Why shares of Carnival Corporation, Royal Caribbean and Norwegian Cruise Line Holdings rebounded on Wednesday

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What happened

Actions of the main cruise lines Carnival Corporation (NYSE: CCL)(NYSE: CUK), Royal Caribbean (NYSE: RCL), and Norwegian Cruise Line Holdings (NASDAQ: NCLH) all took a bath yesterday – the wrong kind. After industry leader Carnival announced that it suffered a net loss of $ 2.9 billion in its last quarter, its stock quickly fell 10% and dragged the others in its wake.

It was yesterday, however. It’s today. And today, Carnival and Royal Caribbean shares are rebounding, up 2.7% at 3:25 p.m. EDT, while Norwegian Cruise still does a bit better than that – up 2.9%.

Three stocks of cruise lines – which do you prefer? Image source: Getty Images.

So what

Why are cruise stocks rebounding? There is no obvious news to explain the rebound – no analyst upgrades or price target hikes for example, or positive news on the cruise stocks themselves. Yet here’s a theory:

One of the reasons Carnival’s stock was torpedoed yesterday was because it had announced plans to dump a total of 18 ships from its fleet – five more than previously promised. On the one hand, this illustrates the extent of the crisis that cruise passengers are facing: there is much more supply (cruise ships) than they expect to have demand to satisfy (passengers of cruise), even after the CDC lifts its order without sail and clears the cruise to resume US ports.

To help balance supply and demand (and also lower its cost of operation), Carnival is thinning its fleet much faster than expected.

Now what

But here’s the thing: While Carnival’s oversized cost cut makes the dangers clear, it also helps remove one of the barriers to this industry’s recovery: overcapacity.

Because Carnival is reducing the size of its fleet so much, the capacity of this industry will also be reduced. This will help eliminate oversupply and minimize the risk of a price war as cruise lines fight for their fair share of vacationers’ discretionary money once the cruise reopens. In doing so, Carnival has essentially “taken one for the team,” and pushed back the day when cruising will once again become a profitable industry.

This is actually good news for Carnival – as well as Royal Caribbean and Norwegian Cruise. If you ask me, this is the reason why these stocks are going up today.



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