What happened
Cruise line stocks struggled in morning trading on Wednesday ahead of the highly anticipated report from this week's Federal Reserve meeting. In fact, travel industry stocks in general were falling, despite the market overall climbing slightly.
Carnival (CCL -2.09%) dropped by as much as 6.2% in early trading, Royal Caribbean Cruises (RCL -0.39%) slid by 7.2%, and Norwegian Cruise Line (NCLH -2.42%) fell as much as 4.9%. The stocks were down 4.2%, 5.1%, and 1.5%, respectively, as of 11:30 a.m. ET.
So what
The Federal Open Market Committee is expected to announce another 75-basis point increase in the benchmark federal funds interest rate Wednesday afternoon, but that's not all the market is looking at. After these meetings, Federal Reserve Chairman Jerome Powell hosts news conferences at which he often gives indications about where he thinks the economy and interest rates are going in the future. In focus this time will be his thoughts on inflation, which has proved difficult to tame, and the U.S. employment picture, which remains strong.
Interest rate hikes will have a double impact on cruise companies. First, raising interest rates is intended to slow the economy, so consumers will likely have less discretionary income to spend on things like leisure travel. That may be why all travel stocks are down today.
Second, cruise lines took on billions of dollars in debt just to survive the pandemic. Higher interest rates would mean higher expenses when that debt needs to be refinanced. As the charts below illustrate, debt levels are up, interest expenses are high but could go higher, and these companies still aren't generating free cash flow.
CCL Total Long Term Debt (Quarterly) data by YCharts
I will also note that Wednesday's share price declines come only one day after an analyst at Truist upgraded Norwegian Cruise Line stock to a buy rating from a hold rating, which had given that stock a brief boost.
Now what
Wednesday's price movements seem to be of the "sell the news" variety. It has been well understood for weeks that the Federal Reserve is going to increase interest rates again, and the impact on the economy and borrowing for companies is likely to be negative. At the same time, one of the reasons Truist upgraded Norwegian Cruise Line Tuesday is because the company has seen strong demand and has been able to increase its prices. That type of business strength could ultimately help cruise companies dig themselves out of their financial holes -- if it persists.
Ups and downs have become common for cruise line stocks, but I think this is still an industry that's far too risky to invest in now. Companies are still burning billions of dollars in cash, and I'm not sure they will be able to refinance their debts or get to positive cash flow anytime soon. That's what worries me, and at least for the moment, traders appear to be selling the industry for the same reasons.
