Like all cruise lines, Carnival (NYSE:CCL) will not be sailing prior to November 1. And realistically, it may very well be 2021 before cruise lines set sail. This doesn’t mean you need to stay away from CCL stock forever. But as a short-term play, there are better ways to speculate.
The novel coronavirus is creating a maddening problem for the cruise line industry. Carnival, along with every other cruise line, has an unprecedented challenge to win back customers. At the same time, the cruise line knows they have customers who would take a cruise right now if they could. But they can’t.
And even when they can, the ships will be operating at limited capacity. On its most recent earnings call, the company acknowledged that they would likely be operating at less than 50% occupancy whenever they are permitted to start.
But even that may not be sufficient to win back skeptical guests. Josh Enomoto wrote about the difficulty the virus is creating even as some cruise lines attempt to relaunch. This is what Enomoto wrote about the Norwegian cruise line operator Hurtigruten:
According to the U.K.’s Daily Mail, at least “40 passengers and crew on a luxury Norwegian cruise liner have been diagnosed with COVID just weeks after the industry relaunched…
This is illuminating a deeper issue that it appears the world is finally coming to grips with. The “new normal” may be around for some time, even with a vaccine.
Carnival Faces Tough Math
Carnival will be ready to go when the sailing ban is lifted. But as I mentioned above, this is a question of confidence. The company earned just over $20.5 billion in 2019 including $4.84 billion in the second quarter. In the second quarter of this year, Carnival posted $740 million in revenue. And the third quarter won’t be any better.
Carnival says they have approximately $2.9 billion in 2021 bookings. But just to get back to 50% of revenue, the company would have to get to $10 billion. I’m not sure I see that happening in 2021. And it appears Carnival agrees. The cruise line says it doesn’t expect its fleet to get back to its Q2 2020 capacity levels until 2022.
That means in the short term it’s all about preserving cash. And Carnival is pledging to reduce its cash burn. The company reports that its cash burn for the second half of this year will be $650 million per month. It also says it will be operating a more efficient fleet with a fewer number of newer ships.
All of that may be true, but the problem facing Carnival is not one they can market themselves out of. People will either cruise or they won’t. But even for the ones that will, there will be limited capacity.
CCL Stock May Get Worse Before It Gets Better
I agree with Bret Kenwell in that the novel coronavirus is not an existential threat to the cruise line industry. At some point, assuming there is progress on the vaccine front, people will return to the seas.
A recent article in Bloomberg crystallizes a thought I’ve had for quite some time. Although the article refers to airports, I think the same will be said of cruise ships. In the long run, the pandemic will probably change the cruising experience for the better.
However, like Kenwell, I also believe CCL stock may have to go lower before it can start to recover. And here’s why. Assuming the entire $2.9 billion in bookings hold that 15% of 2019 revenue. Which means it may be quite a while before the company gets back to $10 billion in revenue.
Let’s apply a 30-30-40 rule. 30% of previous cruise line customers will get back on a ship with little or no reservations. Another 30% of past customers will never sail again. That leaves 40% in the great unknown.
I know that’s not exactly a scientific method, but that’s the point. Right now, revenue assumptions aren’t based on previous knowledge. They are just guesses. And your guess is as good as mine. Which is why it makes little sense to gamble on CCL stock until there is much more clarity.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.