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Point/Counterpoint: The Case for Cruise Lines

Stock MarketsJul 19, 2020 10:03AM ET
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© Reuters.

By Christiana Sciaudone and Liz Moyer

Investing.com -- Admittedly, this isn’t the best time to talk about taking a cruise. A still-pervasive pandemic has put a damper on things for now, but there is hope. 

Carnival Corporation (NYSE:CCL), Royal Caribbean (NYSE:RCL) and Norwegian Cruise Line Holdings Ltd (NYSE:NCLH) halted operations around March. But during that time they haven't been standing still, and just a few months later they're getting ready to set out to sea again.

A CDC order keeping them in port until the end of September isn't stopping some operators from planning trips outside the United States. But cruise lines will likely struggle until tourists return to the seas, forced to take on debt to keep operations going.

Investing.com's Christiana Sciaudone and Liz Moyer argue the bull and bear case on cruise lines. This is Point/Counterpoint.

The Bull Case

Carnival (NYSE:CUK) has three ships scheduled to head out next month from Germany, and departures from Italy could be close behind. Norwegian’s still going to Alaska in September, and may restart other trips after October. Like Carnival, Royal Caribbean is set to start traveling again out of Germany with their TUI cruise line, as of July 24. 

The cruise lines don’t need to be running full steam to make the numbers work, either. 

In 2019, Carnival said operating just 15 ships resulted in cash flow break-even. This year, if they operate 25 ships, generating 40% of cash flow, it would cover the pause costs for the rest of the fleet and all shoreside SG&A, and lead the company to be cash flow break-even, Chief Financial Officer David Bernstein said on an earnings call earlier this month.

They also have the chance to operate only their most productive and newer ships, which should optimize earning power, said Jaime Katz, senior equity analyst at Morningstar.

But who, you may ask, would ever want to go on a cruise at a time like this? We can’t exactly name them, but they're out there. The cruise lines have the numbers to prove it.  

Carnival reported July 10 that it has seen steady demand for new bookings next year; for the first three weeks in June, almost 60% of 2021 reservations were new. 

Norwegian said in May that there continues to be demand for cruise vacations, particularly beginning in the fourth quarter 2020 and accelerating through 2021. The company’s overall booked position and pricing for 2021 is within historical ranges, it said.

The companies have also been tapping credit markets to bolster their balance sheets. As of May 31, Carnival had $7.6 billion of available liquidity, and $8.8 billion of committed export credit facilities available to fund ship deliveries originally planned through 2023. 

Norwegian added $2.4 billion.That along with other “liquidity-enhancing initiatives,” will help it weather 18 unlikely months of suspended voyages, according to CEO Frank Del Rio. 

Finally, at Royal Caribbean, we find recent bond sales that helped add to the $6.6 billion in cash on their balance sheet, Bloomberg reported.

And while the U.S. Congress ignored the industry when handing out cash, the U.K. handed Carnival £25 million ($31.3 million) and Royal Caribbean £300 million ($375 million), Skift reported. Something’s better than nothing. 

Looking at the shares, Norwegian, in particular, is cheap, said Morningstar’s Katz, with book value per share higher than where it’s trading now. 

“It’s still trading at a discount, but what that discount implies is that cruising resumes at some point,” Katz said in a phone interview on July 17. “There is a finite period to this so it should again be a revenue generating business.”

Plus, because of where they are incorporated, they don’t pay taxes, she noted.

Pack your bags, it's time to buy.

The Bear Case

Hello, Covid?

That's basically the case against cruise ship operators at this point.

While many industries have rebounded since hitting their pandemic-era lows in March and April, cruise operators have struggled. Royal Caribbean, Carnival, and Norwegian Cruise Line are all down more than 60% this year and ships remain empty as Covid-19 cases spike across the country.

Analysts expect Royal Caribbean to report a loss of $4.55 a share next week, according to Briefing.com. Carnival Cruise Line, which next reports is seen having a loss of $1.97 when it next reports in September, though it recently said it sees an increase in bookings for next year.

Coronavirus is especially a problem indoors in tight quarters, as public health officials have been telling the world for months. This was obvious with cruise ships during the spring. Many continued to operate, with their live entertainment venues, night clubs, and buffet dining in full swing, and experienced big outbreaks of the virus among passengers and crew.

One of the most notorious examples was Carnival Corp.'s Diamond Princess, which docked in Japan with an outbreak of more than 700 infected people, about 20% of the more than 3,700 people on board. Nine of those people died.

People kept getting on cruise ships during the spring, when coronavirus was raging worldwide, despite the warnings. On Thursday, the CDC blamed cruise operators for widespread transmission of Covid-19, counting 99 outbreaks among 123 ships in U.S. waters from the beginning of March to this month. That includes almost 3,000 cases and 34 deaths on board ships in U.S. waters.

The CDC extended its March no sail order through Sept.30. Already many cruise ship lines had voluntarily suspended operations to mid-September. They have to come up with plans to prevent the on-board spread of Covid. The CDC has complained about cruise operators having inadequate plans for monitoring crew, inadequate medical and personal protection supplies, and insufficient rules for social distancing and other onboard restrictions.

With no passengers, cruise operators are burning through cash and being forced to raise money to stay in business. Norwegian Cruise Line said Thursday it was trying to raise $1.2 billion to get through the crisis, including $925 million in debt. Carnival recently sold $1.3 billion in debt, Motley Fool noted, at an expensive interest rate of 10%.

Even if Covid-19 goes away and passengers return to cruise lines, paying back that expensive debt with much-depleted cash stores is going to make it tough for the big operators to return to profit quickly.

Point/Counterpoint: The Case for Cruise Lines
 

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Comments (20)
Chris Canis
Chris Canis Jul 19, 2020 10:10PM ET
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As long as they test before boarding and pretrip should be ok and on board if anyone feels sick New rapid test antigen by Quidel and BDX just recently FDA EUAapproved. Us HHS just bought huge amount of equipment and tests for distribution starting Monday tomorrow.
Victor Yakov
Victor Yakov Jul 19, 2020 10:10PM ET
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What about onshore excursions?
Victor Yakov
Victor Yakov Jul 19, 2020 10:10PM ET
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every day new testing?
Bulent Ok
Bulent Ok Jul 19, 2020 3:13PM ET
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Old people are dead thanks to Covid... Cruise line customers want be returning.. Best option for them is to be carrying goods from China to West. Or convert them to prison at sea 🤣 I will not go near a single share of liners... But then its got potential to be used as prison so I'll wait until its in the penyy stock category
Rowland Stevens
Rowland Stevens Jul 19, 2020 1:24PM ET
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Cruise ships have a problem.   How do you keep thousands of feet of railing disinfected when passengers touch them all the time to keep their balance in rolling seas?
Kelly Mayer
Kelly Mayer Jul 19, 2020 1:24PM ET
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Passengers will get tested multiple times before and during the cruise trip. You ain't getting on the cruise if you test positive
Dronio Stoica
Dronio Stoica Jul 19, 2020 1:24PM ET
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Kelly Mayer Is that not a deterrent? What happens when you or your spouse contract it at a seaport and you have to spend $1000's more on isolation and flight expenses in addition to your unsecured fees? Cruise lines have always been floating Petri dishes for viruses and bacteria. I can't imagine any improvement via regulation in that regard. Sanitation can't thwart proximity in an enclosed environment. I'm sure they will recover in general but I wouldn't project a rosy forecast based on assumption.
Dronio Stoica
Dronio Stoica Jul 19, 2020 1:24PM ET
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Kelly Mayer I would be investing in trip insurance companies not the cruise lines. The cost of isolation and rescheduling, plus flights (if available) if you are forced off a ship due to virus or interruption is an elevated risk factor now but most people live recklessly these days as evident by the news. Cruise lines have always been floating Petri dishes.
Chris Canis
Chris Canis Jul 19, 2020 1:24PM ET
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Very good hand sanitizer. CHLORHEXADINE GLUCONATE based one is a good choice for multiple applications. Wont dry your hands out like alcohol based.
Alan Rice
Alan Rice Jul 19, 2020 1:10PM ET
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ALL transportation industries should be shuttered until The Pandemic has run its course. Think about it.
John Le
John Le Jul 19, 2020 1:10PM ET
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so you plan on donating your tax money to them so they dont go bankrupt?
Kelly Mayer
Kelly Mayer Jul 19, 2020 1:10PM ET
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You mean in the next 200 years or so? Do you really think the pandemic is going away? Look how that worked out with Influenza.
Joyce lare
Joyce lare Jul 19, 2020 12:20PM ET
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here my joy and pain it's paid with hardworks and loyalty Goodluck to your n we w revisions... KLD
Red Wine Please
Red Wine Please Jul 19, 2020 8:47AM ET
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Since stocks are bought/sold on expected price changes and considering that bookings are usually for trips months out, as confidence in a vaccine distribution date increases, it will probably cause an immediate spike in stock price. Makes sense at least for those lines that can survive.
Carlos Escobar
SELLxTHExTOP Jul 19, 2020 7:35AM ET
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Stay away. Some could go bankrupt
Mauricio V.
Mauricio V. Jul 19, 2020 4:22AM ET
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Very bad business.. Cruises are taking on a lot of debt and there will be no euphoria to return to cruises, it is very different from planes.
Mauricio V.
Mauricio V. Jul 19, 2020 4:22AM ET
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from airlines.
Kelly Mayer
Kelly Mayer Jul 19, 2020 4:22AM ET
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Commercial airplanes are getting wiped out... Boeing just declared the end of it's jumbo line, amid lower and lower demand for air traffic. But most importantly is HYPERLOOP. It's bound to start replacing airplanes very soon. Vision 2030 (saudi project) includes the development of hyperloop transportation for instance. Cruises won't be replaced though. Every cruise line is different. I believe Norweggian CL is the top choice, it got a major investment from a Saudi group amid the pandemic, since they are now heavily investing in tourism, shifting from oil. These shares are likely undervalued right now.
Bulent Ok
Bulent Ok Jul 19, 2020 4:22AM ET
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Where there is a Saudi... I stay well away 🤐
Bulent Ok
Bulent Ok Jul 19, 2020 4:22AM ET
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Saudis are living in a kokoo land... They have no vision believe me... Empty talks. Hype is cheap..
Kelly Mayer
Kelly Mayer Jul 19, 2020 3:12AM ET
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Majors cruise lines are resuming operations in China this month. Is it Royal Caribbean? Can't recall. The news in online, just look it up. Some small scale cruise lines are also already up in Europe, it was on some major news channels in countries around Europe. Think it just takes about 40% of ships to get back into sailing from October onwards and they will break even this year, financially. Again, think that's the RC case.
Kelly Mayer
Kelly Mayer Jul 19, 2020 3:12AM ET
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Oh... I just wrote a good deal of what was already on the article... my bad. Mixed up my sources.
Jonathan Sutton
Jonathan Sutton Jul 18, 2020 10:13PM ET
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Hell no
Jesse Henry
Jesse Henry Jul 18, 2020 8:02PM ET
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When the first few cruises come back with no cases of covid, they will jump 15-20% within weeks.
Charles Stein
Charles Stein Jul 18, 2020 3:58PM ET
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I wonder what the Carnival Corporate Policy is regarding a Covid19 outbreak and deaths on a Carnival Cruise.Carnival towed a cruise ship with an engine breakdown with passengers aboard back to the US from Mexico. This agonizing long trip was across the Gulf of Mexico with water and sewage on the lower decks!
Teh Olympian
Teh Olympian Jul 18, 2020 12:56PM ET
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Shouldn't they be getting aid from Liberia or Panama, the flags they fly? That's where they pay taxes...
Tsepang Lebata
Tsepang Lebata Jul 18, 2020 12:20PM ET
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I searched CUK I could not find it hopefully people will see the typo
Suresh Mahadevan
Suresh Mahadevan Jul 18, 2020 12:20PM ET
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It is CCL
Yodgorjon Ibragimov
Yodgorjon Ibragimov Jul 18, 2020 12:16PM ET
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8600052912141007
vinod kumar
vinod kumar Jul 18, 2020 12:09PM ET
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would this news make any impact on silver prices
Arda Özge
Arda Özge Jul 18, 2020 12:08PM ET
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Carnival trades at NYSE: CCL , or LON: CCL . Not CUK just so you know, CUK is a secondary, converted-into-usd listing.
Val Lange
Val Lange Jul 18, 2020 9:57AM ET
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Opeartions in US has been closed last week, the same situation growing in EU
Plopseven Schwartz
Plopseven Schwartz Jul 18, 2020 9:03AM ET
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Cruise lines need to shut down indefintely to preserve their long-term image. The longer they remain open, the more their entire industry will be vilinaized and boycotted in the future.They’re digging their own graves tring to halfA$s this.
Camaro Camero
Camaro Jul 18, 2020 6:31AM ET
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A couple of days ago the cruise lines had HUGE gains over a rumored Covid-19 vaccination candidate. Of course, the next day a big sell off as many had been waiting to exit their positions for months. These cruise lines will continue to have wild price swings for the rest of the year and into next year.
Steven Goldberg
Steven Goldberg Jul 18, 2020 6:31AM ET
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Agreed but i feel after the election COVID will become less of an issue, hopefully. There are people, millions, chomping at the bit to get back on a cruise ship.
Marcelo Fialho
Marcelo Fialho Jul 18, 2020 6:31AM ET
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As soon as a vaccine is available, or even before that, the shares will come all the way up again. And it is about to occur soon. Stock market moves upon expectations, before what is expected come true.
Mr Toast VR
Mr Toast VR Jul 18, 2020 6:31AM ET
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Marcelo Fialho  This is wishful thinking. I think its time that people move on to other things.
 
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