What happened
Shares of cruise line stocks jumped on Tuesday as investors started to get a feel for what cash burn during their shutdown looks like and what the eventual recovery might be like. Norwegian Cruise Line (NCLH 0.68%) led the charge after giving an operational update, and shares climbed 11.5% at midday. At 12:15 p.m. EDT, shares were still up 10.7%.
It was no surprise that Carnival (CCL 1.82%) and Royal Caribbean (RCL 0.04%) moved higher as well, with the stocks rising as much as 11.6% and 8.9%, respectively. As of this writing, Carnival is up 7.9% and Royal Caribbean is up 4.9%.
Image source: Getty Images.
So what?
The move was really driven by Norwegian Cruise Line releasing a business update that highlighted what it's done to reduce costs. Management said that operating expenses during suspended operations would be about $70 million to $110 million per month. That's a useful figure for investors, because we can then figure out how long the company can go without revenue.
Norwegian Cruise Line has also identified $345 million of capital expenditure reductions for 2020, a total of $515 million through March 31, 2021.
When operating expenses, capital expenses, and debt costs are added up, management estimates there will be about $110 million to $150 million of cash burn while operations are down. Given that cash on the balance sheet was $1.4 billion as of March 31, 2020, the company has as much as a year's worth of liquidity to make it through the current crisis.
Now what?
There's no real clarity on when cruise lines will get back to full operations, but I wouldn't expect any revenue until at least July 24, when a no-sail order from the Centers for Disease Control and Prevention ends. After that, it's not clear how much demand there will be for cruises, but Norwegian Cruise Line has said it's taking orders and deposits for later this year and into future years.
What's encouraging is that companies have been able to cut costs rapidly and shore up their balance sheets. Over the next few weeks, we'll get updates on balance sheets and cash burn at other cruise companies, and that should spell out what their survival plans look like.
What's more uncertain is what a recovery looks like for cruise lines and consumer spending more broadly. Even if cruise ships start sailing in July, they're unlikely to be full or commanding the same prices they were earlier this year. And a single infectious outbreak on a ship, which we've already seen happen, could send the industry back into a tailspin. Investors are betting on a quick recovery today, but I think it's still too early to get bullish on the industry.
