What happened
The value of cruise line stocks plunged on Monday as investors weighed multiple headwinds heading the industry's way. Not only are oil prices spiking, but there's also concern that Russia's invasion of Ukraine could sink consumer discretionary spending on things like cruises.
Carnival Corporation's (CCL 1.13%) (CUK 0.88%) shares fell as much as 6.9% in trading today, Norwegian Cruise Line Holdings (NCLH -0.21%) dropped 7.9%, and Royal Caribbean Cruises (RCL 0.54%) fell 7.4% at one point. The three cruise stocks are down 5.9%, 7.4%, and 6.7% respectively at 1 p.m. ET.
Image source: Getty Images.
So what
The biggest news today is that oil prices have once again moved higher. As I'm writing, the West Texas International crude oil spot price is up 2.2% to $118.24 per barrel and Brent crude is up 3.9% to $122.69 per barrel. This is in large part because Russia's invasion of Ukraine intensified over the weekend and there's at least talk that Russian oil could be cut off from world markets, which is problematic because Russia supplies 11% of the world's oil.
For cruise companies, high oil prices are problematic on two fronts. On one hand, oil is an input cost, so higher prices will raise operating costs. On the other hand, cruises are a discretionary purchase, so if people are spending more at the pump it may mean they start spending less on vacations.
Historically, spikes in oil prices have tended to lead to recessions as well. If oil prices remain around $120 per barrel, it's possible that it could lead to a recession, especially in Europe where natural gas prices are spiking as well because most supply comes from Russia.
Brent Crude Oil Spot Price data by YCharts
There may not be any direct bad news about the cruise line industry today, but the business got a lot more challenging over the weekend.
Now what
Just when it seemed like there was a light at the end of the tunnel for cruise lines, we are seeing oil prices spike. That may hurt what seemed like a strong economic recovery and the potential for more travel restrictions loosening over the next year. Now, we have to worry about consumers having enough money to afford cruises.
What I worry about is that we're going to see demand sink as cruise line balance sheets are stretched. Remember that the industry took out tens of billions of dollars in debt to survive the pandemic and that money has to be repaid.
CCL Financial Debt (Quarterly) data by YCharts
Leverage makes cruise stocks that much riskier and that's why this is an industry I'm staying away from. There are enough questions about the future of the cruise line industry, but when you add this kind of debt to the mix it's too uncertain for me to buy even today's dip.
