With the breakout of the COVID-19 pandemic earlier this year, the cruise industry is facing a historically tough challenge. As numerous countries imposed lockdowns and closed borders, cruise companies joined airlines in grounding their fleets as cancellations mounted with alarming speed. Carnival (CCL 0.37%), a leading player in the cruise industry with nine different cruise brands, was no exception. The company had to deal with a slew of cancellations and a plunge in forward bookings as people canceled their vacation plans to instead hunker down at home.
Carnival's recent earnings report demonstrates the financial damage wrought by the coronavirus. For the second quarter of 2020, passenger ticket revenue plunged by 86.3% year over year to just $446 million, while total revenue declined by a sharp 84.7% year over year to $740 million. The company reported an operating loss of $4.2 billion for the quarter, though part of the loss can be attributed to goodwill and other impairments amounting to close to $2 billion.
Carnival's stock price has plunged 69% year to date, although it has almost doubled from the low of around $8 back in early April. Could the shares present great value for the astute investor?
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Industrywide pause
It has been a long and painful wait for cruises to be able to restart, as the pandemic continues to rage through the U.S. and worldwide. Just last week, members of the Cruise Lines International Association (CLIA) announced the decision to voluntarily extend the pause in U.S. cruise embarkations until Oct. 31, 2020. This means that Carnival had to cancel all cruises that were set to depart the country in October.
To ensure guests retain confidence in Carnival's brand and continue to make new bookings, the company has had to offer guests the flexibility of requesting either an enhanced future cruise credit (FCC) or cash refunds. An enhanced FCC can increase the value of an original booking or provide additional onboard credits.
Although the issuance of an FCC helps to retain customers and minimizes disgruntlement, it could come at a very steep cost for the cruise company in the future.
Sufficient liquidity
The company has estimated that its monthly cash burn rate for the second half of 2020 will be approximately $650 million, with the bulk made up of ongoing ship operating and administrative expenses, interest expense, and committed capital expenditures. Fortunately, Carnival has managed to raise over $10 billion through a series of financing transactions, and it also expects to continue reducing its administrative expenses and newbuild capital expenditures for the rest of the year.
Also, the company has $8.8 billion of committed export credit facilities available to continue funding ship deliveries through 2023. Carnival continues to actively manage its fleet, last month announcing plans for its second LNG Excel Class ship, confirmed for November 2022 delivery. And in June, it reported headway in the construction of a new, 5,000-passenger mega cruise ship called the Mardi Gras. These new vessels are being prepared for guests once cruises are allowed again by the CLIA, showcasing management's long-term commitment to fleet renewal.
Several cruise brands restarting operations
There has been some positive news this month, though, as some of Carnival's cruise brands gear up to resume sailing in September. AIDA Cruises will resume operations starting Sept. 6, with the first ships sailing from German ports. Costa Cruises is planning to restart its operations from Italian ports that same day, following the Aug. 11 approval by the Italian government on the resumption of cruises and new health protocols.
However, other brands such as Holland American Line and P&O Cruises continue to wait for clearance to begin operations, with cruises canceled for the rest of this year.
A long and uncertain wait
Although there are spots of good news amid the slew of bad ones, it's not enough to convince investors that the worst is over. The pandemic situation does not appear to be improving, and even if a vaccine is found, the industry will not be shifting back to prepandemic levels anytime soon.
Although Carnival's brand remains strong and guests have prebooked tours to sail starting in 2021, significant uncertainty revolves around the company's cost structure and expenses load post-pandemic. As it stands, it's probably better to adopt a wait-and-see stance to see how things pan out.
