For an industry that aims to spend its time staying above water, it's only fitting that liquidity has become a top concern. Royal Caribbean (RCL +3.08%), Carnival (CCL +2.88%) (CUK +3.23%), and Norwegian Cruise Line Holdings (NCLH +5.06%) are currently closed, and that will continue to be the case until at least deep into the summer season. Each company has raised billions apiece in recent months, but some Wall Street pros wonder if the major players have enough money to stay afloat.
Ahead of Wednesday morning's earnings report from Royal Caribbean, Wells Fargo analyst Timothy Conder put out an updated note in which liquidity was front and center. Even after completing a senior secured notes offering, Conder figures that the country's second-largest cruise line would have to raise another $2.5 billion to $3 billion to weather the worst-case no-sail scenario, which pushes the disruption well into next year. Royal Caribbean went on to report expectedly crummy financial results, but with roughly $3.3 billion in current liquidity and a monthly cash burn rate of $250 million to $275 million during a prolonged suspension of operations, does it really have to raise money right now? With its stock price trading 70% below its January highs, this may not be the best time to secure financing through what may include issuing new stock or convertible debt.
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Cash floats
Cruise lines continue to expect to resume some form of travel this summer. Carnival has firm plans to sail a few of its ships from three ports in Florida and Texas starting in August. Yesterday we saw Royal Caribbean and Norwegian also cancel all trips through the end of July, even though Royal Caribbean feels that it may be able to get its Chinese cruises going as early as July.
Working the math on Royal Caribbean's current liquidity and its cash burn rate would seem to have it stashing away more than enough dry powder to get it into next year if sailings keep getting canceled. Carnival and Norwegian have also been fortifying their liquidity since the industry interruption, increasing their chances of solvency for what could be a pronounced downtime.
A couple of analysts lowered their price targets on Royal Caribbean following Wednesday's quarterly report, and one of them -- Brandt Montour at JPMorgan -- singled out the cruise line's "shorter liquidity runway" relative to Carnival and Norwegian. Why is Wall Street so worked up over a company with more than $3 billion in liquidity?
Well, as we've already seen, no one knows when cruise ships will begin taking on passengers again. Every few weeks we find Carnival, Royal Caribbean, and Norwegian pushing out their resumption dates by a few weeks. The longer this game goes on, the more frustrated booked passengers will become. Right now fewer than half of the customers on canceled sailings are requesting cash refunds over enhanced credit on future sailings. If we're in the fall or winter and the industry players are still kicking this can down the road, will folks still be comfortable locking up their money with cruise lines?
It also goes without saying that the cash burn doesn't end the moment paying customers start sailing again. The industry itself won't be profitable for some time, and there is going to be a costly marketing tab to restore consumer sentiment when it comes to cruising. There may also be some hefty legal tabs to pay. The uncertainties remain, and that's before considering the inevitable global recession that will limit what those who want to sail can pay. There's a reason the stocks continue to be depressed, but until we get a clearer picture of how bleak things are, near-term liquidity isn't the biggest problem for the industry right now.
