The cruise industry has stalled due to the coronavirus pandemic. That left Royal caribbean (NYSE: RCL), Carnival (NYSE: CCL), and Norwegian Cruise Line (NYSE: NCLH) with no way to make money yet.
The three cruise lines had optimistic dates in mind for the reopening of at least some crossings. But now the Atlanta Centers for Disease Control (CDC) has released a new edict that could keep ships in port (or stuck at sea) for another 100 days. At first glance, this seems like terrible news for cruise lines. The silver lining – although admittedly thin – is that the decision defines at least the parameters of a return.
Some unpleasant seas
The CDC has done more than say that cruise ships operating from US ports must remain moored. It has also created specific parameters under which the industry can resume its activities:
This order renews the prohibition to navigate and other operational measures signed by the director of the CDC on March 14, 2020 – subject to the additional stipulated conditions and conditions set out in this order. This order remains in force until the first of the following dates:
- (1) the expiration of the declaration by the Secretary of Health and Social Services that COVID-19 constitutes a public health emergency;
- (2) the CDC director cancels 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 decision removes any ambiguity or choice for Royal, Carnival and Norwegian in terms of their US cruise times. It sounds like cold comfort, but it means that when the industry returns, it will return with permission from the United States government. This can make customers more comfortable on a cruise ship.
Taking over the CDC could also help exempt cruise lines from potential prosecution that could have occurred if one of the three had decided to return to the sea earlier than the others and had suffered negative consequences.
Should I buy cruise stock?
Cruise lines have always been subject to weather disruptions. They are also very vulnerable to public perception when an illness or other problem occurs on board. But the current situation is of course unprecedented. Crossings could be canceled for about five months – and longer from certain ports.
This has pushed the industry to the brink because cruise lines are not included in any stimulus packages – Royal Caribbean, Carnival and Norwegian are not US companies. They have offices in Miami, but their business records are elsewhere.
This forced the three companies to tap their lines of credit and seek the cash needed to stay afloat. Carnival, for example, received $ 4 billion in cash, but had to pay 11.5% interest on that money to secure it. Royal and Norwegian are likely to face similar pain as the coronavirus crisis spreads.
Cruise lines may be able to begin certain limited operations before the CDC gives the green light to countries that allow crossings and do not stop at US ports. But they will continue to bleed money until the United States and a large number of ports get the green light.
To invest in cruise lines, you will have to accept a very long horizon of potential recovery. These companies will need at least a few years – if not more – to repay their debt. This will limit marketing budgets and capital spending.
It is also unclear how long it will take to return to some kind of normal. Regular passengers may be willing to sail when the CDC finally accepts it, but new cruisers or less frequent customers may take longer to feel comfortable on board a ship.
Down but not outside
In my opinion, these companies will eventually return. From an investor’s perspective, however, it can take a long time and there is a risk of bankruptcy canceling equity.
Understand that in exchange for getting these stocks at a significant discount from their now unimaginable 52-week highs, you are taking a considerable risk. If you can handle it and you’re ready to set up on a very long trip (think of a decade, not just a year or two), it might make sense to buy cruise stocks.