What happened
Shares of Norwegian Cruise Line Holdings (NCLH -0.77%), Carnival Corporation (CCL 1.49%), and Royal Caribbean (RCL 0.04%) are slumping today, down 1.8%, 2%, and 2.5%, respectively, as of noon ET on some disappointing macroeconomic data. As the U.S. Bureau of Labor Statistics reported earlier, inflation spiked to a red-hot 9.1% in the month of June -- the highest rate seen in the United States in more than 40 years.
It's no wonder investors are spooked.
So what
After all, while far from optimistic, market watchers were only expecting to see inflation rates rise to 8.8% last month, so today's 9.1% report wasn't just bad news. It was also worse news than anticipated.
And listen -- I get why cruise investors are spooked here. Over the course of the pandemic, all three of these cruise stocks loaded up on new debt to stay solvent while their ships were forbidden from sailing. At last report, Carnival was in hock to its creditors to the tune of $36.4 billion (against only $7.2 billion in cash). Royal Caribbean owes $23.1 billion -- but has only $2 billion with which to pay it. Even Norwegian Cruise Line Holdings is carrying a debt load of $14.3 billion, with only $2.1 billion in cash.
The reason this is a problem is because part of the Federal Reserve's mandate is to control inflation, and when inflation runs rampant, the chance increases that the Fed will raise interest rates faster in hopes of cooling down the economy and pushing it back down. Higher interest rates mean that the cruise lines' mammoth debt loads get more expensive to service, depressing their profits and even raising the risk of insolvency.
Now what
That's the bad news -- but now here's something you may not have considered: Yes, high inflation can be bad for cruise stocks because it raises the cost of their debt. But high inflation can also be good for cruise stocks because they have a lot of debt.
Think about it. When inflation rises, prices rise -- including the prices that cruise companies charge for their services, as well as the salaries that their customers earn with which to pay those higher prices. That means that cruise companies' revenues rise as well, giving them more money that they can use to pay down their debt.
The debt itself, however, stays constant. Thus inflation means that cruise companies get to use inflated, devalued dollars to pay off debt accrued before the devaluation. Effectively, a "9.1% inflation rate" means that a company can pay off $1 of old debt with $0.909 in new revenue!
Granted, this doesn't negate the negative impacts of inflation -- the higher interest rates that will come with it, as well as the effect this will have upon cruise businesses' profits. But it's not all bad news. If you're invested in cruise stocks today, you're going to want to watch closely and make sure that your companies are at least taking advantage of the "good" effects of inflation -- and using the extra cash, provided by inflation, to whittle away at their debt.
