What happened

Shares of major cruise-line stocks Norwegian Cruise Lines (NCLH 5.39%), Royal Caribbean (RCL 3.55%), and Carnival Cruise Lines (CCL 3.57%) were rallying today, up 4.1%, 3.1%, and 2.7%, respectively, as of 2:22 p.m. EDT.

The above-market moves weren't hard to figure out. Norwegian reported its third-quarter results this morning, in which revenue and profitability exceeded analyst expectations and management offered an optimistic outlook on bookings.

So what

Norwegian reported a solid $1.6 billion in revenue in the third quarter, up many multiples of the paltry revenue from the year-ago quarter, when COVID-19 restrictions were still wreaking havoc on cruising.

Perhaps more important, however, was the company reaching certain profitability milestones for the first time following the pandemic. GAAP net losses per share of $0.70 were a significant improvement from the year-ago quarter's loss of $2.29, and the company reached positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first time since the COVID-19 outbreak.

The company achieved the profitability milestone through solid 82% occupancy plus a 14% increase in revenue per passenger. Also encouraging, management said 2023 bookings were in line with 2019 levels but at "significantly higher" pricing.

Management also targeted adjusted free cash flow in the fourth quarter and forecasted positive adjusted profits in fiscal 2023. Of note, "adjusted" metrics likely ignore stock-based compensation, but that figure's impact on Norwegian isn't as great as what one might find at technology companies.

Now what

Norwegian's ability to pass on costs is a promising sign and likely reflects two factors. The first is that there is clear demand for cruising, especially after the two-year pandemic and rolling variant outbreaks. Second, Norwegian tends to cater to more upscale populations, as it is a bit smaller but has more premium cruise offerings than Carnival or Royal Caribbean.

Of course, Royal Caribbean reported third-quarter earnings last week, and not only did it generate 96% occupancy, it actually generated positive operating income -- not just EBITDA. This could be due to Royal's focus on the U.S., as opposed to Norwegian's focus on Europe, which is currently dealing with more economic problems and regulatory restrictions.

In any case, it looks as if the turnaround in the cruise industry is finally here. The big question is how quickly these companies can pay down the massive debt loads they incurred during the pandemic. Norwegian still has $14 billion in debt against just a $7 billion market cap, Royal Caribbean has more than $23 billion in debt against a $13.7 billion market cap, and Carnival, which reports later this quarter, has $31 billion in debt against an $11.7 market cap.

So while this rally is nice, these companies still have a long way to sail before their balance sheets are shipshape. In an age of rapidly rising interest rates and a potential recession next year, cruise-line stocks aren't in a safe harbor by any means just yet.