Cruise lines fight to stay afloat

Through February, the cruise industry looked like a model of
success. A record number of passengers took cruises last year. In 2020, more
ships were to be delivered than at any other time in history. Wave season was off
to another strong start. 

Then came coronavirus. 

Historically, cruise lines have had an advantage over hotels
and resorts because they could move ships away from trouble, redeploying from
the site of terror attacks, hurricanes and other natural disasters. After 9/11,
they brought ships to U.S. homeports when people preferred to avoid air travel.

Covid-19 has proven to be a different kind of crisis, one
that the cruise industry can’t outrun because it has been a big part
of the Covid-19 story. Ships have been stranded at sea with sick passengers aboard. In several instances, ports have refused to let ships dock and disembark. This has likely damaged the
industry’s reputation to a still-unknown extent.

And now, cruise corporations face a financial hurdle the
likes of which they haven’t known. They’re facing a zero-revenue situation,
having paused operations since mid-March, with no access to help from the U.S.
government’s stimulus package because they are not U.S.-based corporations.
Cruise shares have nosedived since January.

As a result, cruise lines have looked to the private
markets to increase liquidity. Saudi Arabia’s sovereign wealth fund acquired an
8.2% stake (43.51 million shares) in Carnival Corp. The purchase helped
Carnival Corp.’s share price increase 22% when it was announced, after it had
fallen about 80% since mid-January.

Prior to that, Carnival Corp. shored up its liquidity by
securing $500 million from a stock sale and $5.75 billion on the bond market,
at a very high cost: 11.5% interest on $4 billion in three-year senior secured
notes and 5.75% interest on $1.75 billion in three-year senior convertible

Royal Caribbean Cruises Ltd. (RCCL) in late March secured a
$2.2 billion loan facility to improve liquidity, and Norwegian Cruise Line
Holdings (NCLH) on March 12 tapped into an existing $1.55 billion credit line. 

Analysts have viewed the moves as necessary. 

Ben Cordwell, a travel and tourism analyst at research firm
GlobalData, said that absent help from the U.S. government, “it will be vital
for [cruise] companies to raise funding themselves to ensure they survive this
turbulent period.”

“By taking a proactive approach to the crisis, Carnival can
reassure investors and greatly increase their chances of surviving the months
to come,” Cordwell said. 

Wall Street has also estimated how long cruise companies
can survive a zero-revenue situation. UBS analyst Robin Farley asserts that
Carnival has the “longest runway of liquidity to stay afloat” at 12 to 13
months, RCCL has 10 months and NCLH has seven to eight months.

Carnival has taken other approaches to strengthen its
finances, including saying in a regulatory filing this month that it would put “the
substantial majority” of its 104 ships into a “prolonged ship lay-up,” in which
the ships are manned by a very limited crew. 

Farley said that given Carnival’s calculation that managing a
ship in cold layup costs $1 million per month while an active ship costs $2
million to $3 million, its costs could be reduced by $100 million to $150
million per month and extend Carnival’s liquidity by two to three months. 

Carnival’s regulatory filing also made clear that it does
not anticipate being up and running at full capacity anytime soon, saying the
length of its service pause “may be prolonged.”

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