Carnival Cruises
In the second quarter, Carnival reported $740 million on revenue of bookings for later this year and 2021. The company has been offering incentives and discounts but overall, bookings "remain within historical ranges." Revenue was higher than analysts' expectations of $700 million. Additionally, 75% of bookings were new bookings with the other 25% being trips rescheduled due to cancellation.
Carnival's liquidity situation also showed signs of improvement, as it was able to reduce operating costs by $7 billion on an annualized basis and will reduce capital expenditures by $5 billion over the next 18 months. It also secured $10 billion in liquidity which will give it a longer lifeline even if all cruises remain sidelined. All the major cruise operators have raised money in recent months and are aggressively cutting costs to extending their lifelines as much as possible.
Challenges Remain
The resilience of demand is a good sign that cruising will remain a viable option, once the coronavirus is under control and/or a vaccine is developed. Before the coronavirus, cruising had been steadily increasing in popularity. It's also constructive that Carnival has been able to strengthen its cash position and reduce its cash burn as much as possible.
However, it's still going to be burning $650 million per month, even if operations remain at a standstill. When cruises do restart, they will have to increase cleaning and safety standards and implement some sort of protocol for screening and quarantining passengers and employees. Social distancing is another consideration and would mean fewer bookings per ship. Currently, the cruise business is about cramming as many people on a ship at breakeven rates and then upselling them on offers, once they are on the ship. Implementing both of these measures would result in decreased profitability. Also, demand will likely be impaired after the initial burst of pent-up demand.
Stock Price Moves
The biggest variable for cruise stocks, like most stocks connected to the travel industry, remains the spread of the coronavirus. While the broad stock market remains strong, these sectors have been moving lower as case counts have begun to increase. The trajectory of cases for the country as a whole remains concerning.
From late-March to the end of April, they were ranging from 20,000 to 30,000. As case counts started trending lower in April and May and states began reopening, there was a burst of optimism that the crisis had passed and travel stocks exploded higher. For example, Carnival climbed 120% from its May low to its June high.
However, case counts started slowly increasing, and these stocks started selling-off. Carnival is 35% lower from its June peak. Case counts are now higher than they were in March and April when the lockdown was instituted and there are pockets of spread distributed across the country. So far, there have also been no indications that the trajectory is leveling off.
While Carnival's stock popped higher on some good news, these gains are not likely to be sustained.
