Like its rivals, Royal Caribbean (NYSE:RCL) and Carnival (NYSE:CCL), Norwegian Cruise Line (NYSE:NCLH) has seen its business completely halted in the wake of efforts to stem the worldwide coronavirus pandemic. The cruise line finished its last cruise on March 13, and it does not plan to launch another one until April 11 -- though that date may very well be pushed back.
The company calls this a "voluntary" suspension of its operations but had it not stopped, it likely would have been forced to by the U.S. government (and by governments in the other countries where it sails to and from). This suspension of operations and the uncertainty of when it can resume sailing has caused shares in Norwegian to fall to $12.02 as of market close on March 27, down about 80% from a 52-week high of $59.78 a share.
Will Norwegian Cruise Line survive?
The current $2 trillion federal bailout package that the U.S. government passed this week does not provide any relief funds for cruise lines. That's because, while all three major cruise lines have offices in the U.S., their official headquarters are in other countries, and the majority of their employees are not American.
President Donald Trump has said he planned to offer help to the cruise lines, but he has also considered making them move their registration back to the United States for that to happen. That may not be a viable solution for the industry, which has been able to keep prices low by not having to adhere to U.S. labor laws.
For now, that leaves Norwegian and its two rivals on their own. That sounds scary, but before the current crisis, Norwegian had a very strong business. In 2019, it earned $930 million in profit on $6.5 billion in revenue.
It had expected earnings per share to rise to a range of $5.40 to $5.60 in 2020, up from $4.30 in 2019. That forecast was made when COVID-19 was only impacting sailings from China. The company admitted that it could not predict its results due to the uncertainty of the impact of coronavirus.
"Due to the fluidity and uncertainty as to the duration and extent of the outbreak, it is too early for the Company to fully quantify impacts from broader headwinds to its business resulting from decreased demand for travel and tourism globally," the company wrote in its fourth-quarter earnings release. "The Company's financial performance could be materially impacted if travel restrictions and COVID-19 concerns continue for an extended period of time."
Norwegian had roughly $880 million in cruise operating expenses in the fourth quarter, along with about $398 million in other operating expenses on $1.48 billion in revenue. Those expenses drop significantly while the company isn't operating cruises -- much of its marketing spend will go away, for example -- and the company will also see its capital expenditures slow down as work halts on new ships.
The cruise line can cut expenses, but it has only limited cash on hand -- about $250 million at the end of 2019.
Will customers come back?
Norwegian made nearly $1 billion in profits in 2019 and it was on track to beat that in 2020. That clearly won't happen now, but profitable businesses are generally well equipped to find banks willing to loan them money. It also helps that Norwegian CEO Frank Del Rio cited past disruptions in the industry (due to geopolitical concerns), and noted that peak demand returned about eight weeks after the news cycle passed in his remarks in the Q4 earnings call.
"No, it doesn't take a full year, but it's not instant mashed potatoes either. I mean, there is somewhat of a modified V-shaped, U-shaped return. But we saw it in -- last time, we saw this was in 2016 after the string of geopolitical events that occurred. 2017 was a very good year," he said.
COVID-19 is uncharted waters, but it will eventually pass and Norwegian will recover. This is a very profitable business that was on an upswing. It may need loans to make it through to the other side, but it seems very unlikely that it won't be able to find them. This is a disruption -- a terrible one -- but at some point, it will be business as usual, and this will become a growth business again.
It may take Norwegian stock years to get back to its 52-week high. The cruise line's recovery, however, will likely begin as soon as it can get its ships back on the water.