They say that a rising tide lifts all ships, but what happens when the waves are rough and those same ships start to take on water? Shares of Carnival (NYSE:CCL) (NYSE:CUK) tumbled 11% on Tuesday after the company posted disappointing preliminary results for the fiscal third quarter that ended in August.

Fellow cruise line operators Royal Caribbean (NYSE:RCL) and Norwegian Cruise Line (NASDAQ:NCLH) slipped in sympathy, down nearly 5% apiece. With Carnival scaling back its fleet and printing more shares, getting back to where it was a year ago -- in terms of revenue and per-share profitability -- isn't going to be a smooth voyage. Investors considering a stake in Carnival or any of the publicly traded players may want to make sure they check the ports of call before walking up the gangway. 

A guy standing  on a boat surrounded by circling sharks.

Image source: Getty Images.

That sinking feeling

Carnival had $8.2 billion in cash and equivalents on its balance sheet at the end of August. Given the cruising giant's improving monthly cash-burn rate -- going from $770 million in the fiscal third quarter to a projected average $530 million monthly hole in the current quarter -- that would seem to be enough. It might not be enough, and it seems as if even Carnival knows it. 

Carnival on Tuesday filed a prospectus to raise another $1 billion from time to time through an at-the-market equity offering. Carnival, Royal Caribbean, and Norwegian Cruise Line have been beefing up their liquidity since their fleets stopped taking on paying passengers in mid-March. It's almost as if they knew -- despite canceling just a month or so of scheduled sailings at a time -- that they weren't going to be sailing again in the U.S. market at least until next year.

Wall Street has applauded the cash grab, but it comes at a price. Carnival, Royal Caribbean, and Norwegian Cruise Line now have more debt, and the interest expense will weigh on future earnings. They also have more shares outstanding, and that will be an anchor for net income per share. Two months ago Deutsche Bank analyst Chris Woronka put out a grim tab covering all of the money being raised at Carnival. He concluded that the nearly $3 billion in earnings that it reported last year that translated into earnings per share of $4.40 would be whittled down to just $2.88 a share under 2023's incremental interest expense and share dilution. The math gets worse with every financing move.

The bottom line isn't the only problem. Carnival and its smaller peers are getting squeezed at both ends of the income statement with revenue also set to contract. Social distancing in the near term is already going to limit capacity, but the actual fleets are also shrinking. Carnival disappointed investors by pointing out that it will be eliminating 18 of its ships this fiscal year, a few more than it was jettisoning earlier. It's also delaying the arrival of new ships. 

There's a method to the madness here. Carnival argues that it may be getting rid of 12% of its pre-pandemic capacity, but these were less efficient vessels accounting for just 3% of net income. It's hard to fault the logic, but it's just another way that Carnival won't return to its pre-pandemic performance anytime soon. 

Even after the storm clears -- and we're past COVID-19, the global recession, and the current consumer anti-cruising mindset -- it won't be enough for Carnival, Royal Caribbean, and Norwegian Cruise Line to return to pre-pandemic earnings per share levels.