As with so many other businesses, COVID-19 has been immensely difficult for the cruise industry. Revenues shrank to zero as a result of no-sail orders by the Centers for Disease Control (CDC), while fixed costs for cruise companies remained well above zero.
Though the waters have undeniably been choppy, Royal Caribbean (NYSE:RCL) looks to have staying power beyond the pandemic. Here's why.
Cash raises and some good news
After halting its operations, Royal Caribbean had to raise funds to outlast the pandemic. Fortunately, it was able to do so. The company increased its long-term debt to $17.6 billion as of Sept. 30, up from $8.4 billion a year earlier, allowing it to end the third quarter with $3.7 billion of liquidity. This debt does come with considerable interest payments but was vitally needed to cope with COVID-19. Last month, the company raised an additional $1.15 billion through a combination of convertible debt and equity offerings.
Based on Royal Caribbean's free cash flow ranging from $1 billion to $2 billion annually before the pandemic struck, it will take several years of normal operations to get the company's balance sheet back to pre-pandemic levels.
For now, the company continues to burn $250 million to $290 million per month, meaning it has more than a year of funds available to cover fixed costs in a zero-revenue environment. Fortunately for Royal Caribbean, that may not be totally necessary.
At the end of October, the CDC announced that its no-sail mandate would end effective Nov. 1. It's important to note that Royal Caribbean has already canceled sailings through the end of the calendar year regardless of the CDC's decision. Still, this is a positive step for the industry.
Furthermore, the Singaporean Government granted approval to Royal Caribbean to sail beginning next month under capacity restrictions. The return to normalcy will be very slow, but this offers evidence that the process is at least beginning.
Another positive step toward normalcy came this week via a Pfizer announcement that its COVID-19 vaccine candidate is 90% effective. Beyond being allowed to host passengers again, cruise operators will need to earn back public trust in the safety of sailing. That trust is a prerequisite to Royal Caribbean generating the sales and free cash flow it needs to cover the costs associated with its growing debt pile. A vaccine goes a long way in helping to do so -- thank you, Pfizer.
Despite the intense demand shock COVID-19 inflicted upon the cruise business, interest in cruising is still there. For the second half of 2021, Royal Caribbean's bookings are within historical pre-pandemic ranges. Capacity will be limited on these cruises for the foreseeable future, but the progress is still encouraging. The degree of this demand recovery will be key for gauging Royal Caribbean's ability to generate future free cash flow and to outlast the pandemic.
This update came even before the positive vaccine news from Pfizer, which feasibly could improve demand further. Pricing for 2021 bookings is down slightly year over year. Ideally, prices would be moving higher, but considering the year Royal Caribbean has had, the muted decline is admirable.
How did demand hold up so well amid tough times? Royal Caribbean caters solely to leisure travel rather than business; leisure travel demand is expected to bounce back more forcefully than business travel. It's one thing to replace a conference with Zoom Video Communications; vacations cannot be emulated in this same way.
Spending quality time with people you love, taking in new scenery, and visiting new places cannot be copied by technology -- that bodes very well for Royal Caribbean's recovery.
The waters ahead for Royal Caribbean will be anything but smooth, but the company is doing what it needs to do to survive. There will be bumps, there will be hiccups, and it will take significant time for operations and financials to resemble pre-pandemic performance. Still, this cruise company has been able to raise funds to bridge the gap for now and clearly has a large group of excited consumers ready to sail when they can.
While patience will be needed with this investment, Royal Caribbean is poised to outlast the pandemic.