What happened
The terrible week for cruise line stocks continued on Thursday. Not only is the broader market's decline dragging down their share prices, but there are also fears that the companies are seeing pricing pressure for tickets.
Carnival (CCL 1.58%) fell by as much as 8.7% in early trading, while Royal Caribbean Cruises (RCL 1.08%) dipped as much as 8.4%, and Norwegian Cruise Line Holdings (NCLH 3.15%) dropped 9.2%. As of 1:30 p.m. ET, they were down 3.2%, 4.6%, and 5.2% respectively.
So what
On Wednesday, Morgan Stanley analyst Jamie Rollo said in a report that he was worried that cruise line companies could ultimately face insolvency if their business conditions don't improve soon. And on Thursday, Citi leisure and travel sector analyst James Hardiman said during an interview on Yahoo! Finance Live that cruise companies are facing "some pushback on pricing," especially as ships get closer to operating at full capacity.
At the same time, operators are facing higher expenses due to rising labor costs, high fuel prices, and rising interest rates. So it's understandable that the market is skeptical about their futures.
WTI Crude Oil Spot Price data by YCharts
When the broader market falls, as it did in early trading Thursday, high volatility stocks tend to take more exaggerated tumbles. That's another piece of what we're seeing here.
Now what
There's a lot of noise in the market Thursday and it's hard to decipher what's real and what's not. But I think it's clear that all the players in the cruise industry will face some serious challenges over the next year.
It's possible that the U.S. economy is already in a recession, and with inflation at a 40-year high, pressures could persist for cruise lines on both the revenue and expense fronts. That's not good, because these companies are already burning cash and have high debt loads.
CCL Total Long Term Debt (Quarterly) data by YCharts
The market seems to be realizing that the future looks pretty bleak for cruise lines, and that it would take a massive economic recovery to change that outlook. I don't anticipate the macroeconomic picture will get significantly better in the next few quarters, so it may be years before we see these companies generating positive cash flow.
By the time they recover, it's entirely possible that they'll have to restructure their debts. And downward spirals can happen when borrowing costs rise as stock prices fall, leaving companies paying higher costs to raise the funds they require to run their businesses. If a company can't get to positive cash flow and pay down debt, it can wind up in real trouble. I think we're there with cruise lines, and the market may be realizing the same thing.
