By Daniel B. Kline
The cruise industry has ground to a complete halt due to the coronavirus pandemic. That has left Royal Caribbean (NYSE:RCL), Carnival (NYSE:CCL), and Norwegian Cruise Line (NYSE:NCLH) without any way to make money for the moment.
All three cruise lines had optimistic dates in mind for reopening at least some sailings. But now the Centers for Disease Control (CDC) in Atlanta has issued a new edict that could keep ships in port (or stuck at sea) for another 100 days. On the surface, that seems like terrible news for the cruise lines. The silver lining — though admittedly a thin one — is that the ruling at least sets parameters for a return.
Some nasty seas ahead
The CDC did more than say cruise ships operating out of U.S. ports must remain docked. It also created specific parameters under which the industry can return to operation:
This Order renews the No Sail Order and Other Measures Related to Operations signed by the CDC Director on March 14, 2020 — subject to the modifications and additional stipulated conditions as set forth in this Order. This Order shall continue in operation until the earliest of
- (1) the expiration of the Secretary of Health and Human Services’ declaration that COVID-19 constitutes a public health emergency;
- (2) the CDC Director rescinds or modifies the order based on specific public health or other considerations; or
- (3) 100 days from the date of publication in the Federal Register.
This ruling removes any ambiguity or choice for Royal, Carnival, and Norwegian in terms of their U.S. cruise schedules. That sounds like cold comfort, but it means that when the industry returns, it will come back with the permission of the U.S. government. That may make customers feel more comfortable getting on a cruise ship.
The CDC taking charge may also help absolve the cruise lines from potential lawsuits that might have arisen had any of the three decided to head back to sea sooner than the others and experienced negative consequences.
Should I buy a cruise line stock?
Cruise lines have always been prone to weather disruptions. They are also very vulnerable to public perception when an illness or other problem breaks out on board. But the current situation is, of course, unprecedented. Sailings could be canceled for about five months — and longer from some ports.
This has pushed the industry to the brink because the cruise lines are not included in any stimulus packages — Royal Caribbean, Carnival, and Norwegian are not U.S. companies. They have offices in Miami, but their corporate registrations are elsewhere.
That has forced all three companies to tap their credit lines and look for the cash needed to stay afloat. Carnival, for example, took in $4 billion in cash, but it needed to pay 11.5% interest on that money to secure it. Royal and Norwegian will likely face similar pain as the coronavirus crisis extends.
The cruise lines may be able to begin some limited operations before the CDC gives the go-ahead in countries that allow for sailings and do not stop in U.S. ports. But they will continue to bleed money until the U.S. and a large number of ports get the all-clear.
Investing in cruise lines will require accepting a very long time horizon for potential recovery. It will take these companies at least a few years — maybe longer — to pay down debt. That will limit marketing budgets and capital expenditures.
It’s also difficult to know how long it will take to return to any sort of normal. Regular passengers may be willing to sail when the CDC finally OKs it, but new cruisers or less frequent customers may take longer to feel comfortable boarding a ship.
Down but not out
These companies will, in my opinion, eventually come back. From an investor’s point of view, though, that may take a very long time, and there’s a risk of bankruptcies wiping out shareholder equity.
Understand that in exchange for getting these stocks at a major discount from their now-unthinkable 52-week highs, you’re taking on considerable risk. If you can stomach that and are willing to settle in for a very long voyage (think more like a decade, not just a year or two), then it may make sense to buy cruise line stocks.
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