Over the past two years, since the covid pandemic hit in late February 2020, the cruise industry has taken one hit after another. And while the situation has improved since the extended period when cruise ships could not sail from U.S. ports, that doesn’t mean it’s back to 2019 for Royal Caribbean International. (RCL) Carnival Cruise Line (CCL) and Norwegian Cruise Line (NCLH) .
The industry has done a remarkable job getting operations back to near normal. All three cruise lines have not only returned all their ships to service, but are also continuing to move forward with plans for new ships and other investments, such as improvements to private islands and development of new ports.
That said, Carnival just reported its second quarter earnings and the market didn’t like the numbers at all. Shares of all three cruise lines fell by double digits on Sept. 30, but traders clearly missed that, aside from higher costs and a loss (both expected), the cruise line delivered mostly good news.
Carnival went well in the areas it controls
Carnival reported a GAAP net loss of $770 million for the quarter. This was driven by higher costs, as the company specifically cited advertising expenses and that part of its fleet was not available to generate revenue.
While the company’s year-to-date adjusted cruise costs, excluding fuel per ALBD through 2022, have benefited from the sale of smaller, less efficient ships and the delivery of larger, more efficient ships , this benefit is offset by part of its fleet being shut down for part of the year, restart related expenses, an increase in the number of dry dock days, the cost of maintaining improved health and safety protocols , inflation and supply chain disruptions. The company anticipates that many of these costs and expenses will end in 2022.
If you are investing in any cruise line, you have to do it for the very long term. This makes profitability less of a concern than the company recovering its business and Carnival showed some very positive signs in that direction.
- Revenue increased nearly 80% in the third quarter of 2022 compared to the second quarter of 2022, reflecting continued sequential improvement.
- Onboard and other PCD revenue in Q3 2022 increased significantly compared to a strong 2019
Total customer deposits were $4.8 billion as of August 31, 2022, approaching $4.9 billion as of August 31, 2019, which was a record third quarter.
New bookings in the third quarter of 2022 mainly offset the historic third quarter seasonal decline in customer deposits ($0.3 billion decrease in the third quarter of 2022 compared to a decline of $1.1 billion in the same period of 2019).
Carnival (and probably all cruise lines) is being hurt by lower prices generally and by some passengers paying for their trips with future cruise credits from canceled cruises during the pandemic. That’s not really what matters. Carnival has been increasing passenger loads and bringing people back to its ships.
“Since we announced the relaxation of our protocols last month, we have seen a significant improvement in booking volumes and are now well ahead of the strong levels of 2019,” said Josh Weinstein, CEO of Carnival. “We look forward to further building on this momentum with renewed efforts to generate demand. We are focused on delivering significant long-term revenue growth while leveraging short-term tactics to quickly capture pricing and bookings in the interim.”
Basically, cruise fares are cheap right now because it’s more important to get customers back on board than maintaining price integrity. This is a tactic that could hurt prices in the long run, but the cruise industry is less vulnerable than other vacation options because there have always been large price variations based on the calendar and age of the ship being booked.
It’s a long journey for cruise lines
Carnival was trading at a 52-week low after it was reported. This is a pretty significant overreaction given that the cruise industry was barely functioning in the fall of 2021.
Yes, the sector has a long way to go. The big three cruise lines took on billions of dollars of debt during the pandemic. Refinancing that debt in a higher interest rate environment is a challenge, but it’s one Carnival (and its rivals) have found.
This has occurred with some dilution of shareholders. Carnival sold $1.15 billion in new stock during the quarter, but the company has more than $7.4 billion in cash. Weinstein is optimistic (he has to be, it’s part of his job) about the future.
“During our third quarter, our business continued its positive trajectory, achieving more than $300 million in adjusted EBITDA and achieving nearly 90% occupancy on our August sailings. More capacity and lower costs units,” he said.
It’s usually easy to dismiss a CEO who makes upbeat comments after posting a loss, but in this case, Carnival has basically followed the recovery path it laid out once it got back into sailing. Both Royal Caribbean and Norwegian have followed similar paths, and while meaningful shareholder returns may take time, these are solid companies built for the long term that made a lot of money before the pandemic and should do so again .