What happened

It's Monday, and things seem to be taking a turn for the better for cruise line stocks. In early afternoon trading, shares of Royal Caribbean (NYSE:RCL) are leading the cruise sector higher, up 10.9% as of 12:30 p.m. EDT after reporting earnings this morning.

Rivals Carnival (NYSE:CCL) and Norwegian Cruise Line Holdings (NASDAQ:NCLH) are following suit, up 7.7% and 8.6%, respectively. But if you ask me, it all started with Royal Caribbean.

3 cruise liner ships lined up abreast in port

Image source: Getty Images.

So what

Today is earnings day for Royal Caribbean, and in contrast to rival Norwegian Cruise Line last week, it appears that Royal Caribbean beat on revenue.

Heading into earnings, analysts had forecast that Royal Caribbean would incur a pro forma $4.82 per share loss for its fiscal Q2, and with cruises suspended, they forecast revenue of only $43.5 million. Royal Caribbean's loss actually came in bigger than expected: $6.13 per share pro forma, and its GAAP loss was even worse at $7.83 per share. Still, Royal Caribbean's revenue was quite a bit better than predicted at $175.6 million, and investors seem to be focusing on that bright note today.  

Now what

Should investors be so optimistic, though?

Royal Caribbean correctly blamed the coronavirus pandemic, which forced cancellation of all its second-quarter sailings, for both the steep decline in revenue and the huge GAAP loss. "The COVID-19 pandemic is posing an unprecedented challenge to our industry and society," said CEO Richard Fain.  And despite investors' reaction to today's revenue news, the challenge may be getting more serious, not less.

The last we heard, Royal Caribbean was targeting a cash burn rate of $250 million to $275 million per month while its ships are confined to port. In today's report, the company said that its monthly cash burn is now averaging somewhere from $250 million to $290 million. Thus, just as we saw with Norwegian Cruise Line last week, cash burn rates appear to be edging higher, fighting management efforts to drive them lower.

Based on Royal Caribbean's statement that it has "approximately $4.1 billion, all in the form of cash and cash equivalents," even a $290 million-a-month burn rate implies that it still has more than a year of cash left in the kitty to fund it through the tail end of this recession. But if burn rates keep rising beyond what's been planned for, that would clearly be a risk worth keeping an eye on -- for shareholders in Royal Caribbean, and for investors in the other cruise stocks as well.