There is good news and bad news for Royal Caribbean (NYSE:RCL) shareholders. The good news, it looks like RCL stock is not heading down to its March 2020 lows. The bad news, it may be a while before the stock approaches the $75+ share price it reached in early June.
The bullish case for buying shares of RCL stock is relatively straightforward. The cruise line industry will recover once there is a vaccine for the novel coronavirus. Pent-up demand will have consumers eager to have an experience that does not involve the four walls of their home.
But lost in the noise of when cruise lines might be set to start sailing are sobering questions. What if there is no vaccine for the novel coronavirus? Or what if the vaccine is not as effective as the measles vaccine? And how long will it take before the vaccine is available on a mass scale?
At the time I’m writing this, Royal Caribbean is scheduled to start sailing again in mid-September. Carnival (NYSE:CCL) recently announced they would not sail until October. I imagine Royal Caribbean will follow suit. But that raises other questions.
And that’s why I have the same concerns about Royal Caribbean stock now that I did in March.
Will Cruise Lines Sail Before a Vaccine Exists?
I don’t want to wade into a field like vaccine creation. I’m simply putting out questions that are in the public domain.
Royal Caribbean faces two options filled with uncertainty. One option is to not sail until there is a safe, readily available vaccine. The other option is to start sailing, but have to suspend operations again because of an outbreak either on one of its ships or on a ship from another fleet.
And that brings to mind a stark reminder. No matter what other lens you use to look at Royal Caribbean, or any cruise line for that matter, the only thing that really matters is the one thing none of us have any control over.
Can You Socially Distance on a Cruise?
Royal Caribbean is working closely with Norwegian Cruise Lines (NYSE:NCLH) to apply social distancing measures on a cruise ship. The initiative is called the Healthy Sail Panel.
The main approach, as you might expect, is to limit the number of passengers. Of course, customers may be doing by themselves in the short term. But there are other guidelines being developed including ensuring passengers retain a safe distance at restaurants, adding more show times at entertainment venues, and staggering when passengers check-in.
And all of this sheds light on the cruise line business model which relies on ships filled with capacity. When discussing the social distancing guidelines, Royal Caribbean chief executive officer (CEO) Richard Fain recently told the Financial Times, “a lot of people assume that you simply take what happens on land and apply it on to the sea”. Fain went on to say the industry could not take such a “simplistic approach” because of the unique challenges that ships present.
And not only have cruise ships relied on being full, the cruise ship model has been to get bigger and offer more attractions. Carnival will launch its Mardi Gras cruise ship in 2021. Its signature feature is a roller coaster, the first of its kind.
Simply put, without an effective vaccine, the industry model is about to be put to the test.
With that said, it seems to me that the cruise ship model will have to change. And the good news is that it is likely to create some interesting opportunities for cruise lines in the future. But an uncertain and promising future, doesn’t do much for the present.
The Math is Getting Complicated For Royal Caribbean
Cruise line stocks have managed to rise significantly since the March selloff. One reason for this is that cruise lines offered passengers generous rebooking policies. Through their Cruise With Confidence program, Royal Caribbean offered passengers up to 125% of future cruise credit when they rebooked a cancelled cruise rather than requesting a refund.
The program applies to any booking made before August 1, 2020 up to 48 hours before they sail. The credit runs through December 31, 2021 or 12 months from the original sail date.
However, if Royal Caribbean needs to suspend operations deeper into fall, it’s a big assumption that passengers will continue to be patient. That blow to revenue will come as Royal Caribbean continues to have to maintain the ships they have, and that says nothing about the potential for layoffs.
The Bottom Line for RCL Stock
The worst case for RCL stock would seem to be a scenario in which they have to spend operations indefinitely. However, as Chris Tyler points out, Royal Caribbean raised $3.3 billion of capital in May and has additional funding outlets. This buys the company time.
But even if you have no concerns about liquidity, you have to believe that RCL stock does not accurately reflect a continued zero-revenue environment. And when you add to it the fact that Royal suspended its dividend at the end of May, there is a compelling reason not to drift out to sea while the company gets this sorted out.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
