No industry has gotten hit harder by the coronavirus pandemic than cruise lines.
The three major cruise lines, Carnival (NYSE:CCL), Royal Caribbean (NYSE:RCL), and Norwegian Cruise Lines (NYSE:NCLH), have all been forced to dock their ships due to the coronavirus pandemic, and the trio of stocks remain down about 75% since February, despite bouncing aggressively off their lows in recent weeks as some investors spy opportunity for a comeback.
It's easy to see why the pandemic is such a nightmare for the industry. Cruise ships are incubators for viruses like norovirus in normal times. A highly contagious deadly disease like COVID-19 that often spreads undetected turns a floating party into a death trap. In January, an outbreak on the Carnival-owned Diamond Princess ship led to 712 passengers contracting the virus and nine deaths.
In addition to the stoppage in sailings, cruise ships face high fixed costs and heavy debt burdens, making it likely that they will face a long path back to profitability. In normal times, cruise lines are highly profitable: Royal Caribbean finished 2019 with a 17% profit margin, while Norwegian and Carnival both had profit margins of 14%. But normal times are unlikely to return anytime soon.
Will cruise lines ever be profitable again? Let's take a closer look.
The current status
It's no secret that cruise lines are facing a life-threatening emergency. Norwegian warned earlier this month that there was "substantial doubt" about its ability to continue as a going concern, an admission that it faces potential bankruptcy. Since then the company has raised money through a number of outlets, including secondary offerings, private equity investments, and loans. Norwegian estimates that it's burning between $110 million and $150 million per month while operations are suspended, and now says it has $2.4 billion in liquidity, enough to sustain 18 months without voyages.
Royal Caribbean recently said that it is burning between $250 million and $275 million a month in cash with operations shuttered, and the company just borrowed $3.3 billion at interest rates of 10.875% and 11.5%, committing itself to more than $300 million in additional interest payments and giving itself another year of liquidity.
Finally, Carnival has not disclosed its cash burn rate while ships are docked, but as Carnival is the biggest of the three major cruise lines, it's almost certainly higher than Royal Caribbean's. Wedbush analyst James Hardiman estimated in April that the company was burning through $500 million a month during the crisis. Like its peers, Carnival has raised money from stock offerings and debt; among other funding, it raised $4 billion in April at an interest rate of 11.5%.
After raising billions of dollars, these cruise lines will be able to survive several months of shuttered operations, but that survival comes at a steep price in both interest payments and share dilution.
What the future looks like
There's a whole lot of uncertainty facing the cruise industry. The Centers for Disease Control and Prevention have imposed a no-sail order on the industry and are unlikely to lift it until the virus is under control. Considering that about 20,000 new cases of COVID-19 are still being reported each day in the U.S., as well as tens of thousands more globally, and the protocols necessary to control outbreaks (like testing and contact tracing) are not in place, it seems unlikely that the cruise lines will be sailing anytime soon. The normally busy summer months could easily be a wash, and as we look ahead further, control of the outbreak becomes a question of advances in science to develop treatments or a vaccine.
If cruise lines reopen before the virus is sufficiently under control, they run a significant legal and public relations risk, especially if a ship endures another outbreak like the one on the Diamond Princess. Additionally, there's the question of what a cruise would look like during coronavirus. Would customers be tested and screened every day? Would they have to wear masks at certain times? Cruises involve disembarking in exotic ports of call, so even a passenger who was disease-free at the beginning of a cruise could contract the virus during an onshore visit. Then there's the question of whether cities and other destinations want thousands of cruisers coming ashore during a pandemic. It's a logistical nightmare.
Can they be profitable again?
In a world where people can safely enjoy cruises, these cruise lines can once again reach profitability, but there are a number of obstacles standing in the way. The global economy is plunging into a deep recession, which will clamp down on discretionary spending on things like vacations regardless of the status of the pandemic.
Meanwhile, these companies have taken on considerable new debt and share dilution, meaning that even if they are able to turn a profit, they won't reach previous earnings-per-share levels for a long time, if ever.
Lenders have shown a willingness to keep these companies afloat, and they should be able to tap capital markets again if the pandemic drags on. But an extended shutdown will mean they'll be in a deep hole whenever they're allowed to sail again.
Ultimately, a bet on the cruise stocks is a bet on a quick end to the pandemic, which does not seem likely at this point.