Royal Caribbean (RCL -0.10%) announced last week that demand for its cruises "remains strong, with bookings significantly outpacing 2019 levels."
With its full fleet back in service, Royal Caribbean now looks to make up for lost vacation time. But the stock has sunken roughly 66% from its early 2020 highs. With headwinds still present, can Royal Caribbean fight its way back upstream?
Royal Caribbean is strengthening its fleet
The Miami-based company boasts "the most innovative fleet in the industry" and has invested significantly in the modernization of its ships in recent years. With such an extensive fleet, Royal Caribbean offers its customers a variety of options, from short weekend getaways to lengthy adventures to the Galapagos Islands.
Eight new vessels were added to Royal Caribbean's fleet in the past 18 months, including ultra-luxury cruise ship Endeavor, with scheduled service to Antarctica. The addition of Endeavor demonstrates Royal Caribbean's eagerness to carve out more market share of the lucrative expedition segment.
Image source: Royal Caribbean.
The company also recently unveiled a teaser of its soon-to-be-released Icon of the Seas ship. The first of its kind for Royal Caribbean, Icon of the Seas will feature "unrivalled water experiences," with "more water and weight than ever before." Other highlights include updated staterooms and an open-air park with real trees. Icon of the Seas is set to debut in late 2023, and a major reveal is scheduled for October 2022.
Aside from its impressive fleet, Royal Caribbean offers its customers one-of-a-kind destinations like Perfect Day in CocoCay, the company's private island. Complete with dining, zip lining, a water park, and hot air balloon rides, Royal Caribbean's exclusive private island presents a distinct competitive edge over close rival Carnival.
A tsunami of debt
The cruise industry was no doubt one of the most impacted by the pandemic, with ships docked for over a year and horrifying accounts of passengers stuck on quarantined vessels. Royal Caribbean faced the same challenging environment that other cruise lines did, dictated largely by prevailing health restrictions.
For an industry that specializes in moving closely quartered people across international waters for extended periods of time, COVID-19 created the perfect storm. As a result, Royal Caribbean has accumulated more than $17.7 billion in long-term debt from the onset of the pandemic.
But Royal Caribbean's management aims to pay down its debt as soon as possible. According to CFO Naftali Holtz, Royal Caribbean is generating cash flow beyond its operational costs, which it will prioritize to pay down debt. While it's a good sign to see revenues beyond operating expenses, debt will be a looming headwind for the foreseeable future.
A rainbow beyond the storm
With skies starting to clear for the cruise industry in general, Royal Caribbean has seen recent cause for optimism. The pandemic and ensuing lockdown created a gust of pent-up demand for Royal Caribbean's cruises, and bookings now "significantly" outpace 2019 numbers.
An unforeseen tailwind for the cruise industry came when more than 3 million Americans retired during the pandemic. And more millennials now look to vacation with their families as they reach their peak income years. Perhaps another result of the pandemic, Royal Caribbean now benefits from the shift in consumer preference from goods to experiences.
Employment trends have also helped boost the cruise industry, with more paid time off for workers and the ability to work remotely. And with the Center for Disease Control (CDC) lifting testing and vaccination requirements, Royal Caribbean has the perfect recipe for increased demand on its hands.
The company reported that all four quarters of 2023 are booked within record ranges and also "at record prices" -- meaning higher revenue per guest than in 2019. If Royal Caribbean can continue to pay down debt and perhaps also surprise investors with better-than-expected earnings, this cruise line stock could soon see ripples of recovery.
