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Big cruise companies can survive a shutdown lasting many months, Wall Street analyst says

April 08, 2020
5 min read
Symphony of the Seas
Big cruise companies can survive a shutdown lasting many months, Wall Street analyst says
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The world's biggest cruise companies are unlikely to go bankrupt even if cruising doesn't resume for many months, says a top Wall Street analyst who has studied the industry for many years.

Leisure analyst Harry Curtis of Instinet on Tuesday said the three publicly traded companies that dominate the cruise world -- Carnival Corp., Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings -- have enough liquidity and borrowing capacity to survive with near-zero revenues into the first quarter of 2021.

"Many times we’ve been asked about bankruptcy, and we believe [the probability] to be low," Curtis said in a research note that included a lengthy analysis of the companies' financial positions.

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Carnival Corp. is the parent company of Carnival Cruise Line, Princess Cruises, Holland America, Seabourn and five brands based overseas. Royal Caribbean Cruises is the parent company of Royal Caribbean, Celebrity Cruises, Azamara and Silversea. Norwegian Cruise Line Holdings operates Norwegian Cruise Line as well as Regent Seven Seas Cruises and Oceania Cruises.

Together, the three companies account for more than 60% of all cruises taken worldwide.

All three companies have halted cruise operations since mid-March due to the coronavirus outbreak, resulting in a massive revenue drop and negative cash flow.

In a regulatory filing last week, Carnival Corp. said it was burning through $1 billion a month during the shutdown. The filing came as the company attempted to shore up its finances by selling more than $6 billion in stock and debt instruments -- a move it said gave it enough liquidity to meet its needs during a shutdown lasting at least as far as November.

While Carnival Corp. is making contingency plans for such an extended shutdown, Curtis doesn't expect the situation to be quite so dire. He said he's modeling a partial resumption of cruising by the middle of the third quarter of this year.

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Related: Cruise ships could be put into storage for months due to coronavirus

Among his assumptions: New cases of the disease caused by the coronavirus, COVID-19, peak in the United States in the next two weeks, and cruise lines develop new health protocols that restore consumer confidence in boarding ships.

He's also betting that demand for cruises "is impaired but not obliterated" due to the recent weeks of negative headlines surrounding cruise ships experiencing coronavirus outbreaks.

Curtis noted the past resiliency of the industry, which has a strong base of hardcore fans. Cruising has bounced back strongly after such calamities as the 2012 sinking of the Costa Concordia.

While some people may have been turned off to cruising by recent developments, "there is a core base of customers that are and will be rebooking when the all-clear signal is sounded," Curtis said.

Related: CDC says cruisers were exposed to coronavirus on 28 sailings

People in general will be eager to get back to traveling after coronavirus travel restrictions are lifted, he added.

After many days of quarantine, "cabin fever (no pun intended) will be high," Curtis said. "Demand for social interaction and travel are likely to be at unprecedented levels."

Given such assumptions, Curtis thinks the major cruise companies could be able to get half their fleets back into operation during the second half of the year. Initially, they're likely to focus on close-to-home destinations such as the Caribbean and Alaska, he said.

Still, even with a partial restart to operations, revenues for the major cruise companies could be down 80% in the third quarter and 70% in the fourth quarter. For the ships that do operate, he's projecting occupancy levels as low as 60% in the third quarter. Cash flow could remain negative into the first half of 2021, Curtis said.

The major cruise companies normally run at occupancy levels of around 108%, achieving occupancy levels above 100% by filling so-called "third and fourth" berths in cabins -- pulldown bunks and pullout sofas that are in addition to the normal two berths per cabin.

Curtis said ticket prices could be down 25% to 30% on average after cruising resumes.

For now, most cruise lines only have canceled sailings through the middle of May. A few lines, such as Viking, have canceled trips through the end of June. But the lines have been canceling voyages in waves, about a month at a time. More cancellations are expected.

The timing of a resumption of cruises is the big wildcard right now in analyzing the industry's financial outlook, Curtis suggested.

A resumption of cruising is dependent on some factors outside of the cruise industry's control, such as when government travel restrictions are lifted, when ports begin reopening to cruise ships and when flights to cruise hubs resume enough to support cruise travelers. There also will be challenges around restaffing vessels. Lines have been sending crew home from some ships.

Still, the timing of all of these factors ultimately are driven by one big thing: The trajectory of COVID-19 cases.

"We believe the obvious unanswered question is when the COVID threat subsides enough so that travel resumes," he said.

Additional resources for traveling during the coronavirus outbreak:

Featured image by Royal Caribbean's Symphony of the Seas can carry more than 6,500 passengers. (Photo courtesy of Royal Caribbean).