least-3-months-after-covid-19-subsides/#331d20014b60
“COVID-19: The Impact on Supply Chains”, Lehigh University, Phys.org, 28 Apr. 2020, https://phys.org/news/2020-04-covid-impact-chains.html
Kalogeropoulos, Demitrios. “Carnival Raises Cash By Issuing Stock and Taking on More Debt.” The Motley Fool, The Motley Fool, 31 Mar. 2020, www.fool.com/investing/2020/03/31/carnival-raises-cash-by-issuing-stock-and-taking-o.aspx.
Smith, Rich. “Why Carnival Corp, Royal Caribbean, and Norwegian Cruise Line Stocks Are Surging Full-Speed Ahead Monday.” The Motley Fool, The Motley Fool, 6 Apr. 2020, www.fool.com/investing/2020/04/06/why-carnival-corp-royal-caribbean-and-norwegian-cr.aspx.
Korosec, Kirsten. “Uber Eats Waives Delivery Fees for Independent Restaurants during COVID-19 Pandemic.” TechCrunch, TechCrunch, 16 Mar. 2020, techcrunch.com/2020/03/16/uber-eats-waives-delivery-fees-for-independent-restaurants-during-covid-19-pandemic/.
Strauss, Lawrence C. “Carnival Launches $6 Billion in Debt and Stock Sales. It's Also Suspending Its Dividend.” Barron's, Barrons, 31 Mar. 2020, www.barrons.com/articles/carnival-launches-6-billion-in-debt-and-stock-sales-its-also-suspending-its-dividend-51585667238.
John Staszak, CFA, “Carnival Corp: Analyst Report and Rating”, ARGUS Research Co, March 25th, 2020. https://www.etrade.wallst.com/v1/common/pdf.asp?docKey=11-143658300-194070ANOTE&ComponentType=&researchProvider=ArgusAnalyst (NOTE: Link Requires Access to An Active E*TRADE Investment Account, So May Not Be Valid For All Users).
