This is going to be a huge week for the cruise line industry. The Centers for Disease Control and Prevention's "no-sail" order is set to expire on Wednesday, freeing ships to resume operations as early as Thursday. The order has already been extended a few times as the pandemic has played out, and could be extended again, but there are some signs that it will actually stick this time.
Investors in cruise line stocks could use a boost. Shares of Carnival (NYSE:CCL) (NYSE:CUK), Royal Caribbean Cruises (NYSE:RCL), and Norwegian Cruise Line Holdings (NASDAQ:NCLH) have been slammed in the lull. All three operators have given the no-sail order some wiggle room, canceling all sailings until the start of November. Let's go over a few of the reasons why the industry can't afford another extension.
1. The cruise lines have offered huge concessions
One of the more jarring things from last week's Healthy Sail report -- compiled by the Healthy Sail Panel led by Royal Caribbean and Norwegian Cruise Line, which recruited health pros to formulate a plan to safely start sailing again -- is how far the industry is willing to go in tackling the pandemic. Passengers will be required to pass a COVID-19 test in the days before sailing and will be subject to daily temperature screenings during the voyage. They will also be required to wear masks in all indoor public areas outside of dining rooms and lounges when eating or drinking. You can imagine that some potential passengers comfortable with the risks of sailing in the new normal may decide not to jump through those hoops.
The business will also be less lucrative for the cruise operators in the near term. The panel's report calls for capacity reductions to achieve social distancing, and that means fewer revenue-generating passengers on each sailing. New screening, sanitation, and filtration recommendations will also mean more staffing overhead for the cruise lines. Crew members will have even more stringent health screenings, and that includes quarantining for seven days once they get on the ship before they can start working.
In short, cruise lines are willing to go beyond what other transportation stocks and travel sectors are doing to keep their operations safe -- even if it comes at the expense of their near-term profitability. It's going to be hard to keep them from sailing under those conditions.
2. Passengers are starting to lose faith
A lot has changed since the industry came to a halt in March. Folks initially thought voyages would resume within a matter of weeks. They quickly gobbled up offers for as much as 125% of what they had paid in future-cruise credit, in lieu of a cash refund. As much as 62% of displaced passengers opted for the future-cruise credit, but that pool of optimists is down to as low as 40%.
The cruise lines have spent months building up their liquidity levels, but it's challenging when more and more customers are opting for cold hard cash instead of accepting sweetened offers to let the cruise lines keep their money. Most cruise lines have been good about responding to refund submissions, but I'm going on 144 days since Norwegian Cruise Line confirmed my refund request that was supposed to be completed in 90 days.
Passengers going the future-cruise-credit route are naturally going to thin out even more if the bookings they have made for upcoming sailings get nixed, too. The industry is going to have a hard enough time winning over new customers in the future. It can't afford to turn off its current fan base.
3. Cruise lines don't have as much time as you think
Carnival is the world's largest cruise line, so it makes sense that it has raised the most money since the industry pause. It had $8.2 billion in liquidity at the end of August, and it had trimmed its cash-burn rate to $530 million a month. This would seem to give it a long fuse before things go boom, but it's looking to raise another billion as it disposes 18 of its ships.
The hazy outlook has Argus analyst John Staszak slashing his estimates on Carnival this week. He now sees Carnival losing $7.20 a share this year and $3.40 a share next year. He was previously eyeing a deficit of $4 this year and returning to profitability in fiscal 2021.
Carnival, Royal Caribbean, and Norwegian Cruise Line won't be profitable under the conditions they will likely have to sail under come November. Losses will continue, but the cash-burn levels should improve. Getting back to business will also work wonders for consumer perception of the industry, especially if the measures taken help keep outbreaks in check.
There may be a shakeout if things go back to normal in November, but there will definitely be one that eliminates the weaker players if the industry is still not allowed to resume operations later this year. Cruise lines need a fighting chance to prove that they've learned from their earlier mistakes that made their ships hotbeds of COVID-19 outbreaks. The clock is ticking.