Off Brand

Why Investors Are Still Betting on Carnival Cruise Line

What’s driving the irrational optimism for an industry least likely to survive a pandemic?

Carnival Cruise Line has a new ship on the way, and it’s a doozy. The Carnival Mardi Gras is a 180,000-ton, 18-deck marvel, accommodating 6,630 passengers, and boasting among other amenities what is billed as the world’s first at-sea roller coaster. Based in Florida’s Port Canaveral, it is intended to sail Caribbean itineraries, and is “packed with brand-new experiences for eating, drinking, and spectacularly getting down to fun,” the company says, including a new Emeril Lagasse restaurant, two bars, and an 800-capacity performance space to enjoy acrobats and musicians.

In all, the Mardi Gras, among the biggest and likely most expensive cruise ships in the history of the world, is truly a jaw-dropping monument to humanity’s determination to create and prize engineered leisure that brazenly defies the logic of nature. And at this moment, it’s like a vessel arriving from some parallel universe — a packed, isolated place where swarms of vacationers somehow frolic unmasked and fewer than six feet apart, carefree.

Carnival has not disclosed its cost, but reports say the most elaborate cruise ships can cost $1 billion — quadruple the price of Boeing 747, that’s in the league of the cost of building an ambitious skyscraper.

It is also, of course, not sailing any time soon. Originally scheduled for November of 2020, the Mardi Gras’ first voyage has been pushed to February of next year, at the earliest. The postponement is blamed on construction delays attributed to the coronavirus pandemic, which continues to rewrite the best-laid plans of the tourism industry in general, and the cruise ship business in particular.

Cruise lines were among the earliest businesses to be walloped by the pandemic. The Carnival-owned Diamond Princess suffered a notorious outbreak that infected hundreds and killed more than a dozen, and became a symbol of nightmarish cruise ship contagion scenarios when it was quarantined for a month. There’s been no relief since. On July 16, the Centers for Disease Control extended a “no sail” order, suspending cruise line operations, until September 30 — and went out of its way to criticize the industry for practices that spread the virus, resulting in an alarming 99 virus outbreaks on 123 cruise ships, involving nearly 3,000 passengers and 34 deaths.

By the company’s own estimate, it will continue to burn $650 million a month while its 100-plus-ship fleet remains largely idle.

As the virus continues to spread in the U.S. and elsewhere, more international travel restrictions are kicking in; the Bahamas, for example, just banned U.S. tourists. Meanwhile, Carnival and its rivals are stuck with the sunk costs and commitments involved in new ships planned in a pre-pandemic world — like the Mardi Gras. Carnival has not disclosed its cost, but reports say the most elaborate cruise ships can cost $1 billion — quadruple the price of Boeing 747, that’s in the league of the cost of building an ambitious skyscraper. And the ships have been getting steadily bigger for years now.

Given all this, it’s perfectly fair to ponder the future of the Mardi Gras — and Carnival and its cruise-ship peers, and the whole idea of the cruise industry — with skepticism. Carnival and the cruise industry generally are unlikely to get government help (like some airlines, for instance) because they operate under corporate structures involving registration abroad (in Liberia, in Carnival’s case) to minimize tax obligations, making anything resembling a bailout politically toxic. In July, Carnival reported a $4 billion quarterly loss. That’s the largest ever for the company, which was founded in 1972 with a single ship (the original Mardi Gras), and is credited with helping make cruising more broadly affordable. By the company’s own estimate, it will continue to burn $650 million a month while its 100-plus-ship fleet remains largely idle.

Right now, if you were to look at the company’s marketing mock-ups promising thousands of fun-seeking Mardi Gras passengers various forms of close-quarters revelry, you might conclude: That’s never going to happen. You might even wonder, quite rationally, how the cruise industry can continue to exist at all.

Perhaps most strikingly, Carnival and its major rivals have reported that a substantial percentage of cruise customers remain optimistic about setting sail again in the year ahead.

But it apparently takes more than terrifying statistics and seemingly common-sense hunches to wipe out an industry of this size and scale. It turns out there are, in fact, cruise-business optimists. For starters, cruise line shares have become a darling among investors who (mistakenly) believe a beaten-down stock is always a bargain sure to rebound sharply when the economy bounces back — a point of view that seems particularly widespread among less-experienced traders. Carnival Cruise Line shares have become one of the most popular holdings of users of no-fee stock-trading app Robinhood — notorious for its young, newbie user base; Norwegian Cruise Line and Royal Caribbean, the other two major cruise lines, are also widely held by the Robinhood crowd. While shares in the sector remain drastically off their pre-pandemic highs, there have also been occasional run-ups; Carnival sank from the $50 range to a low of $7.97 in early April, but even after consistent volatility was trading at about twice that on July 16, for reasons that seem more tied to day-trader guesswork than fundamentals.

More substantially, Carnival has demonstrated an ability to raise considerable extra financing — $10 billion worth of loan and credit arrangements, as of a July 10 statement from Carnival CEO Arnold Donald. (The company more recently announced a $1.26 billion bond offering.) This gives it the liquidity to stay afloat while its business remains suspended. Back in April, UBS analyst Robin Farley estimated that Carnival could survive “a zero-revenue scenario” for 12 to 13 months, at a minimum. (The report said Royal Caribbean could go 10 months, and Norwegian at least seven. A Motley Fool analysis argues that Royal Caribbean is actually the most financially shipshape major cruise line — and that Norwegian, the smallest of the big three, is like the “first to buckle” if there’s a shakeout.)

But perhaps most strikingly, Carnival and its major rivals have reported that a substantial percentage of cruise customers remain optimistic about setting sail again in the year ahead. While Carnival (and every other line) has been forced to cancel months of cruises, roughly half of affected customers have actually opted to collect a credit to reschedule at some future date, rather than take a cash refund right now. And more to the point, Carnival reports that it “continues to see demand” for new bookings: According to the company, almost 60% of 2021 bookings made in the first three weeks of June were new (not repurposed credits from canceled voyages). Royal Caribbean has also reported demand for new 2021 bookings. In other words, a substantial chunk of the cruise industry’s target audience remains very optimistic. (Perhaps they’ve heard the virus will “just disappear” at some point?)

The site CruiseCritic.com’s latest reader survey, from the first half of June, found that 76% of more than 3,500 respondents said they planned to book a cruise, and 37% were already looking to do so; just 3% ruled out a future cruise. According to the Wall Street Journal, about 30% of cruise customers are repeaters, sometimes hooked into loyalty programs. UBS research from May found over half of cruise travelers intended to book again in the next 18 months, and 85% said they’d do so at some point. Big picture: The cruise business has grown steadily for years, with an increase of 30% in the five years leading up to the pandemic. While the archetypal cruise customer is the over 60 set, millennial-age customers have been the fastest-growing cohort, both in raw numbers and percentage terms.

Meanwhile, the travel industry is more broadly sending mixed signals about if and when it might experience any kind of recovery. Delta, to cite one recent pessimistic data point, has pared back plans to add new summer flights to its drastically reduced offerings, expecting to wait three years before volume returns to pre-pandemic levels. On the other hand, in a surprising turn from just a couple months ago, Airbnb is said to be thinking about an IPO again. Disney reopened its Florida theme park even as infection numbers reached all-time highs — and people showed up.

Investment banking firm Stifel essentially pitched the idea that the pandemic could end up being a long-term plus for the cruise business.

Counterintuitive as it sounds, it’s likely that when cruise lines are allowed to operate, they will probably have customers. What’s still not clear is how long it might be until they can prove they can operate safely. Analysts say that’s likely to be next year, at best. Even then the expectation is that cruises will return gradually, maybe starting with cruises to private islands, perhaps reducing the number of people passengers will be exposed to, as well as avoiding potential travel restrictions. (Various cruise lines own several islands outright.) One bullish forecast suggests perhaps half of current cruise fleets will be back in service by mid-2021.

Cruise optimists are betting that the business can tread water until then. Carnival CEO Donald has said that “right sizing our shoreside operations” has already helped slash operating costs by over $7 billion a year, and lowered capital expenses by $5 billion over the next 18 months. Carnival also announced it would sell off 13 of its current 104 ships. (These would generally be sold to smaller, more regional cruise lines. But older ships may be sold to scrapping operations, taken apart, and their many valued components resold and recycled, explains Gene Sloan, who covers the cruise industry for ThePointsGuy.com.) Bottom line, according to Donald: “We will emerge a leaner, more efficient company.”

This argument was echoed in a recent research note from investment banking firm Stifel, which essentially pitched the idea that the pandemic could end up being a long-term plus for the cruise business. “No, we aren’t crazy or suffering from some sort of home lockdown psychological disorder,” the note clarified. In short, there’s a future in which something like the Mardi Gras actually makes sense again — a future in which, say, a vaccine makes widespread travel and close proximity to other people something that the public is comfortable with again. But it’s going to take time to get there. And on the way to that destination, things are going to get so bad for this industry that Carnival and its rivals will be forced to deal with financial issues (cost structure; aging fleet) that have weighed them down for years.

It’s not such an outlandish argument really. Or at least, it’s no more outlandish than building a floating roller coaster, which Carnival has, for better or worse, already proven that can be done.

Update: An earlier version of this piece misstated the relative size of the Mardi Gras cruise ship. It is among the largest ever, but not the largest.

Author The Art of Noticing. Related newsletter at https://robwalker.substack.com

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